<PAGE> 1
[ ] UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 2
ON
FORM 10-K/A
(Mark One)
[x]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the Fiscal Year Ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
Commission File No. 000-19854
APRIA HEALTHCARE GROUP INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0488566
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)
3560 HYLAND AVENUE 92626
COSTA MESA, CA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 427-2000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
----
As of February 29, 1996, there were outstanding 50,245,452 shares of the
Registrant's Common Stock, par value $0.001 ("Common Stock"), which is the only
class of Common Stock of the Registrant. As of February 29, the aggregate market
value of the shares of Common Stock held by non-affiliates of the Registrant,
computed based on the closing sale price of $31.25 per share as reported by
Nasdaq, was approximately $1,515,996,313.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 1996 Annual Meeting of Stockholders of the
Registrant which will be filed with the Securities and Exchange Commission not
later than 120 days after December 31, 1995.
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Item 7 of Part II and Item 14 of Part IV of the Annual Report on Form 10-K for
the fiscal year ended December 31, 1995 are amended in their entirety as
follows:
PART II.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
Apria Healthcare Group Inc. ("the Company") was formed by the merger of
Abbey Healthcare Group Incorporated ("Abbey") and Homedco Group, Inc.
("Homedco") in June 1995. This transaction was accounted for as a
pooling-of-interests and as such, the results of operations for all periods
presented reflect the combined operations of Abbey and Homedco. The financial
statements have been restated to conform the differing accounting policies of
the separate companies, principally relating to the use of salvage values
recognized for certain patient service equipment and the capitalization of low
dollar patient service items, supplies, accessories and repairs.
In connection with the merger, the Company initiated a significant
consolidation and restructuring plan to consolidate operating locations and
administrative functions within specific geographic markets. The plan provides
for a workforce reduction of approximately 1,220 employees, consolidation of
approximately 120 operating facilities and conversion of branch operating
locations to a standardized information system. The employee reduction and
branch consolidations were substantially complete as of December 1995, with a
reduction of 1,120 employees and consolidation of 105 branch locations. The
Company has also completed approximately 50% of the information system
conversions as of December 1995. The remaining system conversions (approximately
220) are scheduled during 1996. The Company expects the plan to be completed by
September 1996.
During 1995, a charge of approximately $68.3 million was recorded in
connection with the Company's restructuring efforts. The primary components of
the restructuring charge include severance and related costs of $21.5 million
due to workforce reductions, $22.2 million associated with the consolidation of
information systems, $23.1 million related to the closure of duplicate
facilities and $1.5 million for other restructuring activities. The Company
anticipates these activities to result in payroll, rent and other cost savings
from workforce reductions and branch consolidations. Such savings to date have
been partially offset by integration costs, including employee relocation,
temporary and transitional employee costs, overtime and consulting which totaled
approximately $11.5 million in 1995 and are expected to decrease significantly
as the integration activities subside.
Merger costs of approximately $12.2 million were incurred during 1995
and consisted primarily of fees for investment banking, legal, consulting,
accounting, filing requirements, and, as required by the merger agreement, the
cost of liability insurance covering directors and officers of the predecessor
companies for a period of six years against claims arising from facts or events
occurring prior to the merger.
Employee contracts, benefit plan and claim settlements of $20.4 million
were recorded in 1995. Included is approximately $14.4 million provided for
employment and payroll tax related claims and lawsuits, $3.4 million to settle
certain employee contracts, and a settlement loss of $2.3 million for the
termination of the Abbey Medical, Inc. Employee Retirement Plan, a defined
benefit pension plan. At December 31, 1995, the remaining accrual was
approximately $10 million, the majority of which should be settled and paid
within one year.
Net revenues increased 17.7% to $1,133.6 million in 1995, 28.6% to
$962.8 million in 1994 and 45.9% to $748.9 million in 1993. The increase in
revenues in 1995 and 1994 was due to growth from locations owned and operated by
the Company at the beginning of the fiscal year (existing locations) and
acquisitions. The internal growth was primarily generated by increased volumes
realized in managed care markets. 1995 revenues were negatively impacted by the
fact that the last half of the year was the first in which the Company operated
as a merged entity and as a result, there was a disruption of the day to day
operations caused by the consolidation and integration activities. Management
believes this trend to be short term, as indicated by an increase in revenue
during the fourth quarter of 1995.
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During 1993, Congress passed the Omnibus Budget Reconciliation Act of
1993 ("OBRA 1993"), which the Company estimates reduced its revenues by
approximately $12.8 million during 1994. No additional reductions related to
OBRA 1993 were incurred during 1995. The OBRA legislation provides a consumer
price index update, effective January 1, 1996, of 3%. Medicare and Medicaid
reimbursement rates are continually being reviewed by the federal and state
governments, respectively, and additional reimbursement reduction may occur in
the future.
Infusion therapy, respiratory therapy and home medical equipment/other
revenues represent 24%, 53% and 23%, respectively, of total revenue and grew at
rates of 14.9%, 15.2% and 27.7%, respectively, in 1995. Growth in all three
lines of business was primarily due to increased volume from existing locations
and revenue contributed from acquisitions. Additionally, the shift to a managed
care environment has required the Company to provide a full range of services,
resulting in volume increases, specifically in the home medical equipment/other
lines of business. This growth was mitigated by price competition within the
managed care environment. Revenue growth in 1994 was 117.4%, 14.1% and 10.8% for
infusion therapy, respiratory therapy and home medical equipment/other services,
respectively. The significant growth in infusion revenue in 1994 was primarily
due to the Total Pharmaceutical Care, Inc. ("TPC") and Protocare, Inc.
acquisitions. Price increases had a minimal impact on revenue growth.
Gross margins were 68.2% in 1995, 70.1% in 1994 and 69.8% in 1993.
Increased participation in the managed care market place has shifted product mix
toward lower-margin medical equipment and supply items. Also, the managed care
market fosters competition, which places downward pressure on prices. The 1995
gross margin was also adversely impacted by an adjustment of $5.4 million
necessary to conform the accounting policies of the predecessor companies for
certain low dollar patient service items, supplies and accessories and a $7.5
million provision for excess and obsolete patient service equipment and
shrinkage associated with the facility consolidations. Due to the Company's
larger size and resulting increase in volume requirements, management has
renegotiated purchasing contracts for more attractive pricing and has
implemented purchase compliance programs at its operational locations.
Consequently, the Company has realized some cost savings in the last half of
1995 and expects to realize additional savings in 1996. In general, the Company
has not experienced significant fluctuations in its cost structure and expects
this trend to continue for the near term.
Selling, distribution and administrative expenses decreased as a
percentage of net revenues to 53.1% in 1995 from 53.7% in 1994 and 54.8% in
1993. The year to year improvement is due in part to the Company's initiatives
to more effectively manage the delivery and clinical support components of the
business. Due to the more cost conscious health care environment and the
Company's decision to aggressively participate in the managed care approach to
providing health care, the Company is continually evaluating how it can provide
home healthcare at a lower cost. The Company has developed operating models that
facilitate the accumulation and analysis of various statistics related to the
delivery and clinical areas of the business. The models, which are targeted at
the local level, are utilized as tools to expose inefficiencies and determine
the optimal labor mix to best service the needs of the patients. Additionally,
the Company was able to leverage these types of costs as a result of the merger,
contributing significantly to the reduction in selling, distribution and
administrative expenses during 1995. These reductions were partially offset in
1995 by integration costs.
The provision for doubtful accounts as a percentage of net revenue was
8.9% in 1995, 4.9% in 1994 and 4.6% in 1993. The increase in 1996 is
principally attributable to (1) an adjustment to the allowance for doubtful
accounts of approximately $26.3 million to provide for an impairment in Abbey's
infusion therapy accounts receivable and (2) a provision recorded in the fourth
quarter of approximately $13 million, or 3.7% of accounts receivable, for the
anticipated impact on realization resulting from field location consolidations,
changes in billing and collection personnel, and information systems
conversions. The circumstances leading to the recording of both amounts are
discussed more fully below.
Abbey had entered the infusion market primarily through its acquisitions
of TPC and Protocare in November 1993 and March 1994, respectively. From the
point of acquisition through the end of 1994, the receivables of the acquired
TPC business were processed centrally in two billing centers. Cooperation and
assistance from the branch/pharmacy personnel responsible for the initiation and
fulfillment of orders was an important aspect of centralized billing and
collection. In mid-1994, many of the former TPC branch and region level
managers were terminated due to the post-acquisition integration of TPC's
branch/pharmacy operations into Abbey's organizational structure. These changes
had a negative impact on the morale of the branch/pharmacy personnel and
resulted in significant turnover and less cooperation with billing center
personnel. Also in mid-1994, one of the billing centers was relocated and only
a portion of the personnel were transferred to the new location. Consequently,
numerous new billing and collection employees had to be hired and trained.
During the first quarter of 1995, Abbey began to convert and, in some cases,
automate for the first time, the billing and collection procedures of the
acquired TPC operations. Also in early 1995, Abbey began to convert and
centralize the billing and collection functions of the acquired Protocare
branches. These changes, coupled with the announcements on March 1, 1995 of the
Abbey/Homedco merger and later of branch consolidations, led to significant
turnover of billing and collection personnel in the acquired Protocare branches.
All of the aforementioned conditions and disruptions had a negative impact on
the aging of Abbey's infusion receivables. At June 30, 1995 Abbey's infusion
accounts aged in excess of 180 days represented 36% of total infusion accounts
as compared to 31% at March 31, 1995, 30% at December 31, 1994, 22% at September
30, 1994, and 16% at December 31, 1993.
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In response to the deteriorating aging, Abbey management deployed
additional resources and instituted programs to limit potential collection
losses. These efforts included hiring an infusion reimbursement specialist,
reengineering the centralized infusion billing center procedures, hiring
additional manager and director level personnel and instituting collection
incentive programs. Based on Abbey management's expectation that these efforts
would be successful in collecting delinquent infusion accounts receivable, the
Company did not increase its allowance for doubtful accounts as of June 30,
1995.
However, in the third quarter, the Company's management decided to
transfer the infusion billing and collection processes from Abbey's recently
converted centralized system to Homedco's decentralized, branch-based system.
Many of the incentive and other programs instituted by Abbey management were
discontinued in order to focus resources and efforts on completing branch
consolidations, effecting the planned system conversions, training personnel in
the proper use of the new systems and improving the efficiency and effectiveness
of the intake function. During the process, the centralized billing center was
downsized and relocated a second time, pending permanent closure at a later
date. Each of these post-merger decisions caused additional turnover at the
billing centers responsible for collecting the existing receivables and
seriously impacted employee morale.
In connection with management's third quarter accounts receivable
analysis, serious consideration was given to the impact that the merger, planned
branch consolidations and system conversions and reductions in force would
likely have on the already unstable condition of Abbey's infusion accounts
receivable. As a result of a marked deterioration in the aging of Abbey's
infusion accounts in July and August of 1995 and other deteriorating trends, a
provision of $26.3 million was recorded.
Following is information as of June 30, 1995 and August 31, 1995 about
the portion of the accounts receivable for which the impairment was recognized
in the third quarter:
<TABLE>
<CAPTION>
JUNE 30, AUGUST 31,
1995 1995
-------- ----------
(Dollars in thousands)
<S> <C> <C>
Abbey infusion accounts receivable................................ $65,339 $64,865
Abbey infusion allowance for doubtful accounts.................... 7,727 7,453
Abbey infusion allowance for doubtful accounts as
a percentage of Abbey infusion accounts receivable.............. 12% 11%
Percentage of Abbey infusion accounts aged over 180 days.......... 36% 39%
Abbey infusion allowance for doubtful accounts as a percentage
of Abbey infusion accounts aged over 180 days................... 33% 29%
Percentage of Abbey infusion accounts aged over 360 days.......... 15% 22%
Abbey infusion allowance for doubtful accounts as a percentage of
Abbey infusion accounts receivable, after third quarter
adjustment(1)................................................... 52%
Abbey infusion allowance for doubtful accounts as a percentage of
Abbey infusion accounts aged aver 180 days, after third quarter
adjustment(1)................................................... 133%
</TABLE>
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(1) Abbey infusion allowance calculated by adding the third quarter adjustment
of $26.3 million to the August 31, 1995 allowance.
The percentage of consolidated infusion accounts receivable aged in
excess of 180 days increased from 21% at June 30, 1995 to 36% at September 30,
1995 and December 31, 1995. Management believes that the additional reserves
provided for collection losses associated with Abbey's infusion accounts will be
sufficient.
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Also included in the third quarter provision is $5.5 million for Abbey's
home medical equipment and respiratory therapy accounts, which relates primarily
to the application to accounts aged from 181 days to 360 days of more
conservative percentages used to determine the allowance for doubtful accounts
and to a deterioration in July and August in the aging due to post-merger
disruptions caused by the Company's branch consolidation plan.
Increases during the second half of 1995 and early 1996 in write-offs,
the aging of accounts receivables, and days sales outstanding and decreases in
collections in that period as well as experience with a prior business
combination involving extensive field consolidations, personnel changes and
information systems conversions were considered by management in estimating the
$13 million fourth quarter provision relating to the aforementioned field
disruptions. Disruptions caused by the field location consolidations, changes
in billing and collection personnel, and information systems conversions
resulted in billing delays and, ultimately, difficulties in receiving timely
reimbursement. Billing delays were due, in part, to incomplete claim
documentation. The conditions contributing to this problem include documents
lost in the physical movement of billing information and patient files, data
lost due to data field incompatibilities, lack of familiarity with new systems,
and lack of continuity and familiarity with payor requirements due to employee
terminations. The passage of time reduces the likelihood of collection and
increases the likelihood of denial because missing documentation is less likely
to be located or replaced and payor imposed submission deadlines may be
exceeded. Because substantially all of the planned facility consolidations and
employee terminations have been completed, management expects disruptions and
delays of this type to diminish in 1996.
As of December 1995, the Company had completed approximately 90% of the
planned facility consolidations and employee terminations, including the
elimination of approximately 200 billing and collection positions, and 50% of
the 445 planned system conversions. In connection with the facility
consolidations, each branch information system was first converted to the
predominate system in place within its region. Conversion of the branches to a
standard, company-wide system then occurred on a region by region basis. Because
of the conversion to interim systems prior to final conversion, locations
representing approximately 80% of the Company's accounts receivable have been or
will be subject to conversion.
In addition to the delays described above, the conversion of a field
information system to the standard system requires from one to four weeks,
depending on facility size, for conversion and employee training during which
time, billing and collection activity is substantially curtailed. After
conversion and training is complete, billing and collection activity generally
resumes at a slower pace than pre-conversion levels but normalizes within three
to six months. The delays caused by conversion have had the effect of
increasing the age of accounts receivable and delaying collection. Management
expects such delays to continue in 1996 for regions that are scheduled for
conversion through September 1996.
Amortization expense increased to $16.3 million in 1995 from $11.5
million in 1994 and $4.1 million in 1993. The increase in amortization expense
relates to intangible assets recorded in conjunction with business acquisitions.
Interest expense increased to $42.9 million in 1995 from $37.2 million
in 1994 and $18.3 million in 1993. The increase in interest expense in 1995 was
primarily due to the additional debt financing required for restructuring,
merger and integration activities, acquisitions and, to a lesser extent,
increases in interest rates (see Liquidity and Capital Resources).
The Company recognized a tax benefit in 1995 of $20.6 million that was
primarily attributable to carryback of the current year loss and to an increase
in deferred tax assets (future deductions). Included in deferred tax assets are
net operating loss carryforwards available to reduce future taxes of
approximately $20 million, subject to limitations by Section 382 of the Internal
Revenue Code.
Income tax expense for 1994 and 1993 represents the combined tax
provisions of Homedco and Abbey prepared on a separate tax return basis.
Accordingly, complimentary tax attributes of the companies were not considered
available for benefit until periods following the merger. The Company's 1994
combined effective tax rate was 43% which exceeded the statutory rate primarily
because of the effects of non-deductible goodwill. The Company's 1993 combined
effective tax rate was approximately 35%. The lower rate was due primarily to
the utilization of operating loss carryforwards not previously recognized.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in the Company's operating activities was $9.9 million in 1995
compared to $61,000 in 1994 and positive cash from operations of $27.0 million
in 1993. Significantly contributing to the use of cash in 1995 were outlays of
approximately $47.2 million for merger expenses, restructuring costs and
employee-related matters. An additional $22.4 million is expected to be paid
over periods generally not exceeding five years and funded by internally
generated cash and existing credit facilities . Partially offsetting such cash
outlays are tax refunds of $27.7 million for estimated payments made prior to
the merger and for carryback of the 1995 loss which are expected to be received
in
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1996. In addition, increased revenue levels were supported by purchases of
patient service equipment and resulted in increased levels of accounts
receivable.
Days' sales in outstanding receivables ("DSO"), cash receipts as a
percentage of net revenues and the accounts receivable aging are among the key
measurements the Company uses to evaluate the time frame in which accounts
receivable are collected. DSO (calculated as of year-end by dividing gross
accounts receivable by the 90-day rolling average of net revenues) increased to
109 days in 1995 from 99 days in 1994 and 104 days in 1993. Among the factors
contributing to the increase in accounts receivable and DSO were disruptions and
delays in billing and collection activity caused by the numerous facility
consolidations, billing and collection personnel changes, and field information
system conversions (see Results of Operations). The facility conversions and
personnel changes were substantially complete at year end. The system
conversions are scheduled to continue through the third quarter of 1996 and,
accordingly, are expected to continue to impact the timing of billing and
collections. To control and contain the impact on accounts receivable and
collection levels caused by the system conversions, management, among other
steps, documented and disseminated best billing and collection practices,
upgraded the standard field system to incorporate certain features of the
discontinued systems, conducted extensive training at all field locations
undergoing conversion, retained a number of experienced reimbursement employees
on a temporary basis, initiated collection incentive programs with special
emphasis on older accounts, and developed and implemented standard management
reports including key accounts receivable and collection statistics,
expectations and field rankings.
During 1995, the Company centralized its accounts payable function in
connection with the restructuring and consolidation plan. The centralization
process disrupted day-to-day activities causing a processing backlog which was
reflected by the increase in the accounts payable balance at December 31, 1995
as compared to December 31, 1994. The Company expects to eliminate the backlog
during the first two quarters of 1996.
In conjunction with the merger, the Company entered into a credit
agreement with certain banks and Banque Paribas, as administrative agent. The
agreement, which expires in June 2000, provides for borrowings of up to $500
million under a revolving credit facility. The proceeds were used, among other
things, to repay borrowings under the prior separate credit agreements of
Homedco and Abbey. The agreement provides for variable rate interest options
including the higher of the Federal Funds Rate plus .5% or the Prime Rate, or
London Interbank Offered Rate ("LIBOR") plus a margin which is dependent on the
ratio of funded indebtedness to earnings before interest, taxes, depreciation
and amortization. At December 31, 1995, borrowings of $286.3 million were
outstanding, letters of credit amounted to $960,000, and availability under the
revolving credit facility was $212.7 million. The effective interest rates at
December 31, 1995 for borrowings under the credit facility not subject to the
swap or cap agreements (see discussion below) were 6.6% and 8.5% on $13 million
and $7.3 million, respectively.
The Company has limited involvement with derivative financial
instruments and does not use them for trading purposes. Interest rate swap and
cap agreements are used as a means of managing the Company's interest rate
exposure. The swap agreements are contracts to periodically exchange fixed and
floating interest rate payments over the life of the agreement. The Company's
exposure to credit loss under these agreements is limited to the interest rate
spread in the event of nonperformance by the counterparties to the contracts.
The Company anticipates that the counterparties will be able to fully satisfy
their obligations under the contracts. In July 1995, the Company entered into
one-year swap agreements having a total notional principal amount of $266
million which effectively convert variable rate borrowings to fixed rate
borrowings. For the period from July 1995 through December 1995, the Company
received interest at a weighted average rate of 6.7% and paid interest at a
weighted average rate of 6.2%. Payment or receipt of the interest differential
is made quarterly and recognized monthly in the financial statements as an
adjustment to interest expense. In January 1996, the Company canceled its swap
agreements at a cost of $198,000 and entered a new one-year agreement with a
total notional principal amount of $280 million that exchanges floating rate
borrowings for a fixed LIBOR rate of 5.1%.
Under a cap agreement, which expires in July 1996, the three-month LIBOR
rate is limited to 6% on outstanding indebtedness of up to $50 million. The
Company did not derive any benefit from the cap agreement in 1995 due to lower
LIBOR rates.
The 6.5% convertible subordinated debentures were convertible into
shares of the Company's Common Stock at a conversion price of $13.97 per share
and were scheduled to mature on December 1, 2002. Pursuant to a redemption
feature which was based on the market value of the Company's Common Stock, all
outstanding convertible
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debentures as of December 31, 1994, which amounted to $66.6 million, were
converted into 4,771,962 shares of Common Stock during 1995. The conversion of
the debentures eliminates annual interest payments of approximately $4.3 million
and decreases long-term debt by $66.6 million.
Purchases of property, equipment and improvements, net of retirements
and trade-ins, were $49.3 million in 1995, $26.8 million in 1994 and $17.2
million in 1993. The majority of the increase in 1995 was due to additions and
enhancements to the Company's data processing systems. In connection with the
merger and restructure plan, the Company is standardizing branch information
systems, thus necessitating additional expenditures for hardware and software.
The Company estimates that expenditures of $12.5 million and $1.2 million for
hardware and software, respectively, will be made in 1996 to convert the
remaining locations. Capital expenditures will be financed by cash provided by
operations and borrowings available under the credit facility.
During 1995, business acquisitions, which were financed, resulted in
payments of approximately $46.1 million in cash, $787,000 in shares of the
Company's common stock and the assumption of $3.4 million of liabilities.
Covenants not to compete and goodwill arising from these acquisitions resulted
in an increase in intangible assets from December 31, 1994 to December 31, 1995.
Other assets at December 31, 1995, is primarily comprised of payments for
businesses which have not yet been allocated to the various underlying acquired
assets.
During 1994, the Company entered into a five-year agreement to purchase
medical supplies totaling $112.5 million, with annual purchases ranging from
$7.5 million in the first year to $30 million in the third through fifth years.
Beginning in the year ended August 31, 1996, failure to purchase at least 90% of
the annual commitment will result in a penalty of 10% of the difference between
the annual commitment and actual purchases. Purchases will be financed using
cash provided by operations and borrowings available under the credit facility.
Overall, the Company believes that cash provided by operations and
amounts available under its existing credit and lease financing will be
sufficient to finance its current operations for at least the next 12 months.
The Company believes that inflation has not had a significant impact on
the Company's historical operations.
7
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. The documents described in the "Index to Consolidated
Financial Statements and Financial Statement Schedule" are
included in this report starting at page F-1.
2. The financial statement schedule described in the "Index
to Consolidated Financial Statements and Financial
Statement Schedule" are included in this report starting
on page S-1.
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
3. Exhibits included or incorporated herein:
Exhibit
Number Description
23.1 Consent of Ernst and Young LLP
23.2 Consent of KPMG Peat Marwick LLP
(b) Reports on Form 8-K:
Apria Healthcare Group Inc. filed a Current Report on Form 8-K,
dated November 7, 1995, with the Securities and Exchange
Commission on November 7, 1995 attaching the supplemental
consolidated financial statements of the Company.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Auditors............................... F-1
Consolidated Balance Sheets -- December 31, 1995 and 1994..... F-3
Consolidated Statements of Operations -- Years ended
December 31, 1995, 1994 and 1993............................ F-4
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1995, 1994 and 1993............................ F-5
Consolidated Statements of Cash Flows -- Years ended
December 31, 1995, 1994 and 1993............................ F-6
Notes to Consolidated Financial Statements.................... F-7
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts............... S-1
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REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Apria Healthcare Group Inc.
We have audited the accompanying consolidated balance sheets of Apria Healthcare
Group Inc. (formed as a result of the consolidation of Abbey Healthcare Group
Incorporated and Homedco Group, Inc.) as of December 31, 1995 and 1994 and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 1995. Our
audits also included the financial statement schedule listed in the Index at
Item 14 (a). These financial statements are the responsibility of the management
of Apria Healthcare Group Inc. Our responsibility is to express an opinion on
these financial statements based on our audits. We did not audit the
consolidated financial statements of Abbey Healthcare Group Incorporated for the
year ended December 31, 1993, which statements reflects total revenues of $278
million. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to data included for
Abbey Healthcare Group Incorporated, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Apria Healthcare Group Inc. and
subsidiaries at December 31, 1995 and 1994 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, based on our audits and the report of other auditors, the
related financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
We also audited the adjustments described in Note 2 that were applied to restate
the 1994 and 1993 financial statements. In our opinion, such adjustments are
appropriate and have been properly applied.
ERNST & YOUNG LLP
Orange County, California
March 6, 1996
F-1
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Abbey Healthcare Group Incorporated:
We have audited the accompanying consolidated statements of income, changes in
shareholders' equity and cash flows of Abbey Healthcare Group Incorporated and
subsidiaries for the year ended January 1, 1994. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Abbey Healthcare Group Incorporated and subsidiaries for the year ended
January 1, 1994, in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Orange County, California
February 15, 1994
F-2
<PAGE> 11
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1995 1994
--------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash ................................................................... $ 18,829 $ 21,188
Accounts receivable, less allowance for doubtful accounts of $86,567 and
$61,038 at December 31, 1995 and 1994, respectively .................. 258,332 225,619
Inventories ............................................................ 45,198 35,898
Deferred income taxes .................................................. 45,883 36,947
Refundable income taxes ................................................ 27,710 5,439
Prepaid expenses and other current assets .............................. 7,770 10,472
--------- --------
TOTAL CURRENT ASSETS ............................................. 403,722 335,563
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $167,082 and
$129,621 at December 31, 1995 and 1994, respectively .................. 167,090 152,358
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ................................ 80,108 73,976
INVESTMENT IN OMNICARE plc ............................................... 1,504 --
INTANGIBLE ASSETS, NET ................................................... 319,142 282,724
OTHER ASSETS ............................................................. 8,419 11,546
--------- --------
$ 979,985 $856,167
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ....................................................... $ 100,653 $ 78,912
Accrued payroll and related taxes and benefits ......................... 26,792 23,045
Accrued restructuring costs ............................................ 19,085 --
Other accrued liabilities .............................................. 48,910 43,798
Current portion of long-term debt ...................................... 9,652 32,200
--------- --------
TOTAL CURRENT LIABILITIES ........................................ 205,092 177,955
LONG-TERM DEBT ........................................................... 490,655 406,104
DEFERRED INCOME TAXES .................................................... -- 9,238
OTHER NON-CURRENT LIABILITIES ............................................ -- 960
STOCKHOLDERS' EQUITY Preferred Stock, $.001 par value:
10,000,000 shares authorized; none issued ............................ -- --
Common Stock, $.001 par value:
150,000,000 shares authorized; 49,692,266 and 42,001,788 shares issued
and outstanding at December 31, 1995 and 1994, respectively .......... 50 42
Additional paid-in capital ............................................. 294,522 206,405
Retained (deficit) earnings ............................................ (10,334) 55,463
--------- --------
284,238 261,910
COMMITMENTS AND CONTINGENCIES ............................................ -- --
--------- --------
$ 979,985 $856,167
========= ========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 12
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
----------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues ......................................................... $ 1,133,600 $962,812 $748,901
Costs and expenses:
Cost of net revenues:
Product and supply costs ......................................... 286,919 234,604 188,276
Patient service equipment depreciation ........................... 57,400 42,735 33,019
Nursing services ................................................. 7,361 5,947 2,821
Other ............................................................ 9,319 4,404 2,008
----------- -------- --------
360,999 287,690 226,124
Selling, distribution and administrative ........................... 601,978 517,027 410,392
Provision for doubtful accounts, net of recoveries ................. 100,463 46,716 34,476
Amortization of intangible assets .................................. 16,273 11,504 4,103
Restructuring costs ................................................ 68,304 -- --
Merger costs ....................................................... 12,193 -- --
Employee contracts, benefit plan and claim settlements ............. 20,367 -- --
Loss on disposition of U.K. subsidiary ............................. 500 -- --
----------- -------- --------
1,181,077 862,937 675,095
----------- -------- --------
OPERATING (LOSS) INCOME .......................................... (47,477) 99,875 73,806
Interest expense ..................................................... 42,942 37,155 18,266
----------- -------- --------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE TAXES AND EXTRAORDINARY CHARGE ............................ (90,419) 62,720 55,540
Income tax (benefit) expense ......................................... (18,941) 27,104 19,695
----------- -------- --------
(LOSS) INCOME FROM CONTINUING OPERATIONS
BEFORE EXTRAORDINARY CHARGE ...................................... (71,478) 35,616 35,845
Income from discontinued operations, net of taxes .................... -- 344 1,466
Gain on disposal of discontinued operations, net of taxes ............ -- 3,071 --
----------- -------- --------
(LOSS) INCOME BEFORE EXTRAORDINARY CHARGE ........................ (71,478) 39,031 37,311
Extraordinary charge on debt refinancing, net of taxes ............... 2,998 -- --
----------- -------- --------
NET (LOSS) INCOME ................................................ $ (74,476) $ 39,031 $ 37,311
=========== ======== ========
PER COMMON AND COMMON EQUIVALENT SHARE:
(Loss) income from continuing operations before extraordinary charge $ (1.52) $ .81 $ .94
=========== ======== ========
Extraordinary charge on debt refinancing, net of taxes ............. $ (0.06) $ -- $ --
=========== ======== ========
Net (loss) income .................................................. $ (1.58) $ .89 $ .98
=========== ======== ========
Weighted average number of common and common equivalent
shares outstanding ............................................... 47,112 44,096 38,138
PER COMMON SHARE ASSUMING FULL DILUTION:
(Loss) income from continuing operations before extraordinary charge $ (1.52) $ .78 $ .89
=========== ======== ========
Extraordinary charge on debt refinancing, net of taxes ............. $ (0.06) $ -- $ --
=========== ======== ========
Net (loss) income .................................................. $ (1.58) $ .85 $ .93
=========== ======== ========
Weighted average number of common and common
equivalent shares outstanding ...................................... 47,112 49,284 43,864
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 13
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED TOTAL
----------------------- PAID-IN EARNINGS TREASURY STOCKHOLDERS'
SHARES PAR VALUE CAPITAL (DEFICIT) STOCK EQUITY
--------- --------- ---------- --------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 ........ 33,409 $ 34 $ 115,029 $ (20,879) $ (13,783) $ 80,401
Issuance of Common Stock ............ 22 273 273
Treasury stock issued ............... 1,748 558 12,716 13,274
Exercise of stock options ........... 438 1 1,054 1,055
Notes receivable payments ........... 1,201 1,201
Tax benefits related to stock options 1,082 1,082
Compensatory stock options granted .. 105 105
Conversion of subordinated
debentures ........................ 604 1 8,443 8,444
Acquisition of Total
Pharmaceutical Care, Inc. ......... 2,002 2 33,520 33,522
Other ............................... (36) (36)
Net income .......................... 37,311 37,311
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1993 ........ 38,223 38 161,229 16,432 (1,067) 176,632
Issuance of Common Stock ............ 1,362 2 17,785 17,787
Treasury stock issued ............... 142 49 1,067 1,116
Exercise of stock options ........... 395 1,830 1,830
Notes receivable payments ........... 15 15
Tax benefits related to stock options 1,343 1,343
Conversion of subordinated
debentures ........................ 799 1 11,159 11,160
Common Stock issued for acquisitions
and earnouts ...................... 1,081 1 12,877 12,878
Other ............................... 118 118
Net income .......................... 39,031 39,031
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1994 ........ 42,002 42 206,405 55,463 -- 261,910
Net activity for Homedco - October 1,
1994 to December 31, 1994 ......... 51 1,663 8,647 10,310
Issuance of Common Stock ............ 36 570 570
Exercise of stock options ........... 1,473 2 13,259 13,261
Notes receivable payments ........... 6 6
Tax benefits related to stock options 8,138 8,138
Conversion of subordinated
debentures, net of issuance costs
of $2,785 ......................... 4,772 5 63,856 63,861
Exercise of warrants ................ 1,338 1 (1) --
Acceleration of stock option vesting 542 542
Other ............................... 20 84 32 116
Net loss ............................ (74,476) -- (74,476)
--------- --------- --------- --------- --------- ---------
Balance at December 31, 1995 ........ 49,692 $ 50 $ 294,522 $ (10,334) $ -- $ 284,238
========= ========= ========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 14
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income ......................................................... $ (74,476) $ 39,031 $ 37,311
Items included in net (loss) income not requiring (providing) cash:
Income from discontinued operations ................................... -- (344) (1,466)
Extraordinary charge on debt refinancing .............................. 4,684 -- --
Provisions for doubtful accounts ...................................... 100,463 46,716 34,476
Depreciation .......................................................... 84,607 63,895 46,180
Amortization of intangible assets ..................................... 16,273 11,504 4,103
Amortization of deferred debt costs ................................... 1,908 4,878 2,882
Loss (gain) on sale of property, equipment and improvements ........... 3,938 765 (108)
Impairment losses ..................................................... 32,557 -- --
Gain on disposal of discontinued operations ........................... -- (3,071) --
Deferred income taxes ................................................. (19,548) 4,031 (5,452)
Change in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable ....................................... (118,151) (86,116) (55,914)
Increase in inventories ............................................... (4,904) (4,895) (2,291)
(Increase) decrease in prepaids and other current assets .............. (12,194) (2,147) 1,751
Decrease in other non-current assets .................................. 3,269 4,221 692
Increase in accounts payable .......................................... 18,942 16,231 9,313
Increase (decrease) in accruals and other non-current liabilities ..... 3,434 (6,735) (3,832)
Increase in accrued restructuring costs ............................... 19,085 -- --
Other ..................................................................... 2,733 (2,296) (822)
Net purchases of patient service equipment, net of effects of acquisitions (72,518) (85,729) (39,784)
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES ............... (9,898) (61) 27,039
INVESTING ACTIVITIES
Purchases of property, equipment and
improvements, net of effects of acquisitions ........................ (49,327) (26,757) (17,249)
Proceeds on disposal of discontinued operations ....................... -- 20,344 --
Proceeds on disposition of U.K. subsidiary ............................ 926 -- --
Proceeds from sale of property, equipment and improvements ............ 331 540 963
Acquisitions .......................................................... (46,086) (73,782) (185,625)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ............................. (94,156) (79,655) (201,911)
FINANCING ACTIVITIES
Proceeds under revolving credit facility .............................. 463,999 172,954 93,556
Payments under revolving credit facility .............................. (229,171) (164,532) (60,792)
Proceeds from issuance of subordinated notes .......................... -- -- 200,000
Proceeds from senior and other long-term debt ......................... 126,557 44,474 1,878
Payments of senior and other long-term debt ........................... (275,022) (12,929) (41,316)
Capitalized debt costs, net ........................................... (1,429) (2,502) (9,863)
Issuances of Common Stock ............................................. 13,064 2,042 2,256
--------- --------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES ......................... 97,998 39,507 185,719
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH ........................................... (6,056) (40,209) 10,847
Cash at beginning of period ............................................... 21,188 61,397 50,550
Net activity for Homedco - October 1, 1994 to December 31, 1994 ........... 3,697 -- --
--------- --------- ---------
CASH AT END OF PERIOD ............................................. $ 18,829 $ 21,188 $ 61,397
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 15
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial
statements include the accounts of Apria Healthcare Group Inc. ("the Company")
and its subsidiaries. All significant intercompany transactions and accounts
have been eliminated. As described more fully in Note 2, on June 28, 1995,
Homedco Group, Inc. ("Homedco") merged with and into Abbey Healthcare Group
Incorporated ("Abbey") to form the Company ("the merger"). The merger was
accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements reflect the combined financial position and operating
results of Abbey and Homedco for all periods presented.
In conjunction with the merger, the Company adopted a fiscal year end of
December 31. Previously, Abbey reported on a fiscal year ending the Saturday
nearest December 31, and Homedco reported on a fiscal year ending September 30.
The consolidated financial statements for 1994 and 1993 combine the results of
Abbey for the fiscal years ended December 31, 1994 and January 1, 1994 and the
results of Homedco for each of the two years ended September 30, 1994 and
September 30, 1993. The consolidated balance sheet at December 31, 1994 combines
the accounts of Abbey as of December 31, 1994 and Homedco as of September 30,
1994. The consolidated balance sheet and statements of cash flows at December
31, 1995 combines the accounts of Abbey and Homedco on such a date and reflects
the activity of Homedco from October 1, 1994 through December 31, 1994. The
consolidated statements of operations for 1995 reflect combined results for the
year ended December 31, 1995 and exclude the operations of Homedco for the
period October 1, 1994 through December 31, 1994. Homedco's revenues and net
income for this period amounted to $146,293,000 and $8,647,000, respectively.
Company Background: The Company provides home healthcare services
including home infusion therapy, home respiratory therapy and home medical
equipment/other to patients in the home throughout the United States. Infusion
therapy, respiratory therapy and home medical equipment/other represent
approximately 24%, 53% and 23%, of total revenue, respectively.
Revenue Recognition and Concentration of Credit Risk: Revenues are
recognized on the date services and related products are provided to patients
and are recorded at amounts estimated to be received under reimbursement
arrangements with a large number of third party payors, including private
insurers, prepaid health plans, Medicare and Medicaid. Approximately 43% of the
Company's revenues are reimbursed under arrangements with Medicare and Medicaid.
No other third party payor group represents 10% or more of the Company's
revenues. The Company establishes an allowance for doubtful accounts based upon
factors surrounding the credit risk of specific third party payors, historical
trends and other information. Because of continuing changes in healthcare
regulations and reimbursement and disruptions caused by the Company's merger,
restructuring and integration activities, it is reasonably possible that the
Company's estimates of net collectible revenue could change in the near term.
Use of Accounting Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents: The Company considers all highly liquid instruments
purchased with a maturity of less than three months to be cash equivalents. The
Company maintains cash with various financial institutions. These financial
institutions are located throughout the United States and the Company's cash
management practices limit exposure to any one institution. Outstanding checks
in excess of bank balances, which are reported as a component of accounts
payable, were $27,608,000 and $18,185,000 at December 31, 1995 and 1994,
respectively.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist primarily of medical supplies sold
directly to patients for use in their homes.
Patient Service Equipment: Patient service equipment consists of medical
equipment provided to in-home patients and is stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
equipment which range from three to ten years. Included in patient service
equipment are assets under capitalized leases which consist primarily of oxygen
related equipment. Depreciation for equipment under capitalized leases is
provided using the straight-line method over the estimated useful life or the
lease term.
F-7
<PAGE> 16
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Property, Equipment and Improvements: Property, equipment and
improvements are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the property which range
from three to thirty years. Included in property and equipment are assets under
capitalized leases which consist primarily of computer equipment. Depreciation
for equipment under capitalized leases is provided using the straight-line
method over the estimated useful life or the lease term.
Long-lived Assets: Effective January 1, 1995, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of. In accordance with the statement, the Company records impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the carrying amounts of those assets. No
financial statement impact resulted from the adoption of the statement.
Intangible Assets: Intangible assets consist of covenants not to compete
and goodwill arising from business combinations (see Note 2). The values
assigned to intangible assets, based in part on independent appraisals, are
amortized on a straight-line basis. The covenants are amortized over contractual
terms which range from three to ten years. Goodwill, representing the excess of
the purchase price over the estimated fair value of the net assets of the
acquired business, is amortized over the period of expected benefit. The
amortization periods for goodwill range from twenty years for businesses
operating primarily in the home respiratory therapy and home medical equipment
lines and forty years for pharmaceutical and infusion therapy businesses. The
carrying value of goodwill is reviewed if the facts and circumstances suggest
that it may be impaired. If this review indicates that goodwill will not be
recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the carrying value of the
goodwill is reduced.
Fair Value of Financial Instruments: The fair value of long-term debt is
determined by reference to borrowing rates currently available to the Company
for loans with similar terms and average maturities.
Advertising: Advertising costs amounting to $3,849,000, $3,753,000 and
$3,627,000 for 1995, 1994 and 1993, respectively, are expensed as incurred and
included in "Selling, distribution and administrative expenses."
Income Taxes: The Company provides for income taxes under the liability
method. Accordingly, deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts which are
more likely than not to be realized. The provision for income taxes represents
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
Per Share Amounts: Primary per share amounts are calculated by dividing
the applicable operating statement caption by the weighted average number of
common and dilutive common equivalent shares outstanding. Common equivalent
shares consist primarily of stock options. Fully diluted per share amounts
include further adjustments to the applicable operating statement captions and
weighted average shares outstanding to assume conversion of convertible
debentures from issuance, if dilutive. The calculation of per share amounts for
periods prior to the merger reflect the issuance of two shares of the Company's
Common Stock for each share of Homedco Common Stock used in such calculation and
one and four tenths shares of the Company's Common Stock for each share of Abbey
Common Stock used in such calculation.
Stock-based Compensation: The Company grants options for a fixed number
of shares to employees with an exercise price equal to the fair value of the
shares at the date of grant. The Company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognizes no compensation expense for the stock option
grants.
Reclassifications: Certain amounts for prior periods have been
reclassified to conform to the current year presentation.
F-8
<PAGE> 17
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2 -- BUSINESS COMBINATIONS AND DISPOSITIONS
On June 28, 1995, Homedco merged with and into Abbey to form the
Company. Homedco and Abbey provided similar homecare services including infusion
therapy, respiratory therapy and home medical equipment. In connection with the
merger transaction, the Company issued 21,547,529 shares of its Common Stock for
15,391,092 issued and outstanding shares of Abbey Common Stock and 26,034,612
shares of its Common Stock for 13,017,306 issued and outstanding shares of
Homedco Common Stock.
The merger has been accounted for under the pooling-of-interests method
of accounting. Accordingly, the historical financial statements for periods
prior to the consummation of the combination have been restated as though the
companies had been combined. The restated financial statements have been
adjusted to conform the differing accounting policies of the separate companies.
Such differences relate principally to the use of salvage values recognized for
certain patient service equipment and the capitalization of low dollar patient
service items, supplies, accessories and repairs.
Separate and combined results of Abbey and Homedco prior to the merger
are as follows:
<TABLE>
<CAPTION>
ADJUSTMENTS
AND
ABBEY HOMEDCO RECLASSIFICATIONS COMBINED
-------- -------- ----------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Three months ended March 31, 1995
Revenues ........................ $123,394 $161,175 $ 40 $284,609
Net Income ...................... 7,091 9,047 (346) 15,792
Year ended December 31, 1994
Revenues ........................ $439,175 $523,469 $ 168 $962,812
Net Income ...................... 12,307 29,810 (3,086) 39,031
Year ended December 31, 1993
Revenues ........................ $278,457 $470,283 $ 161 $748,901
Net Income ...................... 14,312 24,544 (1,545) 37,311
</TABLE>
On January 2, 1994, the Company acquired the outstanding stock of
Protocare, Inc. ("Protocare") for a cash payment of $11,915,000 plus direct
acquisition costs of $3,700,000. In addition, pursuant to an earnout provision,
as amended in June 1994, approximately 979,000 shares of Common Stock valued at
$11,594,000 were issued in February 1995 to the former Protocare stockholders.
The shares are reflected in the accompanying financial statements as issued and
outstanding at December 31, 1994.
On November 10, 1993, the Company acquired the outstanding stock of
Total Pharmaceutical Care, Inc. ("TPC") for a cash payment of $154,183,000 plus
direct acquisition costs of $9,376,000 and the issuance of approximately
2,002,000 shares of Common Stock valued at $33,522,000.
In addition to the above business combinations, during 1995, 1994 and
1993, the Company acquired numerous complementary businesses in specific
geographic markets. None of these businesses was individually significant. The
transactions, including Protocare and TPC, were accounted for as purchases and,
accordingly, the operations of the acquired businesses are included in the
consolidated statements of operations from the dates of acquisition. The
purchase prices, which aggregated approximately $46,873,000, $109,747,000 and
$231,225,000 in 1995, 1994 and 1993, respectively, consisted of cash, common
stock and notes. The value ascribed to a portion of the common shares issued in
1994 and 1993 reflects a discount from the quoted price of the Company's Common
Stock due to the absence of registration. The purchase prices were allocated to
the various underlying tangible and intangible assets and liabilities on the
basis of estimated fair value, determined in part by independent appraisal.
F-9
<PAGE> 18
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the allocation of the purchase prices,
including non-cash financing activities, of acquisitions made by the Company:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
-------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Fair value of assets acquired ... $ 50,255 $ 124,496 $ 249,554
Liabilities assumed ............. (3,382) (14,749) (18,329)
Promissory note payable to seller -- (4,382) --
Common Stock issued ............. (787) (31,583) (47,069)
-------- --------- ---------
Cash paid ..................... $ 46,086 $ 73,782 $ 184,156
======== ========= =========
</TABLE>
In June 1995, the Company entered an agreement for the sale of the
capital stock of Omnicare Group Ltd. ("Omnicare"), a United Kingdom-based
subsidiary, to a newly formed holding company, Stanton Industries Ltd.
("Stanton"), that is owned and managed by an officer/director of Omnicare and a
shareholder/former director of Abbey. Consideration for the sale amounted to
$2,913,000 and consisted of cash of $968,000, a convertible note in the amount
of $1,605,000 and the assumption of a liability in the amount of $340,000. The
difference between the net sales price per the agreement and the carrying value
of the Company's investment in Omnicare has been reflected as a loss in the
accompanying financial statements.
In September 1995, Stanton transferred its shares of Omnicare common
stock to a newly-formed public limited company, Omnicare plc, in exchange for
6,166,656 ordinary shares of Omnicare plc. Also in September 1995, the Company
converted the note due from Stanton into 1,875,000 unregistered ordinary shares
of Omnicare plc. As a result of these transactions, Stanton and the Company hold
approximately 63% and 27%, respectively, of the issued ordinary share capital of
Omnicare plc. The Company has agreed not to dispose of the shares and to certain
noncompetition covenants for a period of two years. The investment in Omnicare
plc is accounted for using the equity method. At March 6, 1996, the quoted
market value of the investment was approximately $2,400,000. The valuation
represents a mathematical calculation based on a closing quotation published by
the London Alternative Investment Market and is not necessarily indicative of
the amount that could be realized upon sale.
On September 30, 1994, the Company sold its 51% interest in Abbey
Pharmaceutical Services, Inc. ("APS") to Living Centers of America, Inc.
("Living Centers") for cash consideration of $20,300,000 and warrants to
purchase 248,000 shares of Living Center common stock for $35.00 per share. No
value was assigned to the warrants. The APS operating results have been
presented as discontinued operations for 1994 and 1993 (net of applicable income
taxes of $1,879,000 and $2,428,000 in 1994 and 1993, respectively). Net revenues
of the discontinued operations were $43,770,000 and $50,678,000 in 1994 and
1993, respectively.
Supplemental unaudited pro forma information giving effect to business
acquisitions made in 1994 and 1993 and excluding the operations of APS, is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1993
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Net revenues .................... $986,062 $930,192
Income from continuing operations 35,209 27,498
Per share amounts:
Primary ....................... $ 0.79 $ 0.63
Fully diluted ................. $ 0.76 $ 0.63
</TABLE>
The pro forma financial information presented above is not necessarily
indicative of any trends or results that may be expected for any other period.
Pro forma financial information for business acquisitions and dispositions made
in 1995 is not presented because the effects on the Company's operating results
are not material.
In February 1996, the Company signed a letter of intent for the sale of
its M&B Ventures, Inc. home health operations, located in South Carolina under
the assumed business name of Doctor's Home Health, Inc. The sale, which is
expected to be completed in May 1996, is subject to certain conditions. The
proposed sales price of $2,900,000 approximates the book value of the
F-10
<PAGE> 19
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
assets of Doctor's Home Health, Inc. The operations of Doctor's Home Health,
Inc. had revenues of approximately $8,870,000 and $7,340,000 for 1995 and 1994,
respectively.
NOTE 3 --CERTAIN OPERATING STATEMENT CAPTIONS
Restructuring Costs: In connection with the merger, the Company adopted
a plan to restructure and consolidate its operating locations and administrative
functions within specific geographic areas. The principal elements of the plan
include a workforce reduction of approximately 1,220 employees across all
employee groups, the consolidation of approximately 120 branch locations and the
conversion of information systems at the continuing branches to a standardized
system. The plan, which the Company anticipates will be substantially completed
by September 1996, resulted in a restructuring charge of approximately
$68,304,000 consisting of accrued costs and impairments.
Through December 31, 1995, the Company had completed a significant
portion of the plan, including the consolidation of approximately 105 branch
locations and a reduction of approximately 1,120 employees. The Company's
decision to consolidate branches and standardize branch information systems
resulted in write-offs of excess patient service equipment, leasehold
improvements and the hardware and capitalized software relating to information
systems being discontinued. Approximately $1,325,000 in hardware and capitalized
software costs, representing the approximate amount of depreciation attributable
to the expected period of usage prior to completion of the conversion plan, is
included in property, equipment and improvements at December 31, 1995. The
following table summarizes the principal components of the charge, amounts paid
through December 31, 1995, and the remaining accrual at December 31, 1995.
<TABLE>
<CAPTION>
ACCRUALS IMPAIRMENTS
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Severance and related personnel costs .......... $ 21,538 $ --
Branch and billing center closures ............. 13,709 9,354
Information systems ............................ -- 22,160
Other .......................................... 1,000 543
-------- -------
36,247 $32,057
Severance amounts paid through December 31, 1995 (12,607) =======
Other amounts paid through December 31, 1995 ... (4,555)
--------
Accrual at December 31, 1995 ................... $ 19,085
========
</TABLE>
Provision for doubtful accounts: The 1995 provision for doubtful
accounts includes (1) an adjustment made in the third quarter of approximately
$26.3 million to provide for an impairment in Abbey's infusion therapy
receivables and (2) a provision recorded in the fourth quarter of approximately
$13 million, or 3.7% of accounts receivable, for the anticipated impact on
realization resulting from field location consolidations, changes in billing and
collection personnel, and information systems conversions. Such activities
detract from normal operations and result in billing and collection delays which
generally reduce the ultimate collectibility of accounts receivable.
Merger Costs: Merger costs totaling $12,193,000 were incurred and paid
during 1995 and consisted primarily of investment banking fees of $4,899,000,
accounting, consulting, legal and filing fees of $4,767,000 and liability
insurance of $1,699,000 covering directors and officers of the predecessor
companies against pre-merger claims.
Employee Contracts, Benefit Plan and Claim Settlements: In 1995, the
Company accrued $20,367,000 for employee contract, benefit plan and claim
settlements. The accrual included $14,407,000 provided for employee and payroll
tax related claims and lawsuits, $3,481,000 to settle certain employee
contracts, and the settlement loss of $2,275,000 for the termination of the
Abbey Medical, Inc. Employee Retirement Plan, a defined benefit pension plan. At
December 31, 1995, the remaining accrual was $10,479,000, the majority of which
is expected to be settled and paid during 1996.
F-11
<PAGE> 20
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements .............. $ 88 $ 100
Buildings and leasehold improvements 14,620 14,160
Equipment and furnishings .......... 56,507 43,412
Information systems ................ 74,741 65,913
--------- ---------
145,956 123,585
Less accumulated depreciation ...... (65,848) (49,609)
--------- ---------
$ 80,108 $ 73,976
========= =========
</TABLE>
NOTE 5 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Covenants not to compete ......... $ 32,815 $ 28,235
Goodwill ......................... 319,571 271,063
--------- ---------
352,386 299,298
Less accumulated amortization .... (33,244) (16,574)
--------- ---------
$ 319,142 $ 282,724
========= =========
</TABLE>
NOTE 6 -- CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Notes payable relating to revolving credit facilities ....... $ 286,300 $ 41,372
Term loans payable .......................................... -- 75,000
Acquisition line of credit .................................. -- 43,443
6.5% Convertible subordinated debentures .................... -- 66,646
9.5% Senior subordinated notes .............................. 200,000 200,000
Other, interest at rates ranging from 4.1% to 11.0%, payments
due at various dates through December 1998 ................ 4,071 9,792
Capital lease obligations (see Note 9) ...................... 16,520 16,880
--------- ---------
506,891 453,133
Less: Current maturities .................................... (9,652) (32,200)
Unamortized deferred debt costs .................... (6,584) (14,829)
--------- ---------
$ 490,655 $ 406,104
========= =========
</TABLE>
Credit Agreements Prior to Merger: Prior to June 28, 1995, the Company
had credit agreements with various banks ("Bank Credit Agreement") and General
Electric Capital Corporation ("GE Capital Agreement") providing for borrowings
up to $350,000,000. The Bank Credit Agreement included a $75,000,000 term loan,
a $75,000,000 acquisition credit line and a $100,000,000 revolving credit
facility of which $15,000,000 was accessible in the form of letters of credit.
The GE Capital
F-12
<PAGE> 21
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Agreement provided an additional $100,000,000 in revolving credit. Borrowings
under each revolving credit facility were limited to specified levels of
qualified accounts receivable, inventory, and, in the case of the GE Capital
Agreement, patient service equipment.
Each agreement permitted the Company to select from two interest rate
options: prime plus up to 1.25% or London Interbank Offered Rate ("LIBOR") plus
up to 2.25%. Each rate option was subject to reduction for borrowing level, in
the case of the GE Capital Agreement, and achieving targeted levels of earnings
before interest, taxes, depreciation, and amortization, in the case of the Bank
Credit Agreement.
Term loan principal was payable quarterly, in varying amounts,
commencing December 31, 1994 through March 31, 1998. Principal payments under
the acquisition credit line were payable quarterly, commencing June 30, 1997
through December 31, 1998, with a final payment due May 2, 1999.
The agreements required payment of commitment fees of .25% to .50% of
the unused portion of each facility and contained restrictive covenants
requiring the maintenance of certain financial ratios, limitations on additional
borrowings and capital expenditures, and restrictions on cash dividends or other
distributions.
Credit Agreement Subsequent to Merger: Effective June 28, 1995, the
Company executed a credit agreement with certain banks and Banque Paribas, as
administrative agent. The agreement, which expires in June 2000, provides a
revolving loan facility of up to $500,000,000. Proceeds were used, among other
purposes, to retire borrowings under the Bank Credit Agreement and the GE
Capital Agreement. The credit agreement contains restrictive covenants requiring
the maintenance of certain financial ratios, limitations on additional
borrowings and certain expenditures and restrictions on cash dividends and other
distributions. At December 31, 1995, the Company's outstanding letters of credit
amounted to $960,000 and credit available under the agreement was $212,740,000.
Borrowings under the credit agreement bear interest at the higher of
prime or .5% in excess of the Federal Funds rate. The Company may also elect an
interest rate ranging from LIBOR plus .375% to LIBOR plus 1.5% dependent on the
ratio of funded indebtedness to earnings before interest, taxes, depreciation
and amortization. The effective interest rates at December 31, 1995, were 6.2%,
6.6% and 8.5% for borrowings of $266,000,000, $13,000,000 and $7,300,000,
respectively.
The Company has limited involvement with derivative financial
instruments and does not use them for trading purposes. Interest rate swap and
cap agreements are used as a means of managing the Company's interest rate
exposure. The swap agreements are contracts to periodically exchange fixed and
floating interest rate payments over the life of the agreement. In July 1995,
the Company entered into several one-year swap agreements totaling $266,000,000
in notional principal. For the period from July 1995 through December 1995, the
Company received interest at a weighted average rate of 6.7% and paid interest
at a weighted average rate of 6.2%. Payment or receipt of the interest
differential is made quarterly and recognized monthly in the financial
statements as an adjustment to interest expense. The cap agreement, which
expires in July 1996, limits the three-month LIBOR rate to 6% on indebtedness of
up to $50,000,000. In January 1996, the Company canceled its swap agreements and
entered into a new one-year agreement covering $280,000,000 of notional
principal with a fixed LIBOR rate of 5.1%.
As a result of the aforementioned refinancing, unamortized deferred debt
costs of $2,998,000, net of income taxes of $1,686,000, relating to the
refinanced debt were expensed as an extraordinary charge.
The carrying amounts reported for the obligations relating to revolving
credit facilities, term loans and acquisition line approximate fair value
because the underlying instruments are variable rate notes that reprice
frequently.
6.5% Convertible Subordinated notes: The 6.5% convertible subordinated
debentures were convertible into shares of the Company's Common Stock at a
conversion price of $13.97 per share and were scheduled to mature on December 1,
2002. Pursuant to a redemption feature, all outstanding 6.5% convertible
subordinated debentures were converted to Common Stock in September 1995. The
fair value of these debentures was $79,259,000 at December 31, 1994.
9.5% Senior Subordinated notes: The 9.5% senior subordinated notes
mature November 1, 2002 and are subordinated to all senior debt of the Company
and senior in right of payment to subordinated debt of the Company. The fair
value of these notes, determined by reference to quoted market prices, is
$210,340,000 and $183,280,000 at December 31, 1995 and 1994, respectively.
F-13
<PAGE> 22
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Total interest paid in 1995, 1994 and 1993 amounted to $37,454,000,
$32,395,000, and $12,074,000, respectively.
Maturities of long-term debt, exclusive of capital lease obligations,
for the five years ending December 31, 2000 and thereafter, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1996 ..................................... $ 2,807
1997 ..................................... 1,092
1998 ..................................... 172
1999 ..................................... --
2000 ..................................... --
Thereafter ............................... 486,300
--------
$490,371
========
</TABLE>
NOTE 7 -- STOCKHOLDERS' EQUITY
Common Stock: The Company has granted registration rights to certain
holders of Common Stock under which the Company is obligated to pay the expenses
associated with certain of such registration rights.
Prior to June 28, 1995, the Company had adopted preferred stock purchase
rights plans pursuant to which the Company's common stockholders were granted
one right for each share of Common Stock held. Each right allowed its holder to
purchase one-hundredth of a share of Junior Participating Preferred Stock at a
specified price, subject to adjustment. The rights would become exercisable at
certain times associated with a transaction whereby a person or group of
affiliated persons acquired beneficial ownership of 20% or more of the Company's
general voting power, unless the Board of Directors determined the transaction
to be fair and in the best interests of the Company and its stockholders. The
Board of Directors determined that the merger of Abbey and Homedco is fair and
in the best interests of the Company and its stockholders and, accordingly, the
preferred stock purchase rights did not become exercisable. As a result of the
merger, the outstanding preferred stock purchase rights were converted into
Apria preferred stock purchase rights with terms essentially the same as the
predecessor plans.
Stock Option Plans: The Company has various stock option plans that
provide for the granting of incentive stock options or non-statutory options to
certain key employees, non-employee members of the Board of Directors,
consultants and independent contractors. In the case of incentive stock options,
the exercise price may not be less than the fair market value of a share of
Common Stock on the date of grant, and may not be less than 110% of the fair
market value of a share of Common Stock on the date of grant for any individual
possessing 10% or more of the voting power of all classes of stock of the
Company. The options become exercisable over periods ranging from three to five
years and expire not later than 10 years from the date of grant.
F-14
<PAGE> 23
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Transactions under these plans are summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PRICE RANGE
---------- ----------------
<S> <C> <C>
Outstanding at December 31, 1992 ......................................... 2,542,935 $ .75 $11.00
Granted .............................................................. 2,052,053 4.45 16.87
Exercised ............................................................ (437,323) .75 11.00
Cancelled ............................................................ (99,995) .75 12.25
----------
Outstanding at December 31, 1993 ......................................... 4,057,670 .75 16.87
Granted .............................................................. 1,203,253 11.25 20.00
Exercised ............................................................ (394,938) .75 14.11
Cancelled ............................................................ (1,111,407) .75 20.00
Substitute options granted for outstanding options of acquired company 308,563 .97 11.36
----------
Outstanding at December 31, 1994 ......................................... 4,063,141 .75 17.05
Net activity from October 1, 1994 to December 31, 1994 (see Note 1) .. (54,340) 1.50 33.25
Granted .............................................................. 2,028,475 17.68 28.03
Exercised ............................................................ (1,233,243) .75 20.25
Cancelled ............................................................ (620,242) .75 28.05
----------
Outstanding at December 31, 1995 ......................................... 4,183,791 .75 28.03
==========
Exercisable at December 31, 1995 ......................................... 1,572,459 .75 28.03
==========
Available for grant at January 1, 1995 ................................... 1,753,430
==========
Available for grant at December 31, 1995 ................................. 1,030,985
==========
</TABLE>
In addition, the Company has a Long-Term Senior Management Equity Plan
(the "Equity Plan") which provides for the granting of non-statutory stock
options to key members of senior management at fair market value on the date of
grant. As a result of the merger, half of the outstanding options under this
plan became exercisable. The remaining options vest at a rate of 25% per year,
upon announcement of financial results, commencing with the announcement of
financial results for 1995. Vesting may be accelerated under certain
circumstances. The Equity Plan allows for the issuance of 2,000,000 shares of
Common Stock. During 1995, options to purchase 239,600 and 253,000 shares of
Common Stock at prices ranging from $11.00 to $14.63 per share were exercised
and cancelled, respectively. During the period October 1, 1994 through December
31, 1994 (see Note 1) options to purchase 96,000 shares of Common Stock at a
price of $11.00 per share were cancelled. At December 31, 1995, options to
purchase 1,365,400 shares of Common Stock at prices ranging from $11.00 to
$13.50 per share were outstanding. Options granted under this plan expire not
later than 10 years from the date of grant.
Approximately 5,085,000 shares of Common Stock are reserved for future
issuance upon exercise of stock options.
F-15
<PAGE> 24
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8 -- INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation ........................... $ 7,836 $ 2,260
Intangible assets .................................... 1,733 1,332
Other, net ........................................... 3,552 3,875
-------- --------
Total deferred tax liabilities ......................... 13,121 7,467
Deferred tax assets:
Allowance for doubtful accounts ...................... 34,194 24,860
Accruals ............................................. 24,855 17,002
Asset valuation reserves ............................. 13,371 4,182
Net operating loss carryforward, limited by
Section 382......................................... 19,771 19,352
Other, net ........................................... 3,047 3,304
-------- --------
Total deferred tax assets .............................. 95,238 68,700
Valuation allowance .................................... (36,234) (33,524)
-------- --------
Net deferred tax assets ................................ 59,004 35,176
-------- --------
Net deferred taxes ..................................... $ 45,883 $ 27,709
======== ========
Current deferred tax assets, net of current deferred
tax liabilities ...................................... $ 45,883 $ 36,947
Non-current deferred tax liabilities, net of non-current
deferred tax assets .................................. 0 (9,238)
-------- --------
Net deferred taxes ..................................... $ 45,883 $ 27,709
======== ========
</TABLE>
The recognition in 1995 of additional net deferred tax assets was based
primarily on the availability of taxable income in carryback years and to a
lesser extent on future taxable income. The Company's future taxable income
assumption considers the Company's taxable earnings in the fourth quarter of
1995, the Company's history of earnings in periods prior to the merger, and
anticipated integration activities and certain revenue concentration
uncertainties (see Note 12).
At December 31, 1995, the Company's federal and state operating loss
carryforwards approximated $138,000,000 and $135,000,000, respectively, and
begin to expire in 2003 for federal tax purposes and 1996 for state tax
purposes. As a result of an ownership change in March 1992 which met specified
criteria of Section 382 of the Internal Revenue Code, future use of federal and
state operating loss carryforwards are each limited to $4,150,000 per year.
Because of the annual limitation, approximately $89,000,000 each of the
Company's federal and state operating loss carryforwards may expire unused.
A valuation allowance is provided primarily against the Company's net
operating loss carryforwards and certain other deferred tax assets the expected
use of which extends beyond the Company's earning assumption period and are not
otherwise offset by deferred tax liabilities.
F-16
<PAGE> 25
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income tax (benefit) expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Currently (refundable) payable:
Federal ........................................... $ (9,569) $ 17,746 $ 18,906
State ............................................. 495 3,984 5,159
-------- -------- --------
(9,074) 21,730 24,065
Deferred tax benefit or liability:
Federal ........................................... (16,810) 3,650 (4,793)
State ............................................. (2,738) 381 (659)
-------- -------- --------
(19,548) 4,031 (5,452)
Tax benefits credited to paid-in capital and goodwill 9,681 1,343 1,082
-------- -------- --------
$(18,941) $ 27,104 $ 19,695
======== ======== ========
</TABLE>
The exercise of stock options granted under the Company's various stock
option plans gives rise to compensation which is includable as taxable income to
the employee and deductible by the Company for federal and state tax purposes
but is not recognized as expense for financial reporting purposes. In addition,
the recognition for income tax purposes of certain deferred tax assets relating
to acquired businesses reduces related goodwill for financial reporting
purposes.
Differences between the Company's income tax (benefit) expense and an
amount calculated utilizing the federal statutory rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax (benefit) expense at statutory rate .................... $(30,742) $ 21,952 $ 19,439
Minimum tax credit ................................................ -- -- (408)
Non-deductible goodwill and merger costs .......................... 4,907 1,353 --
Use of net operating loss carryforward ............................ -- (1,453) (1,411)
Tax benefit of deferred items not currently (previously) recognized 5,287 -- (531)
Tax benefit of acquired company ................................... -- 2,142 --
State taxes, net of federal benefit and state loss carryforwards .. 825 3,116 2,603
Other ............................................................. 782 (6) 3
-------- -------- --------
$(18,941) $ 27,104 $ 19,695
======== ======== ========
</TABLE>
Income taxes paid (net of refunds received) in 1995, 1994 and 1993,
amounted to $15,159,000, $25,323,000, and $26,650,000, respectively.
NOTE 9 -- LEASES
The Company operates principally in leased offices and warehouse
facilities. In addition, the Company leases delivery vehicles and office
equipment. Lease terms range from one to ten years with renewal options for
additional periods. Many leases provide that the Company pay taxes, maintenance,
insurance and other expenses. Rentals are generally increased annually by the
consumer price index subject to certain maximum amounts defined within
individual agreements.
In addition, during 1995, 1994 and 1993 the Company acquired patient
service equipment, information systems and equipment and furnishings totalling
$5,876,000, $10,719,000, and $7,736,000, respectively, under capital lease
arrangements with lease terms ranging from two to five years. Amortization of
the leased patient service equipment and information systems amounted to
$4,410,000, $5,669,000, and $4,236,000, in 1995, 1994 and 1993, respectively.
F-17
<PAGE> 26
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following amounts for assets acquired under capital lease
obligations are included in both the patient service equipment and property,
equipment and improvements:
<TABLE>
<CAPTION>
DECEMBER 31,
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Patient service equipment ........ $ 3,145 $ 14,419
Information systems .............. 19,891 15,832
Equipment and furnishings ........ 3,796 3,885
Buildings and improvements ....... 565 1,687
-------- --------
27,397 35,823
Less accumulated depreciation .... (9,905) (15,659)
-------- --------
$ 17,492 $ 20,164
======== ========
</TABLE>
Future minimum payments by year and in the aggregate required under
noncancellable operating leases and capital lease obligations consist of the
following at December 31, 1995:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
1996 ........................................... $ 7,418 $ 38,387
1997 ........................................... 7,015 30,353
1998 ........................................... 3,241 24,233
1999 ........................................... 192 17,833
2000 ........................................... -- 10,949
Thereafter ..................................... -- 18,963
--------- --------
$ 17,866 $140,718
========
Less interest included in minimum lease payments (1,346)
---------
Present value of minimum lease payments ........ 16,520
Less current portion ........................... (6,845)
---------
$ 9,675
=========
</TABLE>
Rent expense in 1995, 1994 and 1993 amounted to $47,658,000,
$37,543,000, and $30,577,000, respectively. Facilities leased from lessors in
which stockholders and employees have a financial interest comprised $245,000,
$310,000, and $330,000 of rent expense in 1995, 1994 and 1993, respectively.
NOTE 10 -- EMPLOYEE BENEFIT PLANS
The Company had two defined contribution plans and a defined benefit
plan covering substantially all employees. The defined contribution plans were
401(k) plans whereby eligible employees voluntarily contributed up to a defined
percentage of their annual compensation. Employee contributions were partially
matched by the Company under one plan. Total expenses to the Company relating to
the defined contribution plans for 1995, 1994 and 1993 were $2,980,000,
$3,080,000, and $2,180,000, respectively.
Effective January 1, 1996, the net assets of the Abbey 401(k) plan were
transferred into the Apria 401(k) plan, formerly the Homedco 401(k) plan. The
Company is currently in the process of implementing certain amendments to the
plan which have recently been approved by the Board of Directors. As amended,
the plan provides eligibility for all employees having completed one year of
service with at least 1,000 hours. Participants may contribute up to 16% of
annual basic earnings. Employee contributions are matched 50% for the first 8%
by the Company.
F-18
<PAGE> 27
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
On September 22, 1995, the defined benefit plan trustees agreed to
terminate the defined benefit plan effective April 30, 1996. As a result, the
Company recognized a settlement loss of $2,275,000 in 1995. Prior to the
termination, the defined benefit plan benefits were based upon years of service
and the employees' average compensation over the last five years of employment.
The Company's funding policy was to fund the recommended amount as determined by
the plan's actuaries. Contributions were intended to provide not only for
benefits attributed to services performed to date, but also for those expected
to be earned in the future. Net periodic pension cost included in selling,
distribution and administration expenses amounted to $925,000, $1,136,000 and
$653,000 in 1995, 1994 and 1993, respectively.
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 112, Employers' Accounting for Postemployment Benefits.
The cumulative effect of its application is not presented because the amount is
not material to the Company's 1995 operating results.
NOTE 11 -- RELATED PARTY TRANSACTIONS
In December 1992, pursuant to a secured promissory note agreement, the
Company loaned $1,250,000 to an officer/director. The note bore interest at 8%
per annum and principal and interest were due December 28, 1996. During 1995,
1994 and 1993 principal and interest of $196,000, $188,000 and $675,000,
respectively, were cancelled and recorded as compensation expense. Pursuant to
the terms of a severance agreement dated November 7, 1995, the remaining
outstanding principal and related interest totalling $397,000 was forgiven and
was recorded as compensation expense in 1995.
Through September 1995, the Company retained a firm, in which a member
of the Board of Directors of the Company is a managing director, to provide
ongoing financial advisory services. During 1995, 1994 and 1993, the firm was
paid fees of $3,810,000, $910,000 and $1,886,000, respectively, in connection
with various financing transactions and other investment banking activities. The
fees paid in 1995 related primarily to the merger.
In December 1994, the Company made an interest bearing loan of $100,000
due in December 1997 to an Officer of the Company. In connection with the
Protocare acquisition, the Company also assumed from Protocare a 9% loan to the
same officer which amounted to $597,000. The officer resigned in May 1995, and
the outstanding principal and interest on this assumed loan, amounting to
$499,000 and $288,000 was forgiven and expensed in 1995 and 1994, respectively.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Purchase Commitments: On September 1, 1994, the Company entered into a
five-year agreement to purchase medical supplies totalling $112,500,000, with
annual purchases ranging from $7,500,000 in the first year to $30,000,000 in the
third through fifth years. Beginning in the year ended August 31, 1996, failure
to purchase at least 90% of the annual commitment will result in a penalty of
10% of the difference between the annual commitment and actual purchases.
Litigation: The Company is engaged in the defense of certain claims and
lawsuits arising out of the ordinary course and conduct of its business, the
outcome of which are not determinable at this time. The Company has insurance
policies covering such potential losses where such coverage is cost effective.
In the opinion of management, any liability that might be incurred by the
Company upon the resolution of these claims and lawsuits will not, in the
aggregate, have a material adverse effect on the Company's consolidated results
of operations and financial position. During 1995, certain claims and lawsuits
were settled and the Company paid amounts (including cost of defense) totaling
approximately $10,590,000, and $12,400,000 was charged to income to provide for
probable losses related to matters arising in the period and to revise estimates
for matters arising prior to 1995. Subsequent to year end the Company settled
claims totaling $1,950,000.
Certain Concentrations: Over 50% of the Company's revenue is derived
from the provision of respiratory therapy services, a significant portion of
which is reimbursed under the Federal Medicare program. Various budgets
currently under consideration by Congress and the Federal Administration propose
reductions in Medicare spending including, among other matters, reimbursement
for home oxygen. It is currently uncertain when a budget agreement will be
reached and the ultimate impact such budget will have on home oxygen
reimbursement.
F-19
<PAGE> 28
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company currently purchases approximately 40% of its patient service
equipment and supplies from two supplier(s). Although there are a limited number
of suppliers, management believes that other suppliers could provide similar
products on comparable terms. A change in suppliers, however, could cause a
delay in service delivery and a possible loss in revenues which could affect
operating results adversely.
Other: Management is not aware of any material claims or disputes
related to any of its third-party reimbursement arrangements.
NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER
-------
FIRST SECOND THIRD FOURTH
-------- -------- --------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
1995
Net revenues ................................ $284,609 $287,286 $ 277,670 $284,035
Gross profit ................................ 199,073 199,016 178,833 195,679
Operating income (loss) ..................... 36,032 22,115 (133,948) 28,324
Income (loss) before extraordinary charge ... 15,792 7,497 (112,166) 17,399
Net income (loss) ........................... $ 15,792 $ 4,499 $(112,166) $ 17,399
Per share amounts:
Primary:
Income (loss) before extraordinary charge $ 0.34 $ 0.15 $ (2.32) $ 0.34
Net income (loss) ....................... $ 0.34 $ 0.09 $ (2.32) $ 0.34
Fully diluted:
Income (loss) before extraordinary charge $ 0.32 $ 0.15 $ (2.32) $ 0.34
Net income (loss) ....................... $ 0.32 $ 0.09 $ (2.32) $ 0.34
1994
Net revenues ................................ $226,925 $231,312 $ 244,928 $259,647
Gross profit ................................ 157,882 161,200 172,968 183,072
Operating income ............................ 12,906 24,420 28,722 33,827
Net income .................................. $ 160 $ 9,897 $ 14,124 $ 14,850
Per share amounts:
Primary:
Net income ............................ $ 0.00 $ 0.23 $ 0.32 $ 0.33
Fully diluted:
Net income ............................ $ 0.00 $ 0.22 $ 0.30 $ 0.31
</TABLE>
The quarterly financial information for all periods presented reflect
the conformed accounting policies of Homedco and Abbey (see Note 2).
The second and third quarters of 1995, include charges of approximately
$12,900,000 and $133,800,000, respectively, relating to restructuring, merger
and integration activities and to accounts receivable valuation and
employment-related matters. During the fourth quarter of 1995, the Company
reevaluated the estimates inherent in the restructuring and other merger-related
costs recorded through the end of the third quarter. This evaluation resulted in
a reallocation of expenses which increased the provision for doubtful accounts
by $13,000,000 and reduced restructuring costs and other merger-related costs by
$10,316,000 and $2,684,000, respectively. Additionally, an extraordinary charge
on debt refinance of approximately $2,998,000, net of income taxes of
$1,686,000, was recorded in the second quarter of 1995.
F-20
<PAGE> 29
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
During the first quarter of 1994, the company initiated a program to
integrate the TPC operations and to shift market and sales emphasis from home
medical equipment to respiratory therapy. This program resulted in the write-off
of surplus inventory of $2,100,000, costs related to the consolidation of branch
operations of $3,200,000, and an increase in the provision for doubtful accounts
of $1,600,000. The costs related to the consolidation of branch operations
include the costs of closing eight branch offices and severance for the
termination of approximately 350 employees. Also in the first quarter, the
company recorded acquisition-related charges of $4,600,000, including legal
costs and executive severance expenses.
F-21
<PAGE> 30
APRIA HEALTHCARE GROUP INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
-----------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
- ------------------------------ --------- -------- -------- ---------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts $61,038 $100,463(a) $2,655(f) $77,589 $ 86,567
Reserve for inventory shortages 3,952 2,898(e) 8(f) 1,104 5,754
Reserve for patient service equipment
shortages 4,546 16,783(e) 117(f) 1,802 19,644
------- -------- ------ ------- --------
Totals $69,536 $120,144 $2,780 $80,495 $111,965
======= ======== ====== ======= ========
Year ended December 31, 1994
Deducted from asset accounts:
Allowance for doubtful accounts $52,102 $ 48,718(b) $9,089(c) $48,871(d) $ 61,038
Reserve for inventory shortages 3,143 1,124 316 3,952
Reserve for patient service equipment
shortages 1,810 3,312 448 1,024 4,546
------- -------- ------ ------- --------
Totals $57,055 $ 53,154 $9,537 $50,211 $ 69,536
======= ======== ====== ======= ========
Year ended December 31, 1993
Deducted from asset accounts:
Allowance for doubtful accounts $42,630 $ 37,279(b) $8,779(c) $36,586(d) $ 52,102
Reserve for inventory shortages 3,216 438 511 3,143
Reserve for patient service equipment
shortages 1,252 2,767 2,209 1,810
------- -------- ------ ------- --------
Totals $47,098 $ 40,484 $8,779 $39,306 $ 57,055
======= ======== ====== ======= ========
</TABLE>
(a) See Note 3 to the consolidated financial statements.
(b) Includes $2,002 and $2,803 for discontinued operations for the years
ended December 31, 1994 and 1993, respectively.
(c) Includes amounts added in conjunction with business acquisitions.
(d) Includes the charge-off of uncollectible accounts receivable and a
reversal of the allowance for doubtful accounts related to discontinued
operations for the year ended December 31, 1994.
(e) Includes amounts recorded in conjunction with the establishment of the
merger and restructuring reserves.
(f) Represents the net activity for Homedco for the period of October 1,
1994 through December 31, 1994.
S-1
<PAGE> 31
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
November 8, 1996 /s/ LAWRENCE H. SMALLEN
------------------------
Lawrence H. Smallen
Chief Financial Officer,
Senior Vice President, Finance
and Treasurer
(Principal Financial Officer)
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-94026, 33-51234, 33-75028, 33-77684, 33-57628,
33-80581 and 33-80583), pertaining to the Apria Healthcare Group Inc./Homedco
Group, Inc.'s Stock Incentive Plan, Apria Healthcare Group Inc. Amended and
Restated 1992 Stock Option Plan, 1992 Stock Incentive Plan, 1994 Employee Stock
Purchase Plan, 1991 Nonqualified Stock Option Plan and 1991 Management Stock
Purchase Plan of our report dated March 6, 1996, with respect to the
consolidated financial statements and schedule of Apria Healthcare Group Inc.
for the year ended December 31, 1995, as amended, included in this Form 10-K/A.
ERNST & YOUNG LLP
Orange County, California
November 7, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Apria Healthcare Group, Inc.:
We consent to incorporation by reference in the registration statements on Form
S-8 (33-94026, 33-51234, 33-75028, 33-77684, 33-57628 pertaining to Apria
Healthcare Group Inc./Homedco Group Inc.'s Stock Incentive Plan and Abbey
Healthcare Group Incorporated's 1992 Stock Option Plan, 1992 Stock Incentive
Plan, 1994 Stock Purchase Plan and 1991 Management Stock Purchase Plan) of our
report dated February 15, 1994, with respect to the consolidated statements of
income, changes in shareholders' equity, and cash flows of Abbey Healthcare
Group Incorporated and subsidiaries for the year ended January 1, 1994, which
report is included in the Form 10-K of Apria Healthcare Group Inc. for the year
ended December 31, 1995.
KPMG PEAT MARWICK LLP
Orange County, California
November 7, 1996
