Back to GetFilings.com
1
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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-14316
APRIA HEALTHCARE GROUP INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0488566
(State 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 April 9, 1998, there were outstanding 51,724,059 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 April 9, 1998 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 $8.00 per share as
reported by the New York Stock Exchange, was approximately $339,870,030.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 1998 Annual Meeting of Stockholders of the
Registrant which will be filed with the Securities and Exchange Commission no
later than 120 days after December 31, 1997.
2
PART I
ITEM 1. BUSINESS
GENERAL
Apria Healthcare Group Inc. ("Apria Healthcare", "Apria" or the
"Company") provides and/or manages comprehensive homecare services including
home respiratory therapy, home delivered respiratory medications, home infusion
therapy, home medical equipment and related clinical services. 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. In September
1997, the Company exercised the warrants and recorded a related gain of $1.4
million.
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. ("TPC") 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.
RECENT DEVELOPMENTS
In June 1997, the Company announced that it had retained an investment
banking firm as its financial advisor to explore alternatives to enhance
stockholder value, including the possible sale, merger or recapitalization of
the Company. Following extensive communications and exchanges of information
with a number of third parties, on February 3, 1998, the Company entered into a
Stock Purchase Agreement (the "JLL Agreement") with JLL Argosy Apria, LLC,
Joseph Littlejohn & Levy Fund III, L.P. and CIBC WG Argosy Merchant Fund 2,
L.L.C. (together, the "JLL Group"). Pursuant to the terms of the JLL Agreement,
among other things, the Company agreed to issue and sell 12,300,000 shares of
Common Stock and to issue warrants to purchase 5,000,000 additional shares,
exercisable at $20.00 per share, in consideration for a cash investment of
$172.2 million by the JLL Group. The Company was to have used the proceeds,
together with $70.0 million in new borrowings under the Company's credit
facility, to purchase 17,300,000 shares of Common Stock. On April 3, 1998, the
parties agreed to terminate the JLL Agreement without any obligation to any
party. The Board of Directors of the Company has formed a committee to assess
the Company's future alternatives in light of the termination of the JLL
Agreement.
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 (including home-delivered respiratory medications),
1
3
home infusion therapy and home medical equipment. In all three lines, the
Company provides patients with a variety of clinical services, related products
and supplies, most of which are prescribed by a physician as part of a care
plan. These services include: high-tech infusion nursing, respiratory care and
pharmacy services, educating patients and their caregivers about the illness and
instructing them on self-care and the proper use of products in the home,
monitoring patient compliance with individualized treatment plans, reporting to
the physician and/or managed care organization, maintaining equipment and
processing claims to third-party payors. Approximately 35% of the Company's
business is derived from managed care organizations, with the remainder being
derived from more traditional referral/payor sources. The Company directly
provides numerous services to its patients, and purchases or rents the products
needed to complement the service.
The following table sets forth a summary of net revenues by line of
business, expressed as percentages of total net revenues:
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
----- ----- -----
Respiratory therapy................................... 51% 50% 53%
Infusion therapy...................................... 24% 25% 24%
Home medical equipment/other.......................... 25% 25% 23%
----- ----- -----
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 and a proprietary acuity program.
Approximately 68% 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, noninvasive positive pressure ventilation ("NPPV"),
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 to accompany the
nebulizer through which they are administered. This comprehensive program offers
patients and payors a broad base of services from one source, including the
delivery of medications in premixed unit dose form, pharmacy services, patient
education and claims processing.
INFUSION THERAPY. Home infusion therapy involves the administration of
24-hour access to intravenous or enteral nutrition, anti-infectives,
chemotherapy 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 and registered high-tech infusion nurses who have
specialized skills in the delivery of home infusion therapy. The Company
currently operates 44 pharmacy locations to serve its home infusion patients.
The 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.
2
4
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 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, 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 multiple sclerosis, cancer
and complications or side effects associated with transplantation, continue to
emerge for use in the home setting. The Company provides a number of other
therapies through its infusion network.
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 service approach
allows patients and managed care systems accessing either respiratory or
infusion therapy services to also access needed home medical equipment through a
single source.
As Apria Healthcare's managed care organization customer base has grown,
the Company has recognized the need to expand its ability to provide value-added
services to managed care organizations. Rather than directly provide certain
non-core services itself, Apria aligns itself with other segment leaders (i.e.
medical supply distributors) in formal relationships or ancillary networks. Such
networks must be credentialed and qualified by Apria Healthcare's Clinical
Services department.
ORGANIZATION AND OPERATIONS
ORGANIZATION. Effective January 1998, the Company restructured its field
organization. As a result, the Company's approximately 350 branch locations have
been organized into five geographic divisions, which are further divided into 23
geographic regions. Each region is operated as a separate business unit and
consists of a number of branches that are typically clustered within 100 miles
of the regional office. The regional office provides each of its branches with
key support services such as billing, purchasing and equipment repair. Each
branch delivers home healthcare products and services to patients in their homes
and other care sites through the branch's fleet and qualified personnel. This
structure is designed to create operating efficiencies associated with
centralized services while promoting responsiveness to local market needs.
In conjunction with the geographic reorganization, the Company
restructured its field management into two distinct functional areas: sales and
operations. Previously, each regional manager was responsible for all aspects of
sales and operations, including generating new business, operating branches and
reimbursement. Under the new structure, the sales organization is responsible
for generating new business from both traditional and managed care markets,
while the operations organization is responsible for customer service,
reimbursement and asset management.
CORPORATE COMPLIANCE. As a leader in the home healthcare industry, Apria
Healthcare has made a committment to providing quality home healthcare services
and products while maintaining high standards of ethical and legal conduct. The
Company believes that operating its business with honesty and integrity is not
only proper but makes good business sense. The Company's Corporate Compliance
Program is designed to accomplish these goals
3
5
through employee education, a confidential disclosure program, written policy
guidelines, periodic reviews, compliance audits and other programs.
OPERATING SYSTEMS AND CONTROLS. The Company's business is dependent, to
a substantial degree, upon the quality of its operating and field information
systems for the establishment of accurate and profitable contract terms,
accurate order entry and pricing, billing and collections, and effective
monitoring and supervision. Difficulties encountered in the conversion to a
common system of the previously separate operations of Abbey and Homedco,
following their 1995 merger, and ongoing operational shortcomings have had a
significant negative impact on the Company's results of operations. In April
1997, the Company reorganized its reimbursement and information systems
functions, and Management is currently giving a high priority to the
implementation of standard "best practices" throughout the Company's operations.
The Company has established performance indicators which measure operating
results against expected thresholds, for the purpose of 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 labor expenses and the customer service,
accounts receivable, clinical, and distribution areas of its business. The
Company's management team is compensated using performance-based incentives
focused on quality revenue growth, gross profit, timely cash collections and
improvement in operating income.
Through experience, the Company has developed the means of maintaining
appropriate amounts of inventory sufficient to meet customer requirements.
During 1997, the Company evaluated the adequacy of its field information
systems' functionality and that of other packaged home healthcare information
systems to meet its changing business and reimbursement needs. Based on the
results of the evaluation, Management decided to replace its existing systems
but found the packaged home healthcare information systems to be insufficient
for the Company's needs. Rather, Management committed to a two-year plan to
implement a large-scale fully integrated enterprise resource planning ("ERP")
system. The new system is expected to better position Apria to meet the
reimbursement complexities of the managed care environment, provide a higher
level of real-time information to Management, bring together all product lines
onto one system, allow access to Internet capabilities and electronic commerce
and ensure year 2000 readiness. Significant development effort will be required
to customize the "ERP" system for the complexities of the Company's billing and
contractual arrangements (see "Risk Factors", "Collection of Accounts
Receivable" and "Information Systems").
ACCOUNTS RECEIVABLE MANAGEMENT. The Company derives substantially all
its revenues from third-party payors, including private insurers, managed care
organizations, Medicare and Medicaid. For 1997, approximately 30% of the
Company's net revenues was derived from Medicare and 9% from Medicaid.
Generally, each third-party payor 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.
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:
AUTOMATED CALL ROUTING THROUGH A SINGLE TOLL-FREE NUMBER. This allows
managed care organizations and other customers to reach any of Apria's 350
locations and to access the full range of Apria services through a single
central telephone number (1-800-APRIA-88).
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. Due to 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.
CLINICAL MANAGEMENT SERVICES. As more alternate site healthcare is
managed and directed by various managed care organizations, new methods and
systems are sought to simultaneously control costs and improve outcomes. Apria
Healthcare has developed a series of diagnosis-specific programs designed to
proactively manage patients in conjunction with a managed care partner and the
patient's physician in an alternate site setting. These services include patient
and environmental assessments, screening/diagnostics, patient education,
clinical monitoring, pharmacological
4
6
management, utilization reporting and outcome reporting. Mutually established
goals for inpatient hospital day reductions may be a portion of the basis for
provider compensation.
PHYSICIAN RELATIONS. In 1997, the Company developed a physician
relations group to place phone calls to physician offices in an effort to
increase and enhance awareness of Apria's services and stimulate interest in the
Company. Physician relations representatives work closely with sales
professionals throughout the country to identify, develop and maintain quality
relationships.
SALES
The Company employs approximately 322 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, specific portions of the sales
force's working knowledge of pricing, contracting and negotiating and
specialty-care management programs are being enhanced as well.
An integral component of 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 both the percentage of the U.S. population
that is covered by such plans and their influence over an increasing portion of
the healthcare economy. Managed care plans are consolidating and 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 single account, however, represented more than 5% of
the Company's net revenues for 1997. Among its more significant 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., MedPartners and Humana Health Plans. The
Company also offers discount agreements and various fee-for-service arrangements
to hospitals or hospital systems whose patients have home healthcare needs.
COMPETITION
The segment of the healthcare market in which 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, ability to develop and maintain
contractual relationships with managed care organizations, price of services,
access to capital, ease of doing business, range of homecare services, quality
of care and service and reputation with referral sources, including local
physicians and hospital-based professionals. It is increasingly important to be
able to 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 the JCAHO accreditation of its branches.
Other types of healthcare providers, including hospitals, home health
agencies and health maintenance organizations, have entered and may continue to
enter, Apria Healthcare's various lines of business. Depending on their
individual situation it is possible that the competitors of the Company may have
or may obtain significantly greater financial and marketing resources than the
Company.
GOVERNMENT REGULATION
GENERAL. 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
5
7
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 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.
THE ANTI-KICKBACK STATUTE. As a provider of services under the Medicare
and Medicaid programs, the Company is subject to the Medicare and Medicaid fraud
and abuse laws (sometimes referred to as the "anti-kickback statute"). At the
federal level, the anti-kickback statute prohibits any bribe, kickback or rebate
in return for the referral of patients covered by federal healthcare programs.
Federal healthcare programs have been defined to include plans and programs that
provide health benefits funded by the United States Government including
Medicare, Medicaid, and CHAMPUS, among others. Violations of the anti-kickback
statute may result in civil and criminal penalties and exclusion from
participation in the federal healthcare programs. In addition, an increasing
number of states in which the Company operates have laws that prohibit certain
direct or indirect payments (similar to the anti-kickback statute) or
fee-splitting arrangements between healthcare providers, if such arrangements
are designed to induce or encourage the referral of patients to a particular
provider. Possible sanctions for violation of these restrictions include
exclusion from state funded healthcare programs, loss of licensure and civil and
criminal penalties. Such statutes vary from state to state, are often vague and
have seldom been interpreted by the courts or regulatory agencies. A failure to
comply with the provisions of the federal or state anti-kickback statutes could
have a material adverse effect on the Company.
PHYSICIAN SELF-REFERRALS. Subject to certain exceptions, the Omnibus
Budget Reconciliation Act of 1993 (commonly known as "Stark II") prohibits a
physician or a member of such physician's immediate family from referring
Medicare and Medicaid patients for "designated health services" to an entity
with which the physician has a financial relationship. The term "designated
health services" includes several services commonly performed or supplied by the
Company, including durable medical equipment, home health services and
parenteral and enteral nutrition. In addition, "financial relationship" is
broadly defined to include any ownership or investment interest or compensation
arrangement pursuant to which a physician receives remuneration from the
provider at issue. Violations of Stark II may result in loss of Medicare and
Medicaid reimbursement, civil penalties and exclusion from participation in the
Medicare and Medicaid programs. Stark II is broadly written and at this point,
only proposed regulations have been issued to clarify its meaning and
application. Regulations for a predecessor law, Stark I, were published in
August 1995 and remain in effect, but provide little guidance on the application
of Stark II to the Company's business. While the proposed Stark II regulations
do not have the force and effect of law, they provide some guidance as to what
may be included in the final version. Issued on January 9, 1998, the proposed
regulations purport to define previously undefined key terms, clarify prior
definitions and create new exceptions for certain "fair market value"
transactions, de minimis compensation arrangements and discounts, among others.
It is unclear when these regulations will be finalized and until such time, they
cannot be relied upon in structuring transactions. In addition, a number of the
states in which the Company operates have similar prohibitions on physician
self-referrals. Finally, recent enforcement activity and resulting case law
developments have increased the legal risks of physician compensation
arrangements that do not satisfy the terms of an exception to Stark II,
especially in the area of joint venture arrangements with physicians. A failure
to comply with the provisions of Stark II (including the Stark I regulations),
or the state law equivalents, could have a material adverse effect on the
Company.
OTHER FRAUD AND ABUSE LAWS. The False Claims Act imposes civil liability
on individuals or entities that submit false or fraudulent claims for payment to
the government. Violations of the False Claims Act may result in civil monetary
penalties and exclusion from the Medicare and Medicaid programs. The Health
Insurance Portability and Accountability Act of 1996 created two new federal
crimes: "Health Care Fraud" and "False Statements Relating to Health Care
Matters." The Health Care Fraud statute prohibits knowingly and willfully
executing a scheme or artifice to defraud any healthcare benefit program. A
violation of this statute is a felony and may result in fines and/or
imprisonment. The False Statements statute prohibits knowingly and willfully
falsifying, concealing or covering up a material fact by any trick, scheme or
device or making any materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare benefits, items or
services. A violation of this statute is a felony and may result in fines and/or
imprisonment. Recently, the federal government has made a policy decision to
significantly increase the financial resources allocated to enforcing the
general fraud and abuse laws. In addition, private insurers and various state
enforcement agencies have increased their level of scrutiny of healthcare claims
in an effort to identify and prosecute fraudulent and abusive practices in the
healthcare area.
6
8
A failure to comply with any of the fraud and abuse laws could have a
material adverse impact on the Company.
INTERNAL CONTROLS. 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. 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, billing contracts, 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 (see "Risk Factors").
HEALTHCARE REFORM LEGISLATION. Economic, political and regulatory
influences are subjecting the healthcare industry in the United States to
fundamental change. Healthcare reform proposals have been formulated by members
of Congress and by the current administration. In addition, some of the states
in which 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 Company does not presently anticipate major legislative changes to
the Medicare program during 1998, particularly to reimbursement for home
respiratory equipment and services. However, recommendations for changes may
result from an ongoing study of patient access by the General Accounting Office
("GAO") and to the potential findings of the National Bipartisan Commission of
the Future of Medicare.
The Balanced Budget Act of 1997 contained a number of significant
provisions affecting Medicare reimbursement rates for services and equipment
provided by the Company. A 25% statutory reduction in the reimbursement for home
oxygen was effective January 1, 1998 with an additional 5% reduction scheduled
to take effect January 1, 1999. The GAO was directed by the Balanced Budget Act
of 1997 to report in 18 months on the effect of the reductions in oxygen
reimbursement on accessibility by patients to home oxygen services.
The Balanced Budget Act of 1997 contained additional items that affect
reimbursement for home medical equipment and services under Medicare Part B,
including a provision to eliminate Consumer Price Index adjustments to home
medical equipment reimbursement rates for the years 1998 through 2002.
Other provisions that are likely to affect levels of reimbursement to
the Company for home medical equipment under the Medicare program include new
authority of the Secretary of Health and Human Services to reduce the
reimbursement for home medical equipment by 15% each year under an abbreviated
inherent reasonableness rulemaking procedure; authority for the Secretary to
conduct a demonstration project to determine the feasibility of using
competitive bidding for selected items of home medical equipment; and a
reduction of the Medicare reimbursement for drugs and biologicals from the
current level of the lower of the estimated acquisition cost or the national
average wholesale price ("AWP"), to 95% of the AWP with a dispensing fee paid to
Apria's pharmacy.
Finally, the Balanced Budget Act of 1997 proposed that suppliers of home
medical equipment be required to post surety bonds equal to 15% of their
previous year's Medicare revenues (in a minimum amount of $50,000 and up to a
maximum of $3 million) as a condition of participation in the Medicare program.
The bonds would be used to secure suppliers' performance and compliance with
Medicare program rules and requirements. The deadline for securing such bonds
has been extended indefinitely, as the Health Care Financing Administration
("HCFA") is reviewing the bonding requirements.
7
9
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 that might adversely affect the Company's business.
EMPLOYEES
As of March 1, 1998, the Company had 9,555 employees, of which 7,903
were full-time and 1,652 were part-time. The Company's employees are not
currently represented by a labor union or other labor organization, except for
approximately 20 employees in the State of New York. 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 April 15, 1998.
NAME AND AGE OFFICE AND EXPERIENCE
------------ ---------------------
Lawrence M. Higby, 52............. President and Chief Operating Officer. Mr. Higby joined
Apria in November 1997. Prior to joining Apria, Mr.
Higby served as President and Chief Operating Officer of
Unocal's 76 Products Company and Group Vice President of
Unocal Corporation from 1994 to 1997. From 1986 to
1994, Mr. Higby held various positions with The Times
Mirror Company, including serving as Executive Vice
President, Marketing of the Los Angeles Times and
Chairman of the Orange County Edition (1992-1994).
Thomas M. Robbins, 48 ............ Executive Vice President, Field Operations. Mr. Robbins
was promoted to Executive Vice President, Field
Operations in January 1998. He served as Senior Vice
President, Eastern Zone from October 1996 to January
1998. From June 1995 to October 1996, he served as
Senior Vice President, Southern Zone. 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 when it was acquired by the Company.
Merl A. Wallace, 48 .............. Executive Vice President, Corporate Operations. Mr.
Wallace was promoted to Executive Vice President,
Corporate Operations in March 1997. Mr. Wallace served
as Senior Vice President, Western Zone from June 1995 to
March 1997. 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, 48............... Executive Vice President, Sales. Mr. Walsh was promoted
to Executive Vice President, Sales in January 1998. Mr.
Walsh served as Senior Vice President, Western Zone from
March 1997 to January 1998. From June 1995 to March
1997, he served as Senior Vice President, Sales and
Marketing. He served as Vice President, Sales of
Homedco from November 1987 to June 1995.
Lisa M. Getson, 36................ Senior Vice President, Marketing. Ms. Getson was
promoted to Senior Vice President, Marketing in August
1997. Ms. Getson served as Vice
8
10
President, Marketing from November 1995 to August 1997.
She served as Director of Marketing, Infusion from June
1995 to November 1995. From May 1994 to June 1995, she served
as Director of Business Development of Abbey Home
Healthcare. From 1989 to 1994, Ms. Getson held various
positions with Critical Care America, including Director
of Marketing and Business Development from January 1993
to May 1994.
Robert S. Holcombe, 55............ Senior Vice President, General Counsel and Secretary.
Mr. Holcombe was promoted to Senior Vice President,
General Counsel and Secretary in August 1997. He served
as Vice President, General Counsel and Secretary from
May 1996 to August 1997. Prior to joining Apria, Mr.
Holcombe served as Senior Vice President and General
Counsel for The Cooper Companies, Inc., a diversified
specialty healthcare company, from December 1989 to
April 1996.
Susan K. Skara, 48................ 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.
Lawrence H. Smallen, 49 .......... Chief Financial Officer, Senior Vice President, Finance
and Treasurer. In January 1998, Mr. Smallen resigned
from the above listed positions, effective upon the
selection of his successor which has not yet occurred.
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.
9
11
James E. Baker, 46 ............... 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.
In January 1998, the Company announced the resignation of its Chairman
and Chief Executive Officer, Jeremy M. Jones. Lawrence M. Higby is functioning
as Chief Executive Officer until such time as a replacement is named. In
January 1998, the Company announced the resignation of Jerome J. Lyden, Senior
Vice President, Sales.
RISK FACTORS
The Company's business is subject to a number of risks, some of which
are beyond the Company's control. The Company has identified below important
factors that could cause actual results to differ materially from those
projected in any forward-looking statements the Company may make from time to
time.
MANAGEMENT STABILITY AND RECRUITING.
Uncertainty about the Company's future and significant changes in senior
management have limited the Company's ability to attract and retain personnel to
critical positions, including revenue-producing positions such as sales
representatives. The Company's ability to increase revenues and profitability is
dependent to a significant extent upon its ability to recruit and maintain
qualified personnel. Continued uncertainty concerning management and control of
the Company would likely have a material adverse effect on its business, results
of operations or financial condition.
REGULATORY ENVIRONMENT.
REIMBURSEMENT. A substantial portion of the Company's revenue is
attributable to payments received from third-party payors, including the
Medicare and Medicaid programs and private insurers. For 1997, approximately 30%
of the Company's net revenue was derived from Medicare and 9% from Medicaid. The
Medicare reimbursement rate for home oxygen was recently reduced by 25%,
effective January 1, 1998, pursuant to the provisions of the Balanced Budget Act
of 1997. Medicare-reimbursed home oxygen services represented approximately
19.5% of the Company's net revenues in 1997. The estimated decrease in 1998
revenues and operating income resulting from this reimbursement reduction is
$55.0 million to $60.0 million. A further reimbursement reduction of 5% will be
effective on January 1, 1999. The levels of revenues and profitability of the
Company, similar to those of other healthcare companies, have been and will
continue to be subject to the effect of changes in coverage or payment rates by
third-party payors. Such changes could have a material adverse effect on the
business, results of operations or financial condition of the Company.
Medicare and Medicaid carriers also periodically conduct post-payment
reviews and other audits of claims submitted. These Medicare and Medicaid
contractors are under increasing pressure to scrutinize healthcare claims more
closely. In addition, the home healthcare industry is generally characterized by
long collection cycles for accounts receivable due to the complex and
time-consuming requirements, including collection of medical necessity
documentation, for obtaining reimbursement from private and governmental
third-party payors. There can be no assurance that such long collection cycles
or reviews and/or similar audits of the Company's claims will not result in
significant recoupments or denials which could have a material adverse effect on
the Company's business, results of operations or financial condition.
In addition, Medicare has proposed the implementation of a competitive
bidding system, which could result in lower reimbursement rates, or limits on
increases in reimbursement rates, for healthcare services. There can be no
assurance that such a competitive bidding system will not have a material
adverse effect on the Company's business, results of operations or financial
condition (see "Government Regulation").
FRAUD AND ABUSE LAWS. As a supplier and provider of services under the
Medicare and Medicaid programs, the Company is subject to Medicare and state
healthcare program fraud and abuse laws. These laws include the Medicare and
Medicaid anti-kickback statute, which prohibits, among other things, the offer,
payment, solicitation or
10
12
receipt of any remuneration in return for the referral of patients for items or
services, or arranging for the furnishing of items or services, for which
payment may be made under the Medicare, Medicaid or other federally funded
healthcare programs. Violation of these provisions may result in civil and
criminal penalties and exclusion from participation in Medicare and state health
programs such as Medicaid. Congress also enacted the Health Insurance
Portability and Accounting Act of 1996, which includes an expansion of certain
fraud and abuse provisions to other federal healthcare programs and private
payors. In addition, several healthcare reform proposals have included an
expansion of the anti-kickback laws to include referrals of any patients
regardless of payor source.
The broad language of the anti-kickback statute has been interpreted by
the courts and governmental enforcement agencies in a manner which could impose
liability on healthcare providers for engaging in a wide variety of business
transactions. Limited "safe harbor" regulations exempt certain practices from
enforcement action under the prohibitions. However, these safe harbors are only
available to transactions which fall entirely within the narrowly defined
guidelines. Transactions that do not fall within the safe harbors do not
necessarily violate the fraud and abuse laws and, therefore, parties to such
transactions either may or may not be subject to prosecution. In addition, an
increasing number of states in which the Company operates have laws, which vary
from state to state, prohibiting certain direct or indirect remuneration or
fee-splitting arrangements between healthcare providers, regardless of payor
source, for the referral of patients to a particular provider. Possible
sanctions for violations of these restrictions include loss of licensure and
civil and criminal penalties. In addition, under separate statutes, submission
of claims for payment that are "not provided as claimed" may lead to civil money
penalties, criminal fines and imprisonment, and/or exclusion from participation
in Medicare, Medicaid and other federally funded state healthcare programs.
These false claims statutes include the Federal False Claims Act, which allows
any person to bring suit alleging false or fraudulent Medicare or Medicaid
claims or other violations of the statute and to share in any amounts paid by
the entity to the government in fines or settlement. Such qui tam actions have
increased significantly in recent years and have increased the risk that a
healthcare company will have to defend a false claims action, pay fines or be
excluded from the Medicare and/or Medicaid programs as a result of an
investigation arising out of such an action. Finally, Congress enacted Stark II
in 1993, which prohibits referrals by physicians to certain entities with which
they have a financial relationship unless an exception applies. Several states
in which the Company operates also have similar laws. Possible sanctions for
violation of these laws include denial of payment, loss of licensure and civil
and criminal penalties. The Company maintains an internal regulatory compliance
review program and from time to time retains special counsel for guidance on
applicable laws and regulations. However, no assurance can be given that the
Company's practices, if reviewed, would be found to be in compliance with
applicable health regulatory laws, as such laws ultimately may be interpreted,
or that any non-compliance with such laws would not have a material adverse
effect on the Company's business, results of operations or financial condition
(see "Government Regulation").
OPERATION RESTORE TRUST. In May 1995, the federal government announced
an initiative which would increase significantly the financial and human
resources allocated to enforcing the fraud and abuse laws. Private insurers and
various state enforcement agencies also have increased their scrutiny of
healthcare claims in an effort to identify and prosecute fraudulent and abusive
practices. Under Operation Restore Trust ("ORT"), the Office of the Inspector
General (the "OIG"), in cooperation with other federal and state agencies,
initially focused on the activities of home health agencies, hospices, durable
medical equipment suppliers and nursing homes in New York, Florida, Illinois,
Texas, and California, states in which the Company has significant operations.
More recently, the ORT program has been expanded to include 12 other states in
which the Company also has significant operations (see "Government
Regulation").
OTHER FEDERAL AND STATE REGULATIONS. 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 motor carrier transportation. The Company's operations also
are subject to state laws governing pharmacies, nursing services and certain
types of home healthcare activities. Certain of the Company's employees are
subject to state laws and regulations governing the ethics and professional
practice of medicine, respiratory therapy, pharmacy and nursing. The Company's
operations are subject to periodic survey by governmental and private
accrediting entities to assure compliance with applicable state licensing,
Medicare and Medicaid certification, and accreditation standards, as the case
may be. From time to time in the ordinary course of business, the Company, like
other healthcare companies, receives survey reports containing deficiencies for
alleged failure to comply with applicable requirements. The Company reviews such
reports and attempts to take appropriate corrective action. The failure to
effect such action or to obtain, renew or maintain any of the required
regulatory approvals, certifications or licenses could adversely affect the
Company's business, results of operations or financial condition and could
prevent the programs involved from offering products and services to patients.
In addition, laws and regulations often are
11
13
adopted to regulate new products, services and industries. There can be no
assurance that either the states or the federal government will not impose
additional regulations upon the activities of the Company which might adversely
affect its business, results of operations or financial condition (see
"Government Regulation").
RECENT LOSSES.
The Company reported a net loss of $74.5 million for the year ended
December 31, 1995, net income of $33.3 million for the year ended December 31,
1996 and net loss of $272.6 million for the year ended December 31, 1997. No
assurance can be given that the Company will achieve profitable operations in
the near term.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE.
Accounts receivable, before allowance for doubtful accounts, decreased
by $94.2 million in 1997. The decrease resulted from the combined impacts of (1)
higher collection rates as evidenced by the increase in collections as a
percentage of revenue from 93% in 1996 to 99% in 1997, (2) shorter collection
periods as reflected by a decrease in the Company's average collection period
from approximately 130 days in 1996 to approximately 100 days in 1997 and (3) an
increase in the amount of bad debt write-offs taken, net of recoveries, from
$80.4 million in 1996 to $139.0 million in 1997. Accounts aged in excess of 180
days at December 31, 1997 decreased by $33.6 million as compared to December 31,
1996 but represented a comparable percentage of total accounts receivable. The
high level of bad-debt writeoffs was caused by the residual effects of the
disruptions and delays in billing and collection activity associated with the
Company's 1995 and 1996 conversions of its field locations to standardized
information systems and the continuing impact of a higher than normal turnover
rate among billing and collection personnel in 1996. These activities have
contributed to billing delays and errors and, ultimately, difficulties in
receiving timely reimbursement. To mitigate this negative impact, the Company,
among other steps, initiated collection incentive programs with special emphasis
on older accounts, hired additional management-level billing and collection
personnel and initiated reinforcement training for the billing locations. Early
in 1997, the Company took further steps to reduce the incidence of billing
errors including a process review of the field information systems 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. In April 1997, the Company
reorganized its reimbursement and information systems functions. These changes
were intended to heighten the Company's focus on accounts receivable collections
and information systems management. No assurances can be given, however, that
additional charges for uncollectible accounts receivable will not be required as
a result of continuing difficulties associated with the conversion activities
and meeting payor documentation requirements and claim submission deadlines.
INFORMATION SYSTEMS.
During 1997, the Company evaluated the capacity of its field information
systems and that of other packaged home healthcare information systems to meet
its changing business and reimbursement needs. Based on the results of this
evaluation, Management determined that neither the Company's existing systems
nor the available packaged home healthcare information systems were adequate for
the Company's requirements. As a result of such findings, Management has
implemented a two-year plan to develop a proprietary, large-scale, fully
integrated ERP system that will be customized to handle the complexities of the
Company's billing and contractual arrangements. The ability of the Company to
develop and customize the ERP system for its use, to train personnel on the use
of the system, to implement the ERP system using existing computer equipment or
to identify suitable replacement computer equipment, to develop technical
support capabilities for the ERP system users and to transfer existing field
information databases and nonelectronic records to the ERP system will be
critical to the success of the transition from the current information systems
to the ERP system. There can be no assurance that such a transition will be
accomplished without disruption to service delivery and billing functions, and
any such disruption, if significant or lengthy, may have a material adverse
effect on the Company's business, results of operations or financial condition.
PRICING PRESSURES.
The healthcare industry is currently experiencing market-driven reforms
from forces within and outside the industry that are exerting pressure on
healthcare companies to reduce healthcare costs. These market-driven reforms are
resulting in industry-wide consolidation that is expected to increase the
downward pressure on home healthcare margins, as larger buyer and supplier
groups exert pricing pressure on home healthcare providers. The ultimate timing
or effect of market-driven reforms cannot be predicted, and short-term cost
containment initiatives may vary substantially from long-term reforms. No
assurance can be given that any such reforms will not have a material adverse
effect on the Company's business, results of operations or financial condition.
12
14
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 Company
competes with a large number of organizations in many areas in which its branch
facilities and programs are located. Other types of healthcare providers,
including hospitals, physician groups, home health agencies, nursing homes and
health maintenance organizations, have entered and may continue to enter, the
Company's various lines of business. Depending on their individual situations,
it is possible the competitors of the Company may have or may obtain
significantly greater financial and marketing resources than the Company. In
addition, relatively few barriers to entry exist in the local home healthcare
markets served by the Company. Accordingly, other companies that are not
currently serving the home healthcare market may become competitors, enter the
markets and expand the variety of services offered. As a result, the Company
could encounter increased competition in the future that may limit its ability
to maintain or increase its market share, including competition from parties in
a position to influence referrals to the Company. Such increased competition
could materially adversely affect the Company's business, results of operations
or financial condition.
The Company's ability to successfully compete in the home healthcare
market is dependent on, among other things, the Company's 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. If the Company is unable to maintain its
geographic coverage or develop and maintain its contractual relationships, or
maintain its reputation or its current offerings of homecare services, such
developments could have a material adverse affect on the Company's business,
results of operations or financial condition.
DEPENDENCE ON RELATIONSHIPS WITH THIRD PARTIES.
The profitability and growth of the Company's business depends on its
ability to establish and maintain close working relationships with managed care
organizations, private and governmental third-party payors, hospitals,
physicians, physician groups, home health agencies, long-term care facilities
and other institutional healthcare providers, and large self-insured employers.
There can be no assurance that the Company's existing relationships will be
successfully maintained or that additional relationships will be successfully
developed and maintained in existing or future markets. The loss of such
existing relationships or the failure to continue to develop such relationships
in the future could have a material adverse effect on the Company's business,
results of operations or financial condition.
CONCENTRATION OF LARGE PAYORS.
Managed care organizations have grown substantially in terms of both the
percentage of the population that is covered by such organizations and their
control over an increasing portion of the healthcare economy. Managed care plans
have continued to consolidate to enhance their ability to influence the delivery
of healthcare services and to exert pressure to control healthcare costs. The
Company has a number of contractual arrangements with managed care organizations
and other parties. While no individual arrangement accounted for more than 5% of
the Company's net revenues in fiscal 1997, no assurances can be given that
managed care organizations or other large third-party payors will not use their
power to influence and exert pressure on healthcare services or costs in a
manner that could have a material adverse effect on the Company's business,
results of operations or financial condition.
HEALTHCARE REFORM.
The healthcare industry has experienced extensive and dynamic regulatory
change. Changes in the law, new interpretations of existing laws, or changes in
payment methodology may have a dramatic effect on the definition of permissible
or impermissible activities, the relative costs associated with doing business
and the amount of payment for medical care by both governmental and other
payors. Healthcare reform proposals have been formulated by federal and state
governments. Government officials can be expected to continue reviewing and
assessing alternative healthcare delivery systems and payment methodologies, and
public debate of these issues can be expected to continue in the future. The
Company cannot predict whether any reform measures will be enacted or, if
enacted, the nature of such reforms. There can be no assurance that any reform
measure, if enacted, will not restrict the Company's
13
15
operations, limit expansion of its business, or impose compliance costs which
cannot be recovered through price increases or otherwise adversely affect the
Company's business, results of operations or financial condition.
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 on the business, results of operations or
financial condition of the Company. Claims against the Company, regardless of
their merit or eventual outcome, also may have a material adverse effect upon
the Company's business, results of operations or financial condition.
ITEM 2. PROPERTIES
The Company's headquarters are located in Costa Mesa, California and
consist of approximately 168,000 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 10,000 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
The Company and certain of its present and former officers and/or
directors are defendants in three lawsuits which allege, among other things,
that the defendants made false and/or misleading public statements regarding the
Company and its financial condition in violation of federal securities laws.
Lasker v. Apria Healthcare, Inc., et al, was filed on or about March 5, 1998 in
the U.S. District Court for the Central District of California, Southern
Division (Case No. SACV 98-217 GLT). Miladin v. Apria Healthcare Group Inc., et
al., was filed in the same court (Case No. SACV 98-318 AHS) on or about April 2,
1998. Schiller v. Apria Healthcare Group, Inc. et al., was filed in the same
court (Case No. SACV 98-349 GLT) on or about April 9, 1998. No class has been
certified at this time. The complaints seek compensatory and punitive damages as
well as other relief.
The Company believes that it has meritorious defenses to the plaintiffs'
claims, and it intends to vigorously defend itself against the actions. In the
opinion of Management, the ultimate disposition of these cases will not have a
material adverse effect on the Company's financial condition or results of
operations.
14
16
The Company is also engaged in the defense of certain claims and lawsuits
arising out of the ordinary course and conduct of its business, the outcomes of
which are not determinable at this time. 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 condition.
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.
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
("Nasdaq") 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.
APRIA
-------------------
High Low
------- -------
Year ended December 31, 1996
First Quarter $32.5000 $23.0000
Second Quarter 35.5000 29.1250
Third Quarter 32.7500 17.1250
Fourth Quarter 22.1250 16.7500
Year ended December 31, 1997 $20.6250 $16.5000
First Quarter 19.3750 15.0000
Second Quarter 18.5000 12.7500
Third Quarter 17.0000 13.0625
Fourth Quarter
As of April 8, 1998 there were 854 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.
15
17
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of Apria
Healthcare, 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, 1997. 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,
-----------------------------------------------------------------------
1997(1) 1996(2) 1995 (2,3,4) 1994(2,4,5) 1993 (2,4,6)
------- ------- ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
STATEMENTS OF OPERATIONS DATA:
Net revenues ...................................... $ 1,180,694 $ 1,181,143 $ 1,133,600 $ 962,812 $ 748,901
Gross profit ...................................... 729,512 780,468 772,601 675,122 522,777
(Loss) income from continuing operations
before extraordinary items ..................... (272,608) 33,300 (71,478) 35,616 35,845
Net (loss) income ................................. (272,608) 33,300 (74,476) 39,031 37,311
Per share amounts:
(Loss) income from continuing operations
before extraordinary items ................. $ (5.30) $ 0.66 $ (1.52) $ 0.84 $ 0.99
Net (loss) income per common share ............ $ (5.30) $ 0.66 $ (1.58) $ 0.92 $ 1.03
Per share amounts - assuming dilution:
(Loss) income from continuing operations
before extraordinary items ................. $ (5.30) $ 0.64 $ (1.52) $ 0.78 $ 0.90
Net (loss) income per common share ............ $ (5.30) $ 0.64 $ (1.58) $ 0.85 $ 0.93
BALANCE SHEET DATA:
Working capital ................................... $ 169,090 $ 311,991 $ 198,630 $ 157,608 $ 187,370
Total assets ...................................... 757,170 1,149,110 979,985 856,167 710,122
Long-term obligations, including current maturities 548,905 634,864 500,307 438,304 391,822
Stockholders' equity .............................. 74,467 342,935 284,238 261,910 176,632
(1) As described in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations, and in Notes 3, 4, 8 and
13 to the Consolidated Financial Statements, the Operations data for
1997 includes significant adjustments and charges to write down the
carrying values of goodwill and information systems hardware and
internally developed software - $133,542,000 and $26,781,000,
respectively, increase the valuation allowance on deferred tax assets,
$29,963,000, and provide for estimated losses related to patient service
assets and inventory and related to accounts receivable - $33,100,000
and $101,423,000, respectively.
(2) The per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. For further discussion, see Note 9 to the
Consolidated Financial Statements.
(3) In 1995, the Company incurred charges related to merger, restructuring
and integration activities as discussed in Note 7 to the Consolidated
Financial Statements.
(4) 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.
(5) In 1994, the Company disposed of its 51% interest in Abbey
Pharmaceutical Services, Inc.
(6) The Statements of Operations and Balance Sheet Data reflect the
acquisition on November 10, 1993 of the outstanding stock of Total
Pharmaceutical Care, Inc.
The Company did not pay any cash dividends on its Common Stock during
any of the periods set forth in the table above.
16
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In June 1997, the Company announced that it retained an investment
banking firm as its financial advisor to explore strategic alternatives to
enhance shareholder value, including the possible sale, merger, or
recapitalization of the Company. In February 1998, the Company accepted the
proposal of a private investment firm to enter into a recapitalization
transaction. In April 1998, the Company announced that the transaction would not
be completed (see Liquidity and Capital Resources). The entire process has given
rise to uncertainty within the Company's workforce, the impact
of which is difficult to determine, but which undoubtedly has shifted focus away
from the Company's operational priorities and may have impacted its financial
results.
RESULTS OF OPERATIONS
NET REVENUES: The Company derives substantially all of its revenue from
the home healthcare segment of the healthcare industry in principally three
service lines: home respiratory therapy (including home-delivered respiratory
medications), home infusion therapy and home medical equipment. In all three
lines, the Company provides patients with a variety of clinical services,
related products and supplies, most of which are prescribed by a physician as
part of a care plan. Substantially all of the Company's revenues are reimbursed
by third party payors; including Medicare, Medicaid, managed care organizations
and private insurers, representing approximately 30%, 9%, 35% and 26%,
respectively.
In 1995 and 1996, Management considered the Company's comprehensive,
integrated service offerings and broad geographic coverage a distinct
competitive advantage for obtaining managed care business. Accordingly, efforts
were focused on increasing managed care market share by offering a broad range
of services through the Company's extensive branch network. In June of 1997, the
Company determined that this strategy had negatively impacted its financial
performance, particularly for infusion therapy, because of significant managed
care price compression, difficulties in billing and collecting from managed care
organizations and losses of traditional referral business due to the Company's
focus on managed care business opportunities. In response to these conditions,
Management reevaluated its strategies and began efforts to exit certain managed
care contracts not meeting minimum profitability thresholds, as well as certain
lower-margin service lines and began to reemphasize traditional referral-based
business on a service line basis.
Traditional referral sources include physicians, hospitals, medical
groups and home health agencies. To maximize its ability to obtain a larger
share of the traditional market, the Company is currently recruiting
approximately 30 account executives to increase its sales force. Also in 1997,
the Company organized a physician relations group to place outbound telephone
calls to physician offices in an effort to increase and enhance awareness of and
stimulate interest in the Company's services.
Service lines targeted for exit in 1997 included medical supplies,
women's health and nursing management which represented annual revenues of
approximately $55.8 million. Some portion of the medical supply and nursing
business is expected to continue due to customer requirements. A consequence of
the initiatives to exit certain service lines and to exit certain low-margin
managed care contracts was the unintended loss of related business. One
contract, considered to be significant (representing 1% of net revenues), was
lost. Through the end of 1997, the Company had exited contracted business
representing approximately $25.0 million in annual revenues.
The following table sets forth a summary of net revenues by service
line:
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ ------
(DOLLARS IN MILLIONS)
Respiratory therapy ........ $ 606 $ 594 $ 600
Infusion therapy ........... 281 293 267
Home medical equipment/other 294 294 267
------ ------ ------
Total net revenues ... $1,181 $1,181 $1,134
====== ====== ======
17
19
Respiratory Therapy: Approximately 68% 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, noninvasive positive
pressure ventilation ("NPPV"), and other respiratory therapy products.
Respiratory therapy revenues are obtained predominantly from traditional
referral sources and reimbursed primarily by payors other than managed care.
The increase in respiratory therapy revenues in 1997 over 1996 is due to
the Company's concerted effort in 1997 to refocus on respiratory therapy and
to increase the number of territories covering this higher-margin traditional
business. The decrease in respiratory revenues in 1996 over 1995 was due
primarily to the Company's reduced emphasis on traditional referral business at
that time and to business disruptions caused by merger-related facility
consolidations and system conversions.
In August 1997, the Balanced Budget Act of 1997 was adopted which
includes several provisions affecting Medicare reimbursement for home medical
equipment and services. Effective January 1, 1998, reimbursement for home oxygen
services has been reduced by 25% and will be reduced an additional 5% in 1999.
Also effective January 1, 1998, was a freeze on Consumer Price Index-based
increases until 2002. Medicare-reimbursed home oxygen services represented
approximately 19.5% of the Company's net revenues in 1997. The Company estimates
the impact of the reduction on 1998 revenues to be $55 million to $60 million.
Infusion Therapy: Home infusion therapy involves the administration of
24-hour access to intravenous or enteral nutrition, anti-infectives,
chemotherapy 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. A significant portion of
infusion therapy revenues is obtained and reimbursed under contracts with
managed care organizations.
The reduction in infusion therapy revenues in 1997 as compared to 1996
is due to formidable price competition at the local and national levels, the
termination or loss of certain contracts and the Company's focus on the
respiratory business. To address the downward trend, the Company, among other
steps, is (1) recruiting sales representatives specializing in infusion therapy,
(2) adding an infusion therapy focus to its physician relations program, (3)
adopting related market research initiatives and (4) redesigning marketing
literature to provide a more clinical focus.
In an effort to improve the operating efficiencies of the infusion
therapy service line, the Company began a process in late 1997 of consolidating
certain of its pharmacy locations. Currently, the Company operates 44 pharmacy
locations, down from 60 locations a year ago. The consolidation of locations may
result in lower infusion revenues in future periods.
The increase in infusion therapy revenues in 1996 over 1995 was due
primarily to the Company's focus on obtaining managed care business during 1996
and 1995.
Home Medical Equipment/Other: The Company's primary emphasis in the home
medical equipment service line of business is on the provision of patient room
equipment, principally hospital beds and wheelchairs, to its patients receiving
respiratory or infusion therapy. A significant portion of the Company's home
medical equipment revenues are derived from and paid under managed care
contracts.
Home medical equipment/other revenues remained flat from 1997 to 1996.
This represents growth in the early part of 1997 due to the Company's emphasis
on obtaining managed care business as offset by the loss of medical supply and
nursing revenues in the latter part of 1997. The increase in home medical
equipment revenues in 1996 over 1995 was due primarily to the managed care focus
in 1996 and 1995.
The freeze on Consumer Price Index-based Medicare reimbursement
increases discussed above is applicable to certain patient service equipment
items within the Company's home medical equipment line.
Revenue Adjustments: Due to the complexity of many third-party billing
arrangements and uncertainty of reimbursement amounts for certain services
and/or from certain payors, adjustments to billed amounts are fairly common and
are typically identified and recorded at the point of cash application or upon
account review. Such 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
18
20
delivery to qualify a patient for reimbursement due to lack of written
authorization or a missed filing or appeal deadline. The increase in the
Company's average collection period from approximately 110 days in 1995 to
approximately 130 days in 1996 and early 1997 increased the level of
unidentified revenue adjustments accumulating in accounts receivable. In
addition, the significant number of information system conversions performed in
the second and third quarters of 1996 and the high rate of turnover among
billing and collection personnel in 1996 and 1997 impeded normal processing and
account reviews and resulted in an increased rate of billing errors in the
second half of 1996 and first half of 1997. A number of steps were taken in 1996
and 1997 to mitigate the impact of conversion disruptions and employee turnover
(see Liquidity and Capital Resources). In addition, in connection with the
Company's 1996 year-end audit, Management refined its procedures for estimating
the allowance amount needed to reduce gross accounts receivable to the estimated
net collectible amount. Specifically, Management began to estimate and provide
for unidentified revenue adjustments. As a result, in 1996 and in 1997,
Management estimated and recorded adjustments to reduce net revenues and
accounts receivable by $32.3 million and $40.0 million, respectively.
GROSS PROFIT: Gross margins were 61.8% in 1997, 66.1% in 1996 and 68.2%
in 1995. Gross profit decreased $50.9 million, an amount equal to 4.3% of net
revenues, in 1997 as compared to 1996. Significant components of the decrease
include an increase of $24.8 million in charges for excess quantities,
obsolescence and shrinkage of patient service equipment and inventory due, in
part, to the Company's decision to exit certain lines of business, and an
increase in patient service equipment depreciation of $17.3 million over 1996
due to higher levels of asset purchases in 1996 and 1995. Nursing costs
increased by $6.2 million in 1997 versus 1996, which represents a much higher
rate of increase than in the related revenues.
Also contributing to the decline in gross margins was the focus the
Company placed on increasing managed care market share in 1995, 1996 and the
early part of 1997. To address the downward pressure of managed care pricing on
gross margins, the Company adopted a number of initiatives, including the
decisions to exit certain contracts not meeting profitability standards and to
exit the lower-margin medical supply and home health nursing lines (see Net
Revenues). Other initiatives the Company adopted to improve its gross margins
include (1) phasing out subrented patient service equipment and (2) placing
sales force incentives on certain higher-margin products and services. Further,
late in 1996, the Company established automated purchasing budgets to more
effectively control the purchase and use of patient service equipment which
contributed to a $54.9 million reduction in net patient service equipment
purchases in 1997, as compared to 1996.
Gross profit increased $7.9 million in 1996 as compared to 1995 but
decreased as a percentage of net revenues by 2.1%. Approximately half of the
margin decrease was due to higher product and supply costs resulting from higher
volumes of lower-margin medical supply, infusion therapy and other services.
PROVISION FOR DOUBTFUL ACCOUNTS: The provision for doubtful accounts as
a percentage of net revenues was 10.3%, 5.7% and 8.9% in 1997, 1996 and 1995,
respectively. The significant increase in the bad debt provision rate for 1997
as compared to 1996 was due primarily to the significant increase in bad debt
write-offs experienced during the year.
The 1997 provision for doubtful accounts included adjustments of $55.0
million and $6.4 million recorded in the second and fourth quarters,
respectively, to increase the allowance for doubtful accounts. The second
quarter adjustment resulted from the lower than expected improvement in the
aging of accounts receivable and collection timing and rates. Management had
expected the impact of the 1996 field information system conversions and high
turnover among billing and collection personnel to have been substantially
reversed by the middle of 1997. However, the dollar amount and percentage of
accounts aged over 180 days at May 31, 1997 remained comparable to the December
31, 1996 amount and percentage and the average collection period had decreased
by only four days. As a result, Management increased its allowance estimate for
accounts aged over 180 days to provide for write-offs of older accounts expected
to be taken in the ensuing months. The adjustment also provided for an increased
allowance estimate for accounts aged less than 180 days, necessitated by billing
and collection difficulties that continued into early 1997 (see Liquidity and
Capital Resources). The fourth quarter adjustment resulted primarily from
refinements to the Company's allowance estimation procedures made as a result of
Management's year-end analysis of accounts receivable. Specifically, based on
tests of subsequent realization and review of patient billing files at selected
billing locations, increases were made to the percentages applied to the
Company's accounts receivable aging to estimate allowance amounts. In addition,
due to an increasing tendency for certain managed care payors to accumulate
significant amounts of patient balances, a specific review and allowance
estimation was performed for payors with large aggregate patient balances.
19
21
The 1995 provision for doubtful accounts included $26.3 million for an
impairment in Abbey Healthcare Group Incorporated's ("Abbey") 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 $26.3 million provision for Abbey's infusion therapy accounts
resulted primarily from the deterioration in the aging of infusion accounts
experienced in connection with Abbey's efforts to integrate the operations of
Total Pharmaceutical Care ("TPC"), acquired in November 1993, and Protocare,
Inc. ("Protocare"), acquired in March 1994.
SELLING, DISTRIBUTION AND ADMINISTRATIVE: Selling, distribution and
administrative expenses as a percentage of net revenues were 52.3%, 49.1% and
53.1%, for 1997, 1996 and 1995, respectively. Selling, distribution and
administrative expenses in 1997 increased $36.7 million over 1996. The increase
is due, in part, to increased staffing in the functional areas of reimbursement,
patient services and information systems to address the operating difficulties
the Company has been experiencing in those areas (see Liquidity and Capital
Resources). Also, severance and related excise tax expense totaling $7.9 million
was incurred in connection with the third and fourth quarter terminations of 15
executive management level employees (some of which will be replaced) and
approximately 510 field employees. The annual salary and benefit costs of
terminated employees amounted to approximately $24.6 million. Selling,
distribution and administrative expenses in 1997 also includes charges of $2.3
million incurred in connection with exiting certain business lines and closing
facilities.
The Company is currently recruiting approximately 30 account executives
for its sales force, an action which is expected to increase sales salary,
commission and benefit costs by approximately $3.4 million in 1998.
The improvement in 1996 as compared to 1995, can be attributed mainly to
the cost savings associated with the completed employee reductions and facility
consolidations effected in conjunction with the merger. 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.
As discussed previously, the Company has exited certain lines of
business and contracts. These actions, along with the reduction in Medicare
reimbursement for respiratory services effective January 1, 1998, have reduced
the Company's annual revenue run rate. Accordingly, Management is currently
evaluating its business model, operating strategies and cost structure to
identify appropriate changes that can be made to reduce costs. The Company has
engaged consultants to evaluate process efficiencies for certain functional
areas and to assist in assessing the Company's business model. These efforts are
intended to bring operating costs in line with the lower revenue base.
GOODWILL IMPAIRMENT: Certain 1997 conditions, including the Company's
failure to meet projections and expectations, declining gross margins, recurring
operating losses, downward adjustment to the Company's projections for 1998 and
a depressed Common Stock value, were identified by Management as potential
indicators of intangible asset impairment. In the fourth quarter of 1997,
Management conducted an evaluation of the carrying value and amortization
periods of the Company's recorded intangible assets. Management considered
current and anticipated industry conditions, recent changes in its business
strategies, and current and anticipated operating results. The evaluation
resulted in a reduction of the amortization period for its infusion business
goodwill from 40 years to 20 years (consistent with the life used for the
Company's goodwill related to businesses other than infusion) and an impairment
charge of $133.5 million. The reduction in the amortization period of infusion
business goodwill and the write-off will result in a net reduction in future
annual amortization expense of $2.4 million.
Of the total impairment charge recorded, $128.3 million related to
infusion business goodwill. The infusion business goodwill, with a net carrying
value of $170.1 million prior to the impairment charge, was originally recorded
in connection with the acquisition by Abbey of two infusion companies: TPC in
November 1993 and Protocare in March 1994.
The remaining $5.2 million of the total impairment charge related to
home respiratory and medical equipment ("HME/RT") business goodwill. The HME/RT
business goodwill, with a net carrying value of $118.7 million prior to the
impairment charge, was recorded in connection with the acquisitions of 144 local
and regional HME/RT companies.
20
22
The impairment recognized for HME/RT goodwill was due primarily to the
estimated impact on future operating results and cash flows of a reduction in
Medicare reimbursement for respiratory therapy services of 25% effective January
1, 1998 and an additional 5% effective January 1, 1999.
The impairment recognized for infusion business goodwill resulted
primarily from deteriorating operating and industry trends and lower future
earnings expectations. The Company's infusion revenues, which grew by 10.0% from
1995 to 1996, lagged expectations by about 4% and 2% in 1995 and 1996,
respectively, and infusion gross margins in those years were below expectations
and declining. At the time, Management believed that the lower revenues and
gross margins were due to difficulties and disruptions caused by the
consolidation of its branch operations and conversion of its field information
systems following the merger in 1995. Management expected revenue growth and
higher margins to resume in 1997. However, infusion revenues decreased by 4.1%
in 1997, lagging expectations by about 15% and infusion gross margins dropped an
additional 3.2%. Over the most recent three-year period, infusion gross margins
dropped 8% while the gross margins for the Company's other homecare services
decreased only 2%. The deterioration in infusion revenues and gross margins in
1997 resulted from the combined and related impacts of increased managed care
market share, competitive pricing pressures and changes in service mix from
higher-margin therapies to lower-margin therapies.
For purposes of determining recoverability, undiscounted cash flows were
estimated on a business line (infusion and HME/RT) and branch-specific basis.
Separate evaluations were performed for the Company's infusion and HME/RT
business goodwill because of separate identification in the accounting records,
deteriorating infusion-specific industry trends and the Company's recent change
in emphasis from broad integrated services to separate service lines. On a
branch-specific basis, undiscounted cash flows were estimated for each acquired
business based on forecasted 1998 cash flows projected over the estimated
remaining amortization period of the goodwill. Overhead costs substantially
related to branch operations were allocated to the locations. For those
locations for which undiscounted cash flows were insufficient to recover the
carrying amount of goodwill and other long-lived assets, fair value was
estimated at four and six times estimated 1998 earnings before interest, taxes,
depreciation and amortization ("EBITDA") for infusion and HME/RT acquired
businesses, respectively. The multiples were determined, in part, by reference
to recent publicized transactions.
INFORMATION SYSTEMS HARDWARE AND INTERNALLY DEVELOPED SOFTWARE
IMPAIRMENT: During 1997, Management reevaluated its current information systems
in light of year 2000 risks and ongoing operational difficulties and concluded
that significant additional costs would be necessary to adequately correct
system deficiencies and improve functionality. Accordingly, the decision was
made to replace the Company's systems, including internally developed software,
with a large scale, fully integrated enterprise resource planning ("ERP")
system. A two-year development and implementation plan was approved by the Board
of Directors in December 1997.
In light of the evaluation and decisions, Management reviewed the
carrying value of the capitalized software and recorded an impairment charge of
$20.2 million. The charge included (1) a $3.9 million reduction to the carrying
value of the Company's branch information system ("ACIS") program development
costs ($5.8 million remains at December 31, 1997), (2) an $11.4 million
write-off of costs associated with ACIS implementation and conversion, including
$4.4 million for the cost of developing conversion software, and (3) a $4.9
million write-off of costs of a specialized telecommunications software program
developed for ApriaDirect, a clinical program that was discontinued in December
1997.
In connection with Management's evaluation of the Company's internally
developed software, Management also conducted a review of the Company's computer
hardware, including telecommunications equipment. Equipment with a carrying
value of $6.6 million was identified as functionally obsolete or no longer in
use and was written off.
In 1995, the Company recorded an impairment charge of $22.2 million. The
charge represented computer hardware and software development costs associated
with systems that were discontinued in conjunction with the merger-related
system consolidations.
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
21
23
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 $14.6 million provided
for employment and payroll tax related claims and lawsuits, $3.5 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.
RESTRUCTURING AND MERGER COSTS: In connection with the 1995 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 also completed about half of the 496 information
system conversions as of December 1995; the remaining system conversions were
completed by September 1996.
The completion of the consolidation and restructuring plan yielded
savings in 1996 and 1997 labor and rent expense resulting from the reduction in
employee headcount and the facility closures. The savings however, were largely
offset by operating difficulties that arose, in part, from the information
systems conversions and integration efforts (see Liquidity and Capital
Resources) and by the impact on revenues, service mix and gross margins of
increased managed care business (see Net Revenues).
Restructuring and merger costs of approximately $58.3 million were
recorded in 1995 in connection with the consolidation and restructuring plan.
Restructuring costs included severance and related costs of $21.5 million due to
workforce reductions, $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 consisting primarily of fees for
investment banking, legal, consulting, accounting and filing requirements, as
well as certain other costs required to be incurred pursuant to the merger
agreement.
INTEREST EXPENSE: Interest expense was $49.4 million in 1997, $49.2
million in 1996 and $42.9 million in 1995. Although long-term debt has declined
significantly during 1997, the average debt balance for the year was higher than
in 1996 and 1995. The increases in interest expense in 1997 and 1996 were
mitigated by lower average interest rates than in the preceding year (see
Liquidity and Capital Resources).
INCOME TAXES: Income tax expense for 1997 amounted to $36.6 million and
included $30.0 million to increase the valuation allowance for deferred tax
assets due to recurring tax losses and lower estimates of future taxable income.
The remaining amount of income tax expense includes estimated state taxes
payable based on factors other than income, estimated settlement amounts for
in-progress state tax audits, foreign taxes related to the sale in 1997 of the
Company's 15% equity interest in a United Kingdom-based company and the
settlement amount paid on an examination of the Company's federal tax returns
for 1992 through 1995. Certain of these tax expense items resulted in increases
to deferred tax assets for which no benefit was recorded in 1997 due to
offsetting increases to the valuation allowance.
Income tax expense for 1996 amounted to $18.7 million and represented
36% of income before taxes. The deductibility in 1996 of certain accruals and
merger-related reserves established in 1995 resulted in a tax loss, an increase
in refundable taxes due to a carryback of a portion of the tax loss, and a
decrease in net deferred tax assets.
The 1995 tax benefit of $20.6 million (includes tax impact on
extraordinary charge of $1.7 million) was primarily attributable to losses
related to merger reserves and restructuring charges recorded during 1995.
LIQUIDITY AND CAPITAL RESOURCES
In 1997 the Company generated $104.1 million in operating cash flow
compared to cash used in operating activities of $59.3 million and $9.9 million
in 1996 and 1995, respectively. Improved collections on accounts receivable,
lower expenditures for patient service equipment and inventory, and the receipt
of income tax refunds were
22
24
the primary sources of 1997 operating cash flow. The primary reason for the
increased use of cash in 1996 as compared to 1995 was the increase in accounts
receivable.
ACCOUNTS RECEIVABLE: Accounts receivable, before allowance for doubtful
accounts, decreased by $94.2 million in 1997. The decrease resulted from the
combined impacts of (1) higher collection rates as evidenced by the increase in
collections as a percentage of revenue from 93% in 1996 to 99% in 1997, (2)
shorter collection periods as reflected by a decrease in the Company's average
collection period from approximately 130 days in 1996 to approximately 100 days
in 1997 and (3) an increase in the amount of bad debt write-offs taken, net of
recoveries, from $80.4 million in 1996 to $139.0 million in 1997. Accounts aged
in excess of 180 days at December 31, 1997 decreased by $33.6 million as
compared to December 31, 1996 but represented a comparable percentage of total
accounts receivable.
The improvements to date in collection rates and timing occurred
substantially in the second half of 1997. Through May 31, 1997 accounts
receivable, before allowance for doubtful accounts, had decreased by only $9.4
million and the amount and percentage of accounts aged over 180 days was
substantially unchanged from December 31, 1996. The slower than anticipated
decrease in accounts receivable and the aging of accounts was due to the
continuing effects of disruptions and delays in billing and collection activity
associated with the Company's 1995 and 1996 conversions of its field locations
to standardized information systems and the continuing impact of a higher than
normal turnover rate among billing and collection personnel in 1996.
In connection with the facility consolidations made in late 1995 and
early 1996 as part of the Company's restructuring and consolidation plan, each
branch information system was first converted to the predominant 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 net revenues underwent conversion. Of the 496 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 branches converted in the first, second and third quarters,
respectively. These activities contributed to billing delays and errors and,
ultimately, difficulties in receiving timely reimbursement for services
provided.
Actions taken in 1996 to mitigate the impact of conversion disruptions
and employee turnover included, among others, a collection incentive program
with special emphasis on older accounts, hiring additional management-level
billing and collection personnel and reinforcement training for the billing
locations. In early 1997, the Company took further steps to reduce the incidence
of billing errors including a process review of the field information systems 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. In the second
quarter of 1997, the Company reorganized the reimbursement and information
system functions.
These actions, among others, contributed to improvements in the second
half of 1997 in billing timeliness and accuracy and collection rates and time
frames. During the second half of 1997 significant focus and resources continued
to be directed at the improvement of order intake, fulfillment and billing and
collection processes. In connection with those efforts, the Company evaluated
the adequacy of the functionality of its field information systems and that of
other packaged home healthcare information systems to meet its changing business
and reimbursement needs. Based on the results of the evaluation, Management
decided to replace its existing systems but found the packaged home healthcare
information systems to be insufficient for the Company's needs. Rather,
Management committed to a two-year plan to implement a large scale, fully
integrated ERP system. Significant development effort will be required to
customize the ERP system for the complexities of the Company's billing and
contractual arrangements.
CREDIT FACILITY AND LONG-TERM DEBT: The Company's credit agreement with
Bank of America and a syndicate of banks was amended in April and July of 1997
and further amended in January, March and April of 1998. Total borrowings
allowed under the facility were reduced from an original maximum of $800 million
to $400 million at December 31, 1997. Further reductions to $385 million, $350
million and $300 million are scheduled for December 31, 1998, 1999 and 2000,
respectively. Additionally, amounts available for acquisitions were reduced,
tighter restrictions were imposed on dividends and other distributions and
interest rates and commitment fees were increased. Certain nonrecurring charges
and resulting net losses (as defined by the agreement) will be excluded from the
calculation of specific financial ratios when determining covenant compliance.
23
25
The agreement, as amended, permits the Company to elect one of two
variable rate interest options at the time an advance is made. The first option
is a rate expressed as 0.75% plus the higher as between (a) the Federal Funds
Rate plus 0.50% per annum, and (b) the Bank of America "reference" rate. The
second option is a rate based on the London Interbank Offered Rate ("LIBOR")
plus an additional increment of 2.25% per annum. Prior to the amendments, the
variable rate options consisted of (a) the higher as between (i) the Bank of
America "reference" rate, and (ii) the Federal Funds Rate plus 0.50% per annum,
or (b) a rate based on LIBOR plus 0.35% to 1.0% (depending on the ratio of
consolidated funded indebtedness to earnings before interest income or expense,
taxes, extraordinary gains or losses, depreciation and amortization as more
fully set forth in the agreement). The effective interest rate at December 31,
1997 was 7.1% for borrowings of $338 million. The credit agreement requires
payment of commitment fees of 0.50% on the unused portion of the facility.
Borrowings under the credit agreement are secured by substantially all the
assets of the Company and the agreement also 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. Prior amendments to the credit agreement had waived
covenant deficiencies arising as the result of charges taken in 1997 on a
temporary basis in anticipation of the consummation of the JLL Agreement (see
Recent Developments). The amendment to the credit agreement effected in April
1998 permanently waives the covenant deficiencies existing as a result of the
charges taken by the Company in 1997 and the termination of the JLL Agreement
(see Recent Developments).
Under the Indenture governing the Company's $200 million 9-1/2% Senior
Subordinated Notes due 2002, the Company's ability to incur indebtedness becomes
restricted at times that the Company's "Fixed Charge Coverage Ratio" (as defined
in the Indenture) is less than 3.0 to 1.0. Charges taken against revenues in the
second quarter of 1997 resulted in the Fixed Charge Coverage Ratio being less
than 3.0 to 1.0. This condition is expected to continue for at least the balance
of 1998. Since the second quarter of 1997 the Company has changed its cash
management procedures so as to avoid the need to incur indebtedness in violation
of the terms of the Indenture and has accumulated a cash balance of $45.5
million as of March 31, 1998. The Company does not anticipate a need to incur
debt in connection with its operations during 1998. However, the lack of
borrowing ability may restrict the Company's ability to make major acquisitions
during 1998, and the Company may attempt to procure an amendment to the
Indenture which would permit borrowings for acquisitions and other purposes.
DISPOSITIONS AND BUSINESS COMBINATIONS: In January 1997, the Company
sold its 15% equity interest in Omnicare plc, a United Kingdom based public
limited company, to a former director of Apria. Cash proceeds from the sale were
$2.8 million, which resulted in a gain of $1.2 million.
On March 14, 1997, the Company sold M&B Ventures, Inc., its last
remaining Medicare-certified home health agency, which operated in South
Carolina under the assumed business names of Doctors Home Health and Advanced
Care Service, to North Trident Regional Hospital, Inc., a subsidiary of
Columbia/HCA Healthcare Corporation. Cash proceeds from the sale were $2.4
million, resulting in a loss on the sale of approximately $784,000.
The Company disposed of several branch locations in California and
Arizona in the latter part of 1997. Cash proceeds from these sales were $1.2
million, which resulted in a net gain of approximately $386,000.
On September 30, 1997, the Company exercised its warrants to purchase
247,500 shares of common stock of Living Centers of America, Inc. The subsequent
sale of the shares acquired upon the warrant exercise resulted in net proceeds
and a gain of $1.4 million.
The Company periodically makes acquisitions of complementary businesses
in specific geographic markets. Acquisitions consummated during 1997 and
payments of contingent consideration resulted in cash payments of $11.3 million.
COMMITMENTS: The Company is in the fourth 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
results in a penalty of 10% of the difference between the annual commitment and
actual purchases, beginning with the 12-month period ended August 31, 1996.
Actual purchases for the 12-month periods ended August 31, 1997 and 1996,
exceeded the annual commitment. As a result of Management's recent decision to
exit the medical supply business, the Company has worked to transition its
managed care supply business directly to the vendor and is currently
restructuring the agreement to reflect these changes.
As mentioned above, Management has committed to a two-year plan to
implement a large-scale fully integrated ERP system. Significant development
efforts will be required to customize the system for the complexities of the
Company's business. Software licensing fees and expenditures to upgrade hardware
will also be required. Although the majority of the project cost will be
capitalized, a minimal component will be expensed in the near-term. The Company
is currently in the vendor selection phase of the project, and consequently, it
cannot estimate the total cost of the project with a reasonable degree of
accuracy. The Company expects to finance the new system through a combination of
lease financing and utilization of its existing credit facility.
24
26
YEAR 2000 ISSUE: As the year 2000 approaches, an issue ("Year 2000
Issue") impacting all companies has emerged regarding how existing application
software programs and operating systems can accommodate this date value. In
brief, many existing application programs in the marketplace were designed to
accommodate a two digit date position which represents the year (e.g., "95" is
stored on the system and represents the year 1995). Consequently, the year 1999
could be the maximum date value systems would be able to accurately process.
Beginning in late 1997, the Company conducted a comprehensive review of
its existing computer systems, including an assessment of the nature and
potential extent of the impact of the Year 2000 Issue. As a result, the Company
has begun the modification process of its software in order for its computer
systems to function properly in the year 2000 and thereafter. The Company is
utilizing internal resources to reprogram and test the software for the year
2000 modifications. The total cost of the project is not expected to have a
material effect on the Company's results of operations. The project is currently
on schedule and the Company anticipates all phases of the project, including the
testing and implementation phases, to be completed by December 31, 1998.
Further, the Company's systems underwent two external assessments of the Year
2000 Issue and received a "low" risk rating.
The Company has committed to a plan to replace its existing field
information systems with a large-scale fully integrated enterprise resource
planning system. The new system, which will be year 2000-compliant from the
outset, is not expected to be fully functional at all locations by the beginning
of the year 2000.
Additionally, a formal process has been instituted to assess other
potential risks the Company may face in light of the Year 2000 Issue. Examples
of such issues include, but are not limited to, electronic interfaces with
external agents such as payors, banks and suppliers and internal operational
issues such as date-sensitive security systems and elevators. Another area of
potential risk is with certain patient service equipment items that have
microprocessors with date functionality which could malfunction in the year
2000. Among other steps, the Company has initiated formal communications with
all its significant suppliers of its patient service equipment to ensure those
third parties are also working to remediate their own year 2000 issues, if
applicable. The Company believes that it will be able to resolve these issues
and any others it may identify by the year 2000. The cost of such remediation
has not yet been quantified.
RECENT DEVELOPMENTS: On February 3, 1998, the Company entered into a
Stock Purchase Agreement (the "JLL Agreement") with JLL Argosy Apria, LLC,
Joseph Littlejohn & Levy Fund III, LP and CIBC WG Argosy Merchant Fund 2, LLC
(together, the "JLL Group"). Pursuant to the terms of the JLL Agreement, among
other things, the Company had agreed issue and sell 12,300,000 shares of Common
Stock and issue warrants to purchase 5,000,000 additional shares, exercisable at
$20.00 per share, in consideration for a cash investment of $172.2 million by
the JLL Group. The Company was to have used the proceeds, together with $70.0
million in new borrowings under the Company's credit facility, to purchase
17,300,000 shares of Common Stock. On April 3, 1998, the parties agreed to
terminate the JLL Agreement without any further obligation to any party. The
Board of Directors of the Company has formed a committee to assess the Company's
future alternatives in light of the termination of the JLL Agreement.
OTHER: At December 31, 1997, the Company had $8.2 million invested in a
money market account.
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 year. At
December 31, 1997, availability under the credit facility, after giving
consideration to the subsequent reduction in the loan commitment, was $51.7
million.
The Company believes that inflation has not had a significant impact on
the Company's historical operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 was party to two swap agreements during 1997, both of which were
terminated by the counterparties prior to December 31, 1997. For the fiscal year
ended December 31, 1997, the Company received interest at a weighted average
rate of 6.7% and paid interest at a weighted average rate of 5.6%. Payment or
receipt of the interest differential was settled periodically and recognized
monthly in the financial statements as an adjustment to interest expense.
25
27
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.
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 1997.
26
28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors....................................................... F-1
Consolidated Balance Sheets -- December 31, 1997 and 1996............................ F-2
Consolidated Statements of Operations -- Years ended
December 31, 1997, 1996 and 1995................................................... F-3
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1997, 1996 and 1995................................................... F-4
Consolidated Statements of Cash Flows -- Years ended
December 31, 1997, 1996 and 1995................................................... F-5
Notes to Consolidated Financial Statements........................................... F-6
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts...................................... S-1
29
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, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Apria
Healthcare Group Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended December 31, 1997, 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
March 11, 1998 (except for Notes 5, 12 and 14,
as to which the dates are April 2,
1998, April 9, 1998 and April 3,
1998, respectively)
F-1
30
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------------
1997 1996
----------- -----------
(IN THOUSANDS)
ASSETS
CURRENT ASSETS
Cash ................................................................... $ 16,317 $ 26,930
Accounts receivable, less allowance for doubtful accounts of $58,413 and
$73,809 at December 31, 1997 and 1996, respectively .................. 256,845 335,616
Inventories ............................................................ 26,082 55,733
Deferred income tax benefits ........................................... -- 31,106
Refundable and prepaid income taxes .................................... 2,576 34,598
Prepaid expenses and other current assets .............................. 9,753 9,764
----------- -----------
TOTAL CURRENT ASSETS ............................................. 311,573 493,747
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $245,772 and
$229,684 at December 31, 1997 and 1996, respectively .................. 184,704 213,602
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ................................ 87,583 120,030
INTANGIBLE ASSETS, NET ................................................... 167,620 312,590
OTHER ASSETS ............................................................. 5,690 9,141
----------- -----------
$ 757,170 $ 1,149,110
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ....................................................... $ 50,691 $ 83,619
Accrued payroll and related taxes and benefits ......................... 40,397 34,850
Accrued insurance ...................................................... 12,247 11,336
Other accrued liabilities .............................................. 30,463 40,363
Current portion of long-term debt ...................................... 8,685 11,588
----------- -----------
TOTAL CURRENT LIABILITIES ........................................ 142,483 181,756
LONG-TERM DEBT ........................................................... 540,220 623,276
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; 51,568,525 and 51,203,450 shares issued
and outstanding at December 31, 1997 and 1996, respectively .......... 51 51
Additional paid-in capital ............................................. 324,090 319,950
Retained (deficit) earnings ............................................ (249,674) 22,934
----------- -----------
74,467 342,935
COMMITMENTS AND CONTINGENCIES ............................................ -- --
----------- -----------
$ 757,170 $ 1,149,110
=========== ===========
See notes to consolidated financial statements.
F-2
31
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Net revenues ........................................... $ 1,180,694 $ 1,181,143 $ 1,133,600
Costs and expenses:
Cost of net revenues:
Product and supply costs ........................... 334,766 311,539 286,919
Patient service equipment depreciation ............. 84,932 67,658 57,400
Nursing services ................................... 15,973 9,798 7,361
Other .............................................. 15,511 11,680 9,319
----------- ----------- -----------
451,182 400,675 360,999
Provision for doubtful accounts ........................ 121,908 67,040 100,463
Selling, distribution and administrative ............... 617,113 580,436 602,478
Amortization of intangible assets ...................... 16,833 16,920 16,273
Goodwill impairment .................................... 133,542 -- --
Information systems hardware and
internally developed software impairment ............. 26,781 -- 22,160
Employee contracts, benefit plan and claim settlements . -- 14,795 20,367
Restructuring and merger costs ......................... -- -- 58,337
----------- ----------- -----------
1,367,359 1,079,866 1,181,077
----------- ----------- -----------
OPERATING (LOSS) INCOME ............................ (186,665) 101,277 (47,477)
Interest expense ....................................... 49,393 49,249 42,942
----------- ----------- -----------
(LOSS) INCOME BEFORE TAXES AND EXTRAORDINARY CHARGE (236,058) 52,028 (90,419)
Income tax expense (benefit) ........................... 36,550 18,728 (18,941)
----------- ----------- -----------
(LOSS) INCOME BEFORE EXTRAORDINARY CHARGE .......... (272,608) 33,300 (71,478)
Extraordinary charge on debt refinancing, net of taxes . -- -- 2,998
----------- ----------- -----------
NET (LOSS) INCOME .................................. $ (272,608) $ 33,300 $ (74,476)
=========== =========== ===========
PER COMMON SHARE AMOUNTS:
(Loss) income before extraordinary charge ............ $ (5.30) $ 0.66 $ (1.52)
Extraordinary charge on debt refinancing, net of taxes $ - $ - $ (0.06)
----------- ----------- -----------
Net (loss) income .................................... $ (5.30) $ 0.66 $ (1.58)
=========== =========== ===========
PER COMMON SHARE AMOUNTS - ASSUMING DILUTION:
(Loss) income before extraordinary charge ............ $ (5.30) $ 0.64 $ (1.52)
Extraordinary charge on debt refinancing, net of taxes $ - $ - $ (0.06)
----------- ----------- -----------
Net (loss) income .................................... $ (5.30) $ 0.64 $ (1.58)
=========== =========== ===========
See notes to consolidated financial statements.
F-3
32
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
ADDITIONAL RETAINED TOTAL
COMMON STOCK PAID-IN EARNINGS STOCKHOLDERS'
SHARES PAR VALUE CAPITAL (DEFICIT) EQUITY
------ --------- -------- --------- ------------
(IN THOUSANDS)
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
Exercise of stock options............ 365 4,013 4,013
Other................................ 127 127
Net loss............................. (272,608) (272,608)
------ ------ -------- --------- --------
Balance at December 31, 1997......... 51,568 $ 51 $324,090 $(249,674) $ 74,467
====== ====== ======== ========= ========
See notes to consolidated financial statements.
F-4
33
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net (loss) income ......................................................... $(272,608) $ 33,300 $ (74,476)
Items included in net (loss) income not requiring (providing) cash:
Extraordinary charge on debt refinancing .............................. -- -- 4,684
Provision for doubtful accounts ....................................... 121,908 67,040 100,463
Provision for revenue adjustments ..................................... 40,000 32,300 --
Provision for excess/obsolete equipment ............................... 35,300 10,513 7,500
Depreciation .......................................................... 118,054 93,123 84,607
Amortization of intangible assets ..................................... 16,833 16,920 16,273
Amortization of deferred debt costs ................................... 1,197 1,703 1,908
Impairment loss on long-lived assets .................................. 160,323 -- 25,057
(Gain) loss on disposition of assets .................................. (2,044) 340 3,938
Deferred income taxes ................................................. 29,963 15,920 (19,548)
Change in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable ....................................... (80,229) (176,551) (118,151)
Decrease (increase) in inventories .................................... 2,722 (12,903) (4,904)
Decrease (increase) in prepaids and other
current assets (including prepaid income taxes) .................... 32,758 2,544 (12,194)
Decrease in other non-current assets .................................. 508 310 3,269
(Decrease) increase in accounts payable ............................... (33,153) (17,033) 18,942
Increase in accruals and other non-current liabilities ................ 1,378 3,175 3,434
(Decrease) increase in accrued restructuring costs .................... (5,408) (11,953) 19,085
Net purchases of patient service equipment, net of effects of acquisitions (63,519) (118,372) (72,518)
Other ..................................................................... 127 329 2,733
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............... 104,110 (59,295) (9,898)
INVESTING ACTIVITIES
Purchases of property, equipment and
improvements, net of effects of acquisitions ........................ (21,047) (54,207) (49,327)
Proceeds from disposition of assets ................................... 8,212 317 1,257
Acquisitions and payments of contingent consideration ................. (11,283) (14,815) (46,086)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ............................. (24,118) (68,705) (94,156)
FINANCING ACTIVITIES
Proceeds under revolving credit facility .............................. 129,950 775,125 463,999
Payments under revolving credit facility .............................. (211,950) (641,425) (229,171)
Proceeds from senior and other long-term debt ......................... -- -- 126,557
Payments of senior and other long-term debt ........................... (11,793) (11,445) (275,022)
Capitalized debt costs, net ........................................... (825) (1,312) (1,429)
Issuances of Common Stock ............................................. 4,013 15,158 13,064
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ............... (90,605) 136,101 97,998
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH ........................................... (10,613) 8,101 (6,056)
Cash at beginning of period ............................................... 26,930 18,829 21,188
Net activity for Homedco - October 1, 1994 to December 31, 1994 ........... -- -- 3,697
--------- --------- ---------
CASH AT END OF PERIOD ............................................. $ 16,317 $ 26,930 $ 18,829
========= ========= =========
See notes to consolidated financial statements.
F-5
34
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 statement of operations for 1995 reflects combined results for
the year ended December 31, 1995 and excludes the operations of Homedco for the
period October 1, 1994 through December 31, 1994.
Company Background: The Company operates in the home healthcare segment
of the healthcare industry and provides services including home respiratory
therapy, home infusion therapy, home medical equipment and other services to
patients in the home throughout the United States. Respiratory therapy, infusion
therapy and home medical equipment/other represent approximately 51%, 24% 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 39% 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 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%, 6% and 5% of total net revenues for
1997, 1996 and 1995, respectively.
The Company establishes allowances for revenue adjustments and
doubtful accounts based primarily on the application of specified percentages to
the accounts receivable aging. The percentages used are determined based on
historical trends, reviews of patient billing files and other factors. Revenue
adjustments, which are normally identified and recorded at the point of cash
application or upon account review, result from differences between estimated
and actual reimbursement amounts, failures to obtain payor authorizations or
other specified billing documentation, missed filing or appeal deadlines and
other reasons unrelated to credit risk. The allowance for revenue adjustments is
deducted directly from gross accounts receivable.
The Company periodically refines its procedures for estimating the
allowances for revenue adjustments and doubtful accounts based on experience
with the estimation process and changes in circumstances. At December 31, 1997,
the estimation process was modified to include an evaluation of the
collectibility of amounts owed by third-party payors with aggregate patient
balances exceeding a specified amount. In addition, the percentages applied to
the Company's aging categories were increased at December 31, 1997 based upon
the results of Management's year-end accounts receivable analysis. Because of
continuing changes in the healthcare industry and third-party reimbursement, it
is reasonably possible that the Company's estimates of net collectible revenues
could change in the near term.
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 $13,309,000 and $24,469,000 at December 31, 1997 and
1996, 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 disposables used in
conjunction with patient service equipment.
F-6
35
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Patient Service Equipment: Patient service equipment consists of medical
equipment provided to in-home patients and is stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
equipment which range from one to 10 years. Included in patient service
equipment are assets under capitalized leases which consist principally 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.
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 15 years; information systems - three to
eight years.
Capitalized Software: Included in property, equipment and improvements
are costs related to internally developed and purchased software that are
capitalized and amortized over periods not exceeding eight years. Capitalized
costs include direct costs of materials and services incurred in developing or
obtaining internal use software and payroll and payroll related costs for
employees directly involved in the development of internal use software. Costs
incurred to develop or obtain software for data access or conversions are also
capitalized.
The carrying value of capitalized software is reviewed if the facts and
circumstances suggest that it may be impaired. Indicators of impairment may
include a subsequent change in the extent or manner in which the software is
used or expected to be used, a significant change to the software is made or
expected to be made or the cost to develop or modify internal use software
exceeds that expected amount. If events and circumstances indicate that the
software is impaired, the carrying value is reduced to Management's estimate of
the value of the remaining utility of the software.
Long-lived Assets: 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.
Intangible Assets: Intangible assets consist 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. Covenants are amortized over contractual
terms, which range from 3 to ten years. Goodwill, representing the excess of the
purchase price over the estimated fair value of the net assets of the acquired
business, is amortized over the period of expected benefit. The amortization
period for goodwill is generally 20 years. Prior to December 31, 1997 the
amortization period for goodwill related to acquired infusion therapy businesses
was 40 years. 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 to estimated fair value.
For purposes of determining recoverability, undiscounted cash flows are
estimated for the following year on a business line (infusion therapy and home
respiratory/medical equipment) and branch-specific basis and are multiplied by
the number of years remaining in the amortization period. Corporate costs
substantially related to branch operations are allocated on the basis of
following year revenues. Goodwill is generally separately identified by
acquisition and branch location. However, for multi-location acquisitions,
goodwill is allocated on the basis of acquisition date annual revenues. For
those operations for which undiscounted cash flows are insufficient to recover
the carrying value of recorded goodwill and other long-lived assets, the fair
value of goodwill is estimated at the then current market multiple of estimated
following year earnings before interest, taxes, depreciation and amortization
("EBITDA") for the business line.
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 $4,088,000, $6,095,000 and
$3,849,000 for 1997, 1996 and 1995, respectively, are expensed as incurred and
included in "Selling, distribution and administrative expenses."
F-7
36
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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: The Company has adopted the provisions of Statement
of Financial Accounting Standards 128, Earnings Per Share, and applied this
pronouncement to all periods presented. This statement requires the presentation
of both basic and diluted net income (loss) per share for financial statement
purposes. Basic net income (loss) per share is computed by dividing income
(loss) available to common stockholders by the weighted average number of common
shares outstanding. Diluted net income (loss) per share includes the effect of
the potential shares outstanding, including dilutive stock options and warrants
using the treasury stock method.
Stock-based Compensation: 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).
Recent Accounting Pronouncements: In June 1997, the FASB issued
Statement No. 130, Reporting Comprehensive Income, effective for fiscal years
beginning after December 15, 1997, which establishes standards for the reporting
and display of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders' equity
except those resulting from investments by and distributions to owners.
Currently, no differences exist between the Company's net income or loss and
comprehensive net income or loss.
In June 1997, the FASB issued Statement No. 131 (SFAS 131), Disclosures
About Segments of an Enterprise and Related Information, effective for fiscal
years beginning after December 15, 1997, which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
information about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Once Management has completed its review
of SFAS 131, the Company will adopt the new requirements retroactively in 1998.
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed For or Obtained For Internal Use. The SOP is
effective for Companies beginning on January 1, 1999. The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal-use. The Company
currently capitalizes such costs. The Company recently committed to a two-year
plan to develop and implement an enterprise resource planning system, the
capitalizable and noncapitalizable costs of which are expected to be material to
the Company's future earnings and financial position.
Reclassifications: Certain amounts for prior periods have been
reclassified to conform to the current year presentation.
F-8
37
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.
During 1997, 1996 and 1995, the Company acquired numerous complementary
businesses in specific geographic markets. The businesses, none of which were
individually significant, were purchased for a combination of cash and common
stock. The transactions were accounted for as purchases and, accordingly, the
operations of the acquired businesses are included in the consolidated
statements of operations from the dates of acquisition. The purchase prices were
allocated to the various underlying tangible and intangible assets and
liabilities on the basis of estimated fair value, determined in part by
independent appraisal.
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,
------------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Fair value of assets acquired $ 11,729 $ 15,356 $ 50,255
Liabilities assumed ......... (446) (541) (3,382)
Common Stock issued ......... -- -- (787)
-------- -------- --------
Cash paid ............. $ 11,283 $ 14,815 $ 46,086
======== ======== ========
In January 1997, the Company sold all of its 15% equity interest in
Omnicare plc, a United Kingdom based public limited company, to a former
director of Apria. Cash proceeds from the sale were $2,791,000, which resulted
in a gain of $1,232,000.
In March 1997, the Company sold its Medicare-certified home health
agency, M&B Ventures, Inc., for cash proceeds of $2,400,000 and recorded a loss
on sale of $784,000. The Company also disposed of several branch locations in
California and Arizona in the latter part of 1997. Cash proceeds from these
sales were $1,189,000, which resulted in a net gain of $386,000. The operations
of M&B Ventures and the disposed branches had revenues of approximately
$4,648,000, $11,082,000 and $11,075,000 for 1997, 1996 and 1995, respectively.
In September 1997, the Company exercised its warrants to purchase
247,500 shares of common stock of Living Centers of America, Inc. The subsequent
sale of the shares netted cash proceeds and a gain of $1,350,000.
F-9
38
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following:
DECEMBER 31,
------------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Land and improvements .............. $ 53 $ 88
Buildings and leasehold improvements 23,283 22,067
Equipment and furnishings .......... 71,815 69,136
Information systems ................ 75,012 112,215
--------- ---------
170,163 203,506
Less accumulated depreciation ...... (82,580) (83,476)
--------- ---------
$ 87,583 $ 120,030
========= =========
Included in information systems above are the capitalized costs of
software purchased and developed for internal use. In the fourth quarter of
1997, the Company wrote down the carrying value of internally developed software
by $20,225,000 and computer equipment by $6,556,000. The software impairment
charge consisted of $15,305,000 of capitalized development and implementation
costs related to the Company's branch information system ("ACIS") which the
Company has committed to replace within two years and $4,920,000 of capitalized
development costs related to specialized telecommunications software for
ApriaDirect, a clinical program that was discontinued in December 1997. At
December 31, 1997, $5,769,000 of net capitalized ACIS development costs are
included in information systems. The amount represents Management's estimate of
the value of the software's utility for the period prior to replacement. The
computer equipment impairment charge consists of computer and telecommunications
equipment identified as functionally obsolete or no longer in use.
NOTE 4 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
DECEMBER 31,
------------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Covenants not to compete .... $ 30,874 $ 31,824
Goodwill .................... 198,930 327,821
--------- ---------
229,804 359,645
Less accumulated amortization (62,184) (47,055)
--------- ---------
$ 167,620 $ 312,590
========= =========
Certain 1997 conditions, including the Company's failure to meet
projections and expectations, declining gross margins, recurring operating
losses, significant downward adjustment to the Company's projections for 1998
and a depressed common stock value, were identified by Management as potential
indicators of intangible asset impairment. In the fourth quarter of 1997,
Management conducted an evaluation of the carrying value and amortization
periods of recorded intangible assets. Management considered current and
anticipated industry conditions, recent changes in its business strategies and
current and anticipated operating results. The evaluation resulted in a
reduction of the amortization period for its infusion business goodwill from 40
years to 20 years (consistent with the period used for the Company's goodwill
related to businesses other than infusion) and an impairment charge of
$133,542,000. Of the total impairment charge, $128,308,000 related to infusion
business goodwill and $5,234,000 related to home respiratory and medical
equipment ("HME/RT") business goodwill.
The impairment recognized for infusion goodwill resulted primarily from
deteriorating operating and industry trends and lower future earnings
expectations. The impairment recognized for HME/RT goodwill was due primarily to
the estimated impact on future operating results and cash flows of a reduction
in Medicare reimbursement rates for respiratory therapy services of 25%,
effective January 1, 1998, and an additional 5% effective January 1, 1999.
F-10
39
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Separate evaluations of goodwill recoverability were performed for the
Company's infusion and HME/RT business goodwill because of separate
identification in the accounting records, deteriorating infusion specific
industry trends and the Company's recent change in emphasis from broad
integrated services to separate service lines.
For purposes of determining recoverability, undiscounted cash flows were
estimated by branch for each acquired business based on forecasted 1998 cash
flows and were projected over the remaining amortization period of the goodwill.
Corporate costs substantially related to branch operations were allocated to the
locations. For those locations for which undiscounted cash flows were
insufficient to recover the carrying value of recorded goodwill and other
long-lived assets, fair value was estimated at four and six times estimated 1998
earnings before interest, taxes, depreciation and amortization (EBITDA) for
infusion and HME/RT acquired businesses, respectively. The multiples were
determined by reference to recent transactions.
NOTE 5 -- CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
------------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Notes payable relating to revolving credit facilities . $ 338,000 $ 420,000
9.5% senior subordinated notes ........................ 200,000 200,000
Other, interest at rates ranging from 0% to 4.1%,
payments due at various dates through December 1998 172 1,267
Capital lease obligations (see Note 10) ............... 16,555 19,790
--------- ---------
554,727 641,057
Less: Current maturities .............................. (8,685) (11,588)
Unamortized deferred debt costs ............. (5,822) (6,193)
--------- ---------
$ 540,220 $ 623,276
========= =========
Credit Agreement: The Company's credit agreement with Bank of America
and a syndicate of banks ("the banks") was amended in April and July of 1997 and
further amended in January, March and April 1998. The loan facility, which
expires in August 2001, was reduced several times from a high of $800,000,000 to
the current level of $400,000,000. The loan commitment will be further
permanently reduced to $385,000,000, $350,000,000 and $300,000,000 on December
31, 1998, 1999 and 2000, respectively. Further, amounts available for
acquisitions were reduced, tighter restrictions were imposed on certain
distributions, the payment of dividends was prohibited and interest rates and
commitment fees were increased. Also, net proceeds from the issuance of debt or
sale of equity must be used to permanently reduce outstanding debt. Certain
charges from the fourth quarter of 1996, and the second and fourth quarters of
1997, totaling $76,024,000, $98,000,000 and $81,740,000, respectively, and
resulting net losses have been and will continue to be excluded from the
calculation of specific financial ratios when determining covenant compliance.
The agreement, as amended, permits the Company to elect one of two
variable rate interest options at the time an advance is made. The first option
is a rate expressed as 0.75% plus the higher as between (a) the Federal Funds
Rate plus 0.50% per annum, and (b) the Bank of America "reference" rate. The
second option is a rate based on the London Interbank Offered Rate ("LIBOR")
plus an additional increment of 2.25% per annum. Prior to the amendment, the
variable rate options consisted of (a) the higher as between (i) the Bank of
America "reference" rate, and (ii) the Federal Funds Rate plus 0.50% per annum;
and (b) a rate based on LIBOR plus 0.35% to plus 1.0%, dependent upon achieving
targeted levels of debt to EBITDA. The effective interest rate at December 31,
1997 was 7.1% for borrowings of $338,000,000. The credit agreement currently
requires payment of commitment fees of 0.50% on the unused portion of the
facility. Borrowings under the credit agreement are secured by substantially all
of the assets of the Company, and the agreement contains numerous restrictions
including, but not limited to, covenants requiring the maintenance of certain
financial ratios, limitations on additional borrowings, capital expenditures,
mergers, acquisitions and investments and restrictions on cash dividends, loans
and other distributions. The amendment to the credit agreement effected in April
1998 permanently waives any covenant deficiencies existing through the date of
the amendment as the result of charges taken in 1997 and the termination of the
JLL Agreement.
At December 31, 1997, the Company's outstanding letters of credit
amounted to $10,276,000 and credit available under the revolving credit
facility, after giving consideration to the subsequent reduction in the loan
commitment, was $51,724,000.
The carrying amount of the revolving credit facility approximates fair
market value because the underlying instruments are variable notes that reprice
frequently.
Under the Indenture governing the Company's $200,000,000 9-1/2% Senior
Subordinated Notes due 2002, the Company's ability to incur indebtedness becomes
restricted at times that the Company's "Fixed Charge Coverage Ratio" (as defined
in the Indenture) is less than 3.0 to 1.0. Charges taken against revenues in the
second quarter of 1997 resulted in the Fixed Charge Coverage Ratio being less
than 3.0 to 1.0. This condition is expected to continue for at least the balance
of 1998. Since the second quarter of 1997 the Company has changed its cash
management procedures so as to avoid the need to incur indebtedness in violation
of the terms of the Indenture and has accumulated a cash balance of $45.5
million as of March 31, 1998. The Company does not anticipate a need to incur
debt in connection with its operations during 1998. However, the lack of
borrowing ability may restrict the Company's ability to make major acquisitions
during 1998, and the Company may attempt to procure an amendment to the
Indenture which would permit borrowings for acquisitions and other purposes.
F-11
40
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has limited involvement with derivative financial
instruments and does not use them for trading purposes. Interest rate swap
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
was party to two swap agreements during 1997, both of which were terminated by
the counterparties prior to December 31, 1997. For the fiscal year ended
December 31, 1997, the Company received interest at a weighted average rate of
6.7% and paid interest at a weighted average rate of 5.6%. Payment or receipt of
the interest differential was settled periodically and recognized monthly in the
financial statements as an adjustment to interest expense.
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
$211,540,000 and $209,940,000 at December 31, 1997 and 1996, respectively.
Maturities of long-term debt, exclusive of capital lease obligations,
for the five years ending December 31, 2002 and thereafter, are as follows:
(IN THOUSANDS)
--------------
1998............................................................... $ 172
1999 ............................................................... --
2000 ............................................................... --
2001 ............................................................... 338,000
2002 ............................................................... 200,000
Thereafter ......................................................... --
--------
$538,172
========
Total interest paid in 1997, 1996 and 1995 amounted to $53,222,000,
$44,341,000 and $37,454,000, respectively.
F-12
41
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, 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
(loss) income and per share amounts would have been adjusted to the pro forma
amounts indicated below. The provisions of SFAS No. 123 have been applied to
awards with grant dates in 1997, 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.
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net (loss) income:
As reported ................................ $ (272,608) $ 33,300 $ (74,476)
Pro forma .................................. $ (276,213) $ 29,649 $ (76,359)
Net (loss) income per share:
As reported ................................ $ (5.30) $ 0.66 $ (1.58)
Pro forma .................................. $ (5.37) $ 0.58 $ (1.62)
Net (loss) income per share - assuming dilution:
As reported ................................ $ (5.30) $ 0.64 $ (1.58)
Pro forma .................................. $ (5.37) $ 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 and non-employee members of the Board of Directors. In the case of
incentive stock options, the exercise price may not be less than the fair market
value of the Company's stock on the date of the grant, and may not be less than
110% of the fair market value of the Company's stock on the date of the grant
for any individual possessing 10% or more of the voting power of all classes of
stock of the Company. The options become exercisable over periods ranging from
three to five years and expire not later than 10 years from the date of grant.
Approximately 8,107,000 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 1997,
1996 and 1995: risk-free interest rates ranging from 6.45% to 5.82%, 6.91% to
6.33% and 7.69% to 5.55% for 1997, 1996 and 1995, respectively; dividend yield
of 0% for all years; expected lives ranging from 6.50 years for 1997 and 1.25 to
6.58 years for 1996 and 1995; and volatility of 55% for 1997 and 43% for 1996
and 1995.
F-13
42
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, 1997, 1996 and 1995, and the activity during the years ending on
those dates is presented below:
1997 1996 1995
--------------------------- --------------------------- ----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- --------- -------------- ---------- --------------
Outstanding - beginning of year ........ 3,431,472 $ 17.12 4,111,824 $ 15.22 4,008,801 $ 10.32
Granted:
Exercise price equal to fair value ... 201,000 $ 15.86 710,800 $ 18.60 2,280,475 $ 22.06
Exercise price greater than fair value 53,000 $ 18.25 10,000 $ 28.25 --
Exercise price less than fair value .. -- 25,000 $ 10.00 --
Exercised .............................. (304,635) $ 9.95 (1,073,804) $ 9.67 (1,233,243) $ 8.32
Forfeited .............................. (576,885) $ 18.94 (352,348) $ 20.41 (944,209) $ 19.96
---------- ---------- ----------
Outstanding - end of year .............. 2,803,952 $ 17.46 3,431,472 $ 17.12 4,111,824 $ 15.22
========== ========== ==========
Exercisable at end of year ............. 1,469,113 $ 16.19 1,281,402 $ 13.99 1,541,461 $ 9.56
========== ========== ==========
Weighted-average fair value of options
granted during the year ................ $ 9.91 $ 9.92 $ 11.01
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -----------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE PRICES AS OF 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/97 EXERCISE PRICE
- ------------------------ -------------- ---------------- -------------- -------------- --------------
$ 0.75 - $ 9.64 182,947 3.28 $ 4.54 182,947 $ 4.54
$10.00 - $13.50 292,191 4.06 $11.50 251,204 $11.53
$14.11 - $17.68 1,156,474 7.89 $16.74 503,222 $16.61
$18.25 - $20.50 883,540 7.86 $20.36 377,676 $20.43
$25.25 - $29.00 288,800 7.31 $25.66 154,064 $25.89
--------- ---- ------ --------- ------
$ 0.75 - $29.00 2,803,952 7.12 $17.46 1,469,113 $16.19
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. Due to
the change in control in 1995 meeting specific criteria in the plan, 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 1997 or 1996. Options awarded under this
plan expire 10 years from the date of grant. No options were granted in 1997 or
1996 under this plan, and no further grants are authorized. Approximately
837,000 shares of Common Stock are reserved for future issuance upon exercise of
stock options under this plan.
F-14
43
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the status of the Company's performance-based stock option
plan as of December 31, 1997, 1996 and 1995, and the activity during the years
ending on those dates is presented below:
1997 1996 1995
----------------------- ------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- -------------- ------- -------------- -------- --------------
Outstanding - beginning of year 919,722 $11.24 1,365,400 $11.20 1,858,000 $11.54
Granted ....................... -- -- --
Exercised ..................... (60,440) $11.15 (416,878) $11.13 (239,600) $12.54
Forfeited ..................... (22,680) $11.30 (28,800) $11.00 (253,000) $12.41
------- --------- ---------
Outstanding - end of year ..... 836,602 $11.24 919,722 $11.24 1,365,400 $11.20
======= ========= =========
Exercisable at end of year .... 641,842 $11.25 702,282 $11.24 681,400 $11.19
======= ======= =======
As of December 31, 1997, the 836,602 options outstanding under the
performance-based plan have exercise prices between $11.00 and $13.50 and a
weighted-average remaining contractual life of 4.41 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-15
44
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7 -- CERTAIN OPERATING STATEMENT CAPTIONS
Restructuring and 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, (including $3,810,000 paid to a firm in which a member of the
Company's Board of Directors is a managing director) 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.
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
$68,304,000 (including an impairment charge of $22,160,000 for hardware and
internally developed software which is separately disclosed on the statement of
operations).
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. The following table summarizes the principal
components of the charge, amounts paid through December 31, 1997, and the
remaining accrual at December 31, 1997, which consists of branch and billing
center closure costs.
ACCRUALS IMPAIRMENTS
-------- -----------
(IN THOUSANDS)
Severance and related personnel costs .......... $ 21,538 $ --
Branch and billing center closures ............. 13,709 9,354
Internally developed software .................. -- 14,529
Information systems equipment .................. -- 7,631
Other .......................................... 1,000 543
-------- --------
36,247 $ 32,057
Severance amounts paid through December 31, 1997 (21,501) ========
Other amounts paid through December 31, 1997 ... (13,023)
--------
Accrual at December 31, 1997 ................... $ 1,723
========
Employee Contracts, Benefit Plan and Claim Settlements: In 1996 and
1995, the Company recorded $14,795,000 and $20,367,000, respectively, for
employee contract, benefit plan and claim settlements. In 1996, the accrual
included $5,272,000 for legal settlements and related costs in excess of amounts
previously accrued and $6,223,000 to cover the settlement and associated costs
related to the termination of a proposed merger with Vitas Healthcare
Corporation. Also in 1996, a $3,300,000 increase to the settlement loss on the
termination of the Abbey defined benefit pension plan was recorded based on
updated actuarial estimates. In 1995, the accrual included $14,611,000 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 defined benefit pension plan.
F-16
45
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 -- INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities are as follows:
DECEMBER 31,
------------------------
1997 1996
--------- ---------
(IN THOUSANDS)
Deferred tax liabilities:
Tax over book depreciation ............................ $ 20,402 $ 13,220
Intangible assets ..................................... 727 718
Other, net ............................................ 206 2,889
--------- ---------
Total deferred tax liabilities ..................... 21,335 16,827
Deferred tax assets:
Allowance for doubtful accounts ....................... 33,150 33,105
Accruals .............................................. 15,041 13,404
Asset valuation reserves .............................. 4,058 2,379
Net operating loss carryforward, limited by Section 382 66,416 23,985
AMT and research credit carryovers .................... 4,500 4,977
Other, net ............................................ 475 457
--------- ---------
Total deferred tax assets .......................... 123,640 78,307
Valuation allowance ..................................... (102,305) (31,517)
--------- ---------
Net deferred tax assets ................................. 21,335 46,790
--------- ---------
Net deferred taxes ...................................... $ -- $ 29,963
========= =========
Current deferred tax assets, net of current deferred
tax liabilities ....................................... $ -- $ 31,106
Non-current deferred tax liabilities, net of non-current
deferred tax assets ................................... -- 1,143
--------- ---------
Net deferred taxes ...................................... $ -- $ 29,963
========= =========
At December 31, 1997, the Company's federal operating loss carryforwards
approximated $225,000,000, which begin to expire in 2003. Additionally, the
Company has various state operating loss carryforwards which began to expire in
1997. As a result of an ownership change in 1992 which met specified criteria of
Section 382 of the Internal Revenue Code, future use of a portion of the federal
and state operating loss carryforwards generated prior to 1992 are each limited
to approximately $5,000,000 per year. Because of the annual limitation,
approximately $57,000,000 of each of the Company's federal and state operating
loss carryforwards may expire unused. The net operating loss carryforward amount
included in deferred tax asset excludes such amount.
In the fourth quarter of 1997, the Company increased its valuation
allowance for deferred tax assets due to recurring tax losses and Management's
reduced expectations of future taxable income.
The valuation allowance at December 31, 1996 was provided primarily
against the Company's net operating loss carryforwards and certain other
deferred tax assets, the expected use of which exceeded the Company's earnings
assumption and were not otherwise offset by deferred tax liabilities. The
Company's 1996 future taxable income assumption considered 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).
F-17
46
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income tax (benefit) expense consists of the following:
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Current:
Federal ........................................... $ 3,623 $ (7,917) $ (9,569)
State ............................................. 1,964 177 495
Foreign ........................................... 1,000 -- --
-------- -------- --------
6,587 (7,740) (9,074)
Deferred:
Federal ........................................... 25,768 14,106 (16,810)
State ............................................. 4,195 1,814 (2,738)
-------- -------- --------
29,963 15,920 (19,548)
Tax benefits credited to paid-in capital and goodwill -- 10,548 9,681
-------- -------- --------
$ 36,550 $ 18,728 $(18,941)
======== ======== ========
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. The tax
benefit of stock option exercises in 1997 is included in the Company's net
operating loss carryforward and therefore not reflected as a credit to paid in
capital. In addition, the recognition for income tax purposes of certain
deferred tax assets relating to acquired businesses reduces related goodwill for
financial reporting purposes.
Current federal income tax expense in 1997 represents the amount settled
and paid in connection with an audit of the Company's federal income tax returns
for tax years ending in 1992 through 1995. The amount paid represents an
increase to certain deferred tax assets for which no benefit was recorded in
1997 because an offsetting increase to the valuation allowance was recorded.
Current state income tax expense in 1997 includes the estimated
settlement amounts of state income tax audits in progress. Current state income
tax expense for all periods presented includes state tax amounts accrued and
paid on a basis other than income. Current foreign income tax expense in 1997
includes the estimated foreign taxes payable on the sale of the Company's 15%
interest in Omnicare plc (see Note 2).
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,
------------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
Income tax (benefit) expense at statutory rate .............. $(82,621) $ 18,210 $(30,742)
Non-deductible merger costs and amortization
and impairment loss on goodwill ........................... 48,783 2,150 4,907
State and foreign taxes, net of federal
benefit and state loss carryforwards ...................... 7,159 1,991 (2,243)
Increase in valuation allowance for
deferred items previously recognized ...................... 25,768 -- --
Tax benefit of net operating loss not currently recognized .. 33,816 3,734 419
Expense (benefit) of deferred items not previously recognized -- (7,914) 7,958
Other ....................................................... 3,645 557 760
-------- -------- --------
$ 36,550 $ 18,728 $(18,941)
======== ======== ========
Net income taxes (refunded) paid in 1997, 1996 and 1995, amounted to
$(26,426,000), $(963,000) and $15,159,000, respectively.
F-18
47
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9 - PER SHARE AMOUNTS
The following table sets forth the computation of basic and diluted per
share amounts:
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Numerator:
(Loss) income before extraordinary charge ...................... $ (272,608) $ 33,300 $ (71,478)
Numerator for basic per share amounts - income
available to common stockholders ............................ $ (272,608) $ 33,300 $ (71,478)
Numerator for diluted per share amounts - income
available to common stockholders ............................ $ (272,608) $ 33,300 $ (71,478)
Denominator:
Denominator for basic per share
amounts - weighted average shares ........................... 51,419 50,811 47,112
Effect of dilutive securities:
Employee stock options ...................................... -- 1,371 --
----------- ----------- -----------
Dilutive potential common shares ............................ -- 1,371 --
----------- ----------- -----------
Denominator for diluted per share amounts - adjusted
weighted average shares .................................... 51,419 52,182 47,112
=========== =========== ===========
Basic (loss) earnings per share amounts ........................... $ (5.30) $ 0.66 $ (1.52)
=========== =========== ===========
Diluted (loss) earnings per share amounts ......................... $ (5.30) $ 0.64 $ (1.52)
=========== =========== ===========
Employee stock options excluded from the computation of diluted per
share amounts:
Exercise price exceeds average market
price of Common Stock .................................... 1,813,719 43,600 33,600
Other ....................................................... 468,000 -- 2,117,000
----------- ----------- -----------
2,281,719 43,600 2,150,600
=========== =========== ===========
Average exercise price per share that exceeds
average market price of Common Stock ........................... $ 20.13 $ 27.18 $ 27.68
=========== =========== ===========
Because net losses were incurred in 1997 and 1995 the impact of options
are antidilutive in those years and there is no difference between basic and
diluted per share amounts.
For additional disclosure regarding the employee stock options, see Note
6.
NOTE 10 -- 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.
F-19
48
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company occasionally subleases unused facility space when a lease
buyout is not a viable option. Sublease income, in amounts not considered
material, is recognized monthly and is offset against facility lease expense.
Net rent expense in 1997, 1996 and 1995 amounted to $52,802,000 $46,493,000 and
$47,602,000, respectively.
In addition, during 1997, 1996 and 1995, the Company acquired patient
service equipment, information systems and equipment and furnishings totaling
$7,235,000, $12,021,000 and $5,876,000, 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
$8,578,000, $9,314,000 and $4,410,000 in 1997, 1996 and 1995, respectively.
The following amounts for assets under capital lease obligations are
included in both the patient service equipment and property, equipment and
improvements:
DECEMBER 31,
----------------------
1997 1996
-------- --------
(IN THOUSANDS)
Patient service equipment ... $ 1,930 $ 1,930
Information systems ......... 33,901 31,474
Equipment and furnishings ... 3,648 3,648
Buildings and improvements .. -- 66
-------- --------
39,479 37,118
Less accumulated depreciation (21,210) (15,270)
-------- --------
$ 18,269 $ 21,848
======== ========
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, 1997:
CAPITAL OPERATING
LEASES LEASES
--------- ---------
(IN THOUSANDS)
1998 ........................................... $ 9,611 $ 47,692
1999 ........................................... 5,595 40,587
2000 ........................................... 2,441 31,250
2001 ........................................... -- 22,901
2002 ........................................... -- 14,189
Thereafter ..................................... -- 25,601
--------- ---------
17,647 $ 182,220
Less interest included in minimum lease payments (1,092) =========
---------
Present value of minimum lease payments ........ 16,555
Less current portion ........................... (8,513)
---------
$ 8,042
=========
NOTE 11 -- EMPLOYEE BENEFIT PLANS
The Company has a 401(k) defined contribution plan, whereby eligible
employees may contribute up to 16% of their annual basic earnings. The Company
matches 50% of the first 8% of employee contributions. Total expenses related to
the defined contribution plan were $3,791,000, $4,370,000 and $2,980,000, in
1997, 1996 and 1995, respectively (see Note 7).
The Company had a defined benefit pension plan, covering substantially
all Abbey employees, which was terminated in 1995. Net periodic pension cost,
included in selling, distribution and administration expenses, amounted to
$925,000 in 1995. In connection with the termination, the Company recognized
costs of $3,300,000 and $2,275,000 in 1996 and 1995, respectively (see Note 7).
All benefits were distributed to participants in 1997.
F-20
49
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 12-month period ended
August 31, 1996. Actual purchases for the 12-month periods ended August 31, 1997
and 1996, exceeded the annual commitment by 61% and 54%, respectively. As a
result of Management's recent decision to phase out low-margin medical supply
business, the Company has worked to transition its managed care supply business
directly to the vendor and is currently restructuring the agreement to reflect
these changes.
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 1997, 1996 and 1995, certain claims and
lawsuits were settled and the Company paid amounts, including the cost of
defense, totaling approximately $3,277,000, $16,619,000 and $10,590,000,
respectively. Charges to income of $2,760,000, $11,533,000 and $12,400,000 were
taken in 1997, 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 $291,000.
The Company and several of its present and former officers and/or
directors are defendants in three "class action" lawsuits filed in March and
April of 1998 in the U.S. District Court for the Central District of California,
Southern Division. Two of the complaints purport to establish a class of
shareholders who purchased Apria stock between March 2, 1995 and January 20,
1998. The third complaint purports to establish a class of shareholders who
purchased Apria stock between April 30, 1997 and March 11, 1998. No class has
been certified at this time. The complaints allege, among other things, that the
defendants made false and/or misleading public statements regarding the Company
and its financial condition in violation of federal securities laws. All three
complaints seek compensatory as well as other relief. Two of the complaints
include a claim for punitive damages. The Company believes that it has
meritorious defenses to the plaintiffs' claims, and it intends to vigorously
defend itself against all three actions. In the opinion of Management, the
ultimate disposition of these cases will not have a material adverse effect on
the Company's financial condition or results of operations.
Operating Systems: Management has committed to a two-year plan to
implement a large scale, fully integrated enterprise resource planning (ERP)
system which will replace the Company's current field information systems.
Significant development effort and presumably expense will be required to
customize the ERP system for the complexities of the Company's business. The
Board of Directors approved the project in December 1997; however, the total
cost cannot be reasonably estimated at this time as the Company is currently in
the vendor selection phase of the project.
Certain Concentrations: Approximately 51% 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. Effective
January 1, 1998, reimbursement for home oxygen services has been reduced by 25%
and will be reduced an additional 5% in 1999 and subsequent years. The Company
estimates the impact of the reduction on 1998 revenues to be $55,000,000 to
$60,000,000. Also effective January 1, 1998, Consumer Price Index-based
reimbursement increases on home medical equipment were frozen until 2002.
The Company currently purchases approximately 38% of its patient service
equipment and supplies from three suppliers. Although there are a limited number
of suppliers, Management believes that other suppliers could provide similar
products on comparable terms. However, a change in suppliers could cause delays
in service delivery and possible losses in revenue which could adversely affect
operating results.
Reimbursement: Laws and regulations governing the Medicare and Medicaid
programs are complex and subject to interpretation. The Company believes that it
is in compliance with all applicable laws and regulations and is not aware of
any pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs. Management is
not aware of any material claims or disputes related to any of its third-party
reimbursement arrangements.
F-21
50
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER
----------------------------------------------------
FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997
Net revenues ................ $ 313,863 $ 295,735 $ 304,356 $ 266,740
Gross profit ................ 209,184 167,272 199,706 153,350
Operating income (loss) ..... 41,910 (57,144) 28,474 (199,905)
Net income (loss) ........... $ 19,240 $ (69,876) $ 16,186 $(238,158)
Net income (loss) per share . $ 0.38 $ (1.36) $ 0.31 $ (4.62)
Net income (loss) per share -
assuming dilution ....... $ 0.37 $ (1.36) $ 0.31 $ (4.62)
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)
Net income (loss) per share . $ 0.41 $ 0.43 $ 0.41 $ (0.58)
Net income (loss) per share -
assuming dilution ........ $ 0.39 $ 0.42 $ 0.40 $ (0.58)
The operating results for the fourth quarter of 1997 include adjustments
to reduce revenue and accounts receivable by $20,000,000 and to increase bad
debt expense and the allowance for doubtful accounts by $6,423,000. The
adjustment to revenue represents the estimated 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. Both adjustments resulted primarily from
refinements to the Company's estimation procedures made as a result of
Management's year-end analysis of accounts receivable. Specifically, based on
tests of subsequent realization and review of patient billing files at selected
billing locations, increases were made to the percentages applied to the
Company's accounts receivable aging to estimate allowance amounts. In addition,
due to an increasing tendency for certain managed care payors to accumulate
significant amounts of patient balances, a specific review and allowance
estimation was performed for payors with large aggregated patient balances.
An adjustment of $20,225,000 was recorded in the fourth quarter of 1997
to write down the carrying value of internally developed software due to the
fourth quarter decision of the Company's Information Systems Steering Committee
to replace the Company's internally developed field information system. In
connection with Management's evaluation of the Company's internally developed
software, Management also conducted a review of the Company's computer hardware,
including telecommunications equipment. Equipment with a carrying value of
$6,556,000 was identified as functionally obsolete or no longer in use and was
written off (see Note 3).
Based on Management's year-end evaluation of the carrying value and
amortization periods of intangible assets, an impairment charge of $133,542,000
was recorded in the fourth quarter of 1997 to reduce the carrying value of
recorded goodwill to Management's estimate of fair value (see Note 4).
The fourth quarter of 1997 also includes a $10,100,000 adjustment for
estimated excess quantities, obsolescence and shrinkage of patient service
equipment and inventory arising after the Company's asset verification and
physical inventory procedures, which were performed primarily in the second and
third quarters. In addition, the Company's fourth quarter decision to terminate
approximately 524 employees resulted in a year-end severance accrual of
$6,000,000. Other fourth quarter charges
F-22
51
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
included the accrual of incentive compensation related to fourth quarter
initiatives of $2,151,000, accrual of costs associated with the closure of
certain facilities and the Company's ApriaDirect Clinical program of $2,298,000,
accrual of certain excise taxes and interest on a tax settlement of $2,000,000
and other miscellaneous accruals of $1,250,000.
The Company also recorded in the fourth quarter of 1997, an adjustment
to increase its valuation allowance for net deferred tax assets due to recurring
tax losses and Management's reduced expectations for 1998 (see Note 8).
The second quarter of 1997 included adjustments to reduce revenue and
accounts receivable by $20,000,000 and increase bad debt expense and the
allowance for doubtful accounts by $55,000,000. The adjustments resulted from
the lower than anticipated improvement in the aging of accounts receivable and
collection periods and rates. Management had expected that the impact of 1996
computer system conversions and high turnover rate among billing and collection
personnel would have been substantially reversed by the middle of 1997. However,
the dollar amount and percentage of accounts aged over 180 days at May 31, 1997
remained comparable to the December 31, 1996 amount and percentage, and the
average collection period had decreased by only four days. As a result,
Management increased its allowance estimate for accounts aged over 180 days to
provide for write-offs of older accounts expected to be taken over the ensuing
months. The provision for revenue adjustments represented management's estimate
of accounts originated in 1997 that would ultimately be written off for reasons
unrelated to credit. The adjustment was necessitated by the continuing incidence
of billing errors and long collection periods during which such errors were
generally undetected.
The second quarter of 1997 also includes a $23,000,000 adjustment to
provide for estimated excess quantities, obsolescence and shrinkage of patient
service equipment and inventory. The amount was estimated based on the
preliminary results of asset verification and physical inventory procedures
performed in the second quarter. The adjustment was sufficient to cover actual
write-offs resulting from the third quarter completion of the Company's asset
verification and physical inventory procedures.
The operating results for the fourth quarter of 1996 include adjustments
to reduce revenues and accounts receivable by $32,300,000 and increase bad debt
expense and the allowance for doubtful accounts by $9,000,000. The increase in
the Company's average collection period during 1996, 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 related to transactions originally recorded in periods
prior to the fourth quarter, Management does not believe a reasonably accurate
allocation of the adjustment to prior quarters is determinable. The adjustment
to the allowance for doubtful accounts was due in part to an increase in the
fourth quarter of 1996 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 pension 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 12 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.
F-23
52
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14 - SUBSEQUENT EVENTS
On February 3, 1998, the Company entered into a Stock Purchase Agreement
(the "JLL Agreement") with JLL Argosy Apria, LLC, Joseph Littlejohn & Levy Fund
III, LP and CIBC WG Argosy Merchant Fund 2, LLC (together, the "JLL Group").
Pursuant to the terms of the JLL Agreement, among other things, the Company was
to issue and sell 12,300,000 shares of Common Stock and issue warrants to
purchase 5,000,000 additional shares, exercisable at $20.00 per share, in
consideration for a cash investment of $172,200,000 by the JLL Group. The
Company was to have used the proceeds, together with $70,000,000 in new
borrowings under the Company's credit facility, to purchase 17,300,000 shares of
Common Stock. On April 3, 1998, the parties agreed to terminate the JLL
Agreement without any further obligation to any party.
F-24
53
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, 1997
Deducted from asset accounts:
Allowance for revenue adjustments ... $ 32,300 $ -- $ 40,000(b) $ 34,242 $ 38,058
Allowance for doubtful accounts ..... 73,809 121,908 1,697(a) 139,001 58,413
Reserve for inventory excess,
obsolescence and shrinkage ....... 1,825 26,716 -- 22,168 6,373
Reserve for patient service equipment
excess, obsolescence and shrinkage 4,812 8,584 -- 9,496 3,900
-------- -------- -------- -------- --------
Totals .................. $112,746 $157,208 $ 41,697 $204,907 $106,744
======== ======== ======== ======== ========
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for revenue adjustments ... $ -- $ -- $ 32,300(b) $ -- $ 32,300
Allowance for doubtful accounts ..... 86,567 67,040 608(a) 80,406 73,809
Reserve for inventory 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 $ 2,655(c) $ 77,589 $ 86,567
Reserve for inventory excess,
obsolescence and shrinkage ....... 3,952 2,898 8(c) 1,104 5,754
Reserve for patient service equipment
excess, obsolescence and shrinkage 4,546 9,216 117(c) 2,019 11,860
-------- -------- -------- -------- --------
Totals .................. $ 69,536 $112,577 $ 2,780 $ 80,712 $104,181
======== ======== ======== ======== ========
- -------------------
(a) Includes amounts added in conjunction with business acquisitions.
(b) Amount charged against net revenues. See Note 12 to the Consolidated
Financial Statements.
(c) 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.
S-1
54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: April 15, 1998
APRIA HEALTHCARE GROUP INC.
By: /s/ LAWRENCE M. HIGBY
---------------------------------------
President and Chief Operating 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/ LAWRENCE M. HIGBY
- -----------------------------
Lawrence M. Higby President and Chief Operating Officer April 15, 1998
(Principal Executive Officer)
/s/ LAWRENCE H. SMALLEN
- -----------------------------
Lawrence H. Smallen Chief Financial Officer, Senior Vice April 15, 1998
President, Finance and Treasurer
(Principal Financial Officer)
/s/ JAMES E. BAKER
- -----------------------------
James E. Baker Vice President, Controller April 15, 1998
(Principal Accounting Officer)
/s/ GEORGE ARGYROS
- -----------------------------
George Argyros Director, Chairman of the Board April 15, 1998
/s/ DAVID L. GOLDSMITH
- -----------------------------
David L. Goldsmith Director April 15, 1998
/s/ LEONARD GREEN
- -----------------------------
Leonard Green Director April 15, 1998
/s/ TERRY HARTSHORN
- -----------------------------
Terry Hartshorn Director April 15, 1998
/s/ JEREMY M. JONES
- -----------------------------
Jeremy M. Jones Director April 15, 1998
/s/ FREDERICK S. MOSELEY, IV
- -----------------------------
Frederick S. Moseley, IV Director April 15, 1998
/s/ VINCENT M. PRAGER
- -----------------------------
Vincent M. Prager Director April 15, 1998
55
SIGNATURES (CONTINUED)
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.
/s/ H.J. MARK TOMPKINS Director April 15, 1998
- ----------------------
H.J. Mark Tompkins
/s/ RALPH V. WHITWORTH Director April 15, 1998
- ----------------------
Ralph V. Whitworth
56
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE/REF.
- ------ ----------- ---------
2.1 Agreement and Plan of Merger dated March 1, 1995 between Abbey and Homedco. (e)
2.2 Agreement and Plan of Merger dated March 1, 1995, as amended on May 18, 1995, by and
between Abbey and Homedco. (h)
2.3 Agreement for the Sale and Purchase of the Whole of the 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. (i)
3.1 Restated Certificate of Incorporation of Registrant. (f)
3.2 Certificate of Ownership and Merger merging Apria Healthcare Group Inc. into Abbey
and amending Abbey's Restated Certificate of Incorporation to change Abbey's name to (i)
"Apria Healthcare Group Inc."
3.3 Amended and Restated Bylaws of Registrant, as amended on January 27, 1997. (n)
3.4 Amended and Restated Bylaws of Registrant, as amended on January 27, 1998.
4.1 Form of 9 1/2% Senior Subordinated Note due 2002. (b)
4.2 Indenture dated November 1, 1993, by and among Abbey, certain Subsidiary Guarantors
defined therein and U.S. Trust Company of California, N.A. (d)
4.3 Shareholder Rights Agreement dated February 8, 1995, between Abbey and U. S. Stock
Transfer Corporation, as Rights Agent. (e)
4.4 Specimen Stock Certificate of the Registrant.
4.5 Certificate of Designation of the Registrant. (f)
4.6 Amendment No. 1 to the Rights Agreement dated as of June 30, 1997, by and among Apria
Healthcare Group Inc., Norwest Bank Minnesota, N.A. and U.S. Stock Transfer (p)
Corporation.
10.1 Abbey 1991 Stock Option Plan. (a)
10.2 Abbey Schedule of Registration Procedures and Related Matters. (c)
10.3 Homedco 401(k) Savings Plan, restated effective October 1, 1993, amended December 28, (k)
1994.
10.4 Apria/Homedco Stock Incentive Plan, dated June 28, 1995. (g)
10.5 Abbey Amended and Restated 1992 Stock Incentive Plan. (k)
10.6 Amendment Number Two to the Homedco 401(k) Savings Plan, dated June 28, 1995. (l)
10.7 Building Lease, dated July 21, 1995, between C.J. Segerstrom & Sons, a California
general partnership, and Apria Healthcare, Inc. for 10 locations within Harbor (l)
Gateway Business Center, Costa Mesa, California.
10.8 Assignment, Assumption and Consent Re: Lease (dated December 1, 1988, between C.J.
Segerstrom & Sons, a California general partnership, and Abbey Medical, Inc. for
premises located within Harbor Gateway Business Center, Costa Mesa, California),
executed by Abbey Medical, Inc. and Apria Healthcare, Inc. as of July 21, 1995 and (j)
executed by C.J. Segerstrom & Sons, a California general partnership, as of July 24,
1995.
10.9 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, (n)
1995, between the parties.
57
EXHIBIT INDEX (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION PAGE/REF.
- ------ ----------- ---------
10.10 Assignment and Assumption of Lease (Building Lease, dated July 21,
1995, between C.J. Segerstrom & Sons, a California general
partnership, and Apria Healthcare, Inc.), dated as of January 1,
1996, between Apria Healthcare, Inc. and Apria Healthcare Group (n)
Inc.
10.11 Amendment Number Three to the Homedco 401(k) Savings Plan, dated January 1, 1996. (l)
10.12 Credit Agreement, dated August 9, 1996, between Apria Healthcare
Group Inc. and certain of its subsidiaries, Bank of America National
Trust and Savings Association, Nationsbank of Texas, N.A. and other
financial institutions from time to time party thereto. (m)
10.13 Guaranty, dated as of August 9, 1996, made by Apria Healthcare Group
Inc., Apria Healthcare, Inc., Apria Number One, Inc., Apria Number
Two, Inc., Protocare of Metropolitan New York, Inc. and Homedco of
New York State, Inc. in favor of Bank of America National Trust (m)
and Savings Association.
10.14 Employment Agreement dated April 1, 1997, between Apria Healthcare Group Inc. and Merl (o)
A. Wallace.
10.15 First Amendment to Credit Agreement, dated April 22, 1997, among
Apria Healthcare Group Inc. and certain of its subsidiaries, Bank of
America National Trust and Savings Association, Nationsbank of Texas,
N.A. and other financial institutions party to the Credit (o)
Agreement.
10.16 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Lisa M. Getson. (o)
10.17 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Robert S. Holcombe. (o)
10.18 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Jerome J. Lyden. (o)
10.19 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Gary L. Mangiofico. (o)
10.20 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Steven T. Plochocki. (o)
10.21 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Thomas M. Robbins. (o)
10.22 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Susan K. Skara. (o)
10.23 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Lawrence H. Smallen. (o)
10.24 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Dennis E. Walsh. (o)
10.25 Second Amendment to Credit Agreement, dated July 31, 1997, among
Apria Healthcare Group Inc. and certain of its subsidiaries, Bank of
America National Trust and Savings Association, Nationsbank of Texas,
N.A. and other financial institutions party to the Credit (o)
Agreement.
10.26 Resignation and General Release Agreement dated September 26, 1997, between Apria
Healthcare Group Inc. and Steven T. Plochocki. (q)
58
EXHIBIT INDEX (CONTINUED)
EXHIBIT
NUMBER DESCRIPTION PAGE/REF.
- ------ ----------- ---------
10.27 Resignation and General Release Agreement dated November 7, 1997, between Apria
Healthcare Group Inc. and Gary L. Mangiofico.
10.28 Apria Healthcare Group Inc. 1997 Stock Incentive Plan, dated December 16, 1997. (r)
10.29 Resignation and General Release Agreement dated January 19, 1998, between Apria
Healthcare Group Inc. and Jeremy M. Jones.
10.30 Executive Employment Agreement dated January 26, 1998, between Apria Healthcare Group
Inc. and Lawrence M. Higby.
10.31 Third Amendment to Credit Agreement and Waiver, dated January 30,
1998, among Apria Healthcare Group Inc. and certain of its
subsidiaries, Bank of America National Trust and Savings
Association, Nationsbank of Texas, N.A. and other financial
institutions party to the Credit Agreement.
10.32 Stock Purchase Agreement dated February 3, 1998, by and among, JLL
Argosy Apria, LLC, CIBC WG Argosy Merchant Fund 2, LLC, Joseph
Littlejohn and Levy Fund III, LP and Apria Healthcare Group Inc. (s)
10.33 Stockholder Agreement dated February 3, 1998, by and among, JLL Argosy Apria, LLC,
CIBC WG Argosy Merchant Fund 2, LLC, Joseph Littlejohn and Levy Fund III, LP,
Relational Investors, LLC, HBI Financial, Inc. and Apria Healthcare Group Inc. (s)
10.34 Resignation and General Release Agreement dated February 4, 1998, between Apria
Healthcare Group Inc. and Jerome J. Lyden.
10.35 Fourth Amendment to Credit Agreement and Waiver, dated March 13,
1998, among Apria Healthcare Group Inc. and certain of its
subsidiaries, Bank of America National Trust and Savings
Association, Nationsbank of Texas, N.A. and other financial
institutions party to the Credit Agreement.
10.36 Security Agreement, dated March 13, 1998, between Apria Healthcare Group Inc., Apria
Healthcare, Inc., ApriaCare Management Systems, Inc., Apria Number
Two, Inc., Apria Healthcare of New York State, Inc. and Bank of
America National Trust and Savings Association.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
27.2 Restated Quarterly Financial Data Schedule.
59
EXHIBIT INDEX (CONTINUED)
REFERENCES -- DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
(a) Incorporated by reference to Abbey's Registration Statement on Form S-1
(Registration No. 33-44690), as filed on December 23, 1991.
(b) Incorporated by reference to Abbey's Registration Statement on Form S-1
(Registration No. 33-69078), as filed on September 17, 1993.
(c) Incorporated by reference to Abbey's Registration Statement on Form S-4
(Registration No. 33-69094), as filed on September 17, 1993.
(d) Incorporated by reference to Abbey's Annual Report on Form 10-K for the
year ended January 1, 1994.
(e) Incorporated by reference to Abbey's Current Report on Form 8-K, as
filed on March 20, 1995.
(f) 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.
(g) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-94026), as filed on June 28, 1995.
(h) Incorporated by reference to Abbey's final joint proxy
statement/prospectus as filed pursuant to Rule 424(b) on May 26, 1995.
(i) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q dated June 30, 1995, as filed on August 14, 1995.
(j) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q dated September 30, 1995, as filed on November 14, 1995.
(k) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-80581), as filed on December 19, 1995.
(l) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995.
(m) Incorporated by reference to the Registrant's Registration Statement on
Amendment No. 1 to Form S-4 (Registration No. 333-09407), as filed on
August 27, 1996.
(n) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996.
(o) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q dated June 30, 1997, as filed on August 14, 1997.
(p) Incorporated by reference to the Registrant's Registration Statement on
Form 8-A/A as filed on July 10, 1997.
(q) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q dated September 30, 1997, as filed on November 14, 1997.
(r) Incorporated by reference to Registrant's Registration Statement on Form
S-8 (Registration No. 333-42775), as filed on December 19, 1997.
(s) Incorporated by reference to Registrant's Current Report on Form 8-K, as
filed on February 6, 1998.