UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) June 26, 1997
Commission File Number 000-19854
APRIA HEALTHCARE GROUP INC.
(Exact Name of Registrant as Specified in Charter)
Delaware 33-0488566
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification Number)
3560 Hyland Avenue, Costa Mesa, CA 92626
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 427-2000
<PAGE>
Item 5. Other Events.
PRESS RELEASE
On June 26, 1997, Apria Healthcare Group Inc. (the "Company")
issued a press release announcing that (i) it has retained Goldman,
Sachs & Co. as its financial advisor, (ii) it will consider a
variety of potential alternatives, including the possibility of a
merger or sale of the Company or a capital restructuring to enhance
shareholder value, (iii) it has begun to restructure its operations
to focus more fully on its core businesses, and (iv) it expects its
financial results for the second quarter ending June 30, 1997, to
include charges of up to $95 million, before taxes. A copy of the
press release is attached hereto as an Exhibit under Item 7.
RISK FACTORS
The Company's business is subject to a number of risks, some of
which are beyond the Company's control. The Company has described
certain of those risks below so that this Current Report on Form 8-
K may be used for purposes of the Private Securities Litigation
Reform Act of 1995 as a readily available document containing
meaningful cautionary statements identifying important factors that
could cause actual results to differ materially from those
projected in any forward-looking statements the Company may make
from time to time.
Regulatory Environment.
Reimbursement. A substantial portion of the Company's revenues is
attributable to payments received from third-party payors,
including the Medicare and Medicaid programs and private insurers.
For fiscal 1996, approximately 33% of the Company's net revenues
was derived from Medicare and 10% of the Company's net revenues was
derived from Medicaid. Both public and private payors are
increasing pressures to decrease or limit increases in
reimbursement rates for healthcare services. The levels of
revenues and profitability of the Company, similar to those of
other healthcare companies, will be subject to the effect of
possible reductions in coverage or payment rates by third-party
payors. Such changes could have a material adverse effect on the
business and results of operations of the Company. For example,
recently there have been varying government proposals to reduce the
Medicare home oxygen reimbursement rate by 20% to 40%. Medicare-
reimbursed home oxygen services account for approximately 19% of
the Company's net revenues. At this time, the reduction in the
home oxygen reimbursement rate that will be passed into law, if
any, cannot be predicted. Any significant rate reduction
ultimately enacted could have a material adverse effect on the
Company's business, results of operations or financial condition.
Medicare and Medicaid carriers also periodically conduct post-
payment reviews and other audits of claims submitted. These
Medicare and Medicaid contractors are under increasing pressure to
scrutinize healthcare claims more closely. In addition, the home
healthcare industry is generally characterized by long collection
cycles for accounts receivable due to the complex and time-
consuming requirements, including collection of medical necessity
documentation, for obtaining reimbursement from private and
governmental third-party payors. There can be no assurance that
such long collection cycles or reviews and/or similar audits of the
Company's claims will not result in material recoupments or denials
which could have a material adverse effect on the Company's
business, results of operations or financial condition.
In addition, Medicare has proposed the implementation of a
competitive bidding system, which could result in lower
reimbursement rates, or limits in increases in reimbursement rates,
for healthcare services. There can be no assurance that such a
competitive bidding system will not have a material adverse effect
on the Company's business, results of operations, or financial
condition.
Fraud and Abuse Laws. As a supplier and provider of services under
the Medicare and Medicaid programs, the Company is subject to
Medicare and state healthcare program fraud and abuse laws. These
laws include the Medicare and Medicaid anti-kickback statute, which
prohibits, among other things, the offer, payment, solicitation or
receipt of any remuneration in return for the referral of patients
for items or services, or arranging for the furnishing of items or
services, for which payment may be made under the Medicare,
Medicaid or other federally funded healthcare programs. Violations
of these provisions may result in civil and criminal penalties and
exclusion from participation in Medicare and state health programs
such as Medicaid. Congress has also enacted the Health Insurance
Portability and Accounting Act of 1996, which includes an expansion
of certain fraud and abuse provisions to other federal healthcare
programs and private payors. In addition, several healthcare
reform proposals have included an expansion of the anti-kickback
laws to include referrals of any patients regardless of payor
source.
The broad language of the anti-kickback statute has been
interpreted by the courts and governmental enforcement agencies in
a manner which could impose liability on healthcare providers for
engaging in a wide variety of business transactions. Limited "safe
harbor" regulations exempt certain practices from enforcement
action under the prohibitions. However, these safe harbors are
only available to transactions which fall entirely within the
narrowly defined guidelines. Transactions that do not fall within
the safe harbors do not necessarily violate the fraud and abuse
laws and, therefore, parties to such transactions either may or may
not be subject to prosecution. In addition, an increasing number
of states in which the Company operates have laws, which vary from
state to state, prohibiting certain direct or indirect remuneration
or fee-splitting arrangements between healthcare providers,
regardless of payor source, for the referral of patients to a
particular provider. Possible sanctions for violations of these
restrictions include loss of licensure and civil and criminal
penalties. In addition, under separate statutes, submission of
claims for payment that are "not provided as claimed" may lead to
civil money penalties, criminal fines and imprisonment, and/or
exclusion from participation in Medicare, Medicaid and other
federally funded state healthcare programs. These false claims
statutes include the Federal False Claims Act, which allows any
person to bring suit alleging false or fraudulent Medicare or
Medicaid claims or other violations of the statute and to share in
any amounts paid by the entity to the government in fines or
settlement. Such qui tam actions have increased significantly in
recent years and have increased the risk that a healthcare company
will have to defend a false claims action, pay fines or be excluded
from the Medicare and/or Medicaid programs as a result of an
investigation arising out of such an action. Finally, Congress
enacted in 1993 the so-called "Stark Law," which prohibits
referrals by physicians to certain entities with which they have a
financial relationship unless an exception applies. Several states
in which the Company operates also have similar laws. Possible
sanctions for violation of these laws include denial of payment,
loss of licensure and civil and criminal penalties. The Company
maintains an internal regulatory compliance review program and from
time to time retains special counsel for guidance on applicable
laws and regulations. However, no assurance can be given that the
Company's practices, if reviewed, would be found to be in
compliance with applicable health regulatory laws, as such laws
ultimately may be interpreted, or that any non-compliance with such
laws would not have a material adverse effect on the Company.
Operation Restore Trust. In May 1995, the federal government
announced an initiative which would increase significantly the
financial and human resources allocated to enforcing the fraud and
abuse laws. Private insurers and various state enforcement agencies
also have increased their scrutiny of healthcare claims in an
effort to identify and prosecute fraudulent and abusive practices.
Under Operation Restore Trust ("ORT"), the Office of the Inspector
General (the "OIG"), in cooperation with other federal and state
agencies, initially focused on the activities of home health
agencies, hospices, durable medical equipment suppliers and nursing
homes in New York, Florida, Illinois, Texas, and California, states
in which the Company has significant operations. More recently,
the ORT program has been expanded to include 12 other states in
which the Company also has significant operations.
Other Federal and State Regulations. The federal government and
all states in which the Company currently operates regulate various
aspects of the Company's business. In particular, the operations
of the Company's branch locations are subject to state and federal
laws regulating the repackaging and dispensing of drugs (including
oxygen), the maintenance and tracking of certain life-sustaining
and life-supporting equipment, the handling and disposal of medical
waste and motor carrier transportation. The Company's operations
also are subject to state laws governing pharmacies, nursing
services and certain types of home healthcare activities. Certain
of the Company's employees are subject to state laws and
regulations governing the ethics and professional practice of
medicine, respiratory therapy, pharmacy and nursing. The Company's
operations are subject to periodic survey by governmental and
private accrediting entities to assure compliance with applicable
state licensing, Medicare and Medicaid certification, and
accreditation standards, as the case may be. From time to time in
the ordinary course of business, the Company, like other healthcare
companies, receives survey reports containing deficiencies for
alleged failure to comply with applicable requirements. The
Company reviews such reports and attempts to take appropriate
corrective action. The failure to effect such action or to obtain,
renew or maintain any of the required regulatory approvals,
certifications or licenses could adversely affect the Company's
business, results of operations or financial condition and could
prevent the programs involved from offering products and services
to patients. In addition, laws and regulations often are adopted
to regulate new products, services and industries. There can be no
assurances that either the states or the federal government will
not impose additional regulations upon the activities of the
Company which might adversely affect its business, results of
operations or financial condition.
Recent Losses. The Company reported a net loss of $74.5 million
for the year ended December 31, 1995, net income of $33.3 million
for the year ended December 31, 1996 and net income of $19.2
million for the three months ended March 31, 1997. While the
Company has been profitable over the last 15 months, no assurances
can be given that this performance will be sustained in the future.
Collectibility of Accounts Receivable. The Company's management
believes that disruptions and delays in billing and collection
activity caused by field location consolidations and personnel
changes diminished with the conclusion of those activities in late
1996. However, disruptions and delays associated with conversion
and employee training continued to impact the timing and, in some
cases, the ultimate amount of collections in 1996 and the first
quarter of 1997. Apria's days' sales in outstanding receivables
("DSO" - calculated as of each period-end by dividing accounts
receivable less allowance for doubtful accounts by the 90-day
rolling average of net revenues), a key measurement used by
management to evaluate the time frame in which accounts receivable
are collected, increased from 82 days at December 31, 1995 to 99
days at December 31, 1996, and to 105 days at March 31, 1997.
Although the rate of growth in accounts receivable decreased in the
first quarter of 1997 as compared to the first quarter of 1996,
accounts receivable, before allowance for doubtful accounts,
increased by $30.0 million during the quarter; approximately $21.0
million of which related to accounts aged over 180 days.
Collections historically have been slowest during the first quarter
due to a slowdown in payor processing over the holiday season and
the withholding of Medicare deductibles at the beginning of the new
calendar year. But the primary cause of the increases in accounts
receivable and DSO are the residual effects of the disruptions and
delays in billing and collection activity associated with the
Company's conversion of its field locations to the standardized
information systems and a higher than normal turnover rate among
billing and collection personnel in 1996. These activities have
contributed to billing delays and errors and, ultimately,
difficulties in receiving timely reimbursement. To mitigate this
negative impact, the Company, among other steps, initiated
collection incentive programs with special emphasis on older
accounts, hired additional management level billing and collection
personnel and initiated reinforcement training for the billing
locations. Early in 1997, the Company took further steps to reduce
the incidence of billing errors including a process review of the
field information systems to identify opportunities to improve
billing processing, timeliness and accuracy, validation of system
pricing files and implementation of billing center audits to assess
compliance with billing practices and procedures. Further, in
April 1997, the Company announced a new organizational structure
and the appointment of an executive vice president of operations.
These changes are intended to heighten the Company's focus on
accounts receivable collections and information systems management.
However, no assurances can be given that additional charges for
uncollectible accounts receivable will not be required as a result
of difficulties associated with the continuing conversion
activities and meeting payor documentation and claim submission
deadlines.
Pricing Pressures. The healthcare industry is currently
experiencing market-driven reforms from forces within and outside
the industry that are exerting pressure on healthcare companies to
reduce healthcare costs. These market-driven reforms are resulting
in industry-wide consolidation that is expected to increase the
downward pressure on home healthcare margins, as larger buyer and
supplier groups exert pricing pressure on home healthcare
providers. The ultimate timing or effect of market-driven reforms
cannot be predicted, and short-term cost containment initiatives
may vary substantially from long-term reforms. No assurance can be
given that any such reforms will not have a material adverse effect
on the Company's business, results of operations or financial
condition.
Competition. The segment of the healthcare market in which the
Company operates is highly competitive. In each of its lines of
business, there are a limited number of national providers and
numerous regional and local providers. The Company competes with a
large number of organizations in many areas in which its branch
facilities and programs are located. Other types of healthcare
providers, including hospitals, physician groups, home health
agencies, nursing homes and health maintenance organizations, have
entered, and may continue to enter, the Company's various lines of
business. Depending on their individual situations, it is possible
the competitors of the Company may have or may obtain significantly
greater financial and marketing resources than the Company. In
addition, relatively few barriers to entry exist in the local home
healthcare markets served by the Company. Accordingly, other
companies that are not serving the home healthcare market may
become competitors, enter the markets and expand the variety of
services offered. As a result, the Company could encounter
increased competition in the future that may limit its ability to
maintain or increase its market share, including competition from
parties in a position to influence referrals to the Company. Such
increased competition could materially adversely affect the
Company's financial condition or results of operations.
The Company's ability to successfully compete in the home
healthcare market is dependent on, among other things, the
Company's wide geographic coverage, the ability to develop and
maintain contractual relationships with managed care organizations,
price of services, ease of doing business, quality of care and
service and reputation with referring customers, including local
physicians and hospital-based professionals. Additionally, it is
increasingly important to be able to both offer and integrate a
broad range of homecare services through a single source. If the
Company is unable to maintain its geographic coverage or develop
and maintain such contractual relationships, the Company's
reputation or its offerings of homecare services, such developments
could have a material adverse affect on the Company.
Dependence on Relationships with Third Parties. The profitability
and growth of the Company's business depends on its ability to
establish and maintain close working relationships with managed
care organizations, private and governmental third-party payors,
hospitals, physicians, physician groups, home health agencies, long-
term care facilities and other institutional healthcare providers,
and large self-insured employers. There can be no assurance that
the Company's existing relationships will be successfully
maintained or that additional relationships will be successfully
developed and maintained in existing or future markets. The loss
of such existing relationships or the failure to continue to
develop such relationships in the future could have a material
adverse effect on the Company's business, results of operations or
financial condition.
Concentration of Large Payors. Managed care organizations have
grown substantially in terms of the percentage of the population
that is covered by such organizations and in terms of their control
over an increasing portion of the healthcare economy. Managed care
plans have continued to consolidate to enhance their ability to
influence the delivery of healthcare services and to exert pressure
to control healthcare costs. The Company has a number of
contractual arrangements with managed care organizations and other
parties. While no individual arrangement accounted for more than
5% of the Company's net revenues in fiscal 1996, no assurances can
be given that managed care organizations or other large third party
payors will not use their power to influence and exert pressure on
healthcare services or costs in a manner that could have a material
adverse effect on the Company's business, results of operations or
financial condition.
Healthcare Reform. The healthcare industry has experienced
extensive and dynamic regulatory change. Changes in the law, new
interpretations of existing laws, or changes in payment methodology
may have a dramatic effect on the definition of permissible or
impermissible activities, the relative costs associated with doing
business and the amount of payment for medical care by both
governmental and other payors. Healthcare reform proposals have
been formulated by federal and state governments. Government
officials can be expected to continue reviewing and assessing
alternative healthcare delivery systems and payment methodologies,
and public debate of these issues can be expected to continue in
the future. The Company cannot predict whether any reform measures
will be enacted, or, if enacted, the nature of such reforms. There
can be no assurance that any reform measure, if enacted, will not
restrict the Company's operations, limit expansion of its business,
or impose compliance costs which cannot be recovered through price
increases or otherwise adversely affect the Company's business.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
(a) and (b) Not Applicable.
(c) Exhibits
Press Release dated June 26, 1997
<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 hereunto duly authorized.
Apria Healthcare Group Inc.
---------------------------
Registrant
June 26, 1997 /s/ Lawrence H. Smallen
-----------------------------------
Lawrence H. Smallen
Chief Financial Officer,
Senior Vice President, Finance and
Treasurer
(Principal Financial Officer)
<PAGE>
EXHIBIT INDEX
Exhibit Number Exhibit
- --------------- ------------------------------------
99.1 Press Release dated June 26, 1997
EXHIBIT 99.1
JUNE 26, 1997
For Further Information, Contact:
---------------------------------
Lawrence H. Smallen Sheree L. Aronson
Chief Financial Officer OR Director,Investor Relations
714.427.4935 714.427.4919
APRIA HEALTHCARE MOVES TO ENHANCE SHAREHOLDER VALUE AND
STRENGTHEN FINANCIAL POSITION
- Retains Financial Advisor
- Redirects Focus to Three Core Businesses
- Plans to Establish Additional Provisions in Second
Quarter
COSTA MESA, CALIF. -- June 26, 1997 -- Apria
Healthcare Group Inc. (NYSE:AHG) announced today that it
will explore alternatives to enhance shareholder value,
according to Jeremy M. Jones, Apria chairman and chief
executive officer. The company's board of directors has
retained the investment banking firm of Goldman, Sachs & Co.
as the company's financial advisor. Jones stated that the
company will consider a variety of potential alternatives,
including the possibility of a merger or sale of the company
or a capital restructuring.
The company also announced that it has begun to
restructure its operations to focus more fully on core
business lines of respiratory services, home infusion
therapy and home medical equipment. Lower-margin, non-core
businesses such as subcontracted home health nursing and
sales of rehabilitation equipment and medical supplies will
be phased out during the balance of 1997, according to
Jones.
"Consistent with our 1997 objective to manage the mix
of revenues and improve gross margins, we believe it is
essential to focus our efforts on the three core business
lines that provide the highest return," Jones said.
"Apria began offering various non-core services as a
value-added benefit to managed care customers," Jones said.
"However, managed care customers have simply not valued the
convenience of these offerings and accepted the necessary
pricing levels to support the documentation-intensive
services."
Apria also announced that it expects its financial
results for the second quarter ending June 30, 1997, to
include charges of up to $95 million, before taxes, of which
up to $75 million relate to accounts receivable.
Approximately one-half of the anticipated accounts
receivable charge relates to a more conservative reserve
position taken on accounts over 180 days. This change in
estimate is considered necessary by management because the
reduction in over 180 day accounts has been slower than
anticipated. The remainder of the accounts receivable
charge is a combination of revenue adjustments and an
increase in the bad debt provision rate for accounts
receivable less than 180 days, necessitated by billing and
collection difficulties that continued into early 1997. The
company also expects to incur a charge of up to $20 million
for potential write-offs and accruals associated with
exiting unprofitable business lines and to increase its
reserve for excess and obsolete inventory.
"With our common computer systems now reporting more
detailed and reliable information to operations and field
management, the company is able to better analyze and
evaluate its accounts receivable and inventory.
Furthermore, during 1997, we are dedicating an increased
level of resources to billing and collection activities,"
Jones said.
Jones added that the company's aggregate cash
collections have increased, which, when combined with
controls on capital spending, have contributed to
improvements in operating cash flow and reductions in total
debt.
Excluding the charges of up to $1.21 per share, the
company expects income from continuing operations in 1997's
second quarter to be between $0.35 and $0.38 per fully
diluted share, compared with $0.42 per fully diluted share
for the same quarter of 1996. Apria will release complete,
final results for the second quarter in late July.
Based in Costa Mesa, Calif., Apria is among the
nation's largest home healthcare providers. The company
provides and/or manages comprehensive integrated homecare
services through approximately 350 locations serving
patients in 50 states.
This release includes statements regarding anticipated
future developments that are forward-looking statements
within the meaning of the Private Securities Litigation
Reform Act of 1995. The risk factors set forth in the
company's current report on Form 8-K, filed with the
Securities and Exchange Commission on June 26, 1997,
constitute cautionary statements identifying important
factors that could cause actual results to differ materially
from those in the forward-looking statements. These risks
include whether the company will be able to resolve issues
pertaining to the collectibility of its accounts receivable,
pricing pressures (including changes in governmental
reimbursement levels), the impact of healthcare reform
proposals, the effect of federal and state healthcare
regulations, the highly competitive market, recent losses,
the concentration of large payors and dependence on
relationships with third parties.
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