UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
on
FORM 10-K/A
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
( ) For the Fiscal Year Ended December 31, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-19854
APRIA HEALTHCARE GROUP INC.
(Exact name of Registrant as specified in its charter)
Delaware 33-0488566
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification)
3560 Hyland Avenue 92626
Costa Mesa, CA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 427-2000
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $0.001 par value per share
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of Registrant's knowledge
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
As of March 7, 1997, there were outstanding 51,301,321 shares of
the Registrant's Common Stock, par value $0.001 ("Common Stock"),
which is the only class of Common Stock of the Registrant. As of
March 7, 1997 the aggregate market value of the shares of Common
Stock held by non-affiliates of the Registrant, computed based on
the closing sale price of $20.00 per share as reported by New
York Stock Exchange, was approximately $994,275,400.
Documents Incorporated by Reference
The information called for by Part III is incorporated by
reference to the definitive Proxy Statement for the 1997 Annual
Meeting of Stockholders of the Registrant which will be filed
with the Securities and Exchange Commission not later than 120
days after December 31, 1996.
<PAGE>
Item 7 of Part II of the Annual Report on Form 10-K for the
fiscal year ended December 31, 1996 is amended in its entirety as
follows:
PART II.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Basis of Presentation: Apria Healthcare Group Inc. ("the
Company") was formed by the merger of Abbey Healthcare Group
Incorporated ("Abbey") and Homedco Group, Inc. ("Homedco") in
June 1995 ("the merger"). This transaction was accounted for as
a pooling-of-interests and, accordingly, the consolidated
financial statements and narrative herewith reflect the combined
financial position and operating results of Abbey and Homedco for
all periods presented.
RESULTS OF OPERATIONS
Net Revenues: Net revenues increased 4.2% in 1996 to $1.2
billion from $1.1 billion in 1995, and increased 17.7% in 1995
from 1994 revenues of $962.8 million. The modest growth in 1996
was primarily attributable to volume increases in managed care
markets and, to a lesser extent, traditional markets. The
increase in net revenues in 1995, as compared to 1994, was due to
volume increases in managed care markets and new business
generated from the acquisition of several complementary
companies. Price competition in the managed care environment had
a mitigating impact on the growth in both 1996 and 1995.
Respiratory therapy, infusion therapy and home medical
equipment/other revenues represent 50.3%, 24.8% and 24.9%,
respectively, of total 1996 net revenues. In 1996, respiratory
therapy decreased by 1.0% largely because of the disruptions
caused by the merger-related facility consolidations and systems
conversions. Both of these factors caused a temporary shift in
focus away from traditional business, the impact of which was
greatest on the respiratory line. Infusion therapy and home
medical equipment/other grew at rates of 10.0% and 9.9%,
respectively. The increases in both of these lines were largely
due to volume increases in managed care. Also, the infusion line
benefited from focused sales force training on infusion therapy.
Approximately 33% of the Company's revenues are reimbursed
under the Federal Medicare program. It is currently uncertain
what impact the continuing changes in healthcare regulations and
reimbursement may have on the Company's future revenues.
Gross Profit: Gross margins were 66.1% in 1996, 68.2% in
1995 and 70.1% in 1994. In general, gross margins are being
reduced by the Company's increased participation in the managed
care environment. In 1996, the Company derived approximately 35%
of its revenues from managed care organizations. The intense
competition in the managed care market has caused considerable
price compression. Also, competing in the managed care market
requires a broad offering of products and services, including
lower-margin services, medical equipment and supplies. To
address this downward pressure on gross margins, the Company has
adopted numerous initiatives including the establishment of
automated purchasing budgets to more effectively control the
purchase and use of patient service equipment and supplies, the
placement of sales force initiatives on certain higher-margin
products and services and an effort to redirect the business
development focus toward higher-margin traditional referral/payor
sources. In addition, during the fourth quarter of 1996,
Management initiated a contract assessment process whereby the
Company's top revenue-producing accounts are being reviewed for
profitability. The objective of the review is to renegotiate the
contracts at better pricing, improve the business mix and
eliminate those not meeting acceptable profitability levels.
Further, with the information system conversions complete,
Management now has access to standardized information not
previously available. Detailed management reporting tools are
being developed to quickly identify products and services not
meeting profitability standards and to evaluate product/service
mix at an individual branch level.
Other factors impacting the 1996 gross margin include a
fourth quarter adjustment of $10.0 million to provide for excess
and obsolete patient service equipment and supplies and a third
quarter change in the depreciable lives of certain classes of
patient service equipment. The fourth quarter adjustment was
determined based on the results of the Company's year-end
physical inventory and quantity reconciliation procedures. The
change in depreciable lives was based on Management's analysis
which indicated that the equipment would continue in service
beyond the economic lives over which they were being depreciated.
The change resulted in a reduction to the cost of net revenues in
1996 of $6.4 million of which $5.2 million related to a single
asset type for which the depreciable life was extended from four
to 12 months.
The 1995 gross margin was impacted by an adjustment of $5.4
million to conform the accounting policies of the predecessor
companies for certain low dollar patient service equipment items,
supplies and accessories and a $7.5 million provision for excess
and obsolete patient service equipment and shrinkage associated
with the Company's facility consolidations.
Selling, Distribution and Administrative: Selling,
distribution and administrative expenses expressed as percentages
of net revenues were 49.1%, 53.1% and 53.7%, for 1996, 1995 and
1994, respectively. Much of the improvement in 1996, and to a
lesser extent 1995, can be attributed to the successful execution
of the restructuring and consolidation plan initiated in
conjunction with the merger (see Certain 1995 Operating Statement
Captions). The primary sources of savings associated with the
plan are the completed employee reductions and facility
consolidations. Also contributing to the improvement in 1996 as
compared to 1995 was the cessation of various integration costs
included in the 1995 amount. Such costs, which totaled
approximately $11.5 million, included employee relocation,
temporary and transitional employee costs, overtime pay and
consulting.
Further, Management continually evaluates its operating cost
structure to identify opportunities to effectively minimize the
cost of providing healthcare. Management reporting, budgets and
incentives are among the tools being utilized to control
operating costs.
Provision for Doubtful Accounts: The provision for doubtful
accounts as a percentage of net revenues was 5.7%, 8.9% and 4.9%
for 1996, 1995 and 1994, respectively. Although lower than the
1995 doubtful accounts provision rate, the 1996 rate exceeded the
1994 rate and reflects a fourth quarter increase to the allowance
for doubtful accounts of $9.0 million. The increase was based on
Management's year-end analysis of accounts receivable and
resulted from an increase in the fourth quarter in accounts aged
over 180 days.
The 1995 provision for doubtful accounts included $26.3
million for an impairment in Abbey's infusion therapy accounts
receivable, $5.5 million resulting from the application of more
conservative allowance percentages to Abbey's home medical
equipment and respiratory therapy accounts aged in excess of 180
days and $13.0 million for the anticipated impact on realization
of the Company's accounts receivable resulting from field
location consolidations, changes in billing and collection
personnel and information systems conversions (see LIQUIDITY AND
CAPITAL RESOURCES). The circumstances leading to the $26.3
million provision for Abbey's infusion therapy accounts are
discussed below.
Abbey had entered the infusion market primarily through its
acquisitions of Total Pharmaceutical Care, Inc., ("TPC") and
Protocare, Inc. ("Protocare") in November 1993 and January 1994,
respectively. From the point of acquisition through the end of
1994, the receivables of the acquired TPC business were processed
centrally in two billing centers. Cooperation and assistance
from the branch/pharmacy personnel responsible for the initiation
and fulfillment of orders was an important aspect of centralized
billing and collection. In mid-1994, many of the former TPC
branch and region level managers were terminated due to the post-
acquisition integration of TPC's branch/pharmacy operations into
Abbey's organizational structure. These changes had a negative
impact on the morale of the branch/pharmacy personnel and
resulted in significant turnover and less cooperation with
billing center personnel. Also in mid-1994, one of the billing
centers was relocated and only a portion of the personnel were
transferred to the new location. Consequently, numerous new
billing and collection employees were hired and trained. In
early 1995, Abbey began to convert and, in some cases, automate
for the first time, the billing and collection procedures of the
acquired TPC operations and convert and centralize the billing
and collection functions of the acquired Protocare branches.
These changes, coupled with the announcements on March 1, 1995 of
the Abbey/Homedco merger and later of branch consolidations, led
to significant turnover of billing and collection personnel in
the acquired Protocare branches. All of these conditions and
disruptions had a negative impact on the aging of Abbey's
infusion receivables.
In response to the deteriorating aging, Abbey management
deployed additional resources and instituted programs to limit
potential collection losses. These efforts included hiring an
infusion reimbursement specialist, reengineering the centralized
infusion billing center procedures, hiring additional manager and
director level personnel and instituting collection incentive
programs.
In the third quarter of 1995, the Company's management
decided to transfer the infusion billing and collection processes
from Abbey's recently converted centralized system to Homedco's
decentralized, branch-based system. Many of the incentive and
other programs instituted by Abbey management were discontinued
in order to focus resources and efforts on completing branch
consolidations, effecting the planned system conversions,
training personnel in the proper use of the new systems and
improving the efficiency and effectiveness of the intake
function. During the process, the centralized billing center was
downsized and relocated a second time, pending permanent closure
at a later date. Each of these post-merger decisions caused
additional turnover at the billing centers responsible for
collecting the existing receivables and seriously impacted
employee morale.
In connection with Management's 1995 post-merger accounts
receivable analysis, serious consideration was given to the
impact that the merger, planned branch consolidations and system
conversions and reductions in force would likely have on the
already unstable condition of Abbey's infusion accounts
receivable. As a result of a marked deterioration in the aging
of Abbey's infusion accounts and other deteriorating trends, a
provision of $26.3 million was recorded.
Employee Contracts, Benefit Plan and Claim Settlements: In
1996, the Company recorded $14.8 million in benefit plan and
claim settlement costs. Included are settlement amounts and
related costs of $5.3 million recorded in connection with two
legal matters, settlement and associated costs of $6.2 million
related to the November 1996 termination of a proposed merger
with Vitas Healthcare Corporation and an increase in the
estimated accrual for the settlement loss on the termination of
the Company's defined benefit pension plan of $3.3 million.
Employee contracts, benefit plan and claim settlements of
$20.4 million were recorded in 1995. The total includes
approximately $14.4 million provided for employment and payroll
tax related claims and lawsuits, $3.4 million to settle certain
employee contracts, and a settlement loss of $2.3 million on the
termination of the Company's defined benefit pension plan.
Certain 1995 Operating Statement Captions: In connection
with the merger, the Company initiated a significant
consolidation and restructuring plan to consolidate operating
locations and administrative functions within specific geographic
markets. The plan provided for a workforce reduction of
approximately 1,220 employees, consolidation of approximately 120
operating facilities and conversion of branch operating locations
to a standardized information system. The employee reduction and
branch consolidations were substantially complete as of December
1995. The Company had also completed about half of the 496
information system conversions as of December 1995; the remaining
system conversions were completed by September 1996.
During 1995, a charge of approximately $68.3 million was
recorded in connection with the consolidation and restructuring
plan. The primary components of the restructuring charge
included severance and related costs of $21.5 million due to
workforce reductions, $22.2 million associated with the
consolidation of information systems, $23.1 million related to
the closure of duplicate facilities and $1.5 million for other
restructuring activities.
Merger costs of approximately $12.2 million were incurred
during 1995 and consisted primarily of fees for investment
banking, legal, consulting, accounting, filing requirements, and,
as required by the merger agreement, the cost of a six-year
liability insurance policy covering directors and officers of the
predecessor companies against claims arising from pre-merger
facts or events.
Interest Expense: Interest expense increased in 1996 to
$49.2 million, from $42.9 million in 1995 and $37.2 million in
1994. The increases in both years are primarily due to increases
in long-term debt. The 1996 increase was mitigated by a
reduction in interest rates (see LIQUIDITY AND CAPITAL
RESOURCES).
Income taxes: Income tax expense for 1996 amounted to $18.7
million and represented 36% of income before taxes. The
deductibility in 1996 of certain accruals and merger related
reserves established in 1995 resulted in a current year tax loss,
an increase in refundable taxes due to a carryback of a portion
of the tax loss, and a decrease in net deferred tax assets.
Management believes that future taxable income will be sufficient
to assure the realization of deferred tax assets, net of the
recorded valuation allowance.
The 1995 tax benefit of $20.6 million was primarily
attributable to losses related to merger reserves and
restructuring charges recorded during 1995. Income tax expense
for 1994 represents the combined tax provisions of Homedco and
Abbey. The combined effective tax rate for 1994 was 43%, which
exceeded the statutory rate primarily because of the effects of
non-deductible goodwill.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in the Company's operating activities for 1996 was
$59.3 million compared with $9.9 million in 1995 and $61,000 in
1994. The primary contributor to the increased use of cash in
1996 and 1995 was the increase in accounts receivable.
Accounts receivable, before allowance for doubtful accounts,
increased $64.5 million in 1996. In addition, the Company's
average collection period increased to approximately 130 days
from approximately 110 days in 1995 and 100 days in 1994. These
conditions are primarily attributable to disruptions and delays
in billing and collection activity associated with the Company's
conversion of its field locations to a standardized information
system and a higher than normal turnover rate among billing and
collection personnel in 1996 and, to a lesser degree, to the
continuing impact of facility consolidations and employee
reductions made in late 1995 and early 1996 in connection with
the Company's restructuring and consolidation plan.
In connection with the facility consolidations, each branch
information system was first converted to the predominate system
in place within its region. Conversion of the branches to a
standard, Company-wide system then occurred on a region-by-region
basis. Because of the conversion to interim systems prior to
final conversion, locations representing approximately 80% of the
Company's accounts receivable underwent conversion. Of the 496
planned conversions, about half were completed by December 31,
1995. The remaining conversions, comprised mainly of the
Company's larger branches, were completed by September 30, 1996
with 125, 67 and 72 performed in the first, second and third
quarters, respectively. These activities contributed to billing
delays and errors and, ultimately, difficulties in receiving
timely reimbursement.
Management's year-end accounts receivable analysis
considered the continuing impact on the aging of accounts and
collection activity caused by system conversions and employee
turnover and the degree of effectiveness of billing and
collection improvement programs initiated during the year. In
addition, Management conducted a review of patient billing files
and analyzed subsequent realization for selected billing
locations. Based on such analyses, Management estimated and
recorded in the fourth quarter of 1996 a $32.3 million adjustment
to reduce accounts receivable and net revenues and a $9.0 million
adjustment to increase the allowance for doubtful accounts (see
RESULTS OF OPERATIONS).
Revenue adjustments result from (1) incorrect contract
prices entered upon service delivery due to complex contract
terms, a biller's lack of familiarity with a contract or payor or
an incorrect system price, (2) subsequent changes to estimated
revenue amounts for services not covered by a preexisting
contract, and (3) failure subsequent to service delivery to
qualify a patient for reimbursement due to lack of authorization
or a missed filing or appeal deadline. Revenue adjustments are
typically identified and recorded at the point of cash
application or upon account review. The increase in the
Company's average collection period in 1996 has increased the
level of unidentified revenue adjustments accumulating in
accounts receivable. In addition, the significant number of
system conversions performed in the second and third quarters of
1996 and the high rate of turnover among billing and collection
personnel impeded normal processing and account reviews and
resulted in an increased rate of billing errors in the second
half of 1996.
To mitigate the impact of conversion disruptions and
employee turnover, the Company, among other steps, initiated
collection incentive programs with special emphasis on older
accounts, assembled an accounts receivable task force, hired
additional management level billing and collection personnel and
initiated reinforcement training for the billing locations.
Subsequent to year-end, the Company took further steps to reduce
the incidence of billing errors. These steps include a process
review of the field information system to identify opportunities
to improve billing processing, timeliness and accuracy,
validation of system pricing files and implementation of billing
center audits to assess compliance with billing practices and
procedures.
Cash collections at locations that were converted in early
1996 have shown recent improvement. Because of the significant
number of conversions completed in the second and third quarters
of 1996, a return to routine processing and normal collection
timeframes on a Company-wide basis is not expected before mid-
1997.
The Company centralized its accounts payable function in
connection with the consolidation and restructuring plan. The
centralization process disrupted day-to-day activities causing a
processing backlog, which was reflected in the accounts payable
balance at December 31, 1995. During the first two quarters of
1996, the backlog was substantially eliminated, resulting in
significant outlays of cash.
Other factors contributing to the use of cash and
corresponding increase in long-term debt include purchases of
patient service equipment and supplies to support business growth
and payments made against the restructuring accruals for
severance and trailing facility costs. Such payments are
expected to continue through the year 2000, according to
contractual terms. Approximately $32.0 million in data
processing equipment was purchased in 1996, much of which was to
support the information systems conversions and enhancements and
to upgrade and standardize the consolidated field locations.
Hardware purchases in 1997 are planned at $15.0 million. Income
tax refunds of $6.4 million were received in 1996, and the
application of prior year payments and alternative minimum tax
credits to current year estimated tax requirements reduced cash
outlays for income taxes by $25.0 million. During 1996, the
Company made acquisitions of complementary businesses in specific
geographic markets which resulted in cash payments of $13.9
million. The issuance of Common Stock upon exercise of stock
options yielded $15.2 million in 1996.
Effective August 9, 1996, the Company entered into an
agreement with a syndicate of banks which provides for borrowings
of up to $800.0 million. The agreement is structured as an
unsecured, five-year revolving line of credit, which provides for
variable rate interest options including the higher of the
Federal Funds Rate plus 0.5% per annum or the Bank of America
"reference" rate, or a rate based on the London Interbank Offered
Rate ("LIBOR") plus up to 1.0% per annum. The LIBOR option is
subject to discount if the Company achieves certain targeted
ratios of debt to earnings before interest, taxes, depreciation
and amortization. The agreement contains numerous restrictions
including, but not limited to, covenants requiring the
maintenance of certain financial ratios, limitations on
additional borrowings, capital expenditures, mergers,
acquisitions and investments and restrictions on cash dividends,
loans and other distributions. Loan proceeds are being used to
meet the working capital needs of the Company.
The Company has limited involvement with derivative
financial instruments and does not use them for trading purposes.
Interest rate swap and cap agreements are used as a means of
managing the Company's interest rate exposure. The swap
agreements are contracts to periodically exchange fixed and
floating interest rate payments over the life of the agreement.
The Company's exposure to credit loss under these agreements is
limited to the interest rate spread in the event of
nonperformance by the counterparties to the contracts. The
Company anticipates that the counterparties will be able to fully
satisfy their obligations under the contracts. The Company is
currently party to two swap agreements: an 18-month agreement
covering $280.0 million in notional principal with a fixed
interest rate of 5.7% and a two-year agreement covering $100.0
million of notional principal with a fixed interest rate of 5.6%.
Both agreements allow the counterparty an option to terminate
after one year; if these options are not exercised, the $280.0
million and $100.0 million contracts terminate in February 1998
and November 1998, respectively. In 1996, the Company received
interest at a weighted average rate of 6.5% and paid interest at
a weighted average rate of 6.1%, the difference of which
represents the benefit derived by the Company under the various
swap contracts in effect during the year. Payment or receipt of
the interest differential is made on a monthly and quarterly
basis for the $100.0 million and $280.0 million agreements,
respectively, and recognized monthly in the financial statements
as an adjustment to interest expense. Under a cap agreement,
which expired in July 1996, the Company limited the three-month
LIBOR rate to 6.0% on outstanding indebtedness of up to $50.0
million. The Company did not derive any benefit from the cap
agreement in 1996.
In 1995, all outstanding 6.5% convertible debentures, which
amounted to $66.6 million, were converted into 4,771,962 shares
of Common Stock, at a conversion price of $13.97 per share.
The Company is currently in the third year of a five-year
agreement to purchase medical supplies totaling $112.5 million,
with annual purchases ranging from $7.5 million in the first year
to $30.0 million in the third through fifth years. Failure to
purchase at least 90% of the annual commitment would have
resulted in a penalty of 10% of the difference between the annual
commitment and actual purchases, beginning with the 12-month
period ended August 31, 1996. Actual purchases for that period
exceeded the annual commitment by 54%.
In March 1997, the Company sold its M&B Ventures, Inc. home
health business, which operated in South Carolina under the
assumed business name of Doctor's Home Health, Inc. Proceeds
from the sale were approximately $2.4 million. In January 1997,
the Company sold all of its ordinary shares of Omnicare plc;
proceeds from the sale were approximately $2.8 million.
In its 1994 sale of Abbey Pharmaceutical Services, Inc., the
Company acquired warrants to purchase 248,000 shares of common
stock of Living Centers of America, Inc. at $35.00 per share. No
value was assigned to the stock.
Overall, the Company believes that cash provided by
operations and amounts available under its existing credit and
lease financing will be sufficient to finance its current
operations for at least the next two years. At December 31,
1996, availability under the credit facility was $379.5 million.
The Company believes that inflation has not had a
significant impact on the Company's historical operations.
<PAGE>
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
March 27, 1997
------------------------------------------
Lawrence H. Smallen
Chief Financial Officer,
Senior Vice President,Finance and Treasurer
(Principal Financial Officer)
