UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-14316
APRIA HEALTHCARE GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0488566
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3560 HYLAND AVENUE, COSTA MESA, CA 92626
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 427-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
There were 54,109,795 shares of common stock, $.001 par value, outstanding at
July 20, 2001.
APRIA HEALTHCARE GROUP INC.
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2001
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
- Condensed Consolidated Balance Sheets
- Condensed Consolidated Income Statements
- Condensed Consolidated Statements of Cash Flows
- Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
----------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(dollars in thousands) 2001 2000
-------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................................... $ 26,632 $ 16,864
Accounts receivable, less allowance for doubtful accounts of $36,469
and $39,787 at June 30, 2001 and December 31, 2000, respectively ...... 157,071 145,518
Inventories, net ........................................................ 22,623 22,404
Deferred income taxes ................................................... 33,673 33,067
Prepaid expenses and other current assets ............................... 10,799 8,617
--------- ---------
TOTAL CURRENT ASSETS ............................................ 250,798 226,470
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $327,128
and $310,741 at June 30, 2001 and December 31, 2000, respectively ....... 153,580 134,812
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ................................. 43,540 40,630
DEFERRED INCOME TAXES ..................................................... 60,853 75,076
INTANGIBLE ASSETS, NET .................................................... 165,169 137,928
OTHER ASSETS .............................................................. 1,649 1,687
--------- ---------
$ 675,589 $ 616,603
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ........................................................ $ 55,485 $ 54,250
Accrued payroll and related taxes and benefits .......................... 28,948 28,449
Accrued insurance ....................................................... 9,507 9,980
Income taxes payable .................................................... 13,702 13,378
Other accrued liabilities ............................................... 28,879 24,555
Current portion of long-term debt ....................................... 20,937 1,999
--------- ---------
TOTAL CURRENT LIABILITIES ....................................... 157,458 132,611
LONG-TERM DEBT, net of current portion .................................... 320,716 337,750
COMMITMENTS AND CONTINGENCIES (Note H)
STOCKHOLDERS' EQUITY Preferred stock, $.001 par value:
10,000,000 shares authorized; none issued ............................. - -
Common stock, $.001 par value:
150,000,000 shares authorized; 54,177,527 and 53,153,890 shares
issued at June 30, 2001 and December 31, 2000, respectively;
54,091,427 and 53,067,790 outstanding at June 30, 2001 and
December 31, 2000, respectively ....................................... 54 53
Additional paid-in capital .............................................. 360,470 343,621
Accumulated deficit ..................................................... (162,148) (196,471)
Treasury stock, at cost; 86,100 shares at June 30, 2001
and December 31, 2000 ................................................. (961) (961)
--------- ---------
197,415 146,242
--------- ---------
$ 675,589 $ 616,603
========= =========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ -------------------
(dollars in thousands, except per share data) 2001 2000 2001 2000
-------------------------------------------------------------------------------------------------------
Net revenues ........................................... $283,480 $252,570 $554,834 $503,292
Costs and expenses:
Cost of net revenues:
Product and supply costs ......................... 49,775 46,966 101,702 96,412
Patient service equipment depreciation ........... 22,477 19,410 43,441 38,263
Nursing services ................................. 306 417 660 870
Other ............................................ 3,017 2,588 6,050 5,337
-------- -------- -------- --------
TOTAL COST OF NET REVENUES ................... 75,575 69,381 151,853 140,882
Provision for doubtful accounts ........................ 11,069 8,399 19,219 19,018
Selling, distribution and administrative ............ 158,097 137,737 306,491 271,262
Amortization of intangible assets ................... 3,126 2,486 5,962 4,926
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES ..................... 247,867 218,003 483,525 436,088
-------- -------- -------- --------
OPERATING INCOME ............................. 35,613 34,567 71,309 67,204
Interest expense, net .................................. 8,027 10,307 16,435 20,908
-------- -------- -------- --------
INCOME BEFORE TAXES .......................... 27,586 24,260 54,874 46,296
Income tax expense ..................................... 10,339 10,189 20,551 19,444
-------- -------- -------- --------
NET INCOME ................................... $ 17,247 $ 14,071 $ 34,323 $ 26,852
======== ======== ======== ========
Net income per common share:
Basic ............................................... $ 0.32 $ 0.27 $ 0.64 $ 0.51
Diluted ............................................. $ 0.31 $ 0.26 $ 0.62 $ 0.50
Weighted average common shares outstanding:
Basic ............................................... 53,748 52,326 53,570 52,258
Diluted ............................................. 55,748 53,661 55,616 53,804
See notes to condensed consolidated financial statements
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
SIX MONTHS ENDED
JUNE 30,
------------------------
(dollars in thousands) 2001 2000
-----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income ............................................................... $ 34,323 $ 26,852
Items included in net income not requiring cash:
Provision for doubtful accounts ........................................ 19,219 19,018
Depreciation and amortization .......................................... 57,022 52,242
Amortization of deferred debt costs .................................... 1,176 1,357
Deferred income taxes and other ........................................ 18,817 17,939
Changes in operating assets and liabilities, exclusive of
effects of acquisitions:
Accounts receivable .................................................... (30,772) (17,591)
Inventories ............................................................ (56) (2,128)
Prepaid expenses and other assets ...................................... (2,160) 4,266
Accounts payable ....................................................... 1,235 (6,361)
Accrued payroll and related taxes and benefits ......................... 500 (2,314)
Other accrued liabilities .............................................. 1,545 (8,941)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...................... 100,849 84,339
INVESTING ACTIVITIES
Purchases of patient service equipment and property, equipment
and improvements, exclusive of effects of acquisitions ............... (66,903) (42,744)
Proceeds from disposition of assets .................................... 202 230
Cash paid for acquisitions and payments of contingent consideration .... (35,038) (10,143)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES .......................... (101,739) (52,657)
FINANCING ACTIVITIES
Proceeds from revolving credit facility ................................ 29,300 -
Payments on revolving credit facility .................................. (29,300) -
Payments on term loan .................................................. - (10,000)
Payments on other long-term debt ....................................... (872) (3,143)
Repurchases of common stock ............................................ - (958)
Issuances of common stock .............................................. 11,530 2,373
--------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ............ 10,658 (11,728)
--------- ---------
NET INCREASE IN CASH ..................................................... 9,768 19,954
Cash and cash equivalents at beginning of period ......................... 16,864 20,493
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ............................... $ 26,632 $ 40,447
========= =========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Apria Healthcare Group Inc. ("Apria" or "the company") and its
subsidiaries. Intercompany transactions and accounts have been eliminated.
In the opinion of management, all adjustments, consisting of normal recurring
accruals necessary for a fair presentation of the results of operations for the
interim periods presented, have been reflected herein. The unaudited results of
operations for interim periods are not necessarily indicative of the results to
be expected for the entire year. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended
December 31, 2000, included in the company's 2000 Form 10-K.
For all periods presented herein, there were no differences between net income
and comprehensive income.
NOTE B - RECLASSIFICATIONS, ACCOUNTING ESTIMATES AND RECENT ACCOUNTING
PRONOUNCEMENTS
Reclassifications: Certain amounts from prior periods have been reclassified to
conform to the current year presentation.
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.
Recent Accounting Pronouncements: During the first quarter of 2001, Apria
adopted Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which was
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133" and further amended
by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities". SFAS No. 133, as amended, establishes accounting and
reporting standards for hedging activities and for derivative instruments,
including certain derivative instruments embedded in other contracts. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statements of financial position and measure those
instruments at fair value. Changes in the fair value of derivatives must be
recorded each period. SFAS No. 133 also requires formal documentation,
designation at the time the hedge transaction is initiated and assessment of the
effectiveness of the transactions that receive hedge accounting. At June 30,
2001, Apria had no derivative securities that require fair value measurement
under SFAS No. 133. Accordingly, adoption of SFAS No. 133 did not have a
material effect on the financial statements.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations be accounted for
under the purchase method. The statement further requires separate recognition
of intangible assets that meet one of two criteria. The statement applies to all
business combinations initiated after June 30, 2001.
SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recognized and measured based on its fair value. The statement also
provides that goodwill should not be amortized, but shall be tested for
impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. Existing
goodwill will continue to be amortized through the remainder of 2001 at which
time amortization will cease and the company will perform a transitional
goodwill impairment test. SFAS No. 142 is effective for fiscal periods beginning
after December 15, 2001. Apria management is currently evaluating the impact of
the new accounting standards on existing goodwill and other intangible assets.
While the ultimate impact of the new accounting standards has yet to be
determined, goodwill amortization expense for the six months ended June 30, 2001
was $4,701,000.
NOTE C - REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
Net revenues are recognized on the date services and related products are
provided to patients and are recorded at amounts estimated to be received under
reimbursement arrangements with third-party payors, including private insurers,
managed care organizations, Medicare and Medicaid.
Due to the nature of the industry and the reimbursement environment in which
Apria operates, certain estimates are required to record net revenues and
accounts receivable at their net realizable values. Inherent in these estimates
is the risk that they will have to be revised or updated as additional
information becomes available. Specifically, the complexity of many third-party
billing arrangements and the uncertainty of reimbursement amounts for certain
services from certain payors may result in adjustments to amounts originally
recorded. Such adjustments are typically identified and recorded at the point of
cash application, claim denial or account review.
Management performs various analyses to evaluate the net realizable value of
accounts receivable. Specifically, management considers historical realization
data, accounts receivable aging trends, operating statistics and relevant
business conditions. Also, focused reviews of certain large and/or problematic
payors are performed. Because of continuing changes in the healthcare industry
and third-party reimbursement, it is possible that management's estimates could
change in the near term, which could have an impact on operations and cash
flows.
NOTE D - BUSINESS COMBINATIONS
Apria periodically makes acquisitions of complementary businesses in specific
geographic markets. The transactions are accounted for as purchases and the
results of operations of the acquired companies are included in the accompanying
income statements from the date of acquisition. During the six-month period
ended June 30, 2001, cash paid for acquisitions was $35,038,000. Included in
this amount is contingent consideration of $1,870,000. At June 30, 2001
outstanding contingent consideration totaled $5,116,000.
For the acquisitions that closed during the six-month period ended June 30,
2001, $33,339,000 was allocated to intangible assets, which includes amounts not
yet paid. Goodwill is being amortized over 20 years and covenants not to compete
are being amortized over the life of the respective agreements.
NOTE E - LONG-TERM DEBT
At June 30, 2001, Apria's $200,000,000 9 1/2% senior subordinated notes were
outstanding and borrowings under the then-existing credit agreement were
$140,000,000.
On July 20, 2001, Apria closed a new $400,000,000 senior secured credit
agreement with a syndicate of lenders led by Bank of America, N.A. The previous
credit agreement and the subordinated notes, both of which were scheduled to
mature in late 2002, were repaid in full concurrent with the closing of the new
senior secured credit agreement. In connection with the early retirement of its
debt, Apria will write-off the unamortized balance of deferred financing fees
attributable to the subordinated notes and the previous credit agreement.
Accordingly, Apria will record an extraordinary charge of approximately
$1,600,000, net of tax, in the third quarter of 2001.
The senior credit facilities consist of: a $100,000,000 five-year revolving
credit facility; a $125,000,000 five-year term loan; and a $175,000,000 six-year
term loan. On July 20, 2001, borrowings under the revolving credit facility were
$43,000,000, outstanding letters of credit totaled $1,000,000 and credit
available under the revolving facility was $56,000,000.
Borrowings under the senior credit facilities are collateralized by
substantially all of the assets of Apria. The credit agreement contains numerous
restrictions, including but not limited to, covenants requiring the maintenance
of certain financial ratios, limitations on additional borrowings, capital
expenditures, mergers, acquisitions and investments and, restrictions on cash
dividends, loans and other distributions. The agreement also permits Apria to
expend a maximum of $100,000,000 per year on acquisitions.
The senior credit agreement permits Apria to select one of two variable interest
rates. The base rate is expressed as the higher of (a) the Federal Funds rate
plus 0.50% and (b) the Prime Rate. The Eurodollar rate is based on the London
Interbank Offered Rate. Interest on outstanding balances under the senior credit
agreement are determined by adding a margin to the Eurodollar rate or base rate
existing at each interest calculation date. Margins currently in effect on
initial borrowings under the revolving credit facility and the $125,000,000 term
loan are 1.75% for Eurodollar loans and 0.75% for base rate loans. Commencing on
September 30, 2001, the applicable margins for the revolving credit facility and
the $125,000,000 term loan will be based on Apria's leverage ratio, which is the
ratio of its funded debt to its last four quarters of EBITDA, as defined. The
applicable margin ranges from 1.50% to 2.25% for Eurodollar loans and from 0.50%
to 1.25% for base rate loans. For the $175,000,000 term loan, the margins are
fixed at 3.00% for Eurodollar loans and at 2.00% for base rate loans. The senior
credit agreement also requires payment of commitment fees ranging from 0.25% to
0.50% on the unused portion of the revolving credit facility.
The $125,000,000 term loan is repayable in 20 consecutive quarterly installments
of $5,500,000 to $7,000,000 each, commencing December 31, 2001. The $175,000,000
term loan is repayable in 20 consecutive quarterly installments of $437,500
each, commencing December 31, 2001, and four of $41,562,500 each, three of which
are payable on the last business day of each calendar quarter commencing
December 31, 2006 and the last of which is payable on July 20, 2007.
NOTE F - EQUITY
The change in stockholders' equity, other than from net income, is attributable
to the exercise of stock options and the tax benefit associated with the
exercise of nonqualified stock options. For the six months ended June 30, 2001,
proceeds from the exercise of stock options amounted to $11,530,000 and the
related tax benefit amounted to $5,320,000.
NOTE G - INCOME TAXES
Income taxes for the six months ended June 30, 2001 and 2000 have been provided
at the effective tax rate expected to be applicable for the year.
At December 31, 2000, Apria's federal net operating loss carryforwards ("NOLs")
approximated $173,000,000, which will begin expiring in varying amounts in the
years 2003 through 2013. Additionally, the company has various state NOLs which
began expiring in 1997 and an alternative minimum tax credit carryforward of
approximately $8,000,000. 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 NOLs generated prior to 1992 are each limited
to approximately $5,000,000 per year. Because of the annual limitation,
approximately $57,000,000 of each of Apria's federal and state NOLs may expire
unused. The company excludes the $57,000,000 of potentially expiring NOLs from
its deferred tax assets. In 2001, for federal tax purposes, NOLs are being
utilized to the extent of the company's federal taxable income.
NOTE H - COMMITMENTS AND CONTINGENCIES
Apria and certain of its present and former officers and/or directors are
defendants in a class action lawsuit, In Re Apria Healthcare Group Securities
Litigation, filed in the U.S. District Court for the Central District of
California, Southern Division (Case No. SACV98-217 GLT). This case is a
consolidation of three similar class actions filed in March and April, 1998.
Pursuant to a court order dated May 27, 1998, the plaintiffs in the original
three class actions filed a Consolidated Amended Class Action Complaint on
August 6, 1998. The amended complaint purports to establish a class of plaintiff
shareholders who purchased Apria's common stock between May 22, 1995 and January
20, 1998. No class has been certified at this time. The amended complaint
alleges, among other things, that the defendants made false and/or misleading
public statements regarding Apria and its financial condition in violation of
federal securities laws. The amended complaint seeks compensatory and punitive
damages as well as other relief.
Two similar class actions were filed during July 1998 in the Superior Court for
the State of California for the County of Orange: Schall v. Apria Healthcare
Group Inc., et. al. (Case No. 797060) and Thompson v. Apria Healthcare Group
Inc., et al. (Case No. 797580). These two actions were consolidated by a court
order dated October 22, 1998 (Master Case No. 797060). On June 14, 1999, the
plaintiffs filed a Consolidated Amended Class Action Complaint asserting claims
founded on state law and on Sections 11 and 12(2) of the 1933 Securities Act.
Apria believes that it has meritorious defenses to the plaintiffs' claims, and
it intends to vigorously defend itself in both the federal and state cases. In
the opinion of Apria's management, the ultimate disposition of these class
actions will not have a material adverse effect on Apria's results of operations
or financial condition.
Since mid-1998 Apria has received a number of subpoenas and document requests
from U.S. Attorneys' offices and from the U.S. Department of Health and Human
Services. The subpoenas and requests generally ask for documents, such as
patient files, billing records and other documents relating to billing
practices, related to Apria's patients whose healthcare costs are paid by
Medicare and other federal programs. Apria is cooperating with the government in
connection with these investigations and is responding to the document requests
and subpoenas. In July 1999, Apria received notification that the U.S.
Attorney's office in Sacramento closed its criminal investigation file relating
to eight subpoenas that had been issued by that office.
In January 2001, Apria was informed by the U.S. Attorney's office in Los Angeles
that the billing investigation being conducted by that office is the result of
qui tam litigation filed on behalf of the government against Apria, and that the
government is investigating certain allegations for the purpose of determining
whether it will intervene in that litigation. The complaints in the litigation
are under seal, however, and the government has not informed Apria of either the
identity of the court or courts where the proceedings are pending, the date or
dates instituted, the identity of the plaintiffs or the factual bases alleged to
underlie the proceedings. To date, the U.S. Attorney's office has not informed
Apria of any decision to intervene in the qui tam actions; however, it could
reach a decision with respect to intervention soon.
Apria has acknowledged that there may be errors and omissions in supporting
documentation affecting a portion of its billings. If a judge, jury or
administrative agency were to determine that such errors and omissions resulted
in the submission of false claims to federal healthcare programs or significant
overpayments by the government, Apria could face civil and administrative claims
for refunds, sanctions and penalties for amounts that would be highly material
to its business, results of operations and financial condition, including
exclusion of Apria from participation in federal healthcare programs.
Since early 2001, Apria has had discussions with representatives of the
government concerning the results of a sampling of 300 patient files submitted
by Apria in response to government subpoenas. The government's sample of 300
patient files includes approximately 2,300 "claims" or monthly invoices for
services and products over a three-and-one-half year period from mid-1995
through year-end 1998. The government has alleged that certain of these claims,
involving up to approximately $110,000 of aggregate billings, are inadequately
supported by required documentation with the result, in the government's view,
that Apria is liable for overpayments and penalties under the False Claims Act.
On July 12, 2001, government representatives and counsel for the plaintiffs in
the qui tam actions asserted that, by a process of extrapolation from the 300
patient sample to all of Apria's billings to the federal government during the
sample period, Apria is liable to the government for treble damages of $309
million (based on an extrapolation to $103 million from the alleged false claims
in the sample), plus penalties of $5,000 to $10,000 for each of over 900,000
allegedly false claims, or a range of total liability from $4.8 billion to over
$9 billion.
Apria considers these assertions and amounts to be unsupported both legally and
factually. Apria's position is that the legal analysis of the government and the
qui tam plaintiffs is incorrect, that their review of the sample vastly
overstates the number and significance of deficiencies, and that the sampling
and extrapolation methodologies under the circumstances are statistically flawed
and legally problematic. Apria believes that the number of sample invoices
affected by substantive errors or omissions in supporting documentation is much
less than the government and the qui tam plaintiffs assert. Further, Apria
believes that most of the alleged errors and omissions should not give rise to
any liability, for refunds or otherwise. In fact, Apria believes that its total
obligation to refund overpayments attributable to all of the substantively
deficient documentation in the government's sample should be less than $10,000
instead of the $110,000 alleged by the government.
Apria believes that the claims asserted are unwarranted and that Apria is in a
position to assert numerous meritorious defenses. However, Apria cannot provide
any assurances as to the outcome of these proceedings. Management cannot
estimate the possible loss or range of loss that may result from these
proceedings and therefore has not recorded any related accruals.
Apria is also engaged in the defense of certain claims and lawsuits arising out
of the ordinary course and conduct of its business, the outcomes of which are
not determinable at this time. Apria has insurance policies covering such
potential losses where such coverage is cost effective. In the opinion of
management, any liability that might be incurred by Apria upon the resolution of
these claims and lawsuits will not, in the aggregate, have a material adverse
effect on Apria's results of operations or financial condition.
NOTE I - PER SHARE AMOUNTS
The following table sets forth the computation of basic and diluted per share
amounts:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
(in thousands, except per share data) 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------
NUMERATOR:
Net income ............................................... $17,247 $14,071 $34,323 $26,852
Numerator for basic and diluted per share amounts - net
income available to common stockholders ................ $17,247 $14,071 $34,323 $26,852
DENOMINATOR:
Denominator for basic per share
amounts - weighted average shares ...................... 53,748 52,326 53,570 52,258
Effect of dilutive securities:
Employee stock options ............................. 2,000 1,335 2,046 1,546
------- ------- ------- -------
Total dilutive potential common shares ............. 2,000 1,335 2,046 1,546
------- ------- ------- -------
Denominator for diluted per share amounts -
adjusted weighted average shares ....................... 55,748 53,661 55,616 53,804
======= ======= ======= =======
BASIC NET INCOME PER COMMON SHARE .......................... $ 0.32 $ 0.27 $ 0.64 $ 0.51
======= ======= ======= =======
DILUTED NET INCOME PER COMMON SHARE ........................ $ 0.31 $ 0.26 $ 0.62 $ 0.50
======= ======= ======= =======
Employee stock options excluded from the computation
of diluted per share amounts:
Exercise price exceeds average market
price of common stock ................................ 1,815 2,659 1,900 2,608
Average exercise price per share that exceeds
average market price of common stock ..................... $ 27.12 $ 18.34 $ 27.08 $ 18.42
======= ======= ======= =======
--------------------------------------------------------------------------------
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995: Apria's business is subject to a
number of risks, some of which are beyond the company's control. The company has
described certain of those risks in its Form 10-K for the fiscal year ended
December 31, 2000, as filed with the Securities and Exchange Commission on March
22, 2001 and Amendment No. 2 to Form S-3 Registration Statement, as filed on
July 26, 2001. This report may be used for purposes of the Private Securities
Litigation Reform Act of 1995 as a readily available document containing
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in any forward-looking
statements the company may make from time to time. Those risks include: whether
the company will be able to resolve issues pertaining to the collectibility of
its accounts receivable, healthcare reform and the effect of federal and state
healthcare regulations, the ongoing government investigations regarding patients
covered by Medicare and other federal programs, pricing pressures from large
payors and changes in governmental reimbursement levels, the effectiveness of
the company's operating systems and controls, and the successful implementation
of the company's acquisition strategy.
--------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
NET REVENUES. Net revenues were $283.5 million and $554.8 million in the
second quarter and first six months of 2001, respectively, compared to $252.6
million and $503.3 million for the corresponding periods in 2000. The increases
in net revenues are primarily due to new contracts with regional and national
payors, the acquisition of complementary businesses and price increases in
certain managed care contracts.
SIX MONTHS ENDED JUNE 30,
------------------------------------------
2001 2000
------------------ -------------------
(dollars in thousands) $ % $ %
-------------------------------------------------------------------------------
Respiratory therapy ............ $363,411 65.5% $326,207 64.8%
Infusion therapy ............... 107,259 19.3% 95,449 19.0%
HME/other ...................... 84,164 15.2% 81,636 16.2%
-------- ----- -------- -----
Total net revenues ........ $554,834 100.0% $503,292 100.0%
======== ===== ======== =====
Use of Estimates in Recording Net Revenues. Substantially all of Apria's
revenues are reimbursed by third party payors, including private insurers
Medicare, Medicaid and managed care organizations. Due to the nature of the
industry and the reimbursement environment in which Apria operates, certain
estimates are required in recording net revenues. Inherent in these estimates is
the risk that they will have to be revised or updated as additional information
becomes available.
Medicare Reimbursement Update. The Medicare, Medicaid and SCHIP Benefits
Improvement and Protection Act of 2000 provides reinstatement of the Consumer
Price Index-based reimbursement increase in 2001 for certain durable medical
equipment products and services. The increase, which went into effect July 1,
2001 and continues through December 31, 2001, includes a transitional allowance
that will effectively compress a full year's Consumer Price Index update into
six months.
GROSS MARGIN. Gross margins for the second quarter of 2001 and the six
months ended June 30, 2001 were 73.3% and 72.6%, respectively, compared to 72.5%
and 72.0% for the same periods last year. The improvement is attributable to
better utilization of inventory and patient service equipment, the increase in
the share of higher-margin respiratory revenues to total net revenues, a shift
toward the higher-margin therapies within the infusion line and the price
increases reflected in net revenues.
SELLING, DISTRIBUTION AND ADMINISTRATIVE. Selling, distribution and
administrative expenses, as percentages of net revenue, were 55.8% and 55.2% for
the second quarter and first half of 2001, respectively, versus 54.5% and 53.9%
for the corresponding periods in 2000. The increases are mainly attributable to
merit and other compensation increases.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts was
3.9% of net revenues for the second quarter of 2001 and 3.5% for the first six
months of 2001 compared to 3.3% and 3.8% for the corresponding periods in 2000.
The decrease between the six-month periods is due to a reduction in the
percentage of older accounts to total accounts receivable and a reduction in
collection periods. See "Liquidity and Capital Resources - Accounts Receivable".
AMORTIZATION OF INTANGIBLE ASSETS. Amortization expense was $3.1 million
and $6.0 million for the second quarter and first six months of 2001,
respectively, compared to $2.5 million and $4.9 million in the corresponding
periods of 2000. The increases are directly attributable to intangible assets
that were recorded in conjunction with acquisitions consummated after the
subject periods of 2000.
INTEREST EXPENSE. Interest expense was $8.0 million for the second quarter
of 2001, down from $10.3 million in the second quarter of 2000. For the six
months ended June 30, 2001 interest expense was $16.4 million compared to $20.9
million in the same period in 2000. The decreases are due to the reduction in
long-term debt and decreases in interest rates between the periods.
INCOME TAXES. Income taxes for the six months ended June 30, 2001, and in
the corresponding period of 2000, have been provided at the effective tax rate
expected to be applicable for the year.
At December 31, 2000, Apria's federal net operating loss carryforwards
("NOLs") approximated $173 million, which will begin expiring in varying amounts
in the years 2003 through 2013. Additionally, the company has various state NOLs
which began expiring in 1997 and an alternative minimum tax credit carryforward
of approximately $8 million. 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 NOLs generated prior to 1992 are each
limited to approximately $5 million per year. Because of the annual limitation,
approximately $57 million of each of Apria's federal and state NOLs may expire
unused. Apria excludes the $57 million of potentially expiring NOLs from its
deferred tax assets. In 2001, for federal tax purposes, NOLs are being utilized
to the extent of the company's federal taxable income.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
CASH FLOW. Operating cash flow was $100.8 million in the first six months
of 2001 compared with $84.3 million in the corresponding period in 2000. The
cash flow increase was primarily attributable to the increase in net income
before items not requiring cash. The larger increase in accounts receivable in
the first half of 2001, when compared to the same period in 2000, was offset by
decreases in other working capital requirements.
Cash used in investing activities increased to $101.7 million for the first
half of 2001 compared to $52.7 million during the same period last year. The
increase is attributable to an increase in patient service equipment purchases
to support the revenue growth and increased acquisition activity.
Financing activities provided cash of $10.7 million during the first six
months of 2001 compared to $11.7 million used during the corresponding period of
2000. The variance is due to the absence of term loan payments in the 2001
period that resulted from large prepayments made in the latter part of 2000.
Also contributing to the variance is the increase in 2001 in proceeds from the
exercise of employee stock options.
ACCOUNTS RECEIVABLE. Accounts receivable, before allowance for doubtful
accounts, was $193.5 million at June 30, 2001 and $185.3 million at December 31,
2000. The increase is due to continued quarter-over-quarter net revenue
increases. Days sales outstanding (calculated as of each period-end by dividing
accounts receivable, less allowance for doubtful accounts, by the 90-day rolling
average of net revenues) were 50 days at June 30, 2001 compared to 51 days at
December 31, 2000. Accounts aged in excess of 180 days as a percentage of total
accounts receivable decreased to 20.4% at June 30, 2001 from 23.8% at December
31, 2000.
Evaluation of Net Realizable Value. Management performs various analyses to
evaluate the net realizable value of accounts receivable. Specifically,
management considers historical realization data, accounts receivable aging
trends, operating statistics and relevant business conditions. Also, focused
reviews of certain large and/or problematic payors are performed. Because of
continuing changes in the healthcare industry and third-party reimbursement, it
is possible that management's estimates could change in the near term, which
could have an impact on operations and cash flows.
Unbilled Receivables. Delays between the date of service and billing can
occur due to delays in obtaining certain required payor-specific documentation
from internal and external sources. Such earned but unbilled receivables are
aged from date of service and are considered in Apria's analysis of historical
performance and collectibility. Earned but unbilled receivables were $26.8
million and $17.9 million at June 30, 2001 and December 31, 2000, respectively.
The increase is largely due to the acquisitions effected during the first half
of 2001. The time-consuming processes of converting patient files onto Apria's
systems and obtaining provider numbers from government payors often delay
billing of the newly acquired business.
LONG-TERM DEBT. At June 30, 2001, Apria's $200 million 9 1/2% senior
subordinated notes were outstanding and borrowings under the then-existing
credit agreement were $140 million.
On July 20, 2001, Apria closed a new $400 million senior secured credit
agreement with a syndicate of lenders led by Bank of America, N.A. The previous
credit agreement and the subordinated notes, both of which were scheduled to
mature in late 2002, were repaid in full concurrent with the closing of the new
senior secured credit agreement. In connection with the early retirement of its
debt, Apria will write-off the unamortized balance of deferred financing fees
attributable to the subordinated notes and the previous credit agreement.
Accordingly, Apria will record an extraordinary charge of approximately $1.6
million, net of tax, in the third quarter of 2001.
The senior credit facilities consist of: a $100 million five-year revolving
credit facility; a $125 million five-year term loan; and a $175 million six-year
term loan. On July 20, 2001, borrowings under the revolving credit facility were
$43 million, outstanding letters of credit totaled $1 million and credit
available under the revolving facility was $56 million.
BUSINESS COMBINATIONS. Apria periodically makes acquisitions of
complementary businesses in specific geographic markets. The transactions are
accounted for as purchases and the results of operations of the acquired
companies are included in the accompanying income statements from the date of
acquisition. During the six-month period ended June 30, 2001, cash paid for
acquisitions was $35.0 million. Included in this amount is contingent
consideration of $1.9 million. Outstanding contingent consideration at June 30,
2001 totaled $5.1 million.
For acquisitions that closed during the first half of 2001, approximately
$33.3 million was allocated to intangible assets, which includes amounts not yet
paid. Goodwill is being amortized over 20 years and covenants not to compete are
being amortized over the life of the respective agreements.
FEDERAL INVESTIGATIONS. The U.S. Attorney's office in Los Angeles is
conducting an investigation of Apria's billing documentation. The U.S.
Attorney's office has informed Apria that this investigation is the result of
qui tam litigation filed by one or more individuals on behalf of the government,
but has not yet informed Apria whether it will intervene in the qui tam actions;
however, it could reach a decision with respect to intervention soon. If the
U.S. Attorney were to intervene in the qui tam cases, or if qui tam actions were
to proceed without such intervention, the amount of the claim could be highly
material. On July 12, 2001, government representatives and counsel for the
plaintiffs in the qui tam actions asserted that, by a process of extrapolation
from a 300 patient sample to all of Apria's billings to the federal government
during the sample period from mid-1995 through year-end 1998, Apria is liable to
the government for treble damages of $309 million (based on an extrapolation to
$103 million from the alleged false claims in the sample), plus penalties of
$5,000 to $10,000 for each of over 900,000 allegedly false claims, or a range of
total liability from $4.8 billion to over $9 billion. Although Apria believes
that such assertions are unwarranted, and is prepared to vigorously defend
against any attempt to impose material liabilities or penalties, Apria can
provide no assurance as to the outcome of these proceedings. In the event Apria
was found liable or otherwise reached settlement on any such claim in a material
amount, Apria's liquidity and capital resources could be adversely affected. See
"Note H to the Condensed Consolidated Financial Statements".
RECENT ACCOUNTING PRONOUNCEMENTS. During the first quarter of 2001, Apria
adopted Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which was
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133" and further amended
by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities". SFAS No. 133, as amended, establishes accounting and
reporting standards for hedging activities and for derivative instruments,
including certain derivative instruments embedded in other contracts. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statements of financial position and measure those
instruments at fair value. Changes in the fair value of derivatives must be
recorded each period. SFAS No. 133 also requires formal documentation,
designation at the time the hedge transaction is initiated and assessment of the
effectiveness of the transactions that receive hedge accounting. At June 30,
2001, Apria had no derivative securities that require fair value measurement
under SFAS No. 133. Accordingly, adoption of SFAS No. 133 did not have a
material effect on the financial statements.
In July 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS No. 141 requires that all business combinations be accounted for
under the purchase method. The statement further requires separate recognition
of intangible assets that meet one of two criteria. The statement applies to all
business combinations initiated after June 30, 2001.
SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recognized and measured based on its fair value. The statement also
provides that goodwill should not be amortized, but shall be tested for
impairment annually, or more frequently is circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount. Existing
goodwill will continue to be amortized through the remainder of fiscal 2001 at
which time amortization will cease and the company will perform a transitional
goodwill impairment test. SFAS No. 142 is effective for fiscal periods beginning
after December 15, 2001. Apria management is currently evaluating the impact of
the new accounting standards on existing goodwill and other intangible assets.
While the ultimate impact of the new accounting standards has yet to be
determined, goodwill amortization expense for the six months ended June 30, 2001
was $4.7 million.
OTHER. Apria's management believes that cash provided by operations
together with cash invested in its money market account and amounts available
under its existing credit facility will be sufficient to finance its current
operations for at least the next year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Apria does not currently utilize derivative financial instruments that
expose the company to significant market risk. However, Apria is subject to
interest rate changes on its variable rate term loans under the company's bank
credit agreements. Based on the term debt outstanding at June 30, 2001 and the
new term loans funded in July 2001, along with current market perception, a 100
basis point change in the applicable interest rates would increase or decrease
Apria's annual cash flow and pretax earnings by approximately $2.9 million. See
"Note E to the Condensed Consolidated Financial Statements".
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Apria and certain of its present and former officers and/or
directors are defendants in a class action lawsuit, In Re Apria
Healthcare Group Securities Litigation, filed in the U.S. District
Court for the Central District of California, Southern Division
(Case No. SACV98-217 GLT). This case is a consolidation of three
similar class actions filed in March and April, 1998. Pursuant to a
court order dated May 27, 1998, the plaintiffs in the original three
class actions filed a Consolidated Amended Class Action Complaint on
August 6, 1998. The amended complaint purports to establish a class
of plaintiff shareholders who purchased Apria's common stock between
May 22, 1995 and January 20, 1998. No class has been certified at
this time. The amended complaint alleges, among other things, that
the defendants made false and/or misleading public statements
regarding Apria and its financial condition in violation of federal
securities laws. The amended complaint seeks compensatory and
punitive damages as well as other relief.
Two similar class actions were filed during July 1998 in the
Superior Court for the State of California for the County of Orange:
Schall v. Apria Healthcare Group Inc., et. al. (Case No. 797060) and
Thompson v. Apria Healthcare Group Inc., et al. (Case No. 797580).
These two actions were consolidated by a court order dated October
22, 1998 (Master Case No. 797060). On June 14, 1999, the plaintiffs
filed a Consolidated Amended Class Action Complaint asserting claims
founded on state law and on Sections 11 and 12(2) of the 1933
Securities Act.
Apria believes that it has meritorious defenses to the plaintiffs'
claims, and it intends to vigorously defend itself in both the
federal and state cases. In the opinion of Apria's management, the
ultimate disposition of these class actions will not have a material
adverse effect on Apria's results of operations or financial
condition.
Since mid-1998 Apria has received a number of subpoenas and document
requests from U.S. Attorneys' offices and from the U.S. Department
of Health and Human Services. The subpoenas and requests generally
ask for documents, such as patient files, billing records and other
documents relating to billing practices, related to Apria's patients
whose healthcare costs are paid by Medicare and other federal
programs. Apria is cooperating with the government in connection
with these investigations and is responding to the document requests
and subpoenas. In July 1999, Apria received notification that the
U.S. Attorney's office in Sacramento closed its criminal
investigation file relating to eight subpoenas that had been issued
by that office.
In January 2001, Apria was informed by the U.S. Attorney's office in
Los Angeles that the billing investigation being conducted by that
office is the result of qui tam litigation filed on behalf of the
government against Apria, and that the government is investigating
certain allegations for the purpose of determining whether it will
intervene in that litigation. The complaints in the litigation are
under seal, however, and the government has not informed Apria of
either the identity of the court or courts where the proceedings are
pending, the date or dates instituted, the identity of the
plaintiffs or the factual bases alleged to underlie the proceedings.
To date, the U.S. Attorney's office has not informed Apria of any
decision to intervene in the qui tam actions; however, it could
reach a decision with respect to intervention soon.
Apria has acknowledged that there may be errors and omissions in
supporting documentation affecting a portion of its billings. If a
judge, jury or administrative agency were to determine that such
errors and omissions resulted in the submission of false claims to
federal healthcare programs or significant overpayments by the
government, Apria could face civil and administrative claims for
refunds, sanctions and penalties for amounts that would be highly
material to its business, results of operations and financial
condition, including exclusion of Apria from participation in
federal healthcare programs.
Since early 2001, Apria has had discussions with representatives of
the government concerning the results of a sampling of 300 patient
files submitted by Apria in response to government subpoenas. The
government's sample of 300 patient files includes approximately
2,300 "claims" or monthly invoices for services and products over a
three-and-one-half year period from mid-1995 through year-end 1998.
The government has alleged that certain of these claims, involving
up to approximately $110,000 of aggregate billings, are inadequately
supported by required documentation with the result, in the
government's view, that Apria is liable for overpayments and
penalties under the False Claims Act. On July 12, 2001, government
representatives and counsel for the plaintiffs in the qui tam
actions asserted that, by a process of extrapolation from the 300
patient sample to all of Apria's billings to the federal government
during the sample period, Apria is liable to the government for
treble damages of $309 million (based on an extrapolation to $103
million from the alleged false claims in the sample), plus penalties
of $5,000 to $10,000 for each of over 900,000 allegedly false
claims, or a range of total liability from $4.8 billion to over $9
billion.
Apria considers these assertions and amounts to be unsupported both
legally and factually. Apria's position is that the legal analysis
of the government and the qui tam plaintiffs is incorrect, that
their review of the sample vastly overstates the number and
significance of deficiencies, and that the sampling and
extrapolation methodologies under the circumstances are
statistically flawed and legally problematic. Apria believes that
the number of sample invoices affected by substantive errors or
omissions in supporting documentation is much less than the
government and the qui tam plaintiffs assert. Further, Apria
believes that most of the alleged errors and omissions should not
give rise to any liability, for refunds or otherwise. In fact, Apria
believes that its total obligation to refund overpayments
attributable to all of the substantively deficient documentation in
the government's sample should be less than $10,000 instead of the
$110,000 alleged by the government.
Apria believes that the claims asserted are unwarranted and that
Apria is in a position to assert numerous meritorious defenses.
However, Apria cannot provide any assurances as to the outcome of
these proceedings. Management cannot estimate the possible loss or
range of loss that may result from these proceedings and therefore
has not recorded any related accruals.
Apria is also engaged in the defense of certain claims and lawsuits
arising out of the ordinary course and conduct of its business, the
outcomes of which are not determinable at this time. Apria has
insurance policies covering such potential losses where such
coverage is cost effective. In the opinion of management, any
liability that might be incurred by Apria upon the resolution of
these claims and lawsuits will not, in the aggregate, have a
material adverse effect on Apria's results of operations or
financial condition.
ITEMS 2-5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
None.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APRIA HEALTHCARE GROUP INC.
---------------------------
Registrant
August 2, 2001 /s/ JOHN C. MANEY
----------------------------------------------------
John C. Maney
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)