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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-14316
APRIA HEALTHCARE GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0488566
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
26220 ENTERPRISE COURT, LAKE FOREST, CA 92630
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 639-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
There were 54,700,148 shares of common stock, $.001 par value, outstanding at
August 9, 2002.
APRIA HEALTHCARE GROUP INC.
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2002
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements (unaudited)
- Condensed Consolidated Balance Sheets
- Condensed Consolidated Income Statements
- Condensed Consolidated Statements of Cash Flows
- Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
----------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 2002 2001
-------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................................... $ 17,114 $ 9,359
Accounts receivable, less allowance for doubtful accounts of $32,068
and $32,073 at June 30, 2002 and December 31, 2001, respectively ...... 176,976 162,092
Inventories, net ........................................................ 23,737 25,084
Deferred income taxes ................................................... 30,073 33,017
Prepaid expenses and other current assets ............................... 10,743 10,271
--------- ---------
TOTAL CURRENT ASSETS ............................................ 258,643 239,823
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $358,604
and $342,010 at June 30, 2002 and December 31, 2001, respectively ....... 168,859 165,471
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ................................. 52,325 47,312
DEFERRED INCOME TAXES ..................................................... 19,893 37,838
GOODWILL, NET ............................................................. 208,469 193,458
INTANGIBLE ASSETS, NET .................................................... 4,565 4,863
OTHER ASSETS .............................................................. 6,981 7,017
--------- ---------
$ 719,735 $ 695,782
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ........................................................ $ 55,045 $ 71,198
Accrued payroll and related taxes and benefits .......................... 30,138 33,907
Accrued insurance ....................................................... 11,762 10,376
Income taxes payable .................................................... 9,856 9,060
Other accrued liabilities ............................................... 33,837 34,754
Current portion of long-term debt ....................................... 28,053 15,455
--------- ---------
TOTAL CURRENT LIABILITIES ....................................... 168,691 174,750
LONG-TERM DEBT, net of current portion .................................... 261,503 278,234
COMMITMENTS AND CONTINGENCIES (Note I)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value: 10,000,000 shares authorized;
none issued ........................................................... - -
Common stock, $.001 par value: 150,000,000 shares authorized;
55,967,018 and 54,690,267 shares issued at June 30, 2002 and
December 31, 2001, respectively; 54,876,118 and 54,604,167
outstanding at June 30, 2002 and December 31, 2001, respectively ...... 56 55
Additional paid-in capital .............................................. 387,877 368,231
Treasury stock, at cost; 1,090,900 and 86,100 shares at June 30, 2002
and December 31, 2001, respectively ................................... (22,741) (961)
Accumulated deficit ..................................................... (75,401) (124,554)
Accumulated other comprehensive (loss) income ........................... (250) 27
--------- ---------
289,541 242,798
--------- ---------
$ 719,735 $ 695,782
========= =========
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) 2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------
Net revenues .................................... $310,425 $283,480 $611,770 $554,834
Costs and expenses:
Cost of net revenues:
Product and supply costs .................. 56,751 49,775 111,913 101,702
Patient service equipment depreciation .... 24,425 22,477 47,842 43,441
Nursing services .......................... 228 306 499 660
Other ..................................... 3,079 3,017 6,348 6,050
-------- -------- -------- --------
TOTAL COST OF NET REVENUES ............ 84,483 75,575 166,602 151,853
Selling, distribution and administrative ..... 167,913 158,097 334,021 306,491
Provision for doubtful accounts .............. 11,547 11,069 23,058 19,219
Amortization of goodwill and intangible assets 665 3,126 1,336 5,962
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES .............. 264,608 247,867 525,017 483,525
-------- -------- -------- --------
OPERATING INCOME ...................... 45,817 35,613 86,753 71,309
Interest expense, net ........................... 3,965 8,027 8,109 16,435
-------- -------- -------- --------
INCOME BEFORE TAXES ................... 41,852 27,586 78,644 54,874
Income tax expense .............................. 15,694 10,339 29,491 20,551
-------- -------- -------- --------
NET INCOME ............................ $ 26,158 $ 17,247 $ 49,153 $ 34,323
======== ======== ======== ========
Basic net income per common share ............ $ 0.48 $ 0.32 $ 0.90 $ 0.64
======== ======== ======== ========
Diluted net income per common share .......... $ 0.47 $ 0.31 $ 0.89 $ 0.62
======== ======== ======== ========
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) 2002 2001
---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income ................................................................... $ 49,153 $ 34,323
Items included in net income not requiring cash:
Provision for doubtful accounts ........................................... 23,058 19,219
Depreciation and amortization ............................................. 57,351 57,022
Amortization of deferred debt issuance costs .............................. 644 1,176
Deferred income taxes and other ........................................... 21,879 18,817
Changes in operating assets and liabilities, exclusive
of effects of acquisitions:
Accounts receivable ....................................................... (38,252) (30,772)
Inventories, net .......................................................... 1,439 (56)
Prepaid expenses and other assets ......................................... (657) (2,160)
Accounts payable, exclusive of outstanding checks ......................... (8,928) 1,574
Accrued payroll and related taxes and benefits ............................ (3,769) 500
Income taxes payable ...................................................... 8,125 324
Accrued expenses .......................................................... (2,304) 1,221
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................ 107,739 101,188
INVESTING ACTIVITIES
Purchases of patient service equipment and property,
equipment and improvements, exclusive of effects of acquisitions .......... (57,105) (66,903)
Proceeds from disposition of assets .......................................... 144 202
Cash paid for acquisitions, including payments of deferred consideration ..... (15,689) (35,038)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES ................................ (72,650) (101,739)
FINANCING ACTIVITIES
Proceeds from revolving credit facilities .................................... 120,700 29,300
Payments on revolving credit facilities ...................................... (128,500) (29,300)
Payments on term loans ....................................................... (875) -
Payments on other long-term debt ............................................. (1,481) (872)
Outstanding checks included in accounts payable .............................. (7,225) (339)
Capitalized debt issuance costs, net ......................................... (659) -
Repurchases of common stock .................................................. (21,780) -
Issuances of common stock .................................................... 12,486 11,530
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES .................. (27,334) 10,319
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................................... 7,755 9,768
Cash and cash equivalents at beginning of period ............................... 9,359 16,864
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 17,114 $ 26,632
========= =========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
NOTES TO UNAUDITED 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, 2001, included in the company's 2001 Form 10-K.
NOTE B - RECLASSIFICATIONS, ACCOUNTING ESTIMATES AND RECENT ACCOUNTING
PRONOUNCEMENTS
Reclassifications: Certain amounts from prior periods have been reclassified to
conform to the current period presentation.
Use of Accounting Estimates: The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates.
Recent Accounting Pronouncements: Effective January 1, 2002, Apria adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" in its entirety. SFAS No. 142 addresses the financial
accounting and reporting for goodwill and other intangible assets. The statement
provides that goodwill or other intangible assets with indefinite lives will no
longer be amortized, but shall be tested for impairment annually, or more
frequently if circumstances indicate potential impairment. The effect of
adoption of SFAS No. 142 on the consolidated financial statements is shown in
Note E - Goodwill and Intangible Assets.
Effective January 1, 2002, Apria was required to adopt SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." This statement supercedes
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and amends other guidance related to the
accounting and reporting of long-lived assets. SFAS No. 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale.
Discontinued operations will be measured similarly to other long-lived assets
classified as held for sale at the lower of its carrying amount or fair value
less cost to sell. Future operating losses will no longer be recognized before
they occur. SFAS No. 144 also broadens the presentation of discontinued
operations to include a component of an entity when operations and cash flows
can be clearly distinguished, and establishes criteria to determine when a
long-lived asset is held for sale. Adoption of this statement did not have a
material effect on Apria's consolidated financial statements.
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 expected to be received under
reimbursement arrangements with third-party payors, including private insurers,
prepaid health plans, Medicare and Medicaid. Approximately 33% of the company's
revenues are reimbursed under arrangements with Medicare and Medicaid. No other
third-party payor group represents 10% or more of the company's revenues. The
majority of the company's revenues are derived from fees charged for patient
care under fee-for-service arrangements. Revenues derived from capitation
arrangements represent less than 10% of total net revenues.
Due to the nature of the industry and the reimbursement environment in which
Apria operates, certain estimates are required to record net revenues and
accounts receivable at their net realizable values. Inherent in these estimates
is the risk that they will have to be revised or updated as additional
information becomes available. Specifically, the complexity of many third-party
billing arrangements and the uncertainty of reimbursement amounts for certain
services from certain payors may result in adjustments to amounts originally
recorded. Such adjustments are typically identified and recorded at the point of
cash application, claim denial or account review.
Management performs various analyses to evaluate the net realizable value of
accounts receivable. Specifically, management considers historical realization
data, accounts receivable aging trends, other operating trends and relevant
business conditions. Management also performs focused reviews of certain large
and/or problematic payors. Because of continuing changes in the healthcare
industry and third-party reimbursement, management's estimates may change from
time to time, which could have a material impact on operations and cash flows.
Accounts receivable are reduced by an allowance for doubtful accounts which
provides for those accounts from which payment is not expected to be received,
although services were provided and revenue was earned.
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
consolidated income statements from the date of acquisition. During the
six-month period ended June 30, 2002, cash paid for acquisitions was
$15,689,000, which included amounts deferred from prior years of $1,212,000. At
June 30, 2002, outstanding deferred consideration totaled $5,820,000.
For the acquisitions that were completed during the six-month period ended June
30, 2002, $15,750,000 was allocated to goodwill, including amounts not yet paid,
$581,000 to intangible assets and $1,725,000 to patient service equipment.
NOTE E - GOODWILL AND INTANGIBLE ASSETS
In July 2001, Apria adopted SFAS No. 141, "Business Combinations", which
requires that the purchase method of accounting be applied to all business
combinations completed after June 30, 2001 and which also addresses the criteria
for initial recognition of intangible assets and goodwill. Effective January 1,
2002, the company adopted SFAS No. 142, "Goodwill and Other Intangible Assets",
in its entirety. SFAS No. 142 addresses the financial accounting and reporting
for goodwill and other intangible assets. The statement provides that goodwill
and other intangible assets with indefinite lives will no longer be amortized,
but shall be tested for impairment annually, or more frequently if circumstances
indicate potential impairment. If the carrying value of goodwill or an
intangible asset exceeds its fair value, an impairment loss shall be recognized.
In the year of adoption, SFAS No. 142 requires that a transitional goodwill
impairment test be performed and that the results be measured as of the
beginning of the year. The test is conducted at a "reporting unit" level and
compares each reporting unit's fair value to its carrying value. The company has
determined that its geographic regions are reporting units under SFAS No. 142.
The measurement of fair value for each region was based on an evaluation of
future discounted cash flows and was further tested using a multiple of earnings
approach. The transitional test, which has been completed, indicated that no
impairment exists and, accordingly, no loss was recognized.
In conjunction with the transitional impairment test and based on the criteria
established in SFAS No. 141, management reviewed the useful lives and the
amounts previously recorded for intangible assets and determined that no
adjustments were necessary.
The following table sets forth the reconciliation of net income and earnings per
share as adjusted for the non-amortization provisions of SFAS No. 142:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------- -----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2002 2001
---------------------------------------------------------------------------------------------------
Reported net income ........................ $ 26,158 $ 17,247 $ 49,153 $ 34,323
Add: goodwill amortization, net of taxes... - 1,556 - 2,940
---------- ---------- ---------- ----------
Adjusted net income ........................ $ 26,158 $ 18,803 $ 49,153 $ 37,263
========== ========== ========== ==========
BASIC INCOME PER COMMON SHARE:
Reported net income ................... $ 0.48 $ 0.32 $ 0.90 $ 0.64
Goodwill amortization, net of taxes.... - 0.03 - 0.06
---------- ---------- ---------- ----------
Adjusted net income ................... $ 0.48 $ 0.35 $ 0.90 $ 0.70
========== ========== ========== ==========
DILUTED INCOME PER COMMON SHARE:
Reported net income ................... $ 0.47 $ 0.31 $ 0.89 $ 0.62
Goodwill amortization, net of taxes.... - 0.03 - 0.05
---------- ---------- ---------- ----------
Adjusted net income ................... $ 0.47 $ 0.34 $ 0.89 $ 0.67
========== ========== ========== ==========
Goodwill and intangible assets consist of the following:
JUNE 30, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001
-------------------------------------------------------------------------------------------------------------------
Goodwill from business combinations completed on or before June 30, 2001............. $203,077 $203,077
Less accumulated amortization........................................................ (48,490) (48,490)
-------- --------
154,587 154,587
Goodwill from business combinations completed after June 30, 2001.................... 53,882 38,871
-------- --------
$208,469 $193,458
======== ========
Intangible assets subject to amortization, comprised of covenants not to compete..... $ 17,023 $ 16,180
Less accumulated amortization........................................................ (12,458) (11,317)
-------- --------
$ 4,565 $ 4,863
======== ========
For the six months ended June 30, 2002, the net change in the carrying amount of
goodwill of $15,011,000 is the result of business combinations. All of the
goodwill recorded in conjunction with business combinations completed after June
30, 2001 is expected to be deductible for tax purposes.
Covenants not to compete relating to business combinations completed after June
30, 2001 have a weighted-average life of 4.9 years. Amortization expense related
to the covenants amounts to $1,336,000 for the six months ended June 30, 2002.
Estimated amortization expense for each of the fiscal years ending December 31,
is presented below:
FOR THE YEAR ENDING
(DOLLARS IN THOUSANDS) DECEMBER 31,
-----------------------------------------------------------------------
2002....................................... $ 2,303
2003....................................... 1,597
2004....................................... 1,148
2005....................................... 523
2006....................................... 303
2007....................................... 27
NOTE F - LONG-TERM DEBT
Apria's credit agreement with Bank of America and a syndicate of lenders was
amended and restated effective June 7, 2002. The amendment extended the maturity
date, reduced the applicable interest rate margins and modified the repayment
schedule for the company's $175,000,000 six-year term loan. The term loan, which
was amended to mature in seven years, had a balance of $173,687,500 at June 30,
2002. It is now repayable in 21 remaining consecutive quarterly installments of
$437,500 each, followed by three consecutive quarterly installments of
$41,125,000 each, and a final payment of $41,125,000 due on July 20, 2008.
Interest rates on outstanding balances under the credit agreement are determined
by adding a margin to the Eurodollar or base rate existing at each interest
calculation date. Applicable margins for the seven-year term loan were lowered
and are currently fixed at 2.0% for Eurodollar loans and at 1.0% for base rate
loans.
At June 30, 2002, there were no borrowings under the revolving credit facility,
outstanding letters of credit totaled $100,000, credit available under the
revolving facility was $99,900,000, and Apria was in compliance with all of the
financial covenants required by the credit agreement.
NOTE G - STOCKHOLDERS' EQUITY
For the six months ended June 30, 2002, changes to stockholders' equity are
comprised of the following amounts:
(DOLLARS IN THOUSANDS)
------------------------------------------------------------------------
Net income............................................... $ 49,153
Proceeds from the exercise of stock options.............. 12,486
Tax benefit related to the exercise of stock options..... 7,161
Other comprehensive loss, net of taxes................... (277)
Repurchased common shares held in treasury............... (21,780)
--------
$ 46,743
========
For the six months ended June 30, 2002, net income and comprehensive income
differed by $277,000 which is attributable to unrealized losses on two interest
rate swap agreements. There was no difference between net income and
comprehensive income for the same period of the previous year.
Apria plans to repurchase up to $35,000,000 worth of its outstanding common
stock during this calendar year. Depending on market conditions and other
factors, repurchases will be made in open market transactions over the next two
quarters. The company repurchased 1,004,800 shares for $21,780,000, during the
six-month period ended June 30, 2002.
NOTE H - INCOME TAXES
Income taxes for the six months ended June 30, 2002 and 2001 have been provided
at the effective tax rates expected to be applicable for the respective year.
At December 31, 2001, Apria had federal net operating loss carryforwards of
approximately $89,000,000, expiring in varying amounts in the years 2003 through
2018, and various state net operating loss carryforwards that began to expire in
1997. Additionally, the company has an alternative minimum tax credit
carryforward of approximately $7,600,000. As a result of an ownership change in
1992 that met specified criteria of Section 382 of the Internal Revenue Code,
future use of a portion of the federal and state operating loss carryforwards
generated prior to 1992 are each limited to approximately $5,000,000 per year.
Because of the annual limitation, approximately $57,000,000 of each of Apria's
federal and state operating loss carryforwards may expire unused. The net
operating loss carryforward amount in the related deferred tax asset excludes
such amount. In 2002, for federal tax purposes, the company expects to utilize
its entire net operating loss carryforward amount not subject to limitation.
NOTE I - 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. The
consolidated amended class action 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 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 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.
Following a series of settlement discussions, the parties reached in early 2002
a tentative agreement to settle both the consolidated federal and state class
actions described above for a total of $42 million. In June of this year, final
agreement was reached on all agreements needed to effectuate that settlement.
Under the terms of the settlement, Apria has paid $1 million and its insurance
carriers have paid $41 million into a settlement escrow account. Apria has also
agreed to provide various indemnities to certain current and former Apria
officers and directors who would be entitled to receive such indemnification
under applicable law. A hearing to confirm the settlement as reasonable and fair
to the settlement class has been set for August 20, 2002, before the Orange
County Superior Court. Apria cannot provide any assurance that the Court
ultimately will approve the settlement as reasonable and fair to the settlement
class. However, 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.
Apria and its former Chief Executive Officer are also defendants in a class
action lawsuit, J.E.B. Capital Partners, LP v. Apria Healthcare Group Inc. and
Philip L. Carter, filed on August 27, 2001 in the U.S. District Court for the
Central District of California, Southern Division (Case No. SACV01-813 GLT).
Among other things, the complaint alleges that the defendants made false and/or
misleading public statements by not announcing until July 16, 2001 the amount of
potential damages asserted by the U.S Attorney's office in Los Angeles and
counsel for the plaintiffs in the qui tam actions referred to below. The
defendants' motion to dismiss the complaint was granted with leave to amend on
June 14, 2002. Plaintiff has elected not to amend its complaint, but filed a
notice of appeal on July 15, 2002. Apria believes that it has meritorious
defenses to the plaintiff's claims and it intends to vigorously defend itself.
In the opinion of Apria's management, the ultimate disposition of this class
action will not have a material adverse effect on Apria's results of operations
or financial condition.
As previously reported, since mid-1998 Apria has been the subject of
investigations conducted by several U.S. Attorneys' offices and the U.S.
Department of Health and Human Services. These investigations concern the
documentation supporting Apria's billing for services provided to patients whose
healthcare costs are paid by Medicare and other federal programs. Apria is
cooperating with the government in connection with these investigations and is
responding to various document requests and subpoenas. A criminal investigation
conducted by the U.S. Attorney's office in Sacramento was closed in mid-1999
with no charges being filed. Potential claims resulting from an investigation by
the U.S. Attorney's office in San Diego were settled in mid-2001 in exchange for
a payment by Apria of $95,000.
Apria has been informed by the U.S. Attorney's office in Los Angeles that the
investigation being conducted by that office is the result of civil qui tam
litigation filed on behalf of the government against Apria. The complaints in
the litigation are under seal, however, and the government has not informed
Apria of either the identities of the plaintiffs, the court or courts where the
proceedings are pending, the date or dates instituted or the factual bases
alleged to underlie the proceedings. To date, the U.S. Attorney's office has not
informed Apria of any decision to intervene in the qui tam actions; however, it
could reach a decision with respect to intervention at any time.
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 sample
of 300 patient files to all of Apria's billings to the federal government during
the three-and-one-half year sample period, Apria could be liable to the
government under the False Claims Act for more than $9 billion, consisting of
extrapolated overpayment liability, plus treble damages and penalties of up to
$10,000 for each allegedly false claim derived from the extrapolation.
Apria has acknowledged that there may be errors and omissions in supporting
documentation affecting a portion of its billings. However, it considers the
assertions and amounts described in the preceding paragraph to be unsupported
both legally and factually and believes that most of the alleged documentation
errors and omissions should not give rise to any liability, for overpayment
refunds or otherwise. Accordingly, Apria believes that the claims asserted are
unwarranted and that it is in a position to assert numerous meritorious
defenses. Nevertheless, 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.
If a judge, jury or administrative agency were to determine that false claims
were submitted to federal healthcare programs or that there were significant
overpayments by the government, Apria could face civil and administrative claims
for refunds, sanctions and penalties for amounts that would be highly material
to its business, results of operations and financial condition, including the
exclusion of Apria from participation in federal healthcare programs.
Apria is also engaged in the defense of certain claims and lawsuits arising out
of the ordinary course and conduct of its business, the outcomes of which are
not determinable at this time. Apria has insurance policies covering such
potential losses where such coverage is cost effective. In the opinion of
management, any liability that might be incurred by Apria upon the resolution of
these claims and lawsuits will not, in the aggregate, have a material adverse
effect on Apria's results of operations or financial condition.
NOTE J - 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) 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------
NUMERATOR:
Net income ........................................... $26,158 $17,247 $49,153 $34,323
Numerator for basic and diluted per share amounts -
income available to common stockholders ............ $26,158 $17,247 $49,153 $34,323
DENOMINATOR:
Denominator for basic per share
amounts - weighted average shares .................. 54,434 53,748 54,363 53,570
Effect of dilutive securities:
Employee stock options -
dilutive potential common shares ................. 986 2,000 1,156 2,046
------- ------- ------- -------
Denominator for diluted per share amounts -
adjusted weighted average shares ................... 55,420 55,748 55,519 55,616
======= ======= ======= =======
Basic net income per common share ...................... $ 0.48 $ 0.32 $ 0.90 $ 0.64
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Diluted net income per common share .................... $ 0.47 $ 0.31 $ 0.89 $ 0.62
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Employee stock options excluded from the
computation of diluted per share amounts:
Shares for which exercise price exceeds
average market price of common stock ............... 1,503 1,815 2,572 1,900
Average exercise price per share that exceeds
average market price of common stock ................. $ 26.39 $ 27.12 $ 25.40 $ 27.08
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CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995: Apria's business is subject to a
number of risks which are partly or entirely beyond the company's control. The
company has described certain of those risks in its Form 10-K for the fiscal
year ended December 31, 2001, as filed with the Securities and Exchange
Commission on April 1, 2002. This report may be used for purposes of the Private
Securities Litigation Reform Act of 1995 as a readily available document
containing meaningful cautionary statements identifying important factors that
could cause actual results to differ materially from those projected in any
forward-looking statements the company may make from time to time. Those risks
include:
- trends and developments affecting the collectibility of accounts
receivable;
- the effectiveness of the company's operating systems and controls;
- healthcare reform and the effect of federal and state healthcare
regulations;
- government legislative and budget developments which could affect
reimbursement levels for products and services provided by Apria;
- the ongoing government investigations regarding patients covered by
Medicare and other federal programs;
- pricing pressures from large payors; and
- the successful implementation of the company's acquisition strategy and
integration of acquired businesses.
In addition, the terrorist attacks of September 11, 2001 and the military and
security activities which followed, their impacts on the United States economy
and government spending priorities, and the effects of any further such
developments pose risks and uncertainties to all U.S.-based businesses,
including Apria. Among other things, deficit spending by the government as the
result of adverse developments in the economy and costs of the government's
response to the terrorist attacks could lead to the increased pressure to reduce
government expenditures for other purposes, including governmentally-funded
programs such as Medicare.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Apria operates in the home healthcare segment of the healthcare industry
and provides services in the home respiratory therapy, home infusion therapy and
home medical equipment areas. In all three lines, Apria provides patients with a
variety of clinical services and related products and supplies, most of which
are prescribed by a physician as part of a care plan. Apria provides these
services to patients in the home throughout the United States through
approximately 400 branch locations.
CRITICAL ACCOUNTING POLICIES. Apria's management considers the accounting
policies that govern revenue recognition and the determination of the net
realizable value of accounts receivable to be the most critical in relation to
the company's consolidated financial statements. These policies require
management's most complex and subjective judgments. Other accounting policies
requiring significant judgment are those related to goodwill and income taxes.
These policies are presented in detail in Apria's 2001 Form 10-K - Management's
Discussion and Analysis of Financial Condition and Results of Operations.
SEGMENT REPORTING. Apria's branch locations are organized into geographic
regions. Each region consists of a number of branches and a regional office that
provides key support services, such as billing, purchasing, patient service
equipment maintenance, repair and warehousing. Management evaluates operating
results on a geographic basis, and therefore views each region as an operating
segment. All regions provide the same products and services, including
respiratory therapy, infusion therapy and home medical equipment and supplies.
For financial reporting purposes, all the company's operating segments are
aggregated into one reportable segment in accordance with the aggregation
criteria in paragraph 17 of Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
RECENT ACCOUNTING PRONOUNCEMENTS. Effective January 1, 2002, Apria adopted
SFAS No. 142, "Goodwill and Other Intangible Assets", in its entirety. SFAS No.
142 addresses the financial accounting and reporting for goodwill and other
intangible assets. The statement provides that goodwill or other intangible
assets with indefinite lives will no longer be amortized, but shall be tested
for impairment annually, or more frequently if circumstances indicate potential
impairment. Upon adoption, a transitional goodwill impairment test must be
performed. The test is conducted at the "reporting unit" level and compares each
reporting unit's fair value to its carrying value. Apria's management has
determined that its geographic regions are reporting units under SFAS No. 142.
Apria's transitional goodwill impairment test utilized a discounted cash flow
approach in determining fair value, which was further tested by a multiple of
earnings approach. The transitional test has been completed; no goodwill
impairment is indicated at any of Apria's reporting units. See "Amortization of
Goodwill and Intangible Assets."
Effective January 1, 2002 Apria adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale.
Discontinued operations will be measured similarly to other long-lived assets
classified as held for sale at the lower of its carrying amount or fair value
less cost to sell. Future operating losses will no longer be recognized before
they occur. SFAS No. 144 also broadens the presentation of discontinued
operations to include a component of an entity when operations and cash flows
can be clearly distinguished, and establishes criteria to determine when a
long-lived asset is held for sale. Adoption of this statement did not have a
material effect on Apria's financial statements.
RESULTS OF OPERATIONS
NET REVENUES. Net revenues were $310.4 million and $611.8 million in the
second quarter and first six months of 2002, respectively, compared to $283.5
million and $554.8 million for the corresponding periods in 2001. This
represents increases of 9.5% and 10.3% for the three and six month periods,
respectively. The growth is due to volume increases, new contracts with regional
and national payors, the acquisition of complementary businesses and price
increases in certain managed care agreements.
Apria's acquisition strategy generally results in the rapid integration of
acquired businesses into existing operating locations. This limits management's
ability to separately track the amount of revenue generated by an acquired
business. Estimating the revenue contribution from acquisitions therefore
requires certain assumptions. Based on its analyses, Apria's management
estimates that approximately one-third of the revenue growth between the six
month periods presented was derived from acquisitions.
The following table sets forth a summary of net revenues by service line:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------------ -------------------------------------
2002 2001 2002 2001
---------------- ---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS) $ % $ % $ % $ %
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Respiratory therapy......... $205,263 66.1% $185,081 65.3% $408,495 66.8% $363,411 65.5%
Infusion therapy............ 57,636 18.6% 54,874 19.4% 111,419 18.3% 107,259 19.3%
HME/other................... 47,526 15.3% 43,525 15.3% 91,856 14.9% 84,164 15.2%
-------- ------ -------- ------ -------- ------ -------- ------
Total net revenues $310,425 100.0% $283,480 100.0% $611,770 100.0% $554,834 100.0%
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Home Respiratory Therapy. Respiratory therapy revenues are derived
primarily from the provision of oxygen systems, home ventilators, sleep apnea
equipment, nebulizers, respiratory medications and related services. The
respiratory therapy service line increased by 10.9% and 12.4% in the second
quarter and first half of 2002, respectively, as compared to the same periods in
2001. Apria's focus on the acquisition of respiratory therapy businesses
contributed to this growth.
Home Infusion Therapy. The infusion therapy service line involves the
administration of a drug or nutrient directly into the body intravenously
through a needle or catheter. Examples include: parenteral nutrition,
anti-infectives, pain management, chemotherapy and other medications and related
services. The infusion line also includes enteral nutrition, which is the
administration of nutrients directly into the gastrointestinal tract through a
feeding tube. Infusion therapy revenues increased by 5.0% and 3.9% in the second
quarter and first six months of 2002, respectively, when compared to the
corresponding periods in 2001. For the six month period in 2002, the growth
percentage reflects the effect of a 13.9% increase in enteral nutrition
attributable to a renewed focus on this product, resulting from a program
(initiated in mid-2001) that centralized the enteral intake and distribution
functions at the regional level. Offsetting this was a 1.2% decline in the
remaining infusion line, due in part to eliminating certain product offerings
within a large contract.
Home Medical Equipment/Other. Home medical equipment/other revenues are
derived from the provision of patient safety items, ambulatory and patient room
equipment. Home medical equipment/other revenues increased by 9.2% and 9.1% in
the second quarter and first six months of 2002, respectively, as compared to
the same periods in 2001. The increase between periods is partially due to the
fact that the full Medicare cost of living adjustment for certain durable
medical equipment products and services that had been frozen since 1998 pursuant
to the Balanced Budget Act of 1997 was restored in 2001. Substantially all of
this adjustment was provided through a transitional allowance applied to amounts
reimbursed during the second half of the year. The 2002 reimbursement amounts
incorporate the 2001 adjustments as if they had been applied evenly throughout
the year. Medicare reimbursement amounts for 2002 include only minimal increases
significantly below the cost of living rate.
Revenue Recognition and Certain Concentrations. Revenues are recognized on
the date services and related products are provided to patients and are recorded
at amounts estimated to be received under reimbursement arrangements with
third-party payors, including private insurers, prepaid health plans, Medicare
and Medicaid. Due to the nature of the industry and the reimbursement
environment in which Apria operates, certain estimates are required to record
net revenues and accounts receivable at their net realizable values. Inherent in
these estimates is the risk that they will have to be revised or updated as
additional information becomes available, which could have an impact on the
consolidated financial statements.
Approximately 33% of Apria's revenues are reimbursed under arrangements
with Medicare and Medicaid. No other third-party payor represents 10% or more of
the company's revenues. The majority of the company's revenues are derived from
fees charged for patient care under fee-for-service arrangements. Revenues
derived from capitation arrangements represent less than 10% of total net
revenues for all periods presented.
Medicare and Medicaid Reimbursement. The Balanced Budget Act of 1997
significantly reduced the Medicare reimbursement rates for home oxygen therapy
and included other provisions that have impacted or may impact reimbursement
rates in the future, such as potential reimbursement reductions under an
inherent reasonableness procedure and competitive bidding. Also currently at
issue is the potential adoption of an alternative pricing methodology for
certain drugs and biologicals. These issues are discussed in detail in Apria's
2001 Form 10-K.
In June 2002, the U.S. House of Representatives passed the Medicare
Modernization and Prescription Drug Act of 2002. The bill provides for a
nationwide competitive bidding program for an as-yet-undetermined list of
durable medical equipment ("DME") items covered by Medicare Part B. In July
2002, the U.S. Senate failed to pass a Medicare prescription drug benefit. None
of the Senate proposals contained Medicare "provider adjustments" such as
competitive bidding for DME. The Senate is likely to take up these provider
adjustment issues in the third quarter, but it is unclear at the present time
whether the Senate will include competitive bidding for DME or other issues of
interest to Apria in such legislation. It is also unclear whether competitive
bidding or other issues of interest to Apria will be included in the conference
report on Medicare provider adjustments that the House and Senate negotiators
may finally agree upon before adjournment.
GROSS PROFIT. Gross margins for both the second quarter of 2002 and the
first half of 2002 were 72.8% compared to 73.3% and 72.6% for the corresponding
periods in the prior year. The higher margin in the second quarter of 2001 was
due in part to a retroactive price increase of a managed care contract .
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts was
3.7% of net revenues for the second quarter of 2002 and 3.8% for the first six
months of 2002 compared to 3.9% and 3.5% for the corresponding periods in 2001.
The provision for doubtful accounts results from management's estimate of the
net realizable value of accounts receivable after considering actual write-offs
of specific receivables. The increase in the provision between the six month
periods can be attributed to the increase in accounts receivable in the first
quarter of 2002 due mainly to two large fourth quarter acquisitions. Such
acquisitions result in integrating a significant amount of patient information
into Apria's information systems and document files which can delay the billing
and collection process. Also contributing to the accounts receivable growth in
the first quarter are the following factors that are typical with the start of a
new calendar year: (1) patient payor and/or benefit changes that can slow the
billing and collection process as the new payor information is obtained; and (2)
patient deductible requirements that can also slow the collection process. These
new-year factors were also present in 2001, however the magnitude was greater in
2002 due to revenue growth and the fourth quarter acquisitions. The rate of
accounts receivable increase declined in the second quarter of 2002. See
"Accounts Receivable - Evaluation of Net Realizable Value."
SELLING, DISTRIBUTION AND ADMINISTRATIVE. Selling, distribution and
administrative expenses are comprised of expenses incurred in direct support of
operations and those associated with administrative functions. Expenses incurred
by the operating locations include salaries and other expenses in the following
functional areas: selling, distribution, clinical, intake, reimbursement,
warehousing and repair. Many of these operating costs are directly variable with
revenue growth patterns. Certain expenses, such as facility lease and fuel
costs, are also very sensitive to market-driven price fluctuations. The
administrative expenses include overhead costs incurred by the operating
locations and corporate support functions. These expenses do not vary as closely
with revenue growth as do the operating costs. Selling, distribution and
administrative expenses, expressed as percentages of net revenues, were 54.1%
and 54.6% for the second quarter and first half of 2002, respectively, versus
55.8% and 55.2% for the corresponding periods in 2001. In 2002, the first
quarter included $2.6 million in contract termination costs related to the
departure of the former Chief Executive Officer and the second quarter included
approximately $2.2 million in merit compensation increases. Despite these
additional expenses, management was able to leverage its expense structure
against the revenue growth.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS. Amortization of intangible
assets for the second quarter and the six months ended June 30, 2002 were
$665,000 and $1.3 million, respectively, compared to $3.1 million and $6.0
million for the same periods last year (which included goodwill amortization).
Upon adoption of SFAS No. 142 on January 1, 2002, goodwill amortization ceased.
Amortization of goodwill was $2.5 million for the second quarter and $4.7
million for the first six months of 2001. The effect of adding this amount back
as though SFAS No. 142 were adopted at the beginning of the prior year would
have been increases in net income of $1.6 million and $2.9 million and increases
in diluted income per common share of $0.03 and $0.05 for the second quarter and
first six months of 2001, respectively. See "Recent Accounting Pronouncements",
"Business Combinations" and Note C to the Condensed Consolidated Financial
Statements.
INTEREST EXPENSE. Interest expense was $4.0 million for the second quarter
of 2002, down from $8.0 million in the second quarter of 2001. For the six
months ended June 30, 2002 interest expense was $8.1 million compared to $16.4
million in the same period in 2001. The significant decrease between the periods
is due to a number of factors. From June 30, 2001 to June 30, 2002, long-term
debt decreased by $52.1 million. The July 2001 refinancing replaced the 9 1/2%
senior subordinated notes with debt at significantly more favorable interest
rates and resulted in lower rates on the bank loans. In connection with the
refinancing, deferred debt issuance costs on the 9 1/2% notes and former bank
debt were written off; the issuance costs incurred upon refinancing resulted in
a lower monthly amortization expense. Also, the June 2002 credit agreement
amendment included a reduction in the applicable interest rate margin for the
$175 million term loan. Finally, the dramatic decreases in market-driven
interest rates over the course of 2001 contributed to the overall decrease in
Apria's interest expense. See "Long-Term Debt."
INCOME TAXES. Income taxes for the six months ended June 30, 2002 and in
the corresponding period of 2001, have been provided at the effective tax rates
expected to be applicable for the respective year.
At December 31, 2001, Apria had federal net operating loss carryforwards of
approximately $89 million, expiring in varying amounts in the years 2003 through
2018 and various state net operating loss carryforwards that began to expire in
1997. Additionally, the company has an alternative minimum tax credit
carryforward of approximately $7.6 million. As a result of an ownership change
in 1992 that 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 million per year.
Because of the annual limitation, approximately $57 million of each of Apria's
federal and state operating loss carryforwards may expire unused. The net
operating loss carryforward amount in the related deferred tax asset excludes
such amount. In 2002, for federal tax purposes, the company expects to utilize
its entire net operating loss carryforward not subject to limitation.
LIQUIDITY AND CAPITAL RESOURCES
Apria's principal source of liquidity is its operating cash flow, which is
supplemented by a $100 million revolving credit facility. Apria's ability to
generate operating cash flows in excess of its operating needs has afforded it
the ability, among other things, to pursue its acquisition strategy and fund
patient service equipment expenditures to support revenue growth. Apria's
management believes that its operating cash flow and revolving credit line will
continue to be sufficient to fund its operations and growth strategies. However,
sustaining the current cash flow levels is dependent on many factors, some of
which are not within Apria's control, such as government reimbursement levels
and the financial health of its payors.
CASH FLOW. Cash provided by operating activities was $107.7 million in the
first six months of 2002 compared with $101.2 million in the corresponding
period in 2001. The increase between periods in net income (before items not
requiring cash) was partially offset by the increase in accounts receivable and
increases in payments against accounts payable and other expense accruals.
Cash used in investing activities decreased to $72.7 million for the first
half of 2002 compared to $101.7 million during the same period last year. The
decrease in cash used is attributable to the difference in acquisition activity
between the periods and a decrease in patient service and other equipment
purchases.
Cash used in financing activities was $27.3 million during the first six
months of 2002 compared to $10.3 million provided by financing activities during
the same period last year. The difference is mainly due to the stock repurchases
effected in the 2002 period. See "Treasury Stock."
CONTRACTUAL CASH OBLIGATIONS. The following table summarizes Apria's long
term cash payment obligations to which the company is contractually bound (the
years presented below represent twelve-month rolling periods ending June 30):
(DOLLARS IN MILLIONS) YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEARS 6+ TOTALS
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Term loans.............................. $ 25 $ 26 $ 28 $ 29 $ 9 $165 $282
Capitalized lease obligations........... 3 2 2 - - - 7
Operating leases........................ 53 44 35 28 16 25 201
Deferred acquisition payments........... 6 - 6
---- ---- ---- ---- ---- ---- ----
Total contractual obligations...... $ 87 $ 72 $ 65 $ 57 $ 25 $190 $496
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ACCOUNTS RECEIVABLE. Accounts receivable before allowance for doubtful
accounts increased to $209.0 million at June 30, 2002 from $194.2 million at
December 31, 2001, which is attributable to the 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 51 at June 30, 2002, and 50 at December 31, 2001. Accounts aged
in excess of 180 days decreased to 17.7% at June 30, 2002 from 19.8% at December
31, 2001. See "Provision for Doubtful Accounts."
Evaluation of Net Realizable Value. Management performs various analyses to
evaluate accounts receivable balances to ensure that recorded amounts reflect
estimated net realizable value. Management applies specified percentages to the
accounts receivable aging to estimate the amount that will ultimately be
uncollectible and therefore should be reserved. The percentages are increased as
the accounts age; accounts aged in excess of 360 days are reserved at 100%.
Management establishes and monitors these percentages through extensive analyses
of historical realization data, accounts receivable aging trends, other
operating trends, the extent of contracted business and business combinations.
Also considered are relevant business conditions, such as governmental and
managed care payor claims processing procedures and system changes. If indicated
by such analyses, management may periodically adjust the uncollectible estimate
and corresponding percentages. Further, focused reviews of certain large and/or
problematic payors are performed to determine if additional reserves are
necessary.
Unbilled Receivables. Included in accounts receivable are earned but
unbilled receivables of $30.0 million and $26.9 million at June 30, 2002 and
December 31, 2001, respectively. Delays, ranging from a day up to several weeks,
between the date of service and billing can occur due to delays in obtaining
certain required payor-specific documentation from internal and external
sources. Earned but unbilled receivables are aged from date of service and are
considered in Apria's analysis of net realizable value. The increase is
partially due to acquisitions effected late in 2001 and in 2002. The
time-consuming processes of converting patient files onto Apria's systems and
obtaining provider numbers from government payors routinely delay billing of the
newly acquired business.
INVENTORIES AND PATIENT SERVICE EQUIPMENT. Inventories consist primarily of
pharmaceuticals and disposable articles used in conjunction with patient service
equipment. Patient service equipment consists of respiratory and home medical
equipment that is provided to in-home patients for the course of their care plan
and subsequently returned to Apria for reuse. Continued revenue growth is
directly dependent on Apria's ability to fund its inventory and patient service
equipment requirements.
LONG-TERM DEBT. Apria's credit agreement with Bank of America and a
syndicate of lenders was amended and restated effective June 7, 2002. The
amendment extended the maturity date, reduced the applicable interest rate
margins and modified the repayment schedule for the company's $175 million
six-year term loan. The term loan, which was amended to mature in seven years,
had a balance of $173.7 million at June 30, 2002. It is now repayable in 21
remaining consecutive quarterly installments of $437,500 each, followed by three
consecutive quarterly installments of $41.1 million each, and a final payment of
$41.1 million due on July 20, 2008.
Interest rates on outstanding balances under the credit agreement are
determined by adding a margin to the Eurodollar or base rate existing at each
interest calculation date. Applicable margins for the seven-year term loan were
lowered to 2.0% for Eurodollar loans and 1.0% for base rate loans.
On June 30, 2002, total borrowings under the credit agreement were $282.2
million. Outstanding letters of credit totaled $100,000 and credit available
under the revolving facility was $99.9 million. At June 30, 2002, the company
was in compliance with all of the financial covenants required by the credit
agreement.
Hedging Activities. Apria is exposed to interest rate fluctuations on its
underlying variable rate long-term debt. Apria's policy for managing interest
rate risk is to evaluate and monitor all available relevant information,
including but not limited to, the structure of its interest-bearing assets and
liabilities, historical interest rate trends and interest rate forecasts
published by major financial institutions. The tools Apria may utilize to
moderate its exposure to fluctuations in the relevant interest rate indices
include, but are not limited to: (1) strategic determination of repricing
periods and related principal amounts, and (2) derivative financial instruments
such as interest rate swap agreements, caps or collars. Apria does not use
derivative financial instruments for trading or other speculative purposes.
Apria has two interest rate swap agreements with a total notional amount of
$100 million that fix its LIBOR-based variable rate debt at 2.58% (before the
applicable margin). The swap agreements terminate March 2003. The swaps are
being accounted for as cash flow hedges under SFAS No. 133. Accordingly, the
difference between the interest received and interest paid is reflected as an
adjustment to interest expense. For the first six months of 2002, Apria paid a
net settlement amount of $289,000. At June 30, 2002, the swap agreements are
reflected in the accompanying consolidated balance sheet in other accrued
liabilities at their fair value of $401,000. Unrealized losses on the fair value
of the swap agreements are reflected, net of taxes, in other comprehensive loss.
Apria does not anticipate losses due to counterparty nonperformance, as its
counterparty to the swap agreements is a nationally-recognized financial
institution with a strong credit rating.
TREASURY STOCK. Apria plans to repurchase up to $35 million worth of its
outstanding common stock during this calendar year. Depending on market
conditions and other considerations, repurchases will be made from time to time
in open market transactions. During the first six months of 2002, Apria
repurchased 1,004,800 shares for $21.8 million. All repurchased common shares
are being held in treasury. Apria's credit agreement limits common stock
repurchases to $35 million in any fiscal year and $100 million in the aggregate
over the term of the agreement.
BUSINESS COMBINATIONS. Pursuant to one of its primary growth strategies,
Apria periodically acquires complementary businesses in specific geographic
markets. These transactions are accounted for as purchases and the results of
operations of the acquired companies are included in the accompanying
consolidated income statements from the dates of acquisition. Effective with the
adoption of SFAS No. 142, goodwill is no longer being amortized. Covenants not
to compete are being amortized over the life of the respective agreements.
The aggregate consideration for acquisitions that closed during the first
half of 2002 was $18.4 million. Allocation of this amount includes $15.7 million
to goodwill, $581,000 to intangible assets and $1.7 million to patient service
equipment. During the first half of 2001, the aggregate consideration for
acquisitions was $37 million. Cash paid for acquisitions, which includes amounts
deferred from prior year acquisitions, totaled $15.7 million and $35 million in
the first six months of 2002 and 2001, respectively.
The success of Apria's acquisition strategy is directly dependent on
Apria's ability to maintain and/or generate sufficient liquidity to fund such
purchases and on the company's ability to integrate the acquired operations
successfully.
FEDERAL INVESTIGATIONS. As previously reported, since mid-1998 Apria has
been the subject of investigations conducted by several U.S. Attorneys' offices
and the U.S. Department of Health and Human Services. These investigations
concern the documentation supporting Apria's billing for services provided to
patients whose healthcare costs are paid by Medicare and other federal programs.
Apria is cooperating with the government in connection with these investigations
and is responding to various document requests and subpoenas. A criminal
investigation conducted by the U.S. Attorney's office in Sacramento was closed
in mid-1999 with no charges being filed. Potential claims resulting from an
investigation by the U.S. Attorney's office in San Diego were settled in
mid-2001 in exchange for a payment by Apria of $95,000.
Apria has been informed by the U.S. Attorney's office in Los Angeles that
the investigation being conducted by that office is the result of civil qui tam
litigation filed on behalf of the government against Apria. The complaints in
the litigation are under seal, however, and the government has not informed
Apria of either the identities of the plaintiffs, the court or courts where the
proceedings are pending, the date or dates instituted or the factual bases
alleged to underlie the proceedings. To date, the U.S. Attorney's office has not
informed Apria of any decision to intervene in the qui tam actions; however, it
could reach a decision with respect to intervention at any time.
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
sample of 300 patient files to all of Apria's billings to the federal government
during the three-and-one-half year sample period, Apria could be liable to the
government under the False Claims Act for more than $9 billion, consisting of
extrapolated overpayment liability, plus treble damages and penalties of up to
$10,000 for each allegedly false claim derived from the extrapolation.
Apria has acknowledged that there may be errors and omissions in supporting
documentation affecting a portion of its billings. However, it considers the
assertions and amounts described in the preceding paragraph to be unsupported
both legally and factually and believes that most of the alleged documentation
errors and omissions should not give rise to any liability, for overpayment
refunds or otherwise. Accordingly, Apria believes that the claims asserted are
unwarranted and that it is in a position to assert numerous meritorious
defenses. Nevertheless, 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.
If a judge, jury or administrative agency were to determine that false
claims were submitted to federal healthcare programs or that there were
significant overpayments by the government, Apria could face civil and
administrative claims for refunds, sanctions and penalties for amounts that
would be highly material to its business, results of operations and financial
condition, including the exclusion of Apria from participation in federal
healthcare programs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Apria is exposed to interest rate fluctuations on its underlying variable
rate long-term debt. Apria utilizes interest rate swap agreements to moderate
such exposure. Apria does not use derivative financial instruments for trading
or other speculative purposes.
At June 30, 2002, Apria's term loan borrowings totaled $282.2 million. The
bank credit agreement governing the term loans provides interest rate options
based on the following indices: Federal Funds Rate, Prime Rate or LIBOR. All
such interest rate options are subject to the application of an interest margin
as specified in the bank credit agreement. At June 30, 2002, all of Apria's
outstanding term debt was tied to LIBOR. Apria has two interest rate swap
agreements with a total notional amount of $100 million that fix its LIBOR-based
debt at 2.58% (before application of the interest margin). Both agreements
expire March 2003.
Based on the term debt outstanding and the swap agreements in place at June
30, 2002, a 100 basis point change in LIBOR would increase or decrease Apria's
annual cash flow and pretax earnings by approximately $1.8 million.
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. The
consolidated amended class action 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 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 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.
Following a series of settlement discussions, the parties reached in
early 2002 a tentative agreement to settle both the consolidated
federal and state class actions described above for a total of $42
million. In June of this year, final agreement was reached on all
agreements needed to effectuate that settlement. Under the terms of
the settlement, Apria has paid $1 million and its insurance carriers
have paid $41 million into a settlement escrow account. Apria has
also agreed to provide various indemnities to certain current and
former Apria officers and directors who would be entitled to receive
such indemnification under applicable law. A hearing to confirm the
settlement as reasonable and fair to the settlement class has been
set for August 20, 2002, before the Orange County Superior Court.
Apria cannot provide any assurance that the Court ultimately will
approve the settlement as reasonable and fair to the settlement
class. However, 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.
Apria and its former Chief Executive Officer are also defendants in
a class action lawsuit, J.E.B. Capital Partners, LP v. Apria
Healthcare Group Inc. and Philip L. Carter, filed on August 27, 2001
in the U.S. District Court for the Central District of California,
Southern Division (Case No. SACV01-813 GLT). Among other things, the
complaint alleges that the defendants made false and/or misleading
public statements by not announcing until July 16, 2001 the amount
of potential damages asserted by the U.S Attorney's office in Los
Angeles and counsel for the plaintiffs in the qui tam actions
referred to below. The defendants' motion to dismiss the complaint
was granted with leave to amend on June 14, 2002. Plaintiff has
elected not to amend its complaint, but filed a notice of appeal on
July 15, 2002. Apria believes that it has meritorious defenses to
the plaintiff's claims and it intends to vigorously defend itself.
In the opinion of Apria's management, the ultimate disposition of
this class action will not have a material adverse effect on Apria's
results of operations or financial condition.
As previously reported, since mid-1998 Apria has been the subject of
investigations conducted by several U.S. Attorneys' offices and the
U.S. Department of Health and Human Services. These investigations
concern the documentation supporting Apria's billing for services
provided to patients whose healthcare costs are paid by Medicare and
other federal programs. Apria is cooperating with the government in
connection with these investigations and is responding to various
document requests and subpoenas. A criminal investigation conducted
by the U.S. Attorney's office in Sacramento was closed in mid-1999
with no charges being filed. Potential claims resulting from an
investigation by the U.S. Attorney's office in San Diego were
settled in mid-2001 in exchange for a payment by Apria of $95,000.
Apria has been informed by the U.S. Attorney's office in Los Angeles
that the investigation being conducted by that office is the result
of civil qui tam litigation filed on behalf of the government
against Apria. The complaints in the litigation are under seal,
however, and the government has not informed Apria of either the
identities of the plaintiffs, the court or courts where the
proceedings are pending, the date or dates instituted or the factual
bases alleged to underlie the proceedings. To date, the U.S.
Attorney's office has not informed Apria of any decision to
intervene in the qui tam actions; however, it could reach a decision
with respect to intervention at any time.
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 sample of 300 patient files to all of Apria's
billings to the federal government during the three-and-one-half
year sample period, Apria could be liable to the government under
the False Claims Act for more than $9 billion, consisting of
extrapolated overpayment liability, plus treble damages and
penalties of up to $10,000 for each allegedly false claim derived
from the extrapolation.
Apria has acknowledged that there may be errors and omissions in
supporting documentation affecting a portion of its billings.
However, it considers the assertions and amounts described in the
preceding paragraph to be unsupported both legally and factually and
believes that most of the alleged documentation errors and omissions
should not give rise to any liability, for overpayment refunds or
otherwise. Accordingly, Apria believes that the claims asserted are
unwarranted and that it is in a position to assert numerous
meritorious defenses. Nevertheless, 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.
If a judge, jury or administrative agency were to determine that
false claims were submitted to federal healthcare programs or that
there were significant overpayments by the government, Apria could
face civil and administrative claims for refunds, sanctions and
penalties for amounts that would be highly material to its business,
results of operations and financial condition, including the
exclusion of Apria from participation in federal healthcare
programs.
Apria is also engaged in the defense of certain claims and lawsuits
arising out of the ordinary course and conduct of its business, the
outcomes of which are not determinable at this time. Apria has
insurance policies covering such potential losses where such
coverage is cost effective. In the opinion of management, any
liability that might be incurred by Apria upon the resolution of
these claims and lawsuits will not, in the aggregate, have a
material adverse effect on Apria's results of operations or
financial condition.
ITEMS 2-5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Reference
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10.1 Executive Severance Agreement effective May 8, 2002
between Registrant and Anthony S. Domenico.
10.2 Third Amended and Restated Credit Agreement dated June
7, 2002, among Registrant and certain of its
subsidiaries, Bank of America National Association
and other financial institutions party to the Credit
Agreement.
99.1 Certification of the Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350.
(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 14, 2002 /s/ JAMES E. BAKER
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James E. Baker
Chief Financial Officer
(Principal Financial and Accounting Officer)