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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-14316
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 April 9, 1998, there were outstanding 51,724,059 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 April 9, 1998 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 $8.00 per share as
reported by the New York Stock Exchange, was approximately $339,870,030.
DOCUMENTS INCORPORATED BY REFERENCE
The information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the 1998 Annual Meeting of Stockholders of the
Registrant which will be filed with the Securities and Exchange Commission no
later than 120 days after December 31, 1997.
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PART I
ITEM 1. BUSINESS
GENERAL
Apria Healthcare Group Inc. ("Apria Healthcare", "Apria" or the
"Company") provides and/or manages comprehensive homecare services including
home respiratory therapy, home delivered respiratory medications, home infusion
therapy, home medical equipment and related clinical services. The Company
provides its services through approximately 350 branch locations which serve
patients in all 50 states.
On June 28, 1995, Homedco Group, Inc. ("Homedco") merged with and into
Abbey Healthcare Group Incorporated ("Abbey") to form the Company. In connection
with the merger transaction (the "merger"), 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 merger have
been restated as though the companies had been combined. The restated financial
statements included herewith have been adjusted to conform the differing
accounting policies of the separate companies.
On September 30, 1994, the Company sold its 51% interest in Abbey
Pharmaceutical Services, Inc. to Living Centers of America, Inc. ("Living
Centers") for cash consideration of $20.3 million and warrants to purchase
247,500 shares of Living Centers common stock for $35.00 per share. In September
1997, the Company exercised the warrants and recorded a related gain of $1.4
million.
On January 2, 1994, the Company acquired the outstanding stock of
Protocare, Inc. ("Protocare") for a cash payment of $11.9 million plus direct
acquisition costs of $3.7 million. In addition, pursuant to an earnout
provision, as amended in June 1994, approximately 979,000 shares of Common Stock
valued at $11.6 million were issued in February 1995 to the former Protocare
stockholders.
On November 10, 1993, the Company acquired the outstanding stock of
Total Pharmaceutical Care, Inc. ("TPC") for a cash payment of $154.2 million
plus direct acquisition costs of $9.4 million and the issuance of approximately
2,002,000 shares of Common Stock valued at $33.5 million.
On August 7, 1992, the Company acquired substantially all of the
business and assets of Glasrock Home Healthcare, Inc. for a cash payment of
$68.4 million plus the assumption of liabilities amounting to $3.3 million and
direct acquisition costs of $11.4 million.
The Company was incorporated in 1991 in the State of Delaware.
RECENT DEVELOPMENTS
In June 1997, the Company announced that it had retained an investment
banking firm as its financial advisor to explore alternatives to enhance
stockholder value, including the possible sale, merger or recapitalization of
the Company. Following extensive communications and exchanges of information
with a number of third parties, on February 3, 1998, the Company entered into a
Stock Purchase Agreement (the "JLL Agreement") with JLL Argosy Apria, LLC,
Joseph Littlejohn & Levy Fund III, L.P. and CIBC WG Argosy Merchant Fund 2,
L.L.C. (together, the "JLL Group"). Pursuant to the terms of the JLL Agreement,
among other things, the Company agreed to issue and sell 12,300,000 shares of
Common Stock and to issue warrants to purchase 5,000,000 additional shares,
exercisable at $20.00 per share, in consideration for a cash investment of
$172.2 million by the JLL Group. The Company was to have used the proceeds,
together with $70.0 million in new borrowings under the Company's credit
facility, to purchase 17,300,000 shares of Common Stock. On April 3, 1998, the
parties agreed to terminate the JLL Agreement without any obligation to any
party. The Board of Directors of the Company has formed a committee to assess
the Company's future alternatives in light of the termination of the JLL
Agreement.
LINES OF BUSINESS
Apria Healthcare derives substantially all of its revenue from the home
healthcare segment of the healthcare market in principally three service lines:
home respiratory therapy (including home-delivered respiratory medications),
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home infusion therapy and home medical equipment. In all three lines, the
Company provides patients with a variety of clinical services, related products
and supplies, most of which are prescribed by a physician as part of a care
plan. These services include: high-tech infusion nursing, respiratory care and
pharmacy services, educating patients and their caregivers about the illness and
instructing them on self-care and the proper use of products in the home,
monitoring patient compliance with individualized treatment plans, reporting to
the physician and/or managed care organization, maintaining equipment and
processing claims to third-party payors. Approximately 35% of the Company's
business is derived from managed care organizations, with the remainder being
derived from more traditional referral/payor sources. The Company directly
provides numerous services to its patients, and purchases or rents the products
needed to complement the service.
The following table sets forth a summary of net revenues by line of
business, expressed as percentages of total net revenues:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Respiratory therapy................................... 51% 50% 53%
Infusion therapy...................................... 24% 25% 24%
Home medical equipment/other.......................... 25% 25% 23%
----- ----- -----
Total net revenues.............................. 100% 100% 100%
==== ==== ====
</TABLE>
RESPIRATORY THERAPY. The Company provides home respiratory therapy
services to patients with a variety of conditions, including chronic obstructive
pulmonary disease ("COPD", e.g., emphysema, chronic bronchitis and asthma),
cystic fibrosis and neurologically-related respiratory conditions. Apria
Healthcare employs a clinical staff of respiratory care professionals to provide
support to its home respiratory therapy patients, according to
physician-directed treatment plans and a proprietary acuity program.
Approximately 68% of the Company's respiratory therapy revenues are
derived from the provision of oxygen systems, nebulizers (devices to aerosolize
medication) and home ventilators. The remaining respiratory revenues are
generated from the provision of apnea monitors used to monitor the vital signs
of newborns, continuous positive airway pressure ("CPAP/BiPAP") devices used to
control adult sleep apnea, noninvasive positive pressure ventilation ("NPPV"),
and other respiratory therapy products.
The Company has developed a home respiratory medication service, which
is fulfilled through the Apria Pharmacy Network ("APN"). Through APN, the
Company offers its patients physician-prescribed medications to accompany the
nebulizer through which they are administered. This comprehensive program offers
patients and payors a broad base of services from one source, including the
delivery of medications in premixed unit dose form, pharmacy services, patient
education and claims processing.
INFUSION THERAPY. Home infusion therapy involves the administration of
24-hour access to intravenous or enteral nutrition, anti-infectives,
chemotherapy and other intravenous and injectable medications. Depending on the
therapy, a broad range of venous access devices and pump technology may be used
to facilitate homecare and patient independence. Apria Healthcare employs
licensed pharmacists and registered high-tech infusion nurses who have
specialized skills in the delivery of home infusion therapy. The Company
currently operates 44 pharmacy locations to serve its home infusion patients.
The following is a brief description of the major therapies:
Anti-infective Therapy. Anti-infective therapy typically is a
short-duration therapy involving the infusion of antibiotic, antiviral or
antifungal drugs into the patient's bloodstream in order to treat a variety of
infections and diseases, including osteomyelitis, endocarditis, post-surgical
wound infections, AIDS-related infections and urinary tract infections.
Generally, anti-infectives are administered intravenously from one to six times
per day for a period of several days to several weeks.
Total Parenteral Nutrition Therapy. Total parenteral nutrition ("TPN")
is the intravenous provision of life-sustaining nutrients, acting as a
replacement for normal food intake, to patients with a gastrointestinal illness
or dysfunction. TPN therapy is usually administered over a period of months with
some patients continuing therapy for longer periods due to chronic conditions.
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Enteral Nutrition Therapy. Enteral nutrition is the delivery of
nutrients directly through a feeding tube to a patient's partially functioning
gastrointestinal tract to accommodate an inability to intake food normally.
Enteral nutrition therapy is often administered over a long period, generally
for more than six months.
Pain Management. Pain management is the intravenous or intraspinal
administration of analgesic drugs to patients suffering chronic pain from
terminal or chronic conditions.
Chemotherapy. Chemotherapy is the intermittent or continuous intravenous
administration of drugs to patients with various types of cancer. Although most
chemotherapy is administered in physicians' offices, the development of new
continuous delivery pumps and antiemetic drugs has allowed for the
administration of chemotherapy in the home and other ambulatory settings.
Chronic Condition Therapy. Chronic condition therapy is the intravenous
or injectable administration of drugs to treat congenital or acquired chronic
conditions, such as Prolastin(R) therapy for patients with congenital emphysema,
human growth hormone therapy for pediatric patients with growth hormone
deficiencies, and intravenous immunoglobulin ("IVIG") therapy for
immune-deficient or immunosuppressed patients.
Other Therapies. New infusion delivery devices and medications that
address a broad range of patient conditions, such as multiple sclerosis, cancer
and complications or side effects associated with transplantation, continue to
emerge for use in the home setting. The Company provides a number of other
therapies through its infusion network.
HOME MEDICAL EQUIPMENT/OTHER. Apria Healthcare's primary emphasis in the
home medical equipment line of business is on the provision of patient room
equipment, principally hospital beds and wheelchairs, to its patients receiving
respiratory or infusion therapy. The Company's integrated service approach
allows patients and managed care systems accessing either respiratory or
infusion therapy services to also access needed home medical equipment through a
single source.
As Apria Healthcare's managed care organization customer base has grown,
the Company has recognized the need to expand its ability to provide value-added
services to managed care organizations. Rather than directly provide certain
non-core services itself, Apria aligns itself with other segment leaders (i.e.
medical supply distributors) in formal relationships or ancillary networks. Such
networks must be credentialed and qualified by Apria Healthcare's Clinical
Services department.
ORGANIZATION AND OPERATIONS
ORGANIZATION. Effective January 1998, the Company restructured its field
organization. As a result, the Company's approximately 350 branch locations have
been organized into five geographic divisions, which are further divided into 23
geographic regions. Each region is operated as a separate business unit and
consists of a number of branches that are typically clustered within 100 miles
of the regional office. The regional office provides each of its branches with
key support services such as billing, purchasing and equipment repair. Each
branch delivers home healthcare products and services to patients in their homes
and other care sites through the branch's fleet and qualified personnel. This
structure is designed to create operating efficiencies associated with
centralized services while promoting responsiveness to local market needs.
In conjunction with the geographic reorganization, the Company
restructured its field management into two distinct functional areas: sales and
operations. Previously, each regional manager was responsible for all aspects of
sales and operations, including generating new business, operating branches and
reimbursement. Under the new structure, the sales organization is responsible
for generating new business from both traditional and managed care markets,
while the operations organization is responsible for customer service,
reimbursement and asset management.
CORPORATE COMPLIANCE. As a leader in the home healthcare industry, Apria
Healthcare has made a committment to providing quality home healthcare services
and products while maintaining high standards of ethical and legal conduct. The
Company believes that operating its business with honesty and integrity is not
only proper but makes good business sense. The Company's Corporate Compliance
Program is designed to accomplish these goals
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through employee education, a confidential disclosure program, written policy
guidelines, periodic reviews, compliance audits and other programs.
OPERATING SYSTEMS AND CONTROLS. The Company's business is dependent, to
a substantial degree, upon the quality of its operating and field information
systems for the establishment of accurate and profitable contract terms,
accurate order entry and pricing, billing and collections, and effective
monitoring and supervision. Difficulties encountered in the conversion to a
common system of the previously separate operations of Abbey and Homedco,
following their 1995 merger, and ongoing operational shortcomings have had a
significant negative impact on the Company's results of operations. In April
1997, the Company reorganized its reimbursement and information systems
functions, and Management is currently giving a high priority to the
implementation of standard "best practices" throughout the Company's operations.
The Company has established performance indicators which measure operating
results against expected thresholds, for the purpose of allowing all levels of
management to identify, monitor and adjust areas requiring improvement.
Operating models with strategic targets have been developed to move the Company
toward more effectively managing labor expenses and the customer service,
accounts receivable, clinical, and distribution areas of its business. The
Company's management team is compensated using performance-based incentives
focused on quality revenue growth, gross profit, timely cash collections and
improvement in operating income.
Through experience, the Company has developed the means of maintaining
appropriate amounts of inventory sufficient to meet customer requirements.
During 1997, the Company evaluated the adequacy of its field information
systems' functionality and that of other packaged home healthcare information
systems to meet its changing business and reimbursement needs. Based on the
results of the evaluation, Management decided to replace its existing systems
but found the packaged home healthcare information systems to be insufficient
for the Company's needs. Rather, Management committed to a two-year plan to
implement a large-scale fully integrated enterprise resource planning ("ERP")
system. The new system is expected to better position Apria to meet the
reimbursement complexities of the managed care environment, provide a higher
level of real-time information to Management, bring together all product lines
onto one system, allow access to Internet capabilities and electronic commerce
and ensure year 2000 readiness. Significant development effort will be required
to customize the "ERP" system for the complexities of the Company's billing and
contractual arrangements (see "Risk Factors", "Collection of Accounts
Receivable" and "Information Systems").
ACCOUNTS RECEIVABLE MANAGEMENT. The Company derives substantially all
its revenues from third-party payors, including private insurers, managed care
organizations, Medicare and Medicaid. For 1997, approximately 30% of the
Company's net revenues was derived from Medicare and 9% from Medicaid.
Generally, each third-party payor has specific claims requirements. The Company
has policies and procedures in place to manage the claims submission process,
including verification procedures to facilitate complete and accurate
documentation.
MARKETING
The Company markets its services to managed care organizations,
physicians, hospitals, medical groups, home health agencies and case managers
through its field sales force. The following marketing initiatives address the
requirements of its referring customers:
AUTOMATED CALL ROUTING THROUGH A SINGLE TOLL-FREE NUMBER. This allows
managed care organizations and other customers to reach any of Apria's 350
locations and to access the full range of Apria services through a single
central telephone number (1-800-APRIA-88).
JCAHO ACCREDITATION. The Joint Commission on Accreditation of Healthcare
Organizations ("JCAHO") is a nationally recognized organization which develops
standards for various healthcare industry segments and monitors compliance with
those standards through voluntary surveys of participating providers. As the
home healthcare industry has grown, the need for objective quality measurements
has increased. JCAHO accreditation entails a lengthy review process which is
conducted every three years. Accreditation is increasingly being considered a
prerequisite for entering into contracts with managed care organizations at
every level. Because accreditation is expensive and time consuming, not all
providers choose to undergo the process. Due to its leadership role in
establishing quality standards for home healthcare and its active and early
participation in this process, Apria Healthcare is viewed favorably by referring
healthcare professionals. The Company's branch locations are all accredited by
or in the process of receiving accreditation from JCAHO.
CLINICAL MANAGEMENT SERVICES. As more alternate site healthcare is
managed and directed by various managed care organizations, new methods and
systems are sought to simultaneously control costs and improve outcomes. Apria
Healthcare has developed a series of diagnosis-specific programs designed to
proactively manage patients in conjunction with a managed care partner and the
patient's physician in an alternate site setting. These services include patient
and environmental assessments, screening/diagnostics, patient education,
clinical monitoring, pharmacological
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management, utilization reporting and outcome reporting. Mutually established
goals for inpatient hospital day reductions may be a portion of the basis for
provider compensation.
PHYSICIAN RELATIONS. In 1997, the Company developed a physician
relations group to place phone calls to physician offices in an effort to
increase and enhance awareness of Apria's services and stimulate interest in the
Company. Physician relations representatives work closely with sales
professionals throughout the country to identify, develop and maintain quality
relationships.
SALES
The Company employs approximately 322 sales professionals whose primary
responsibility is to target key customers for all lines of business. Key
customers include but are not limited to hospital-based healthcare
professionals, physicians and their staffs, and managed care organizations.
Sales professionals are afforded the necessary clinical and technical training
to represent the Company's major service offerings of home respiratory therapy,
home infusion therapy and home medical equipment. As larger segments of the
marketplace become involved with managed care, specific portions of the sales
force's working knowledge of pricing, contracting and negotiating and
specialty-care management programs are being enhanced as well.
An integral component of the Company's overall sales strategy is to
increase volume through a variety of contractual relationships with both managed
care organizations and other healthcare providers. Managed care organizations
have grown substantially in terms of both the percentage of the U.S. population
that is covered by such plans and their influence over an increasing portion of
the healthcare economy. Managed care plans are consolidating and increasing
their influence over the delivery and cost of healthcare services. The Company
believes this trend will continue. As a result, the Company focuses a
significant portion of its marketing efforts and specialized sales resources on
managed care organizations to develop mutually beneficial risk sharing programs,
including capitation arrangements. Managed care organizations already represent
a significant portion of the Company's business in several of its primary
metropolitan markets. No single account, however, represented more than 5% of
the Company's net revenues for 1997. Among its more significant managed care
agreements, the Company has contracts with United HealthCare Corporation, Kaiser
Permanente, Aetna/U.S. Healthcare Health Plans, Health Insurance Plan of New
York, PacifiCare Health Systems, Inc., MedPartners and Humana Health Plans. The
Company also offers discount agreements and various fee-for-service arrangements
to hospitals or hospital systems whose patients have home healthcare needs.
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 competitive factors most important in Apria Healthcare's lines of
business are its wide geographic coverage, ability to develop and maintain
contractual relationships with managed care organizations, price of services,
access to capital, ease of doing business, range of homecare services, quality
of care and service and reputation with referral sources, including local
physicians and hospital-based professionals. It is increasingly important to be
able to integrate a broad range of homecare services through a single source.
The Company believes that it competes effectively in each of its business lines
with respect to all of the above factors and that it has an established record
as a quality provider of home respiratory therapy and home infusion therapy as
reflected by the JCAHO accreditation of its branches.
Other types of healthcare providers, including hospitals, home health
agencies and health maintenance organizations, have entered and may continue to
enter, Apria Healthcare's various lines of business. Depending on their
individual situation it is possible that the competitors of the Company may have
or may obtain significantly greater financial and marketing resources than the
Company.
GOVERNMENT REGULATION
GENERAL. 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
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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
interstate motor carrier transportation. The Company's operations also are
subject to state laws governing pharmacies, nursing services and certain types
of home health agency activities. Certain of the Company's employees are subject
to state laws and regulations governing the ethics and professional practice of
respiratory therapy, pharmacy and nursing. The failure to obtain, renew or
maintain any of the required regulatory approvals or licenses could adversely
affect expansion of the Company's business and could prevent the location
involved from offering certain products and services to patients.
THE ANTI-KICKBACK STATUTE. As a provider of services under the Medicare
and Medicaid programs, the Company is subject to the Medicare and Medicaid fraud
and abuse laws (sometimes referred to as the "anti-kickback statute"). At the
federal level, the anti-kickback statute prohibits any bribe, kickback or rebate
in return for the referral of patients covered by federal healthcare programs.
Federal healthcare programs have been defined to include plans and programs that
provide health benefits funded by the United States Government including
Medicare, Medicaid, and CHAMPUS, among others. Violations of the anti-kickback
statute may result in civil and criminal penalties and exclusion from
participation in the federal healthcare programs. In addition, an increasing
number of states in which the Company operates have laws that prohibit certain
direct or indirect payments (similar to the anti-kickback statute) or
fee-splitting arrangements between healthcare providers, if such arrangements
are designed to induce or encourage the referral of patients to a particular
provider. Possible sanctions for violation of these restrictions include
exclusion from state funded healthcare programs, loss of licensure and civil and
criminal penalties. Such statutes vary from state to state, are often vague and
have seldom been interpreted by the courts or regulatory agencies. A failure to
comply with the provisions of the federal or state anti-kickback statutes could
have a material adverse effect on the Company.
PHYSICIAN SELF-REFERRALS. Subject to certain exceptions, the Omnibus
Budget Reconciliation Act of 1993 (commonly known as "Stark II") prohibits a
physician or a member of such physician's immediate family from referring
Medicare and Medicaid patients for "designated health services" to an entity
with which the physician has a financial relationship. The term "designated
health services" includes several services commonly performed or supplied by the
Company, including durable medical equipment, home health services and
parenteral and enteral nutrition. In addition, "financial relationship" is
broadly defined to include any ownership or investment interest or compensation
arrangement pursuant to which a physician receives remuneration from the
provider at issue. Violations of Stark II may result in loss of Medicare and
Medicaid reimbursement, civil penalties and exclusion from participation in the
Medicare and Medicaid programs. Stark II is broadly written and at this point,
only proposed regulations have been issued to clarify its meaning and
application. Regulations for a predecessor law, Stark I, were published in
August 1995 and remain in effect, but provide little guidance on the application
of Stark II to the Company's business. While the proposed Stark II regulations
do not have the force and effect of law, they provide some guidance as to what
may be included in the final version. Issued on January 9, 1998, the proposed
regulations purport to define previously undefined key terms, clarify prior
definitions and create new exceptions for certain "fair market value"
transactions, de minimis compensation arrangements and discounts, among others.
It is unclear when these regulations will be finalized and until such time, they
cannot be relied upon in structuring transactions. In addition, a number of the
states in which the Company operates have similar prohibitions on physician
self-referrals. Finally, recent enforcement activity and resulting case law
developments have increased the legal risks of physician compensation
arrangements that do not satisfy the terms of an exception to Stark II,
especially in the area of joint venture arrangements with physicians. A failure
to comply with the provisions of Stark II (including the Stark I regulations),
or the state law equivalents, could have a material adverse effect on the
Company.
OTHER FRAUD AND ABUSE LAWS. The False Claims Act imposes civil liability
on individuals or entities that submit false or fraudulent claims for payment to
the government. Violations of the False Claims Act may result in civil monetary
penalties and exclusion from the Medicare and Medicaid programs. The Health
Insurance Portability and Accountability Act of 1996 created two new federal
crimes: "Health Care Fraud" and "False Statements Relating to Health Care
Matters." The Health Care Fraud statute prohibits knowingly and willfully
executing a scheme or artifice to defraud any healthcare benefit program. A
violation of this statute is a felony and may result in fines and/or
imprisonment. The False Statements statute prohibits knowingly and willfully
falsifying, concealing or covering up a material fact by any trick, scheme or
device or making any materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare benefits, items or
services. A violation of this statute is a felony and may result in fines and/or
imprisonment. Recently, the federal government has made a policy decision to
significantly increase the financial resources allocated to enforcing the
general fraud and abuse laws. In addition, private insurers and various state
enforcement agencies have increased their level of scrutiny of healthcare claims
in an effort to identify and prosecute fraudulent and abusive practices in the
healthcare area.
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A failure to comply with any of the fraud and abuse laws could have a
material adverse impact on the Company.
INTERNAL CONTROLS. Apria Healthcare maintains several programs designed
to minimize the likelihood that the Company would engage in conduct or enter
into contracts violative of the fraud and abuse laws. Contracts of the types
subject to these laws are reviewed and approved at the corporate level. The
Company maintains an extensive contract compliance review program established
and monitored by its Legal Department. The Company also maintains various
educational programs designed to keep its managers updated and informed on
developments with respect to the fraud and abuse laws and to remind all
employees of the Company's policy of strict compliance in this area. While the
Company believes its discount agreements, billing contracts, and various
fee-for-service arrangements with other healthcare providers comply with
applicable laws and regulations, there can be no assurance that further judicial
interpretations of existing laws or legislative enactment of new laws will not
have a material adverse effect on the Company's business (see "Risk Factors").
HEALTHCARE REFORM LEGISLATION. Economic, political and regulatory
influences are subjecting the healthcare industry in the United States to
fundamental change. Healthcare reform proposals have been formulated by members
of Congress and by the current administration. In addition, some of the states
in which the Company operates periodically consider various healthcare reform
proposals. The Company anticipates that Congress and state legislatures will
continue to review and assess alternative healthcare delivery systems and
payment methodologies and public debate of these issues will continue in the
future. Due to uncertainties regarding the ultimate features of reform
initiatives and their enactment and implementation, the Company cannot predict
which, if any, of such reform proposals will be adopted, when they may be
adopted or that any such reforms will not have a material adverse effect on the
Company's business and results of operations.
Healthcare is an area of extensive and dynamic regulatory change.
Changes in the law or new interpretations of existing laws can have a dramatic
effect on permissible activities, the relative costs associated with doing
business and the amount of reimbursement by government and other third-party
payors.
The Company does not presently anticipate major legislative changes to
the Medicare program during 1998, particularly to reimbursement for home
respiratory equipment and services. However, recommendations for changes may
result from an ongoing study of patient access by the General Accounting Office
("GAO") and to the potential findings of the National Bipartisan Commission of
the Future of Medicare.
The Balanced Budget Act of 1997 contained a number of significant
provisions affecting Medicare reimbursement rates for services and equipment
provided by the Company. A 25% statutory reduction in the reimbursement for home
oxygen was effective January 1, 1998 with an additional 5% reduction scheduled
to take effect January 1, 1999. The GAO was directed by the Balanced Budget Act
of 1997 to report in 18 months on the effect of the reductions in oxygen
reimbursement on accessibility by patients to home oxygen services.
The Balanced Budget Act of 1997 contained additional items that affect
reimbursement for home medical equipment and services under Medicare Part B,
including a provision to eliminate Consumer Price Index adjustments to home
medical equipment reimbursement rates for the years 1998 through 2002.
Other provisions that are likely to affect levels of reimbursement to
the Company for home medical equipment under the Medicare program include new
authority of the Secretary of Health and Human Services to reduce the
reimbursement for home medical equipment by 15% each year under an abbreviated
inherent reasonableness rulemaking procedure; authority for the Secretary to
conduct a demonstration project to determine the feasibility of using
competitive bidding for selected items of home medical equipment; and a
reduction of the Medicare reimbursement for drugs and biologicals from the
current level of the lower of the estimated acquisition cost or the national
average wholesale price ("AWP"), to 95% of the AWP with a dispensing fee paid to
Apria's pharmacy.
Finally, the Balanced Budget Act of 1997 proposed that suppliers of home
medical equipment be required to post surety bonds equal to 15% of their
previous year's Medicare revenues (in a minimum amount of $50,000 and up to a
maximum of $3 million) as a condition of participation in the Medicare program.
The bonds would be used to secure suppliers' performance and compliance with
Medicare program rules and requirements. The deadline for securing such bonds
has been extended indefinitely, as the Health Care Financing Administration
("HCFA") is reviewing the bonding requirements.
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Laws and regulations are often adopted to regulate new and existing
products and services. There can be no assurance that either the states or the
federal government will not impose additional regulations upon the Company's
activities that might adversely affect the Company's business.
EMPLOYEES
As of March 1, 1998, the Company had 9,555 employees, of which 7,903
were full-time and 1,652 were part-time. The Company's employees are not
currently represented by a labor union or other labor organization, except for
approximately 20 employees in the State of New York. The Company believes that
its employee relations are good.
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, titles with the Company and present
and past positions of the persons serving as executive officers of the Company
as of April 15, 1998.
<TABLE>
<CAPTION>
NAME AND AGE OFFICE AND EXPERIENCE
------------ ---------------------
<S> <C>
Lawrence M. Higby, 52............. President and Chief Operating Officer. Mr. Higby joined
Apria in November 1997. Prior to joining Apria, Mr.
Higby served as President and Chief Operating Officer of
Unocal's 76 Products Company and Group Vice President of
Unocal Corporation from 1994 to 1997. From 1986 to
1994, Mr. Higby held various positions with The Times
Mirror Company, including serving as Executive Vice
President, Marketing of the Los Angeles Times and
Chairman of the Orange County Edition (1992-1994).
Thomas M. Robbins, 48 ............ Executive Vice President, Field Operations. Mr. Robbins
was promoted to Executive Vice President, Field
Operations in January 1998. He served as Senior Vice
President, Eastern Zone from October 1996 to January
1998. From June 1995 to October 1996, he served as
Senior Vice President, Southern Zone. He served as
Senior Vice President, Southeast Region since joining
Homedco in August 1992. Prior to joining Homedco, Mr.
Robbins was Vice President, Northeast Region, for
Glasrock Home Healthcare, Inc., a firm in substantially
the same business as the Company, from 1990 until August
1992 when it was acquired by the Company.
Merl A. Wallace, 48 .............. Executive Vice President, Corporate Operations. Mr.
Wallace was promoted to Executive Vice President,
Corporate Operations in March 1997. Mr. Wallace served
as Senior Vice President, Western Zone from June 1995 to
March 1997. Mr. Wallace served as Vice President,
Operations of Homedco from April 1994 to June 1995.
From November 1990 to April 1994, he served as General
Manager of the Southwest District of Homedco.
Dennis E. Walsh, 48............... Executive Vice President, Sales. Mr. Walsh was promoted
to Executive Vice President, Sales in January 1998. Mr.
Walsh served as Senior Vice President, Western Zone from
March 1997 to January 1998. From June 1995 to March
1997, he served as Senior Vice President, Sales and
Marketing. He served as Vice President, Sales of
Homedco from November 1987 to June 1995.
Lisa M. Getson, 36................ Senior Vice President, Marketing. Ms. Getson was
promoted to Senior Vice President, Marketing in August
1997. Ms. Getson served as Vice
</TABLE>
8
<PAGE> 10
<TABLE>
<S> <C>
President, Marketing from November 1995 to August 1997.
She served as Director of Marketing, Infusion from June
1995 to November 1995. From May 1994 to June 1995, she served
as Director of Business Development of Abbey Home
Healthcare. From 1989 to 1994, Ms. Getson held various
positions with Critical Care America, including Director
of Marketing and Business Development from January 1993
to May 1994.
Robert S. Holcombe, 55............ Senior Vice President, General Counsel and Secretary.
Mr. Holcombe was promoted to Senior Vice President,
General Counsel and Secretary in August 1997. He served
as Vice President, General Counsel and Secretary from
May 1996 to August 1997. Prior to joining Apria, Mr.
Holcombe served as Senior Vice President and General
Counsel for The Cooper Companies, Inc., a diversified
specialty healthcare company, from December 1989 to
April 1996.
Susan K. Skara, 48................ Senior Vice President, Human Resources. Ms. Skara was
promoted to Senior Vice President, Human Resources in
November 1996. She served as Vice President, Human
Resources of Homedco and, subsequently, the Company,
from November 1987 until November 1996.
Lawrence H. Smallen, 49 .......... Chief Financial Officer, Senior Vice President, Finance
and Treasurer. In January 1998, Mr. Smallen resigned
from the above listed positions, effective upon the
selection of his successor which has not yet occurred.
Mr. Smallen was promoted to Senior Vice President,
Finance in March 1996. He held the titles of Vice
President, Finance and Treasurer with Homedco and,
subsequently, the Company, since November 1987.
Mr. Smallen served as Secretary of the Company from June
1995 until May 1996.
</TABLE>
9
<PAGE> 11
<TABLE>
<S> <C>
James E. Baker, 46 ............... Vice President, Controller. Mr. Baker has served as
Vice President, Controller of Homedco and, subsequently,
the Company, since August 1991. He served as Corporate
Controller of Homedco from November 1987 to August
1991.
</TABLE>
In January 1998, the Company announced the resignation of its Chairman
and Chief Executive Officer, Jeremy M. Jones. Lawrence M. Higby is functioning
as Chief Executive Officer until such time as a replacement is named. In
January 1998, the Company announced the resignation of Jerome J. Lyden, Senior
Vice President, Sales.
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 identified below 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.
MANAGEMENT STABILITY AND RECRUITING.
Uncertainty about the Company's future and significant changes in senior
management have limited the Company's ability to attract and retain personnel to
critical positions, including revenue-producing positions such as sales
representatives. The Company's ability to increase revenues and profitability is
dependent to a significant extent upon its ability to recruit and maintain
qualified personnel. Continued uncertainty concerning management and control of
the Company would likely have a material adverse effect on its business, results
of operations or financial condition.
REGULATORY ENVIRONMENT.
REIMBURSEMENT. A substantial portion of the Company's revenue is
attributable to payments received from third-party payors, including the
Medicare and Medicaid programs and private insurers. For 1997, approximately 30%
of the Company's net revenue was derived from Medicare and 9% from Medicaid. The
Medicare reimbursement rate for home oxygen was recently reduced by 25%,
effective January 1, 1998, pursuant to the provisions of the Balanced Budget Act
of 1997. Medicare-reimbursed home oxygen services represented approximately
19.5% of the Company's net revenues in 1997. The estimated decrease in 1998
revenues and operating income resulting from this reimbursement reduction is
$55.0 million to $60.0 million. A further reimbursement reduction of 5% will be
effective on January 1, 1999. The levels of revenues and profitability of the
Company, similar to those of other healthcare companies, have been and will
continue to be subject to the effect of changes in coverage or payment rates by
third-party payors. Such changes could have a material adverse effect on the
business, results of operations or financial condition of the Company.
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
significant 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 on
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 (see "Government Regulation").
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
10
<PAGE> 12
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. Violation of these provisions may result in civil and
criminal penalties and exclusion from participation in Medicare and state health
programs such as Medicaid. Congress 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 Stark II
in 1993, 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's business, results of operations or financial condition
(see "Government Regulation").
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 (see "Government
Regulation").
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
11
<PAGE> 13
adopted to regulate new products, services and industries. There can be no
assurance 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 (see
"Government Regulation").
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 loss of $272.6 million for the year ended December 31, 1997. No
assurance can be given that the Company will achieve profitable operations in
the near term.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE.
Accounts receivable, before allowance for doubtful accounts, decreased
by $94.2 million in 1997. The decrease resulted from the combined impacts of (1)
higher collection rates as evidenced by the increase in collections as a
percentage of revenue from 93% in 1996 to 99% in 1997, (2) shorter collection
periods as reflected by a decrease in the Company's average collection period
from approximately 130 days in 1996 to approximately 100 days in 1997 and (3) an
increase in the amount of bad debt write-offs taken, net of recoveries, from
$80.4 million in 1996 to $139.0 million in 1997. Accounts aged in excess of 180
days at December 31, 1997 decreased by $33.6 million as compared to December 31,
1996 but represented a comparable percentage of total accounts receivable. The
high level of bad-debt writeoffs was caused by the residual effects of the
disruptions and delays in billing and collection activity associated with the
Company's 1995 and 1996 conversions of its field locations to standardized
information systems and the continuing impact of 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. In April 1997, the Company
reorganized its reimbursement and information systems functions. These changes
were intended to heighten the Company's focus on accounts receivable collections
and information systems management. No assurances can be given, however, that
additional charges for uncollectible accounts receivable will not be required as
a result of continuing difficulties associated with the conversion activities
and meeting payor documentation requirements and claim submission deadlines.
INFORMATION SYSTEMS.
During 1997, the Company evaluated the capacity of its field information
systems and that of other packaged home healthcare information systems to meet
its changing business and reimbursement needs. Based on the results of this
evaluation, Management determined that neither the Company's existing systems
nor the available packaged home healthcare information systems were adequate for
the Company's requirements. As a result of such findings, Management has
implemented a two-year plan to develop a proprietary, large-scale, fully
integrated ERP system that will be customized to handle the complexities of the
Company's billing and contractual arrangements. The ability of the Company to
develop and customize the ERP system for its use, to train personnel on the use
of the system, to implement the ERP system using existing computer equipment or
to identify suitable replacement computer equipment, to develop technical
support capabilities for the ERP system users and to transfer existing field
information databases and nonelectronic records to the ERP system will be
critical to the success of the transition from the current information systems
to the ERP system. There can be no assurance that such a transition will be
accomplished without disruption to service delivery and billing functions, and
any such disruption, if significant or lengthy, may have a material adverse
effect on the Company's business, results of operations or financial condition.
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.
12
<PAGE> 14
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
currently 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 business, results of operations
or financial condition.
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 its contractual relationships, or
maintain its reputation or its current offerings of homecare services, such
developments could have a material adverse affect on the Company's business,
results of operations or financial condition.
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 both the
percentage of the population that is covered by such organizations and 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 1997, 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
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<PAGE> 15
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, results of operations or financial condition.
INSURANCE.
In recent years, physicians, hospitals and other participants in the
healthcare market have become subject to an increasing number of lawsuits
alleging professional negligence, product liability or related claims, many of
which involve large claims and significant defense costs. The Company is from
time to time subject to such suits due to the nature of its business. The
Company currently maintains liability insurance intended to cover such claims.
There can be no assurance that the coverage limits of the Company's insurance
policies will be adequate. While the Company has been able to obtain liability
insurance in the past, such insurance varies in cost, is difficult to obtain and
may not be available in the future on acceptable terms or at all. A successful
claim against the Company in excess of the Company's insurance coverage could
have a material adverse effect on the business, results of operations or
financial condition of the Company. Claims against the Company, regardless of
their merit or eventual outcome, also may have a material adverse effect upon
the Company's business, results of operations or financial condition.
ITEM 2. PROPERTIES
The Company's headquarters are located in Costa Mesa, California and
consist of approximately 168,000 square feet of office space. The lease expires
in 2001. The Company has approximately 350 branch facilities serving patients in
all 50 states. These branch facilities are typically located in light industrial
areas and average approximately 10,000 square feet. Each facility is a
combination warehouse and office, with approximately 50% of the square footage
consisting of warehouse space. Lease terms on branch facilities are generally
five years or less.
Except for the facilities in Sherman, Texas and Beckley, West Virginia,
which the Company owns, the Company leases all of its facilities.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain of its present and former officers and/or
directors are defendants in three lawsuits which allege, among other things,
that the defendants made false and/or misleading public statements regarding the
Company and its financial condition in violation of federal securities laws.
Lasker v. Apria Healthcare, Inc., et al, was filed on or about March 5, 1998 in
the U.S. District Court for the Central District of California, Southern
Division (Case No. SACV 98-217 GLT). Miladin v. Apria Healthcare Group Inc., et
al., was filed in the same court (Case No. SACV 98-318 AHS) on or about April 2,
1998. Schiller v. Apria Healthcare Group, Inc. et al., was filed in the same
court (Case No. SACV 98-349 GLT) on or about April 9, 1998. No class has been
certified at this time. The complaints seek compensatory and punitive damages as
well as other relief.
The Company believes that it has meritorious defenses to the plaintiffs'
claims, and it intends to vigorously defend itself against the actions. In the
opinion of Management, the ultimate disposition of these cases will not have a
material adverse effect on the Company's financial condition or results of
operations.
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<PAGE> 16
The Company is also engaged in the defense of certain claims and lawsuits
arising out of the ordinary course and conduct of its business, the outcomes of
which are not determinable at this time. 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 condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's common stock is traded on the New York Stock Exchange
(NYSE) under the symbol AHG. Prior to May 16, 1996, Apria Common Stock was
listed and traded on the Nasdaq National Market tier of the Nasdaq Stock Market
("Nasdaq") under the symbol APRA. The table below sets forth, for the calendar
periods indicated, the high and low sales prices per share of Apria Common Stock
as reported by the NYSE and the high and low bid information per share of Apria
Common Stock as reported by Nasdaq.
<TABLE>
<CAPTION>
APRIA
-------------------
High Low
------- -------
<S> <C> <C>
Year ended December 31, 1996
First Quarter $32.5000 $23.0000
Second Quarter 35.5000 29.1250
Third Quarter 32.7500 17.1250
Fourth Quarter 22.1250 16.7500
Year ended December 31, 1997 $20.6250 $16.5000
First Quarter 19.3750 15.0000
Second Quarter 18.5000 12.7500
Third Quarter 17.0000 13.0625
Fourth Quarter
</TABLE>
As of April 8, 1998 there were 854 holders of record of Apria Common
Stock.
The Company has not paid any dividends since its inception and does not
intend to pay any dividends on its Common Stock in the foreseeable future. In
addition, the Company has a bank credit agreement which prohibits the payment of
dividends.
15
<PAGE> 17
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data of Apria
Healthcare, giving effect, in periods prior to June 28, 1995, to the merger
between Homedco and Abbey using the pooling-of-interests method of accounting,
for the five years ended December 31, 1997. The data set forth below have been
derived from the audited consolidated financial statements of the Company and
are qualified by reference to, and should be read in conjunction with, the
Consolidated Financial Statements and related notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this report. As discussed in the Notes to the Consolidated Financial
Statements, certain adjustments have been made to conform the two companies'
accounting practices.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
1997(1) 1996(2) 1995 (2,3,4) 1994(2,4,5) 1993 (2,4,6)
------- ------- ------------ ----------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues ...................................... $ 1,180,694 $ 1,181,143 $ 1,133,600 $ 962,812 $ 748,901
Gross profit ...................................... 729,512 780,468 772,601 675,122 522,777
(Loss) income from continuing operations
before extraordinary items ..................... (272,608) 33,300 (71,478) 35,616 35,845
Net (loss) income ................................. (272,608) 33,300 (74,476) 39,031 37,311
Per share amounts:
(Loss) income from continuing operations
before extraordinary items ................. $ (5.30) $ 0.66 $ (1.52) $ 0.84 $ 0.99
Net (loss) income per common share ............ $ (5.30) $ 0.66 $ (1.58) $ 0.92 $ 1.03
Per share amounts - assuming dilution:
(Loss) income from continuing operations
before extraordinary items ................. $ (5.30) $ 0.64 $ (1.52) $ 0.78 $ 0.90
Net (loss) income per common share ............ $ (5.30) $ 0.64 $ (1.58) $ 0.85 $ 0.93
BALANCE SHEET DATA:
Working capital ................................... $ 169,090 $ 311,991 $ 198,630 $ 157,608 $ 187,370
Total assets ...................................... 757,170 1,149,110 979,985 856,167 710,122
Long-term obligations, including current maturities 548,905 634,864 500,307 438,304 391,822
Stockholders' equity .............................. 74,467 342,935 284,238 261,910 176,632
</TABLE>
(1) As described in Item 7 - Management's Discussion and Analysis of
Financial Condition and Results of Operations, and in Notes 3, 4, 8 and
13 to the Consolidated Financial Statements, the Operations data for
1997 includes significant adjustments and charges to write down the
carrying values of goodwill and information systems hardware and
internally developed software - $133,542,000 and $26,781,000,
respectively, increase the valuation allowance on deferred tax assets,
$29,963,000, and provide for estimated losses related to patient service
assets and inventory and related to accounts receivable - $33,100,000
and $101,423,000, respectively.
(2) The per share amounts prior to 1997 have been restated as required to
comply with Statement of Financial Accounting Standards No. 128,
Earnings Per Share. For further discussion, see Note 9 to the
Consolidated Financial Statements.
(3) In 1995, the Company incurred charges related to merger, restructuring
and integration activities as discussed in Note 7 to the Consolidated
Financial Statements.
(4) The Statements of Operations and Balance Sheet Data reflect the June 28,
1995 Abbey/Homedco merger using the pooling-of-interests method of
accounting. Accordingly, the financial data for all periods prior to
June 28, 1995 have been restated as though the two companies had been
combined.
(5) In 1994, the Company disposed of its 51% interest in Abbey
Pharmaceutical Services, Inc.
(6) The Statements of Operations and Balance Sheet Data reflect the
acquisition on November 10, 1993 of the outstanding stock of Total
Pharmaceutical Care, Inc.
The Company did not pay any cash dividends on its Common Stock during
any of the periods set forth in the table above.
16
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In June 1997, the Company announced that it retained an investment
banking firm as its financial advisor to explore strategic alternatives to
enhance shareholder value, including the possible sale, merger, or
recapitalization of the Company. In February 1998, the Company accepted the
proposal of a private investment firm to enter into a recapitalization
transaction. In April 1998, the Company announced that the transaction would not
be completed (see Liquidity and Capital Resources). The entire process has given
rise to uncertainty within the Company's workforce, the impact
of which is difficult to determine, but which undoubtedly has shifted focus away
from the Company's operational priorities and may have impacted its financial
results.
RESULTS OF OPERATIONS
NET REVENUES: The Company derives substantially all of its revenue from
the home healthcare segment of the healthcare industry in principally three
service lines: home respiratory therapy (including home-delivered respiratory
medications), home infusion therapy and home medical equipment. In all three
lines, the Company provides patients with a variety of clinical services,
related products and supplies, most of which are prescribed by a physician as
part of a care plan. Substantially all of the Company's revenues are reimbursed
by third party payors; including Medicare, Medicaid, managed care organizations
and private insurers, representing approximately 30%, 9%, 35% and 26%,
respectively.
In 1995 and 1996, Management considered the Company's comprehensive,
integrated service offerings and broad geographic coverage a distinct
competitive advantage for obtaining managed care business. Accordingly, efforts
were focused on increasing managed care market share by offering a broad range
of services through the Company's extensive branch network. In June of 1997, the
Company determined that this strategy had negatively impacted its financial
performance, particularly for infusion therapy, because of significant managed
care price compression, difficulties in billing and collecting from managed care
organizations and losses of traditional referral business due to the Company's
focus on managed care business opportunities. In response to these conditions,
Management reevaluated its strategies and began efforts to exit certain managed
care contracts not meeting minimum profitability thresholds, as well as certain
lower-margin service lines and began to reemphasize traditional referral-based
business on a service line basis.
Traditional referral sources include physicians, hospitals, medical
groups and home health agencies. To maximize its ability to obtain a larger
share of the traditional market, the Company is currently recruiting
approximately 30 account executives to increase its sales force. Also in 1997,
the Company organized a physician relations group to place outbound telephone
calls to physician offices in an effort to increase and enhance awareness of and
stimulate interest in the Company's services.
Service lines targeted for exit in 1997 included medical supplies,
women's health and nursing management which represented annual revenues of
approximately $55.8 million. Some portion of the medical supply and nursing
business is expected to continue due to customer requirements. A consequence of
the initiatives to exit certain service lines and to exit certain low-margin
managed care contracts was the unintended loss of related business. One
contract, considered to be significant (representing 1% of net revenues), was
lost. Through the end of 1997, the Company had exited contracted business
representing approximately $25.0 million in annual revenues.
The following table sets forth a summary of net revenues by service
line:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1996 1995
------ ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Respiratory therapy ........ $ 606 $ 594 $ 600
Infusion therapy ........... 281 293 267
Home medical equipment/other 294 294 267
------ ------ ------
Total net revenues ... $1,181 $1,181 $1,134
====== ====== ======
</TABLE>
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<PAGE> 19
Respiratory Therapy: Approximately 68% of the Company's respiratory
therapy revenues are derived from the provision of oxygen systems, nebulizers
(devices to aerosolize medication) and home ventilators. The remaining
respiratory revenues are generated from the provision of apnea monitors used to
monitor the vital signs of newborns, continuous positive airway pressure
("CPAP/BiPAP") devices used to control adult sleep apnea, noninvasive positive
pressure ventilation ("NPPV"), and other respiratory therapy products.
Respiratory therapy revenues are obtained predominantly from traditional
referral sources and reimbursed primarily by payors other than managed care.
The increase in respiratory therapy revenues in 1997 over 1996 is due to
the Company's concerted effort in 1997 to refocus on respiratory therapy and
to increase the number of territories covering this higher-margin traditional
business. The decrease in respiratory revenues in 1996 over 1995 was due
primarily to the Company's reduced emphasis on traditional referral business at
that time and to business disruptions caused by merger-related facility
consolidations and system conversions.
In August 1997, the Balanced Budget Act of 1997 was adopted which
includes several provisions affecting Medicare reimbursement for home medical
equipment and services. Effective January 1, 1998, reimbursement for home oxygen
services has been reduced by 25% and will be reduced an additional 5% in 1999.
Also effective January 1, 1998, was a freeze on Consumer Price Index-based
increases until 2002. Medicare-reimbursed home oxygen services represented
approximately 19.5% of the Company's net revenues in 1997. The Company estimates
the impact of the reduction on 1998 revenues to be $55 million to $60 million.
Infusion Therapy: Home infusion therapy involves the administration of
24-hour access to intravenous or enteral nutrition, anti-infectives,
chemotherapy and other intravenous and injectable medications. Depending on the
therapy, a broad range of venous access devices and pump technology may be used
to facilitate homecare and patient independence. A significant portion of
infusion therapy revenues is obtained and reimbursed under contracts with
managed care organizations.
The reduction in infusion therapy revenues in 1997 as compared to 1996
is due to formidable price competition at the local and national levels, the
termination or loss of certain contracts and the Company's focus on the
respiratory business. To address the downward trend, the Company, among other
steps, is (1) recruiting sales representatives specializing in infusion therapy,
(2) adding an infusion therapy focus to its physician relations program, (3)
adopting related market research initiatives and (4) redesigning marketing
literature to provide a more clinical focus.
In an effort to improve the operating efficiencies of the infusion
therapy service line, the Company began a process in late 1997 of consolidating
certain of its pharmacy locations. Currently, the Company operates 44 pharmacy
locations, down from 60 locations a year ago. The consolidation of locations may
result in lower infusion revenues in future periods.
The increase in infusion therapy revenues in 1996 over 1995 was due
primarily to the Company's focus on obtaining managed care business during 1996
and 1995.
Home Medical Equipment/Other: The Company's primary emphasis in the home
medical equipment service line of business is on the provision of patient room
equipment, principally hospital beds and wheelchairs, to its patients receiving
respiratory or infusion therapy. A significant portion of the Company's home
medical equipment revenues are derived from and paid under managed care
contracts.
Home medical equipment/other revenues remained flat from 1997 to 1996.
This represents growth in the early part of 1997 due to the Company's emphasis
on obtaining managed care business as offset by the loss of medical supply and
nursing revenues in the latter part of 1997. The increase in home medical
equipment revenues in 1996 over 1995 was due primarily to the managed care focus
in 1996 and 1995.
The freeze on Consumer Price Index-based Medicare reimbursement
increases discussed above is applicable to certain patient service equipment
items within the Company's home medical equipment line.
Revenue Adjustments: Due to the complexity of many third-party billing
arrangements and uncertainty of reimbursement amounts for certain services
and/or from certain payors, adjustments to billed amounts are fairly common and
are typically identified and recorded at the point of cash application or upon
account review. Such 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
18
<PAGE> 20
delivery to qualify a patient for reimbursement due to lack of written
authorization or a missed filing or appeal deadline. The increase in the
Company's average collection period from approximately 110 days in 1995 to
approximately 130 days in 1996 and early 1997 increased the level of
unidentified revenue adjustments accumulating in accounts receivable. In
addition, the significant number of information system conversions performed in
the second and third quarters of 1996 and the high rate of turnover among
billing and collection personnel in 1996 and 1997 impeded normal processing and
account reviews and resulted in an increased rate of billing errors in the
second half of 1996 and first half of 1997. A number of steps were taken in 1996
and 1997 to mitigate the impact of conversion disruptions and employee turnover
(see Liquidity and Capital Resources). In addition, in connection with the
Company's 1996 year-end audit, Management refined its procedures for estimating
the allowance amount needed to reduce gross accounts receivable to the estimated
net collectible amount. Specifically, Management began to estimate and provide
for unidentified revenue adjustments. As a result, in 1996 and in 1997,
Management estimated and recorded adjustments to reduce net revenues and
accounts receivable by $32.3 million and $40.0 million, respectively.
GROSS PROFIT: Gross margins were 61.8% in 1997, 66.1% in 1996 and 68.2%
in 1995. Gross profit decreased $50.9 million, an amount equal to 4.3% of net
revenues, in 1997 as compared to 1996. Significant components of the decrease
include an increase of $24.8 million in charges for excess quantities,
obsolescence and shrinkage of patient service equipment and inventory due, in
part, to the Company's decision to exit certain lines of business, and an
increase in patient service equipment depreciation of $17.3 million over 1996
due to higher levels of asset purchases in 1996 and 1995. Nursing costs
increased by $6.2 million in 1997 versus 1996, which represents a much higher
rate of increase than in the related revenues.
Also contributing to the decline in gross margins was the focus the
Company placed on increasing managed care market share in 1995, 1996 and the
early part of 1997. To address the downward pressure of managed care pricing on
gross margins, the Company adopted a number of initiatives, including the
decisions to exit certain contracts not meeting profitability standards and to
exit the lower-margin medical supply and home health nursing lines (see Net
Revenues). Other initiatives the Company adopted to improve its gross margins
include (1) phasing out subrented patient service equipment and (2) placing
sales force incentives on certain higher-margin products and services. Further,
late in 1996, the Company established automated purchasing budgets to more
effectively control the purchase and use of patient service equipment which
contributed to a $54.9 million reduction in net patient service equipment
purchases in 1997, as compared to 1996.
Gross profit increased $7.9 million in 1996 as compared to 1995 but
decreased as a percentage of net revenues by 2.1%. Approximately half of the
margin decrease was due to higher product and supply costs resulting from higher
volumes of lower-margin medical supply, infusion therapy and other services.
PROVISION FOR DOUBTFUL ACCOUNTS: The provision for doubtful accounts as
a percentage of net revenues was 10.3%, 5.7% and 8.9% in 1997, 1996 and 1995,
respectively. The significant increase in the bad debt provision rate for 1997
as compared to 1996 was due primarily to the significant increase in bad debt
write-offs experienced during the year.
The 1997 provision for doubtful accounts included adjustments of $55.0
million and $6.4 million recorded in the second and fourth quarters,
respectively, to increase the allowance for doubtful accounts. The second
quarter adjustment resulted from the lower than expected improvement in the
aging of accounts receivable and collection timing and rates. Management had
expected the impact of the 1996 field information system conversions and high
turnover among billing and collection personnel to have been substantially
reversed by the middle of 1997. However, the dollar amount and percentage of
accounts aged over 180 days at May 31, 1997 remained comparable to the December
31, 1996 amount and percentage and the average collection period had decreased
by only four days. As a result, Management increased its allowance estimate for
accounts aged over 180 days to provide for write-offs of older accounts expected
to be taken in the ensuing months. The adjustment also provided for an increased
allowance estimate for accounts aged less than 180 days, necessitated by billing
and collection difficulties that continued into early 1997 (see Liquidity and
Capital Resources). The fourth quarter adjustment resulted primarily from
refinements to the Company's allowance estimation procedures made as a result of
Management's year-end analysis of accounts receivable. Specifically, based on
tests of subsequent realization and review of patient billing files at selected
billing locations, increases were made to the percentages applied to the
Company's accounts receivable aging to estimate allowance amounts. In addition,
due to an increasing tendency for certain managed care payors to accumulate
significant amounts of patient balances, a specific review and allowance
estimation was performed for payors with large aggregate patient balances.
19
<PAGE> 21
The 1995 provision for doubtful accounts included $26.3 million for an
impairment in Abbey Healthcare Group Incorporated's ("Abbey") 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 $26.3 million provision for Abbey's infusion therapy accounts
resulted primarily from the deterioration in the aging of infusion accounts
experienced in connection with Abbey's efforts to integrate the operations of
Total Pharmaceutical Care ("TPC"), acquired in November 1993, and Protocare,
Inc. ("Protocare"), acquired in March 1994.
SELLING, DISTRIBUTION AND ADMINISTRATIVE: Selling, distribution and
administrative expenses as a percentage of net revenues were 52.3%, 49.1% and
53.1%, for 1997, 1996 and 1995, respectively. Selling, distribution and
administrative expenses in 1997 increased $36.7 million over 1996. The increase
is due, in part, to increased staffing in the functional areas of reimbursement,
patient services and information systems to address the operating difficulties
the Company has been experiencing in those areas (see Liquidity and Capital
Resources). Also, severance and related excise tax expense totaling $7.9 million
was incurred in connection with the third and fourth quarter terminations of 15
executive management level employees (some of which will be replaced) and
approximately 510 field employees. The annual salary and benefit costs of
terminated employees amounted to approximately $24.6 million. Selling,
distribution and administrative expenses in 1997 also includes charges of $2.3
million incurred in connection with exiting certain business lines and closing
facilities.
The Company is currently recruiting approximately 30 account executives
for its sales force, an action which is expected to increase sales salary,
commission and benefit costs by approximately $3.4 million in 1998.
The improvement in 1996 as compared to 1995, can be attributed mainly to
the cost savings associated with the completed employee reductions and facility
consolidations effected in conjunction with the merger. 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.
As discussed previously, the Company has exited certain lines of
business and contracts. These actions, along with the reduction in Medicare
reimbursement for respiratory services effective January 1, 1998, have reduced
the Company's annual revenue run rate. Accordingly, Management is currently
evaluating its business model, operating strategies and cost structure to
identify appropriate changes that can be made to reduce costs. The Company has
engaged consultants to evaluate process efficiencies for certain functional
areas and to assist in assessing the Company's business model. These efforts are
intended to bring operating costs in line with the lower revenue base.
GOODWILL IMPAIRMENT: Certain 1997 conditions, including the Company's
failure to meet projections and expectations, declining gross margins, recurring
operating losses, downward adjustment to the Company's projections for 1998 and
a depressed Common Stock value, were identified by Management as potential
indicators of intangible asset impairment. In the fourth quarter of 1997,
Management conducted an evaluation of the carrying value and amortization
periods of the Company's recorded intangible assets. Management considered
current and anticipated industry conditions, recent changes in its business
strategies, and current and anticipated operating results. The evaluation
resulted in a reduction of the amortization period for its infusion business
goodwill from 40 years to 20 years (consistent with the life used for the
Company's goodwill related to businesses other than infusion) and an impairment
charge of $133.5 million. The reduction in the amortization period of infusion
business goodwill and the write-off will result in a net reduction in future
annual amortization expense of $2.4 million.
Of the total impairment charge recorded, $128.3 million related to
infusion business goodwill. The infusion business goodwill, with a net carrying
value of $170.1 million prior to the impairment charge, was originally recorded
in connection with the acquisition by Abbey of two infusion companies: TPC in
November 1993 and Protocare in March 1994.
The remaining $5.2 million of the total impairment charge related to
home respiratory and medical equipment ("HME/RT") business goodwill. The HME/RT
business goodwill, with a net carrying value of $118.7 million prior to the
impairment charge, was recorded in connection with the acquisitions of 144 local
and regional HME/RT companies.
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<PAGE> 22
The impairment recognized for HME/RT goodwill was due primarily to the
estimated impact on future operating results and cash flows of a reduction in
Medicare reimbursement for respiratory therapy services of 25% effective January
1, 1998 and an additional 5% effective January 1, 1999.
The impairment recognized for infusion business goodwill resulted
primarily from deteriorating operating and industry trends and lower future
earnings expectations. The Company's infusion revenues, which grew by 10.0% from
1995 to 1996, lagged expectations by about 4% and 2% in 1995 and 1996,
respectively, and infusion gross margins in those years were below expectations
and declining. At the time, Management believed that the lower revenues and
gross margins were due to difficulties and disruptions caused by the
consolidation of its branch operations and conversion of its field information
systems following the merger in 1995. Management expected revenue growth and
higher margins to resume in 1997. However, infusion revenues decreased by 4.1%
in 1997, lagging expectations by about 15% and infusion gross margins dropped an
additional 3.2%. Over the most recent three-year period, infusion gross margins
dropped 8% while the gross margins for the Company's other homecare services
decreased only 2%. The deterioration in infusion revenues and gross margins in
1997 resulted from the combined and related impacts of increased managed care
market share, competitive pricing pressures and changes in service mix from
higher-margin therapies to lower-margin therapies.
For purposes of determining recoverability, undiscounted cash flows were
estimated on a business line (infusion and HME/RT) and branch-specific basis.
Separate evaluations were performed for the Company's infusion and HME/RT
business goodwill because of separate identification in the accounting records,
deteriorating infusion-specific industry trends and the Company's recent change
in emphasis from broad integrated services to separate service lines. On a
branch-specific basis, undiscounted cash flows were estimated for each acquired
business based on forecasted 1998 cash flows projected over the estimated
remaining amortization period of the goodwill. Overhead costs substantially
related to branch operations were allocated to the locations. For those
locations for which undiscounted cash flows were insufficient to recover the
carrying amount of goodwill and other long-lived assets, fair value was
estimated at four and six times estimated 1998 earnings before interest, taxes,
depreciation and amortization ("EBITDA") for infusion and HME/RT acquired
businesses, respectively. The multiples were determined, in part, by reference
to recent publicized transactions.
INFORMATION SYSTEMS HARDWARE AND INTERNALLY DEVELOPED SOFTWARE
IMPAIRMENT: During 1997, Management reevaluated its current information systems
in light of year 2000 risks and ongoing operational difficulties and concluded
that significant additional costs would be necessary to adequately correct
system deficiencies and improve functionality. Accordingly, the decision was
made to replace the Company's systems, including internally developed software,
with a large scale, fully integrated enterprise resource planning ("ERP")
system. A two-year development and implementation plan was approved by the Board
of Directors in December 1997.
In light of the evaluation and decisions, Management reviewed the
carrying value of the capitalized software and recorded an impairment charge of
$20.2 million. The charge included (1) a $3.9 million reduction to the carrying
value of the Company's branch information system ("ACIS") program development
costs ($5.8 million remains at December 31, 1997), (2) an $11.4 million
write-off of costs associated with ACIS implementation and conversion, including
$4.4 million for the cost of developing conversion software, and (3) a $4.9
million write-off of costs of a specialized telecommunications software program
developed for ApriaDirect, a clinical program that was discontinued in December
1997.
In connection with Management's evaluation of the Company's internally
developed software, Management also conducted a review of the Company's computer
hardware, including telecommunications equipment. Equipment with a carrying
value of $6.6 million was identified as functionally obsolete or no longer in
use and was written off.
In 1995, the Company recorded an impairment charge of $22.2 million. The
charge represented computer hardware and software development costs associated
with systems that were discontinued in conjunction with the merger-related
system consolidations.
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
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<PAGE> 23
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 $14.6 million provided
for employment and payroll tax related claims and lawsuits, $3.5 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.
RESTRUCTURING AND MERGER COSTS: In connection with the 1995 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 also completed about half of the 496 information
system conversions as of December 1995; the remaining system conversions were
completed by September 1996.
The completion of the consolidation and restructuring plan yielded
savings in 1996 and 1997 labor and rent expense resulting from the reduction in
employee headcount and the facility closures. The savings however, were largely
offset by operating difficulties that arose, in part, from the information
systems conversions and integration efforts (see Liquidity and Capital
Resources) and by the impact on revenues, service mix and gross margins of
increased managed care business (see Net Revenues).
Restructuring and merger costs of approximately $58.3 million were
recorded in 1995 in connection with the consolidation and restructuring plan.
Restructuring costs included severance and related costs of $21.5 million due to
workforce reductions, $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 consisting primarily of fees for
investment banking, legal, consulting, accounting and filing requirements, as
well as certain other costs required to be incurred pursuant to the merger
agreement.
INTEREST EXPENSE: Interest expense was $49.4 million in 1997, $49.2
million in 1996 and $42.9 million in 1995. Although long-term debt has declined
significantly during 1997, the average debt balance for the year was higher than
in 1996 and 1995. The increases in interest expense in 1997 and 1996 were
mitigated by lower average interest rates than in the preceding year (see
Liquidity and Capital Resources).
INCOME TAXES: Income tax expense for 1997 amounted to $36.6 million and
included $30.0 million to increase the valuation allowance for deferred tax
assets due to recurring tax losses and lower estimates of future taxable income.
The remaining amount of income tax expense includes estimated state taxes
payable based on factors other than income, estimated settlement amounts for
in-progress state tax audits, foreign taxes related to the sale in 1997 of the
Company's 15% equity interest in a United Kingdom-based company and the
settlement amount paid on an examination of the Company's federal tax returns
for 1992 through 1995. Certain of these tax expense items resulted in increases
to deferred tax assets for which no benefit was recorded in 1997 due to
offsetting increases to the valuation allowance.
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 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.
The 1995 tax benefit of $20.6 million (includes tax impact on
extraordinary charge of $1.7 million) was primarily attributable to losses
related to merger reserves and restructuring charges recorded during 1995.
LIQUIDITY AND CAPITAL RESOURCES
In 1997 the Company generated $104.1 million in operating cash flow
compared to cash used in operating activities of $59.3 million and $9.9 million
in 1996 and 1995, respectively. Improved collections on accounts receivable,
lower expenditures for patient service equipment and inventory, and the receipt
of income tax refunds were
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<PAGE> 24
the primary sources of 1997 operating cash flow. The primary reason for the
increased use of cash in 1996 as compared to 1995 was the increase in accounts
receivable.
ACCOUNTS RECEIVABLE: Accounts receivable, before allowance for doubtful
accounts, decreased by $94.2 million in 1997. The decrease resulted from the
combined impacts of (1) higher collection rates as evidenced by the increase in
collections as a percentage of revenue from 93% in 1996 to 99% in 1997, (2)
shorter collection periods as reflected by a decrease in the Company's average
collection period from approximately 130 days in 1996 to approximately 100 days
in 1997 and (3) an increase in the amount of bad debt write-offs taken, net of
recoveries, from $80.4 million in 1996 to $139.0 million in 1997. Accounts aged
in excess of 180 days at December 31, 1997 decreased by $33.6 million as
compared to December 31, 1996 but represented a comparable percentage of total
accounts receivable.
The improvements to date in collection rates and timing occurred
substantially in the second half of 1997. Through May 31, 1997 accounts
receivable, before allowance for doubtful accounts, had decreased by only $9.4
million and the amount and percentage of accounts aged over 180 days was
substantially unchanged from December 31, 1996. The slower than anticipated
decrease in accounts receivable and the aging of accounts was due to the
continuing effects of disruptions and delays in billing and collection activity
associated with the Company's 1995 and 1996 conversions of its field locations
to standardized information systems and the continuing impact of a higher than
normal turnover rate among billing and collection personnel in 1996.
In connection with the facility consolidations made in late 1995 and
early 1996 as part of the Company's restructuring and consolidation plan, each
branch information system was first converted to the predominant 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 net revenues underwent conversion. Of the 496 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 branches converted in the first, second and third quarters,
respectively. These activities contributed to billing delays and errors and,
ultimately, difficulties in receiving timely reimbursement for services
provided.
Actions taken in 1996 to mitigate the impact of conversion disruptions
and employee turnover included, among others, a collection incentive program
with special emphasis on older accounts, hiring additional management-level
billing and collection personnel and reinforcement training for the billing
locations. In early 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. In the second
quarter of 1997, the Company reorganized the reimbursement and information
system functions.
These actions, among others, contributed to improvements in the second
half of 1997 in billing timeliness and accuracy and collection rates and time
frames. During the second half of 1997 significant focus and resources continued
to be directed at the improvement of order intake, fulfillment and billing and
collection processes. In connection with those efforts, the Company evaluated
the adequacy of the functionality of its field information systems and that of
other packaged home healthcare information systems to meet its changing business
and reimbursement needs. Based on the results of the evaluation, Management
decided to replace its existing systems but found the packaged home healthcare
information systems to be insufficient for the Company's needs. Rather,
Management committed to a two-year plan to implement a large scale, fully
integrated ERP system. Significant development effort will be required to
customize the ERP system for the complexities of the Company's billing and
contractual arrangements.
CREDIT FACILITY AND LONG-TERM DEBT: The Company's credit agreement with
Bank of America and a syndicate of banks was amended in April and July of 1997
and further amended in January, March and April of 1998. Total borrowings
allowed under the facility were reduced from an original maximum of $800 million
to $400 million at December 31, 1997. Further reductions to $385 million, $350
million and $300 million are scheduled for December 31, 1998, 1999 and 2000,
respectively. Additionally, amounts available for acquisitions were reduced,
tighter restrictions were imposed on dividends and other distributions and
interest rates and commitment fees were increased. Certain nonrecurring charges
and resulting net losses (as defined by the agreement) will be excluded from the
calculation of specific financial ratios when determining covenant compliance.
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<PAGE> 25
The agreement, as amended, permits the Company to elect one of two
variable rate interest options at the time an advance is made. The first option
is a rate expressed as 0.75% plus the higher as between (a) the Federal Funds
Rate plus 0.50% per annum, and (b) the Bank of America "reference" rate. The
second option is a rate based on the London Interbank Offered Rate ("LIBOR")
plus an additional increment of 2.25% per annum. Prior to the amendments, the
variable rate options consisted of (a) the higher as between (i) the Bank of
America "reference" rate, and (ii) the Federal Funds Rate plus 0.50% per annum,
or (b) a rate based on LIBOR plus 0.35% to 1.0% (depending on the ratio of
consolidated funded indebtedness to earnings before interest income or expense,
taxes, extraordinary gains or losses, depreciation and amortization as more
fully set forth in the agreement). The effective interest rate at December 31,
1997 was 7.1% for borrowings of $338 million. The credit agreement requires
payment of commitment fees of 0.50% on the unused portion of the facility.
Borrowings under the credit agreement are secured by substantially all the
assets of the Company and the agreement also 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. Prior amendments to the credit agreement had waived
covenant deficiencies arising as the result of charges taken in 1997 on a
temporary basis in anticipation of the consummation of the JLL Agreement (see
Recent Developments). The amendment to the credit agreement effected in April
1998 permanently waives the covenant deficiencies existing as a result of the
charges taken by the Company in 1997 and the termination of the JLL Agreement
(see Recent Developments).
Under the Indenture governing the Company's $200 million 9-1/2% Senior
Subordinated Notes due 2002, the Company's ability to incur indebtedness becomes
restricted at times that the Company's "Fixed Charge Coverage Ratio" (as defined
in the Indenture) is less than 3.0 to 1.0. Charges taken against revenues in the
second quarter of 1997 resulted in the Fixed Charge Coverage Ratio being less
than 3.0 to 1.0. This condition is expected to continue for at least the balance
of 1998. Since the second quarter of 1997 the Company has changed its cash
management procedures so as to avoid the need to incur indebtedness in violation
of the terms of the Indenture and has accumulated a cash balance of $45.5
million as of March 31, 1998. The Company does not anticipate a need to incur
debt in connection with its operations during 1998. However, the lack of
borrowing ability may restrict the Company's ability to make major acquisitions
during 1998, and the Company may attempt to procure an amendment to the
Indenture which would permit borrowings for acquisitions and other purposes.
DISPOSITIONS AND BUSINESS COMBINATIONS: In January 1997, the Company
sold its 15% equity interest in Omnicare plc, a United Kingdom based public
limited company, to a former director of Apria. Cash proceeds from the sale were
$2.8 million, which resulted in a gain of $1.2 million.
On March 14, 1997, the Company sold M&B Ventures, Inc., its last
remaining Medicare-certified home health agency, which operated in South
Carolina under the assumed business names of Doctors Home Health and Advanced
Care Service, to North Trident Regional Hospital, Inc., a subsidiary of
Columbia/HCA Healthcare Corporation. Cash proceeds from the sale were $2.4
million, resulting in a loss on the sale of approximately $784,000.
The Company disposed of several branch locations in California and
Arizona in the latter part of 1997. Cash proceeds from these sales were $1.2
million, which resulted in a net gain of approximately $386,000.
On September 30, 1997, the Company exercised its warrants to purchase
247,500 shares of common stock of Living Centers of America, Inc. The subsequent
sale of the shares acquired upon the warrant exercise resulted in net proceeds
and a gain of $1.4 million.
The Company periodically makes acquisitions of complementary businesses
in specific geographic markets. Acquisitions consummated during 1997 and
payments of contingent consideration resulted in cash payments of $11.3 million.
COMMITMENTS: The Company is in the fourth 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
results 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 the 12-month periods ended August 31, 1997 and 1996,
exceeded the annual commitment. As a result of Management's recent decision to
exit the medical supply business, the Company has worked to transition its
managed care supply business directly to the vendor and is currently
restructuring the agreement to reflect these changes.
As mentioned above, Management has committed to a two-year plan to
implement a large-scale fully integrated ERP system. Significant development
efforts will be required to customize the system for the complexities of the
Company's business. Software licensing fees and expenditures to upgrade hardware
will also be required. Although the majority of the project cost will be
capitalized, a minimal component will be expensed in the near-term. The Company
is currently in the vendor selection phase of the project, and consequently, it
cannot estimate the total cost of the project with a reasonable degree of
accuracy. The Company expects to finance the new system through a combination of
lease financing and utilization of its existing credit facility.
24
<PAGE> 26
YEAR 2000 ISSUE: As the year 2000 approaches, an issue ("Year 2000
Issue") impacting all companies has emerged regarding how existing application
software programs and operating systems can accommodate this date value. In
brief, many existing application programs in the marketplace were designed to
accommodate a two digit date position which represents the year (e.g., "95" is
stored on the system and represents the year 1995). Consequently, the year 1999
could be the maximum date value systems would be able to accurately process.
Beginning in late 1997, the Company conducted a comprehensive review of
its existing computer systems, including an assessment of the nature and
potential extent of the impact of the Year 2000 Issue. As a result, the Company
has begun the modification process of its software in order for its computer
systems to function properly in the year 2000 and thereafter. The Company is
utilizing internal resources to reprogram and test the software for the year
2000 modifications. The total cost of the project is not expected to have a
material effect on the Company's results of operations. The project is currently
on schedule and the Company anticipates all phases of the project, including the
testing and implementation phases, to be completed by December 31, 1998.
Further, the Company's systems underwent two external assessments of the Year
2000 Issue and received a "low" risk rating.
The Company has committed to a plan to replace its existing field
information systems with a large-scale fully integrated enterprise resource
planning system. The new system, which will be year 2000-compliant from the
outset, is not expected to be fully functional at all locations by the beginning
of the year 2000.
Additionally, a formal process has been instituted to assess other
potential risks the Company may face in light of the Year 2000 Issue. Examples
of such issues include, but are not limited to, electronic interfaces with
external agents such as payors, banks and suppliers and internal operational
issues such as date-sensitive security systems and elevators. Another area of
potential risk is with certain patient service equipment items that have
microprocessors with date functionality which could malfunction in the year
2000. Among other steps, the Company has initiated formal communications with
all its significant suppliers of its patient service equipment to ensure those
third parties are also working to remediate their own year 2000 issues, if
applicable. The Company believes that it will be able to resolve these issues
and any others it may identify by the year 2000. The cost of such remediation
has not yet been quantified.
RECENT DEVELOPMENTS: On February 3, 1998, the Company entered into a
Stock Purchase Agreement (the "JLL Agreement") with JLL Argosy Apria, LLC,
Joseph Littlejohn & Levy Fund III, LP and CIBC WG Argosy Merchant Fund 2, LLC
(together, the "JLL Group"). Pursuant to the terms of the JLL Agreement, among
other things, the Company had agreed issue and sell 12,300,000 shares of Common
Stock and issue warrants to purchase 5,000,000 additional shares, exercisable at
$20.00 per share, in consideration for a cash investment of $172.2 million by
the JLL Group. The Company was to have used the proceeds, together with $70.0
million in new borrowings under the Company's credit facility, to purchase
17,300,000 shares of Common Stock. On April 3, 1998, the parties agreed to
terminate the JLL Agreement without any further obligation to any party. The
Board of Directors of the Company has formed a committee to assess the Company's
future alternatives in light of the termination of the JLL Agreement.
OTHER: At December 31, 1997, the Company had $8.2 million invested in a
money market account.
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 year. At
December 31, 1997, availability under the credit facility, after giving
consideration to the subsequent reduction in the loan commitment, was $51.7
million.
The Company believes that inflation has not had a significant impact on
the Company's historical operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 was party to two swap agreements during 1997, both of which were
terminated by the counterparties prior to December 31, 1997. For the fiscal year
ended December 31, 1997, the Company received interest at a weighted average
rate of 6.7% and paid interest at a weighted average rate of 5.6%. Payment or
receipt of the interest differential was settled periodically and recognized
monthly in the financial statements as an adjustment to interest expense.
25
<PAGE> 27
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Report of Independent Auditors, Consolidated Financial Statements
and Consolidated Financial Statement Schedule listed in the "Index to
Consolidated Financial Statements and Financial Statement Schedule" are filed as
part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item is incorporated by reference from
the Company's definitive Proxy Statement to be filed with the Commission within
120 days after the close of the Company's fiscal year. Information regarding
executive officers of the Company is set forth under the caption "Executive
Officers of the Registrant" in Item 1 hereof.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item is incorporated by reference from
the Company's definitive Proxy Statement to be filed with the Commission within
120 days after the close of the Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item is incorporated by reference from
the Company's definitive Proxy Statement to be filed with the Commission within
120 days after the close of the Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item is incorporated by reference from
the Company's definitive Proxy Statement to be filed with the Commission within
120 days after the close of the Company's fiscal year.
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" is included in this report starting on
page S-1.
All other schedules for which provision is made in the
applicable accounting regulations 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:
See Exhibit Index
(b) Reports on Form 8-K:
None filed during the fourth quarter of 1997.
26
<PAGE> 28
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors....................................................... F-1
Consolidated Balance Sheets -- December 31, 1997 and 1996............................ F-2
Consolidated Statements of Operations -- Years ended
December 31, 1997, 1996 and 1995................................................... F-3
Consolidated Statements of Stockholders' Equity -- Years ended
December 31, 1997, 1996 and 1995................................................... F-4
Consolidated Statements of Cash Flows -- Years ended
December 31, 1997, 1996 and 1995................................................... F-5
Notes to Consolidated Financial Statements........................................... F-6
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts...................................... S-1
</TABLE>
<PAGE> 29
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. as of December 31, 1997 and 1996 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule referred to in Item 14(a). These financial
statements and schedule are the responsibility of the management of Apria
Healthcare Group Inc. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
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 provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Apria
Healthcare Group Inc. at December 31, 1997 and 1996, and the consolidated
results of its operations and cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Orange County, California
March 11, 1998 (except for Notes 5, 12 and 14,
as to which the dates are April 2,
1998, April 9, 1998 and April 3,
1998, respectively)
F-1
<PAGE> 30
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1996
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ................................................................... $ 16,317 $ 26,930
Accounts receivable, less allowance for doubtful accounts of $58,413 and
$73,809 at December 31, 1997 and 1996, respectively .................. 256,845 335,616
Inventories ............................................................ 26,082 55,733
Deferred income tax benefits ........................................... -- 31,106
Refundable and prepaid income taxes .................................... 2,576 34,598
Prepaid expenses and other current assets .............................. 9,753 9,764
----------- -----------
TOTAL CURRENT ASSETS ............................................. 311,573 493,747
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $245,772 and
$229,684 at December 31, 1997 and 1996, respectively .................. 184,704 213,602
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ................................ 87,583 120,030
INTANGIBLE ASSETS, NET ................................................... 167,620 312,590
OTHER ASSETS ............................................................. 5,690 9,141
----------- -----------
$ 757,170 $ 1,149,110
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ....................................................... $ 50,691 $ 83,619
Accrued payroll and related taxes and benefits ......................... 40,397 34,850
Accrued insurance ...................................................... 12,247 11,336
Other accrued liabilities .............................................. 30,463 40,363
Current portion of long-term debt ...................................... 8,685 11,588
----------- -----------
TOTAL CURRENT LIABILITIES ........................................ 142,483 181,756
LONG-TERM DEBT ........................................................... 540,220 623,276
DEFERRED INCOME TAXES .................................................... -- 1,143
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value:
10,000,000 shares authorized; none issued ............................ -- --
Common Stock, $.001 par value:
150,000,000 shares authorized; 51,568,525 and 51,203,450 shares issued
and outstanding at December 31, 1997 and 1996, respectively .......... 51 51
Additional paid-in capital ............................................. 324,090 319,950
Retained (deficit) earnings ............................................ (249,674) 22,934
----------- -----------
74,467 342,935
COMMITMENTS AND CONTINGENCIES ............................................ -- --
----------- -----------
$ 757,170 $ 1,149,110
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 31
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net revenues ........................................... $ 1,180,694 $ 1,181,143 $ 1,133,600
Costs and expenses:
Cost of net revenues:
Product and supply costs ........................... 334,766 311,539 286,919
Patient service equipment depreciation ............. 84,932 67,658 57,400
Nursing services ................................... 15,973 9,798 7,361
Other .............................................. 15,511 11,680 9,319
----------- ----------- -----------
451,182 400,675 360,999
Provision for doubtful accounts ........................ 121,908 67,040 100,463
Selling, distribution and administrative ............... 617,113 580,436 602,478
Amortization of intangible assets ...................... 16,833 16,920 16,273
Goodwill impairment .................................... 133,542 -- --
Information systems hardware and
internally developed software impairment ............. 26,781 -- 22,160
Employee contracts, benefit plan and claim settlements . -- 14,795 20,367
Restructuring and merger costs ......................... -- -- 58,337
----------- ----------- -----------
1,367,359 1,079,866 1,181,077
----------- ----------- -----------
OPERATING (LOSS) INCOME ............................ (186,665) 101,277 (47,477)
Interest expense ....................................... 49,393 49,249 42,942
----------- ----------- -----------
(LOSS) INCOME BEFORE TAXES AND EXTRAORDINARY CHARGE (236,058) 52,028 (90,419)
Income tax expense (benefit) ........................... 36,550 18,728 (18,941)
----------- ----------- -----------
(LOSS) INCOME BEFORE EXTRAORDINARY CHARGE .......... (272,608) 33,300 (71,478)
Extraordinary charge on debt refinancing, net of taxes . -- -- 2,998
----------- ----------- -----------
NET (LOSS) INCOME .................................. $ (272,608) $ 33,300 $ (74,476)
=========== =========== ===========
PER COMMON SHARE AMOUNTS:
(Loss) income before extraordinary charge ............ $ (5.30) $ 0.66 $ (1.52)
Extraordinary charge on debt refinancing, net of taxes $ - $ - $ (0.06)
----------- ----------- -----------
Net (loss) income .................................... $ (5.30) $ 0.66 $ (1.58)
=========== =========== ===========
PER COMMON SHARE AMOUNTS - ASSUMING DILUTION:
(Loss) income before extraordinary charge ............ $ (5.30) $ 0.64 $ (1.52)
Extraordinary charge on debt refinancing, net of taxes $ - $ - $ (0.06)
----------- ----------- -----------
Net (loss) income .................................... $ (5.30) $ 0.64 $ (1.58)
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 32
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON STOCK PAID-IN EARNINGS STOCKHOLDERS'
SHARES PAR VALUE CAPITAL (DEFICIT) EQUITY
------ --------- -------- --------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
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
Issuance of Common Stock............. 20 242 242
Exercise of stock options............ 1,491 1 14,717 14,718
Notes receivable payments............ 198 198
Tax benefits related to stock options 10,229 10,229
Other................................ 42 (32) 10
Net income........................... 33,300 33,300
------ ------ -------- --------- --------
Balance at December 31, 1996......... 51,203 51 319,950 22,934 342,935
Exercise of stock options............ 365 4,013 4,013
Other................................ 127 127
Net loss............................. (272,608) (272,608)
------ ------ -------- --------- --------
Balance at December 31, 1997......... 51,568 $ 51 $324,090 $(249,674) $ 74,467
====== ====== ======== ========= ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 33
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1997 1996 1995
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income ......................................................... $(272,608) $ 33,300 $ (74,476)
Items included in net (loss) income not requiring (providing) cash:
Extraordinary charge on debt refinancing .............................. -- -- 4,684
Provision for doubtful accounts ....................................... 121,908 67,040 100,463
Provision for revenue adjustments ..................................... 40,000 32,300 --
Provision for excess/obsolete equipment ............................... 35,300 10,513 7,500
Depreciation .......................................................... 118,054 93,123 84,607
Amortization of intangible assets ..................................... 16,833 16,920 16,273
Amortization of deferred debt costs ................................... 1,197 1,703 1,908
Impairment loss on long-lived assets .................................. 160,323 -- 25,057
(Gain) loss on disposition of assets .................................. (2,044) 340 3,938
Deferred income taxes ................................................. 29,963 15,920 (19,548)
Change in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable ....................................... (80,229) (176,551) (118,151)
Decrease (increase) in inventories .................................... 2,722 (12,903) (4,904)
Decrease (increase) in prepaids and other
current assets (including prepaid income taxes) .................... 32,758 2,544 (12,194)
Decrease in other non-current assets .................................. 508 310 3,269
(Decrease) increase in accounts payable ............................... (33,153) (17,033) 18,942
Increase in accruals and other non-current liabilities ................ 1,378 3,175 3,434
(Decrease) increase in accrued restructuring costs .................... (5,408) (11,953) 19,085
Net purchases of patient service equipment, net of effects of acquisitions (63,519) (118,372) (72,518)
Other ..................................................................... 127 329 2,733
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ............... 104,110 (59,295) (9,898)
INVESTING ACTIVITIES
Purchases of property, equipment and
improvements, net of effects of acquisitions ........................ (21,047) (54,207) (49,327)
Proceeds from disposition of assets ................................... 8,212 317 1,257
Acquisitions and payments of contingent consideration ................. (11,283) (14,815) (46,086)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES ............................. (24,118) (68,705) (94,156)
FINANCING ACTIVITIES
Proceeds under revolving credit facility .............................. 129,950 775,125 463,999
Payments under revolving credit facility .............................. (211,950) (641,425) (229,171)
Proceeds from senior and other long-term debt ......................... -- -- 126,557
Payments of senior and other long-term debt ........................... (11,793) (11,445) (275,022)
Capitalized debt costs, net ........................................... (825) (1,312) (1,429)
Issuances of Common Stock ............................................. 4,013 15,158 13,064
--------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ............... (90,605) 136,101 97,998
--------- --------- ---------
NET (DECREASE) INCREASE IN CASH ........................................... (10,613) 8,101 (6,056)
Cash at beginning of period ............................................... 26,930 18,829 21,188
Net activity for Homedco - October 1, 1994 to December 31, 1994 ........... -- -- 3,697
--------- --------- ---------
CASH AT END OF PERIOD ............................................. $ 16,317 $ 26,930 $ 18,829
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 34
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 statement of operations for 1995 reflects combined results for
the year ended December 31, 1995 and excludes the operations of Homedco for the
period October 1, 1994 through December 31, 1994.
Company Background: The Company operates in the home healthcare segment
of the healthcare industry and provides services including home respiratory
therapy, home infusion therapy, home medical equipment and other services to
patients in the home throughout the United States. Respiratory therapy, infusion
therapy and home medical equipment/other represent approximately 51%, 24% and
25% of total revenues, 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 39% of the
Company's revenues are reimbursed under arrangements with Medicare and Medicaid.
No other third-party payor group represents 5% or more of the Company's
revenues. The majority of the Company's revenues are derived from fees charged
for patient care under fee-for-service arrangements. Revenues derived from
capitation arrangements represented 6%, 6% and 5% of total net revenues for
1997, 1996 and 1995, respectively.
The Company establishes allowances for revenue adjustments and
doubtful accounts based primarily on the application of specified percentages to
the accounts receivable aging. The percentages used are determined based on
historical trends, reviews of patient billing files and other factors. Revenue
adjustments, which are normally identified and recorded at the point of cash
application or upon account review, result from differences between estimated
and actual reimbursement amounts, failures to obtain payor authorizations or
other specified billing documentation, missed filing or appeal deadlines and
other reasons unrelated to credit risk. The allowance for revenue adjustments is
deducted directly from gross accounts receivable.
The Company periodically refines its procedures for estimating the
allowances for revenue adjustments and doubtful accounts based on experience
with the estimation process and changes in circumstances. At December 31, 1997,
the estimation process was modified to include an evaluation of the
collectibility of amounts owed by third-party payors with aggregate patient
balances exceeding a specified amount. In addition, the percentages applied to
the Company's aging categories were increased at December 31, 1997 based upon
the results of Management's year-end accounts receivable analysis. Because of
continuing changes in the healthcare industry and third-party reimbursement, it
is reasonably possible that the Company's estimates of net collectible revenues
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: 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 $13,309,000 and $24,469,000 at December 31, 1997 and
1996, respectively. The Company considers all highly liquid instruments
purchased with a maturity of less than three months to be cash equivalents.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist primarily of disposables used in
conjunction with patient service equipment.
F-6
<PAGE> 35
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 one to 10 years. Included in patient service
equipment are assets under capitalized leases which consist principally 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.
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. 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. Estimated useful lives for each of the categories presented
in Note 3 are as follows: land improvements - seven years; building and
leasehold improvements - the shorter of the remaining lease term or seven years;
equipment and furnishings - three to 15 years; information systems - three to
eight years.
Capitalized Software: Included in property, equipment and improvements
are costs related to internally developed and purchased software that are
capitalized and amortized over periods not exceeding eight years. Capitalized
costs include direct costs of materials and services incurred in developing or
obtaining internal use software and payroll and payroll related costs for
employees directly involved in the development of internal use software. Costs
incurred to develop or obtain software for data access or conversions are also
capitalized.
The carrying value of capitalized software is reviewed if the facts and
circumstances suggest that it may be impaired. Indicators of impairment may
include a subsequent change in the extent or manner in which the software is
used or expected to be used, a significant change to the software is made or
expected to be made or the cost to develop or modify internal use software
exceeds that expected amount. If events and circumstances indicate that the
software is impaired, the carrying value is reduced to Management's estimate of
the value of the remaining utility of the software.
Long-lived Assets: 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.
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. Covenants are amortized over contractual
terms, which range from 3 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
period for goodwill is generally 20 years. Prior to December 31, 1997 the
amortization period for goodwill related to acquired infusion therapy businesses
was 40 years. 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 to estimated fair value.
For purposes of determining recoverability, undiscounted cash flows are
estimated for the following year on a business line (infusion therapy and home
respiratory/medical equipment) and branch-specific basis and are multiplied by
the number of years remaining in the amortization period. Corporate costs
substantially related to branch operations are allocated on the basis of
following year revenues. Goodwill is generally separately identified by
acquisition and branch location. However, for multi-location acquisitions,
goodwill is allocated on the basis of acquisition date annual revenues. For
those operations for which undiscounted cash flows are insufficient to recover
the carrying value of recorded goodwill and other long-lived assets, the fair
value of goodwill is estimated at the then current market multiple of estimated
following year earnings before interest, taxes, depreciation and amortization
("EBITDA") for the business line.
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 $4,088,000, $6,095,000 and
$3,849,000 for 1997, 1996 and 1995, respectively, are expensed as incurred and
included in "Selling, distribution and administrative expenses."
F-7
<PAGE> 36
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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: The Company has adopted the provisions of Statement
of Financial Accounting Standards 128, Earnings Per Share, and applied this
pronouncement to all periods presented. This statement requires the presentation
of both basic and diluted net income (loss) per share for financial statement
purposes. Basic net income (loss) per share is computed by dividing income
(loss) available to common stockholders by the weighted average number of common
shares outstanding. Diluted net income (loss) per share includes the effect of
the potential shares outstanding, including dilutive stock options and warrants
using the treasury stock method.
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
("APB No. 25") and, accordingly, recognizes no compensation expense for the
stock option grants. However, the Company has adopted the disclosure provisions
of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-based Compensation ("SFAS No. 123") (see Note 6).
Recent Accounting Pronouncements: In June 1997, the FASB issued
Statement No. 130, Reporting Comprehensive Income, effective for fiscal years
beginning after December 15, 1997, which establishes standards for the reporting
and display of comprehensive income and its components in financial statements.
Comprehensive income generally represents all changes in shareholders' equity
except those resulting from investments by and distributions to owners.
Currently, no differences exist between the Company's net income or loss and
comprehensive net income or loss.
In June 1997, the FASB issued Statement No. 131 (SFAS 131), Disclosures
About Segments of an Enterprise and Related Information, effective for fiscal
years beginning after December 15, 1997, which establishes standards for the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report
information about operating segments in interim financial reports. SFAS 131 also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Once Management has completed its review
of SFAS 131, the Company will adopt the new requirements retroactively in 1998.
In March 1998, the AICPA issued SOP 98-1, Accounting for the Costs of
Computer Software Developed For or Obtained For Internal Use. The SOP is
effective for Companies beginning on January 1, 1999. The SOP will require the
capitalization of certain costs incurred after the date of adoption in
connection with developing or obtaining software for internal-use. The Company
currently capitalizes such costs. The Company recently committed to a two-year
plan to develop and implement an enterprise resource planning system, the
capitalizable and noncapitalizable costs of which are expected to be material to
the Company's future earnings and financial position.
Reclassifications: Certain amounts for prior periods have been
reclassified to conform to the current year presentation.
F-8
<PAGE> 37
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
respiratory therapy, infusion 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 was accounted for under the pooling-of-interests method of
accounting. Accordingly, the historical financial statements for periods prior
to the consummation of the combination were restated as though the companies had
been combined. The restated financial statements were adjusted to conform the
differing accounting policies of the separate companies. Such differences
related 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.
During 1997, 1996 and 1995, the Company acquired numerous complementary
businesses in specific geographic markets. The businesses, none of which were
individually significant, were purchased for a combination of cash and common
stock. The transactions 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 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.
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,
------------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Fair value of assets acquired $ 11,729 $ 15,356 $ 50,255
Liabilities assumed ......... (446) (541) (3,382)
Common Stock issued ......... -- -- (787)
-------- -------- --------
Cash paid ............. $ 11,283 $ 14,815 $ 46,086
======== ======== ========
</TABLE>
In January 1997, the Company sold all of its 15% equity interest in
Omnicare plc, a United Kingdom based public limited company, to a former
director of Apria. Cash proceeds from the sale were $2,791,000, which resulted
in a gain of $1,232,000.
In March 1997, the Company sold its Medicare-certified home health
agency, M&B Ventures, Inc., for cash proceeds of $2,400,000 and recorded a loss
on sale of $784,000. The Company also disposed of several branch locations in
California and Arizona in the latter part of 1997. Cash proceeds from these
sales were $1,189,000, which resulted in a net gain of $386,000. The operations
of M&B Ventures and the disposed branches had revenues of approximately
$4,648,000, $11,082,000 and $11,075,000 for 1997, 1996 and 1995, respectively.
In September 1997, the Company exercised its warrants to purchase
247,500 shares of common stock of Living Centers of America, Inc. The subsequent
sale of the shares netted cash proceeds and a gain of $1,350,000.
F-9
<PAGE> 38
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 3 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements .............. $ 53 $ 88
Buildings and leasehold improvements 23,283 22,067
Equipment and furnishings .......... 71,815 69,136
Information systems ................ 75,012 112,215
--------- ---------
170,163 203,506
Less accumulated depreciation ...... (82,580) (83,476)
--------- ---------
$ 87,583 $ 120,030
========= =========
</TABLE>
Included in information systems above are the capitalized costs of
software purchased and developed for internal use. In the fourth quarter of
1997, the Company wrote down the carrying value of internally developed software
by $20,225,000 and computer equipment by $6,556,000. The software impairment
charge consisted of $15,305,000 of capitalized development and implementation
costs related to the Company's branch information system ("ACIS") which the
Company has committed to replace within two years and $4,920,000 of capitalized
development costs related to specialized telecommunications software for
ApriaDirect, a clinical program that was discontinued in December 1997. At
December 31, 1997, $5,769,000 of net capitalized ACIS development costs are
included in information systems. The amount represents Management's estimate of
the value of the software's utility for the period prior to replacement. The
computer equipment impairment charge consists of computer and telecommunications
equipment identified as functionally obsolete or no longer in use.
NOTE 4 -- INTANGIBLE ASSETS
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Covenants not to compete .... $ 30,874 $ 31,824
Goodwill .................... 198,930 327,821
--------- ---------
229,804 359,645
Less accumulated amortization (62,184) (47,055)
--------- ---------
$ 167,620 $ 312,590
========= =========
</TABLE>
Certain 1997 conditions, including the Company's failure to meet
projections and expectations, declining gross margins, recurring operating
losses, significant downward adjustment to the Company's projections for 1998
and a depressed common stock value, were identified by Management as potential
indicators of intangible asset impairment. In the fourth quarter of 1997,
Management conducted an evaluation of the carrying value and amortization
periods of recorded intangible assets. Management considered current and
anticipated industry conditions, recent changes in its business strategies and
current and anticipated operating results. The evaluation resulted in a
reduction of the amortization period for its infusion business goodwill from 40
years to 20 years (consistent with the period used for the Company's goodwill
related to businesses other than infusion) and an impairment charge of
$133,542,000. Of the total impairment charge, $128,308,000 related to infusion
business goodwill and $5,234,000 related to home respiratory and medical
equipment ("HME/RT") business goodwill.
The impairment recognized for infusion goodwill resulted primarily from
deteriorating operating and industry trends and lower future earnings
expectations. The impairment recognized for HME/RT goodwill was due primarily to
the estimated impact on future operating results and cash flows of a reduction
in Medicare reimbursement rates for respiratory therapy services of 25%,
effective January 1, 1998, and an additional 5% effective January 1, 1999.
F-10
<PAGE> 39
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Separate evaluations of goodwill recoverability were performed for the
Company's infusion and HME/RT business goodwill because of separate
identification in the accounting records, deteriorating infusion specific
industry trends and the Company's recent change in emphasis from broad
integrated services to separate service lines.
For purposes of determining recoverability, undiscounted cash flows were
estimated by branch for each acquired business based on forecasted 1998 cash
flows and were projected over the remaining amortization period of the goodwill.
Corporate costs substantially related to branch operations were allocated to the
locations. For those locations for which undiscounted cash flows were
insufficient to recover the carrying value of recorded goodwill and other
long-lived assets, fair value was estimated at four and six times estimated 1998
earnings before interest, taxes, depreciation and amortization (EBITDA) for
infusion and HME/RT acquired businesses, respectively. The multiples were
determined by reference to recent transactions.
NOTE 5 -- CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Notes payable relating to revolving credit facilities . $ 338,000 $ 420,000
9.5% senior subordinated notes ........................ 200,000 200,000
Other, interest at rates ranging from 0% to 4.1%,
payments due at various dates through December 1998 172 1,267
Capital lease obligations (see Note 10) ............... 16,555 19,790
--------- ---------
554,727 641,057
Less: Current maturities .............................. (8,685) (11,588)
Unamortized deferred debt costs ............. (5,822) (6,193)
--------- ---------
$ 540,220 $ 623,276
========= =========
</TABLE>
Credit Agreement: The Company's credit agreement with Bank of America
and a syndicate of banks ("the banks") was amended in April and July of 1997 and
further amended in January, March and April 1998. The loan facility, which
expires in August 2001, was reduced several times from a high of $800,000,000 to
the current level of $400,000,000. The loan commitment will be further
permanently reduced to $385,000,000, $350,000,000 and $300,000,000 on December
31, 1998, 1999 and 2000, respectively. Further, amounts available for
acquisitions were reduced, tighter restrictions were imposed on certain
distributions, the payment of dividends was prohibited and interest rates and
commitment fees were increased. Also, net proceeds from the issuance of debt or
sale of equity must be used to permanently reduce outstanding debt. Certain
charges from the fourth quarter of 1996, and the second and fourth quarters of
1997, totaling $76,024,000, $98,000,000 and $81,740,000, respectively, and
resulting net losses have been and will continue to be excluded from the
calculation of specific financial ratios when determining covenant compliance.
The agreement, as amended, permits the Company to elect one of two
variable rate interest options at the time an advance is made. The first option
is a rate expressed as 0.75% plus the higher as between (a) the Federal Funds
Rate plus 0.50% per annum, and (b) the Bank of America "reference" rate. The
second option is a rate based on the London Interbank Offered Rate ("LIBOR")
plus an additional increment of 2.25% per annum. Prior to the amendment, the
variable rate options consisted of (a) the higher as between (i) the Bank of
America "reference" rate, and (ii) the Federal Funds Rate plus 0.50% per annum;
and (b) a rate based on LIBOR plus 0.35% to plus 1.0%, dependent upon achieving
targeted levels of debt to EBITDA. The effective interest rate at December 31,
1997 was 7.1% for borrowings of $338,000,000. The credit agreement currently
requires payment of commitment fees of 0.50% on the unused portion of the
facility. Borrowings under the credit agreement are secured by substantially all
of the assets of the Company, and 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. The amendment to the credit agreement effected in April
1998 permanently waives any covenant deficiencies existing through the date of
the amendment as the result of charges taken in 1997 and the termination of the
JLL Agreement.
At December 31, 1997, the Company's outstanding letters of credit
amounted to $10,276,000 and credit available under the revolving credit
facility, after giving consideration to the subsequent reduction in the loan
commitment, was $51,724,000.
The carrying amount of the revolving credit facility approximates fair
market value because the underlying instruments are variable notes that reprice
frequently.
Under the Indenture governing the Company's $200,000,000 9-1/2% Senior
Subordinated Notes due 2002, the Company's ability to incur indebtedness becomes
restricted at times that the Company's "Fixed Charge Coverage Ratio" (as defined
in the Indenture) is less than 3.0 to 1.0. Charges taken against revenues in the
second quarter of 1997 resulted in the Fixed Charge Coverage Ratio being less
than 3.0 to 1.0. This condition is expected to continue for at least the balance
of 1998. Since the second quarter of 1997 the Company has changed its cash
management procedures so as to avoid the need to incur indebtedness in violation
of the terms of the Indenture and has accumulated a cash balance of $45.5
million as of March 31, 1998. The Company does not anticipate a need to incur
debt in connection with its operations during 1998. However, the lack of
borrowing ability may restrict the Company's ability to make major acquisitions
during 1998, and the Company may attempt to procure an amendment to the
Indenture which would permit borrowings for acquisitions and other purposes.
F-11
<PAGE> 40
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has limited involvement with derivative financial
instruments and does not use them for trading purposes. Interest rate swap
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 arrangements is limited to the interest rate spread in
the event of non-performance by the counterparties to the contracts. The Company
was party to two swap agreements during 1997, both of which were terminated by
the counterparties prior to December 31, 1997. For the fiscal year ended
December 31, 1997, the Company received interest at a weighted average rate of
6.7% and paid interest at a weighted average rate of 5.6%. Payment or receipt of
the interest differential was settled periodically and recognized monthly in the
financial statements as an adjustment to interest expense.
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, as determined by reference to quoted market prices, is
$211,540,000 and $209,940,000 at December 31, 1997 and 1996, respectively.
Maturities of long-term debt, exclusive of capital lease obligations,
for the five years ending December 31, 2002 and thereafter, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
--------------
<S> <C>
1998............................................................... $ 172
1999 ............................................................... --
2000 ............................................................... --
2001 ............................................................... 338,000
2002 ............................................................... 200,000
Thereafter ......................................................... --
--------
$538,172
========
</TABLE>
Total interest paid in 1997, 1996 and 1995 amounted to $53,222,000,
$44,341,000 and $37,454,000, respectively.
F-12
<PAGE> 41
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 6 -- 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.
Under the Company's preferred stock purchase rights plan, 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 become exercisable at certain times associated with a transaction whereby
a person or group of affiliated persons acquires beneficial ownership of 20% or
more of the Company's general voting power, unless the Board of Directors
determines the transaction to be fair and in the best interests of the Company
and its stockholders.
Stock Compensation Plans: The Company has various stock-based
compensation plans, which are described below. The Company applies the
provisions of APB No. 25 and related Interpretations in accounting for its
plans. Accordingly, no compensation expense has been recognized upon granting of
options under its fixed stock option plans, performance-based plan or its stock
purchase plan. Had compensation cost for the Company's stock-based compensation
plans been determined based on the fair value at the grant dates for awards
under those plans consistent with the method of SFAS No. 123, the Company's net
(loss) income and per share amounts would have been adjusted to the pro forma
amounts indicated below. The provisions of SFAS No. 123 have been applied to
awards with grant dates in 1997, 1996 and 1995, only. Therefore, until the new
rules are applied to all outstanding, nonvested awards, the compensation cost
reflected in the pro forma amounts presented below is not indicative of future
amounts.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Net (loss) income:
As reported ................................ $ (272,608) $ 33,300 $ (74,476)
Pro forma .................................. $ (276,213) $ 29,649 $ (76,359)
Net (loss) income per share:
As reported ................................ $ (5.30) $ 0.66 $ (1.58)
Pro forma .................................. $ (5.37) $ 0.58 $ (1.62)
Net (loss) income per share - assuming dilution:
As reported ................................ $ (5.30) $ 0.64 $ (1.58)
Pro forma .................................. $ (5.37) $ 0.58 $ (1.62)
</TABLE>
Fixed Stock Option Plans: The Company has various fixed stock option
plans that provide for the granting of incentive or non-statutory options to its
key employees and non-employee members of the Board of Directors. In the case of
incentive stock options, the exercise price may not be less than the fair market
value of the Company's stock on the date of the grant, and may not be less than
110% of the fair market value of the Company's stock on the date of the 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.
Approximately 8,107,000 shares of Common Stock are reserved for future issuance
upon exercise of fixed options.
For purposes of pro forma disclosure, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted average assumptions used for grants in 1997,
1996 and 1995: risk-free interest rates ranging from 6.45% to 5.82%, 6.91% to
6.33% and 7.69% to 5.55% for 1997, 1996 and 1995, respectively; dividend yield
of 0% for all years; expected lives ranging from 6.50 years for 1997 and 1.25 to
6.58 years for 1996 and 1995; and volatility of 55% for 1997 and 43% for 1996
and 1995.
F-13
<PAGE> 42
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the status of the Company's fixed stock option plans as of
December 31, 1997, 1996 and 1995, and the activity during the years ending on
those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------------- --------------------------- ----------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------ -------------- --------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year ........ 3,431,472 $ 17.12 4,111,824 $ 15.22 4,008,801 $ 10.32
Granted:
Exercise price equal to fair value ... 201,000 $ 15.86 710,800 $ 18.60 2,280,475 $ 22.06
Exercise price greater than fair value 53,000 $ 18.25 10,000 $ 28.25 --
Exercise price less than fair value .. -- 25,000 $ 10.00 --
Exercised .............................. (304,635) $ 9.95 (1,073,804) $ 9.67 (1,233,243) $ 8.32
Forfeited .............................. (576,885) $ 18.94 (352,348) $ 20.41 (944,209) $ 19.96
---------- ---------- ----------
Outstanding - end of year .............. 2,803,952 $ 17.46 3,431,472 $ 17.12 4,111,824 $ 15.22
========== ========== ==========
Exercisable at end of year ............. 1,469,113 $ 16.19 1,281,402 $ 13.99 1,541,461 $ 9.56
========== ========== ==========
Weighted-average fair value of options
granted during the year ................ $ 9.91 $ 9.92 $ 11.01
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- -----------------------------
WEIGHTED-
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGE OF EXERCISE PRICES AS OF 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AS OF 12/31/97 EXERCISE PRICE
- ------------------------ -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.75 - $ 9.64 182,947 3.28 $ 4.54 182,947 $ 4.54
$10.00 - $13.50 292,191 4.06 $11.50 251,204 $11.53
$14.11 - $17.68 1,156,474 7.89 $16.74 503,222 $16.61
$18.25 - $20.50 883,540 7.86 $20.36 377,676 $20.43
$25.25 - $29.00 288,800 7.31 $25.66 154,064 $25.89
--------- ---- ------ --------- ------
$ 0.75 - $29.00 2,803,952 7.12 $17.46 1,469,113 $16.19
</TABLE>
Performance-Based Stock Option Plan: The Company's Long-Term Senior
Management Equity Plan provided for the granting of non-statutory stock option
awards to key members of senior management at fair market value on the date of
the grant. The Plan provided for vesting at the rate of 25% per year beginning
in 1995 and accelerated vesting upon the occurrence of certain events and the
achievement of certain cumulative and annual earnings per share targets. Due to
the change in control in 1995 meeting specific criteria in the plan, half of the
outstanding options vested. An additional 32% of the outstanding options vested
in 1995 based on the achievement of the targeted cumulative earnings per share
amount. No further vesting occurred in 1997 or 1996. Options awarded under this
plan expire 10 years from the date of grant. No options were granted in 1997 or
1996 under this plan, and no further grants are authorized. Approximately
837,000 shares of Common Stock are reserved for future issuance upon exercise of
stock options under this plan.
F-14
<PAGE> 43
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the status of the Company's performance-based stock option
plan as of December 31, 1997, 1996 and 1995, and the activity during the years
ending on those dates is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------- ------------------------- -------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
------- -------------- ------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of year 919,722 $11.24 1,365,400 $11.20 1,858,000 $11.54
Granted ....................... -- -- --
Exercised ..................... (60,440) $11.15 (416,878) $11.13 (239,600) $12.54
Forfeited ..................... (22,680) $11.30 (28,800) $11.00 (253,000) $12.41
------- --------- ---------
Outstanding - end of year ..... 836,602 $11.24 919,722 $11.24 1,365,400 $11.20
======= ========= =========
Exercisable at end of year .... 641,842 $11.25 702,282 $11.24 681,400 $11.19
======= ======= =======
</TABLE>
As of December 31, 1997, the 836,602 options outstanding under the
performance-based plan have exercise prices between $11.00 and $13.50 and a
weighted-average remaining contractual life of 4.41 years.
Employee Stock Purchase Plan: Under the 1994 Employee Stock Purchase
Plan (the "Plan"), the Company was authorized to issue up to 350,000 shares of
Common Stock to its full-time employees, nearly all of whom were eligible to
participate. This Plan was effectively terminated on December 31, 1995 and was
replaced by a noncompensatory plan in 1996. Under the terms of the Plan,
participants could choose to have up to 10% of their annual base earnings
withheld to purchase the Company's Common Stock. The purchase price of the stock
was the lesser of the beginning-of-the-year market price or 85% of the
end-of-year market price. Under the Plan, the Company sold 21,456 shares to
employees in 1995. The fair value of the employees' purchase rights was
estimated using the Black-Scholes model with the following assumptions for 1995:
risk-free interest rate of 7.23%; dividend yield of 0%; an expected life of one
year; and expected volatility of 68.7%. The weighted-average fair value of
purchase rights granted in 1995 was $5.76.
F-15
<PAGE> 44
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7 -- CERTAIN OPERATING STATEMENT CAPTIONS
Restructuring and 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, (including $3,810,000 paid to a firm in which a member of the
Company's Board of Directors is a managing director) 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 premerger
claims.
In connection with the 1995 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 included a
workforce reduction of approximately 1,220 employees across all employee groups,
the consolidation of approximately 120 branch locations and the conversion of
continuing branches to a standardized information system. The plan, which was
completed by September 1996, resulted in a restructuring charge in 1995 of
$68,304,000 (including an impairment charge of $22,160,000 for hardware and
internally developed software which is separately disclosed on the statement of
operations).
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 related to information
systems being discontinued. The following table summarizes the principal
components of the charge, amounts paid through December 31, 1997, and the
remaining accrual at December 31, 1997, which consists of branch and billing
center closure costs.
<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
Internally developed software .................. -- 14,529
Information systems equipment .................. -- 7,631
Other .......................................... 1,000 543
-------- --------
36,247 $ 32,057
Severance amounts paid through December 31, 1997 (21,501) ========
Other amounts paid through December 31, 1997 ... (13,023)
--------
Accrual at December 31, 1997 ................... $ 1,723
========
</TABLE>
Employee Contracts, Benefit Plan and Claim Settlements: In 1996 and
1995, the Company recorded $14,795,000 and $20,367,000, respectively, for
employee contract, benefit plan and claim settlements. In 1996, the accrual
included $5,272,000 for legal settlements and related costs in excess of amounts
previously accrued and $6,223,000 to cover the settlement and associated costs
related to the termination of a proposed merger with Vitas Healthcare
Corporation. Also in 1996, a $3,300,000 increase to the settlement loss on the
termination of the Abbey defined benefit pension plan was recorded based on
updated actuarial estimates. In 1995, the accrual included $14,611,000 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 defined benefit pension plan.
F-16
<PAGE> 45
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,
------------------------
1997 1996
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation ............................ $ 20,402 $ 13,220
Intangible assets ..................................... 727 718
Other, net ............................................ 206 2,889
--------- ---------
Total deferred tax liabilities ..................... 21,335 16,827
Deferred tax assets:
Allowance for doubtful accounts ....................... 33,150 33,105
Accruals .............................................. 15,041 13,404
Asset valuation reserves .............................. 4,058 2,379
Net operating loss carryforward, limited by Section 382 66,416 23,985
AMT and research credit carryovers .................... 4,500 4,977
Other, net ............................................ 475 457
--------- ---------
Total deferred tax assets .......................... 123,640 78,307
Valuation allowance ..................................... (102,305) (31,517)
--------- ---------
Net deferred tax assets ................................. 21,335 46,790
--------- ---------
Net deferred taxes ...................................... $ -- $ 29,963
========= =========
Current deferred tax assets, net of current deferred
tax liabilities ....................................... $ -- $ 31,106
Non-current deferred tax liabilities, net of non-current
deferred tax assets ................................... -- 1,143
--------- ---------
Net deferred taxes ...................................... $ -- $ 29,963
========= =========
</TABLE>
At December 31, 1997, the Company's federal operating loss carryforwards
approximated $225,000,000, which begin to expire in 2003. Additionally, the
Company has various state operating loss carryforwards which began to expire in
1997. As a result of an ownership change in 1992 which met specified criteria of
Section 382 of the Internal Revenue Code, future use of a portion of the federal
and state operating loss carryforwards generated prior to 1992 are each limited
to approximately $5,000,000 per year. Because of the annual limitation,
approximately $57,000,000 of each of the Company's federal and state operating
loss carryforwards may expire unused. The net operating loss carryforward amount
included in deferred tax asset excludes such amount.
In the fourth quarter of 1997, the Company increased its valuation
allowance for deferred tax assets due to recurring tax losses and Management's
reduced expectations of future taxable income.
The valuation allowance at December 31, 1996 was provided primarily
against the Company's net operating loss carryforwards and certain other
deferred tax assets, the expected use of which exceeded the Company's earnings
assumption and were not otherwise offset by deferred tax liabilities. The
Company's 1996 future taxable income assumption considered the Company's pretax
earnings in 1996 and in the fourth quarter of 1995, the Company's history of
earnings in periods prior to the merger and certain revenue concentration
uncertainties (see Note 12).
F-17
<PAGE> 46
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income tax (benefit) expense consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal ........................................... $ 3,623 $ (7,917) $ (9,569)
State ............................................. 1,964 177 495
Foreign ........................................... 1,000 -- --
-------- -------- --------
6,587 (7,740) (9,074)
Deferred:
Federal ........................................... 25,768 14,106 (16,810)
State ............................................. 4,195 1,814 (2,738)
-------- -------- --------
29,963 15,920 (19,548)
Tax benefits credited to paid-in capital and goodwill -- 10,548 9,681
-------- -------- --------
$ 36,550 $ 18,728 $(18,941)
======== ======== ========
</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. The tax
benefit of stock option exercises in 1997 is included in the Company's net
operating loss carryforward and therefore not reflected as a credit to paid in
capital. In addition, the recognition for income tax purposes of certain
deferred tax assets relating to acquired businesses reduces related goodwill for
financial reporting purposes.
Current federal income tax expense in 1997 represents the amount settled
and paid in connection with an audit of the Company's federal income tax returns
for tax years ending in 1992 through 1995. The amount paid represents an
increase to certain deferred tax assets for which no benefit was recorded in
1997 because an offsetting increase to the valuation allowance was recorded.
Current state income tax expense in 1997 includes the estimated
settlement amounts of state income tax audits in progress. Current state income
tax expense for all periods presented includes state tax amounts accrued and
paid on a basis other than income. Current foreign income tax expense in 1997
includes the estimated foreign taxes payable on the sale of the Company's 15%
interest in Omnicare plc (see Note 2).
Differences between the Company's income tax expense (benefit) and an
amount calculated utilizing the federal statutory rate are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax (benefit) expense at statutory rate .............. $(82,621) $ 18,210 $(30,742)
Non-deductible merger costs and amortization
and impairment loss on goodwill ........................... 48,783 2,150 4,907
State and foreign taxes, net of federal
benefit and state loss carryforwards ...................... 7,159 1,991 (2,243)
Increase in valuation allowance for
deferred items previously recognized ...................... 25,768 -- --
Tax benefit of net operating loss not currently recognized .. 33,816 3,734 419
Expense (benefit) of deferred items not previously recognized -- (7,914) 7,958
Other ....................................................... 3,645 557 760
-------- -------- --------
$ 36,550 $ 18,728 $(18,941)
======== ======== ========
</TABLE>
Net income taxes (refunded) paid in 1997, 1996 and 1995, amounted to
$(26,426,000), $(963,000) and $15,159,000, respectively.
F-18
<PAGE> 47
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 9 - PER SHARE AMOUNTS
The following table sets forth the computation of basic and diluted per
share amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Numerator:
(Loss) income before extraordinary charge ...................... $ (272,608) $ 33,300 $ (71,478)
Numerator for basic per share amounts - income
available to common stockholders ............................ $ (272,608) $ 33,300 $ (71,478)
Numerator for diluted per share amounts - income
available to common stockholders ............................ $ (272,608) $ 33,300 $ (71,478)
Denominator:
Denominator for basic per share
amounts - weighted average shares ........................... 51,419 50,811 47,112
Effect of dilutive securities:
Employee stock options ...................................... -- 1,371 --
----------- ----------- -----------
Dilutive potential common shares ............................ -- 1,371 --
----------- ----------- -----------
Denominator for diluted per share amounts - adjusted
weighted average shares .................................... 51,419 52,182 47,112
=========== =========== ===========
Basic (loss) earnings per share amounts ........................... $ (5.30) $ 0.66 $ (1.52)
=========== =========== ===========
Diluted (loss) earnings per share amounts ......................... $ (5.30) $ 0.64 $ (1.52)
=========== =========== ===========
Employee stock options excluded from the computation of diluted per
share amounts:
Exercise price exceeds average market
price of Common Stock .................................... 1,813,719 43,600 33,600
Other ....................................................... 468,000 -- 2,117,000
----------- ----------- -----------
2,281,719 43,600 2,150,600
=========== =========== ===========
Average exercise price per share that exceeds
average market price of Common Stock ........................... $ 20.13 $ 27.18 $ 27.68
=========== =========== ===========
</TABLE>
Because net losses were incurred in 1997 and 1995 the impact of options
are antidilutive in those years and there is no difference between basic and
diluted per share amounts.
For additional disclosure regarding the employee stock options, see Note
6.
NOTE 10 -- 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.
F-19
<PAGE> 48
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company occasionally subleases unused facility space when a lease
buyout is not a viable option. Sublease income, in amounts not considered
material, is recognized monthly and is offset against facility lease expense.
Net rent expense in 1997, 1996 and 1995 amounted to $52,802,000 $46,493,000 and
$47,602,000, respectively.
In addition, during 1997, 1996 and 1995, the Company acquired patient
service equipment, information systems and equipment and furnishings totaling
$7,235,000, $12,021,000 and $5,876,000, 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
$8,578,000, $9,314,000 and $4,410,000 in 1997, 1996 and 1995, respectively.
The following amounts for assets under capital lease obligations are
included in both the patient service equipment and property, equipment and
improvements:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Patient service equipment ... $ 1,930 $ 1,930
Information systems ......... 33,901 31,474
Equipment and furnishings ... 3,648 3,648
Buildings and improvements .. -- 66
-------- --------
39,479 37,118
Less accumulated depreciation (21,210) (15,270)
-------- --------
$ 18,269 $ 21,848
======== ========
</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, 1997:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
1998 ........................................... $ 9,611 $ 47,692
1999 ........................................... 5,595 40,587
2000 ........................................... 2,441 31,250
2001 ........................................... -- 22,901
2002 ........................................... -- 14,189
Thereafter ..................................... -- 25,601
--------- ---------
17,647 $ 182,220
Less interest included in minimum lease payments (1,092) =========
---------
Present value of minimum lease payments ........ 16,555
Less current portion ........................... (8,513)
---------
$ 8,042
=========
</TABLE>
NOTE 11 -- EMPLOYEE BENEFIT PLANS
The Company has a 401(k) defined contribution plan, whereby eligible
employees may contribute up to 16% of their annual basic earnings. The Company
matches 50% of the first 8% of employee contributions. Total expenses related to
the defined contribution plan were $3,791,000, $4,370,000 and $2,980,000, in
1997, 1996 and 1995, respectively (see Note 7).
The Company had a defined benefit pension plan, covering substantially
all Abbey employees, which was terminated in 1995. Net periodic pension cost,
included in selling, distribution and administration expenses, amounted to
$925,000 in 1995. In connection with the termination, the Company recognized
costs of $3,300,000 and $2,275,000 in 1996 and 1995, respectively (see Note 7).
All benefits were distributed to participants in 1997.
F-20
<PAGE> 49
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
Purchase Commitments: On September 1, 1994, the Company entered into a
five-year agreement to purchase medical supplies totaling $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. 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 the 12-month periods ended August 31, 1997
and 1996, exceeded the annual commitment by 61% and 54%, respectively. As a
result of Management's recent decision to phase out low-margin medical supply
business, the Company has worked to transition its managed care supply business
directly to the vendor and is currently restructuring the agreement to reflect
these changes.
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. In 1997, 1996 and 1995, certain claims and
lawsuits were settled and the Company paid amounts, including the cost of
defense, totaling approximately $3,277,000, $16,619,000 and $10,590,000,
respectively. Charges to income of $2,760,000, $11,533,000 and $12,400,000 were
taken in 1997, 1996 and 1995, respectively, to provide for probable losses
related to matters arising in each period and to revise estimates for matters
arising in previous periods. Subsequent to year-end, the Company settled claims
totaling $291,000.
The Company and several of its present and former officers and/or
directors are defendants in three "class action" lawsuits filed in March and
April of 1998 in the U.S. District Court for the Central District of California,
Southern Division. Two of the complaints purport to establish a class of
shareholders who purchased Apria stock between March 2, 1995 and January 20,
1998. The third complaint purports to establish a class of shareholders who
purchased Apria stock between April 30, 1997 and March 11, 1998. No class has
been certified at this time. The complaints allege, among other things, that the
defendants made false and/or misleading public statements regarding the Company
and its financial condition in violation of federal securities laws. All three
complaints seek compensatory as well as other relief. Two of the complaints
include a claim for punitive damages. The Company believes that it has
meritorious defenses to the plaintiffs' claims, and it intends to vigorously
defend itself against all three actions. In the opinion of Management, the
ultimate disposition of these cases will not have a material adverse effect on
the Company's financial condition or results of operations.
Operating Systems: Management has committed to a two-year plan to
implement a large scale, fully integrated enterprise resource planning (ERP)
system which will replace the Company's current field information systems.
Significant development effort and presumably expense will be required to
customize the ERP system for the complexities of the Company's business. The
Board of Directors approved the project in December 1997; however, the total
cost cannot be reasonably estimated at this time as the Company is currently in
the vendor selection phase of the project.
Certain Concentrations: Approximately 51% of the Company's revenues are
derived from the provision of respiratory therapy services, a significant
portion of which is reimbursed under the Federal Medicare program. Effective
January 1, 1998, reimbursement for home oxygen services has been reduced by 25%
and will be reduced an additional 5% in 1999 and subsequent years. The Company
estimates the impact of the reduction on 1998 revenues to be $55,000,000 to
$60,000,000. Also effective January 1, 1998, Consumer Price Index-based
reimbursement increases on home medical equipment were frozen until 2002.
The Company currently purchases approximately 38% of its patient service
equipment and supplies from three suppliers. Although there are a limited number
of suppliers, Management believes that other suppliers could provide similar
products on comparable terms. However, a change in suppliers could cause delays
in service delivery and possible losses in revenue which could adversely affect
operating results.
Reimbursement: Laws and regulations governing the Medicare and Medicaid
programs are complex and subject to interpretation. The Company believes that it
is in compliance with all applicable laws and regulations and is not aware of
any pending or threatened investigations involving allegations of potential
wrongdoing. While no such regulatory inquiries have been made, compliance with
such laws and regulations can be subject to future government review and
interpretation as well as significant regulatory action including fines,
penalties, and exclusion from the Medicare and Medicaid programs. Management is
not aware of any material claims or disputes related to any of its third-party
reimbursement arrangements.
F-21
<PAGE> 50
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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>
1997
Net revenues ................ $ 313,863 $ 295,735 $ 304,356 $ 266,740
Gross profit ................ 209,184 167,272 199,706 153,350
Operating income (loss) ..... 41,910 (57,144) 28,474 (199,905)
Net income (loss) ........... $ 19,240 $ (69,876) $ 16,186 $(238,158)
Net income (loss) per share . $ 0.38 $ (1.36) $ 0.31 $ (4.62)
Net income (loss) per share -
assuming dilution ....... $ 0.37 $ (1.36) $ 0.31 $ (4.62)
1996
Net revenues ................ $ 295,303 $ 306,579 $ 306,026 $ 273,235
Gross profit ................ 201,212 209,636 212,109 157,511
Operating income (loss) ..... 42,868 46,234 45,231 (33,056)
Net income (loss) ........... $ 20,326 $ 21,908 $ 20,749 $ (29,683)
Net income (loss) per share . $ 0.41 $ 0.43 $ 0.41 $ (0.58)
Net income (loss) per share -
assuming dilution ........ $ 0.39 $ 0.42 $ 0.40 $ (0.58)
</TABLE>
The operating results for the fourth quarter of 1997 include adjustments
to reduce revenue and accounts receivable by $20,000,000 and to increase bad
debt expense and the allowance for doubtful accounts by $6,423,000. The
adjustment to revenue represents the estimated amount of year-end accounts
receivable that will ultimately be written off due to price discrepancies,
failure to obtain payor authorizations, missed filing deadlines and other
reasons unrelated to credit risk. Both adjustments resulted primarily from
refinements to the Company's estimation procedures made as a result of
Management's year-end analysis of accounts receivable. Specifically, based on
tests of subsequent realization and review of patient billing files at selected
billing locations, increases were made to the percentages applied to the
Company's accounts receivable aging to estimate allowance amounts. In addition,
due to an increasing tendency for certain managed care payors to accumulate
significant amounts of patient balances, a specific review and allowance
estimation was performed for payors with large aggregated patient balances.
An adjustment of $20,225,000 was recorded in the fourth quarter of 1997
to write down the carrying value of internally developed software due to the
fourth quarter decision of the Company's Information Systems Steering Committee
to replace the Company's internally developed field information system. In
connection with Management's evaluation of the Company's internally developed
software, Management also conducted a review of the Company's computer hardware,
including telecommunications equipment. Equipment with a carrying value of
$6,556,000 was identified as functionally obsolete or no longer in use and was
written off (see Note 3).
Based on Management's year-end evaluation of the carrying value and
amortization periods of intangible assets, an impairment charge of $133,542,000
was recorded in the fourth quarter of 1997 to reduce the carrying value of
recorded goodwill to Management's estimate of fair value (see Note 4).
The fourth quarter of 1997 also includes a $10,100,000 adjustment for
estimated excess quantities, obsolescence and shrinkage of patient service
equipment and inventory arising after the Company's asset verification and
physical inventory procedures, which were performed primarily in the second and
third quarters. In addition, the Company's fourth quarter decision to terminate
approximately 524 employees resulted in a year-end severance accrual of
$6,000,000. Other fourth quarter charges
F-22
<PAGE> 51
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
included the accrual of incentive compensation related to fourth quarter
initiatives of $2,151,000, accrual of costs associated with the closure of
certain facilities and the Company's ApriaDirect Clinical program of $2,298,000,
accrual of certain excise taxes and interest on a tax settlement of $2,000,000
and other miscellaneous accruals of $1,250,000.
The Company also recorded in the fourth quarter of 1997, an adjustment
to increase its valuation allowance for net deferred tax assets due to recurring
tax losses and Management's reduced expectations for 1998 (see Note 8).
The second quarter of 1997 included adjustments to reduce revenue and
accounts receivable by $20,000,000 and increase bad debt expense and the
allowance for doubtful accounts by $55,000,000. The adjustments resulted from
the lower than anticipated improvement in the aging of accounts receivable and
collection periods and rates. Management had expected that the impact of 1996
computer system conversions and high turnover rate among billing and collection
personnel would have been substantially reversed by the middle of 1997. However,
the dollar amount and percentage of accounts aged over 180 days at May 31, 1997
remained comparable to the December 31, 1996 amount and percentage, and the
average collection period had decreased by only four days. As a result,
Management increased its allowance estimate for accounts aged over 180 days to
provide for write-offs of older accounts expected to be taken over the ensuing
months. The provision for revenue adjustments represented management's estimate
of accounts originated in 1997 that would ultimately be written off for reasons
unrelated to credit. The adjustment was necessitated by the continuing incidence
of billing errors and long collection periods during which such errors were
generally undetected.
The second quarter of 1997 also includes a $23,000,000 adjustment to
provide for estimated excess quantities, obsolescence and shrinkage of patient
service equipment and inventory. The amount was estimated based on the
preliminary results of asset verification and physical inventory procedures
performed in the second quarter. The adjustment was sufficient to cover actual
write-offs resulting from the third quarter completion of the Company's asset
verification and physical inventory procedures.
The operating results for the fourth quarter of 1996 include adjustments
to reduce revenues and accounts receivable by $32,300,000 and increase bad debt
expense and the allowance for doubtful accounts by $9,000,000. The increase in
the Company's average collection period during 1996, the significant number of
system conversions performed in the second and third quarters of 1996 and an
increased turnover rate in 1996 among billing and collection personnel resulted
in a slow down in cash applications and account reviews, an increased rate of
billing errors in the second half of 1996, delays in the identification and
recording of revenue adjustments and an increased level of unidentified revenue
adjustments in the year-end accounts receivable balance. Although some portion
of the revenue adjustment related to transactions originally recorded in periods
prior to the fourth quarter, Management does not believe a reasonably accurate
allocation of the adjustment to prior quarters is determinable. The adjustment
to the allowance for doubtful accounts was due in part to an increase in the
fourth quarter of 1996 in the amount of accounts aged in excess of 180 days.
The fourth quarter of 1996 also includes a $10,000,000 adjustment to
provide for excess and obsolete patient service equipment and supplies which was
determined based on the Company's year-end physical inventory and quantity
reconciliation procedures. In addition, two lawsuits were settled in the fourth
quarter which resulted in the accrual of $5,272,000 for settlement amounts and
related costs in excess of amounts previously accrued. The November 1996
termination of a proposed merger with Vitas Healthcare Corporation resulted in a
settlement and associated costs totaling $6,223,000, which was accrued and paid
in the fourth quarter. Further, based on information provided by actuarial
consultants, the estimated settlement loss on the termination of the Abbey
defined benefit pension plan was increased by $3,300,000 in the fourth quarter.
Gross profit in the third quarter of 1996 reflects a change in the
depreciable lives of certain classes of patient service equipment. The change
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 revenues in the
third quarter of $3,200,000 of which $2,900,000 related to a single asset type
for which the depreciable life was extended from four to 12 months. The impact
to the year ended December 31, 1996 was a reduction in the cost of net revenues
of $6,400,000. The impact to net income per share for the third quarter of 1996
and the year ended December 31, 1996 were increases of $.04 and $.08,
respectively.
F-23
<PAGE> 52
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14 - SUBSEQUENT EVENTS
On February 3, 1998, the Company entered into a Stock Purchase Agreement
(the "JLL Agreement") with JLL Argosy Apria, LLC, Joseph Littlejohn & Levy Fund
III, LP and CIBC WG Argosy Merchant Fund 2, LLC (together, the "JLL Group").
Pursuant to the terms of the JLL Agreement, among other things, the Company was
to issue and sell 12,300,000 shares of Common Stock and issue warrants to
purchase 5,000,000 additional shares, exercisable at $20.00 per share, in
consideration for a cash investment of $172,200,000 by the JLL Group. The
Company was to have used the proceeds, together with $70,000,000 in new
borrowings under the Company's credit facility, to purchase 17,300,000 shares of
Common Stock. On April 3, 1998, the parties agreed to terminate the JLL
Agreement without any further obligation to any party.
F-24
<PAGE> 53
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
of Period Expenses Accounts Deductions Period
-------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
Deducted from asset accounts:
Allowance for revenue adjustments ... $ 32,300 $ -- $ 40,000(b) $ 34,242 $ 38,058
Allowance for doubtful accounts ..... 73,809 121,908 1,697(a) 139,001 58,413
Reserve for inventory excess,
obsolescence and shrinkage ....... 1,825 26,716 -- 22,168 6,373
Reserve for patient service equipment
excess, obsolescence and shrinkage 4,812 8,584 -- 9,496 3,900
-------- -------- -------- -------- --------
Totals .................. $112,746 $157,208 $ 41,697 $204,907 $106,744
======== ======== ======== ======== ========
Year ended December 31, 1996
Deducted from asset accounts:
Allowance for revenue adjustments ... $ -- $ -- $ 32,300(b) $ -- $ 32,300
Allowance for doubtful accounts ..... 86,567 67,040 608(a) 80,406 73,809
Reserve for inventory excess,
obsolescence and shrinkage ....... 5,754 3,013 -- 6,942 1,825
Reserve for patient service equipment
excess, obsolescence and shrinkage 11,860 7,500 -- 14,548 4,812
-------- -------- -------- -------- --------
Totals .................. $104,181 $ 77,553 $ 32,908 $101,896 $112,746
======== ======== ======== ======== ========
Year ended December 31, 1995
Deducted from asset accounts:
Allowance for doubtful accounts ..... $ 61,038 $100,463 $ 2,655(c) $ 77,589 $ 86,567
Reserve for inventory excess,
obsolescence and shrinkage ....... 3,952 2,898 8(c) 1,104 5,754
Reserve for patient service equipment
excess, obsolescence and shrinkage 4,546 9,216 117(c) 2,019 11,860
-------- -------- -------- -------- --------
Totals .................. $ 69,536 $112,577 $ 2,780 $ 80,712 $104,181
======== ======== ======== ======== ========
</TABLE>
- -------------------
(a) Includes amounts added in conjunction with business acquisitions.
(b) Amount charged against net revenues. See Note 12 to the Consolidated
Financial Statements.
(c) Represents the net activity for Homedco for the period of October 1,
1994 through December 31, 1994. See Note 2 to the Consolidated Financial
Statements.
S-1
<PAGE> 54
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 15, 1998
APRIA HEALTHCARE GROUP INC.
By: /s/ LAWRENCE M. HIGBY
---------------------------------------
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ LAWRENCE M. HIGBY
- -----------------------------
Lawrence M. Higby President and Chief Operating Officer April 15, 1998
(Principal Executive Officer)
/s/ LAWRENCE H. SMALLEN
- -----------------------------
Lawrence H. Smallen Chief Financial Officer, Senior Vice April 15, 1998
President, Finance and Treasurer
(Principal Financial Officer)
/s/ JAMES E. BAKER
- -----------------------------
James E. Baker Vice President, Controller April 15, 1998
(Principal Accounting Officer)
/s/ GEORGE ARGYROS
- -----------------------------
George Argyros Director, Chairman of the Board April 15, 1998
/s/ DAVID L. GOLDSMITH
- -----------------------------
David L. Goldsmith Director April 15, 1998
/s/ LEONARD GREEN
- -----------------------------
Leonard Green Director April 15, 1998
/s/ TERRY HARTSHORN
- -----------------------------
Terry Hartshorn Director April 15, 1998
/s/ JEREMY M. JONES
- -----------------------------
Jeremy M. Jones Director April 15, 1998
/s/ FREDERICK S. MOSELEY, IV
- -----------------------------
Frederick S. Moseley, IV Director April 15, 1998
/s/ VINCENT M. PRAGER
- -----------------------------
Vincent M. Prager Director April 15, 1998
</TABLE>
<PAGE> 55
SIGNATURES (CONTINUED)
Pursuant to the requirements of Section 13 or 15(d) 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.
<TABLE>
<S> <C> <C>
/s/ H.J. MARK TOMPKINS Director April 15, 1998
- ----------------------
H.J. Mark Tompkins
/s/ RALPH V. WHITWORTH Director April 15, 1998
- ----------------------
Ralph V. Whitworth
</TABLE>
<PAGE> 56
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE/REF.
- ------ ----------- ---------
<S> <C> <C>
2.1 Agreement and Plan of Merger dated March 1, 1995 between Abbey and Homedco. (e)
2.2 Agreement and Plan of Merger dated March 1, 1995, as amended on May 18, 1995, by and
between Abbey and Homedco. (h)
2.3 Agreement for the Sale and Purchase of the Whole of the Issued Share Capital of The
Omnicare Group Limited and Assumption of Certain Liabilities, dated June 20, 1995,
between Abbey Health Services Limited and Stanton Industries Limited. (i)
3.1 Restated Certificate of Incorporation of Registrant. (f)
3.2 Certificate of Ownership and Merger merging Apria Healthcare Group Inc. into Abbey
and amending Abbey's Restated Certificate of Incorporation to change Abbey's name to (i)
"Apria Healthcare Group Inc."
3.3 Amended and Restated Bylaws of Registrant, as amended on January 27, 1997. (n)
3.4 Amended and Restated Bylaws of Registrant, as amended on January 27, 1998.
4.1 Form of 9 1/2% Senior Subordinated Note due 2002. (b)
4.2 Indenture dated November 1, 1993, by and among Abbey, certain Subsidiary Guarantors
defined therein and U.S. Trust Company of California, N.A. (d)
4.3 Shareholder Rights Agreement dated February 8, 1995, between Abbey and U. S. Stock
Transfer Corporation, as Rights Agent. (e)
4.4 Specimen Stock Certificate of the Registrant.
4.5 Certificate of Designation of the Registrant. (f)
4.6 Amendment No. 1 to the Rights Agreement dated as of June 30, 1997, by and among Apria
Healthcare Group Inc., Norwest Bank Minnesota, N.A. and U.S. Stock Transfer (p)
Corporation.
10.1 Abbey 1991 Stock Option Plan. (a)
10.2 Abbey Schedule of Registration Procedures and Related Matters. (c)
10.3 Homedco 401(k) Savings Plan, restated effective October 1, 1993, amended December 28, (k)
1994.
10.4 Apria/Homedco Stock Incentive Plan, dated June 28, 1995. (g)
10.5 Abbey Amended and Restated 1992 Stock Incentive Plan. (k)
10.6 Amendment Number Two to the Homedco 401(k) Savings Plan, dated June 28, 1995. (l)
10.7 Building Lease, dated July 21, 1995, between C.J. Segerstrom & Sons, a California
general partnership, and Apria Healthcare, Inc. for 10 locations within Harbor (l)
Gateway Business Center, Costa Mesa, California.
10.8 Assignment, Assumption and Consent Re: Lease (dated December 1, 1988, between C.J.
Segerstrom & Sons, a California general partnership, and Abbey Medical, Inc. for
premises located within Harbor Gateway Business Center, Costa Mesa, California),
executed by Abbey Medical, Inc. and Apria Healthcare, Inc. as of July 21, 1995 and (j)
executed by C.J. Segerstrom & Sons, a California general partnership, as of July 24,
1995.
10.9 First Amendment to Complete Restatement of Lease Amendments and
Amendment to Building Lease, dated as of July 24, 1996, between C.J.
Segerstrom & Sons, a California general partnership, and Apria
Healthcare, Inc., amending the Building Lease, dated July 21, (n)
1995, between the parties.
</TABLE>
<PAGE> 57
EXHIBIT INDEX (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE/REF.
- ------ ----------- ---------
<S> <C> <C>
10.10 Assignment and Assumption of Lease (Building Lease, dated July 21,
1995, between C.J. Segerstrom & Sons, a California general
partnership, and Apria Healthcare, Inc.), dated as of January 1,
1996, between Apria Healthcare, Inc. and Apria Healthcare Group (n)
Inc.
10.11 Amendment Number Three to the Homedco 401(k) Savings Plan, dated January 1, 1996. (l)
10.12 Credit Agreement, dated August 9, 1996, between Apria Healthcare
Group Inc. and certain of its subsidiaries, Bank of America National
Trust and Savings Association, Nationsbank of Texas, N.A. and other
financial institutions from time to time party thereto. (m)
10.13 Guaranty, dated as of August 9, 1996, made by Apria Healthcare Group
Inc., Apria Healthcare, Inc., Apria Number One, Inc., Apria Number
Two, Inc., Protocare of Metropolitan New York, Inc. and Homedco of
New York State, Inc. in favor of Bank of America National Trust (m)
and Savings Association.
10.14 Employment Agreement dated April 1, 1997, between Apria Healthcare Group Inc. and Merl (o)
A. Wallace.
10.15 First Amendment to Credit Agreement, dated April 22, 1997, among
Apria Healthcare Group Inc. and certain of its subsidiaries, Bank of
America National Trust and Savings Association, Nationsbank of Texas,
N.A. and other financial institutions party to the Credit (o)
Agreement.
10.16 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Lisa M. Getson. (o)
10.17 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Robert S. Holcombe. (o)
10.18 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Jerome J. Lyden. (o)
10.19 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Gary L. Mangiofico. (o)
10.20 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Steven T. Plochocki. (o)
10.21 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Thomas M. Robbins. (o)
10.22 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Susan K. Skara. (o)
10.23 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Lawrence H. Smallen. (o)
10.24 Executive Severance Agreement dated June 28, 1997, between Apria Healthcare Group Inc.
and Dennis E. Walsh. (o)
10.25 Second Amendment to Credit Agreement, dated July 31, 1997, among
Apria Healthcare Group Inc. and certain of its subsidiaries, Bank of
America National Trust and Savings Association, Nationsbank of Texas,
N.A. and other financial institutions party to the Credit (o)
Agreement.
10.26 Resignation and General Release Agreement dated September 26, 1997, between Apria
Healthcare Group Inc. and Steven T. Plochocki. (q)
</TABLE>
<PAGE> 58
EXHIBIT INDEX (CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE/REF.
- ------ ----------- ---------
<S> <C> <C>
10.27 Resignation and General Release Agreement dated November 7, 1997, between Apria
Healthcare Group Inc. and Gary L. Mangiofico.
10.28 Apria Healthcare Group Inc. 1997 Stock Incentive Plan, dated December 16, 1997. (r)
10.29 Resignation and General Release Agreement dated January 19, 1998, between Apria
Healthcare Group Inc. and Jeremy M. Jones.
10.30 Executive Employment Agreement dated January 26, 1998, between Apria Healthcare Group
Inc. and Lawrence M. Higby.
10.31 Third Amendment to Credit Agreement and Waiver, dated January 30,
1998, among Apria Healthcare Group Inc. and certain of its
subsidiaries, Bank of America National Trust and Savings
Association, Nationsbank of Texas, N.A. and other financial
institutions party to the Credit Agreement.
10.32 Stock Purchase Agreement dated February 3, 1998, by and among, JLL
Argosy Apria, LLC, CIBC WG Argosy Merchant Fund 2, LLC, Joseph
Littlejohn and Levy Fund III, LP and Apria Healthcare Group Inc. (s)
10.33 Stockholder Agreement dated February 3, 1998, by and among, JLL Argosy Apria, LLC,
CIBC WG Argosy Merchant Fund 2, LLC, Joseph Littlejohn and Levy Fund III, LP,
Relational Investors, LLC, HBI Financial, Inc. and Apria Healthcare Group Inc. (s)
10.34 Resignation and General Release Agreement dated February 4, 1998, between Apria
Healthcare Group Inc. and Jerome J. Lyden.
10.35 Fourth Amendment to Credit Agreement and Waiver, dated March 13,
1998, among Apria Healthcare Group Inc. and certain of its
subsidiaries, Bank of America National Trust and Savings
Association, Nationsbank of Texas, N.A. and other financial
institutions party to the Credit Agreement.
10.36 Security Agreement, dated March 13, 1998, between Apria Healthcare Group Inc., Apria
Healthcare, Inc., ApriaCare Management Systems, Inc., Apria Number
Two, Inc., Apria Healthcare of New York State, Inc. and Bank of
America National Trust and Savings Association.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
27.2 Restated Quarterly Financial Data Schedule.
</TABLE>
<PAGE> 59
EXHIBIT INDEX (CONTINUED)
REFERENCES -- DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
(a) Incorporated by reference to Abbey's Registration Statement on Form S-1
(Registration No. 33-44690), as filed on December 23, 1991.
(b) Incorporated by reference to Abbey's Registration Statement on Form S-1
(Registration No. 33-69078), as filed on September 17, 1993.
(c) Incorporated by reference to Abbey's Registration Statement on Form S-4
(Registration No. 33-69094), as filed on September 17, 1993.
(d) Incorporated by reference to Abbey's Annual Report on Form 10-K for the
year ended January 1, 1994.
(e) Incorporated by reference to Abbey's Current Report on Form 8-K, as
filed on March 20, 1995.
(f) Incorporated by reference to Abbey's Registration Statement on Form S-4
(Registration No. 33-90658), and its appendices, as filed on March 27,
1995.
(g) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-94026), as filed on June 28, 1995.
(h) Incorporated by reference to Abbey's final joint proxy
statement/prospectus as filed pursuant to Rule 424(b) on May 26, 1995.
(i) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q dated June 30, 1995, as filed on August 14, 1995.
(j) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q dated September 30, 1995, as filed on November 14, 1995.
(k) Incorporated by reference to the Registrant's Registration Statement on
Form S-8 (Registration No. 33-80581), as filed on December 19, 1995.
(l) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1995.
(m) Incorporated by reference to the Registrant's Registration Statement on
Amendment No. 1 to Form S-4 (Registration No. 333-09407), as filed on
August 27, 1996.
(n) Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996.
(o) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q dated June 30, 1997, as filed on August 14, 1997.
(p) Incorporated by reference to the Registrant's Registration Statement on
Form 8-A/A as filed on July 10, 1997.
(q) Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q dated September 30, 1997, as filed on November 14, 1997.
(r) Incorporated by reference to Registrant's Registration Statement on Form
S-8 (Registration No. 333-42775), as filed on December 19, 1997.
(s) Incorporated by reference to Registrant's Current Report on Form 8-K, as
filed on February 6, 1998.
<PAGE> 1
EXHIBIT 3.4
AMENDED AND RESTATED BYLAWS
OF
APRIA HEALTHCARE GROUP INC.,
A DELAWARE CORPORATION
January 27, 1998
ARTICLE I
OFFICES
SECTION 1.1 Registered Office. The registered office of this Corporation
shall be in the City of Wilmington, County of New Castle, Delaware and the name
of the resident agent in charge thereof is the agent named in the Certificate of
Incorporation until changed by the Board of Directors (the "Board").
SECTION 1.2 Principal Office. The principal office for the transaction of
the business of the Corporation shall be at such place as may be established by
the Board. The Board is granted full power and authority to change said
principal office from one location to another.
SECTION 1.3 Other Offices. The Corporation may also have an office or
offices at such other places, either within or without the State of Delaware, as
the Board may from time to time designate or the business of the Corporation may
require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.1 Time and Place of Meetings. Meetings of stockholders shall be
held at such time and place, within or without the State of Delaware, as shall
be stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
SECTION 2.2 Annual Meetings of Stockholders. The annual meeting of
stockholders shall be held on such date and at such time and place as may be
fixed by the Board of Directors and stated in the notice of the meeting, for the
purpose of electing directors and for the transaction of such other business as
is properly brought before the meeting in accordance with these Bylaws. To be
properly brought before the annual meeting, business must be either (i)
specified in the notice of annual meeting (or any supplement or amendment
thereto) given by or at the direction of the Board of Directors, (ii) otherwise
brought before the annual meeting by or at the direction of the Board of
Directors, (iii) brought before the meeting in accordance with Rule 14a-8 under
the Securities Exchange Act of 1934, or (iv) otherwise properly brought before
the annual meeting by a stockholder. In addition to any other applicable
requirements, for business to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation not less than sixty (60) days nor more than ninety (90) days prior
to the meeting; provided, however, that in the event that less than forty (40)
days' notice or prior public
1
<PAGE> 2
disclosure of the date of the annual meeting is given or made to stockholders,
notice by a stockholder, to be timely, must be received no later than the close
of business on the tenth (10th) day following the day on which such notice of
the date of the annual meeting was mailed or such public disclosure was made,
whichever first occurs. A stockholder's notice to the Secretary shall set forth
as to each matter the stockholder proposes to bring before the annual meeting
(i) a brief description of the business desired to be brought before the annual
meeting, (ii) the name and record address of the stockholder proposing such
business, (iii) the class, series and number of shares of the Corporation which
are beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business. No business shall be conducted at the annual
meeting except in accordance with the procedures set forth in this Article II,
Section 2.2. The officer of the Corporation presiding at an annual meeting
shall, if the facts warrant, determine and declare to the annual meeting that
business was not properly brought before the annual meeting in accordance with
the provisions of this Article II, Section 2.2, and if he should so determine,
he shall so declare to the annual meeting and any such business not properly
brought before the meeting shall not be transacted.
SECTION 2.3 Special Meetings. Special meetings of the stockholders of the
Corporation for any purpose or purposes may be called at any time by the Board,
or by a committee of the Board that has been duly designated by the Board and
whose powers and authority, as provided in a resolution of the Board or in the
Bylaws of the Corporation, include the power to call such meetings, and shall be
called by the Chairman or Secretary at the request in writing of a majority of
the Board, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the Corporation issued and outstanding and
entitled to vote but such special meetings may not be called by any other person
or persons; provided, however, that if and to the extent that any special
meeting of stockholders may be called by any other person or persons specified
in any provisions of the Certificate of Incorporation or any amendment thereto,
or any certificate filed under Section 151(g) of the Delaware General
Corporation Law (or its successor statute as in effect from time to time
hereafter), then such special meeting may also be called by the person or
persons in the manner, at the times and for the purposes so specified. Business
transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice.
SECTION 2.4 Stockholder Lists. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten (10) days before
every meeting of stockholders, a complete list of stockholders entitled to vote
at the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting or at the place of the meeting, and the list shall also be available at
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 2.5 Notice of Meetings. Notice of each meeting of stockholders,
whether annual or special, stating the place, date and hour of the meeting and,
in the case of a special
2
<PAGE> 3
meeting, the purpose or purposes for which such meeting has been called, shall
be given to each stockholder of record entitled to vote at such meeting not less
than ten (10) nor more than sixty (60) days before the date of the meeting.
Except as otherwise expressly required by law, notice of any adjourned meeting
of the stockholders need not be given if the time and place thereof are
announced at the meeting at which the adjournment is taken.
Whenever any notice is required to be given under the provisions of the
statutes or of the Certificate of Incorporation or of these Bylaws, a waiver
thereof in writing, signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto. Notice of any meeting of stockholders shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, except a
stockholder who shall attend such meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened.
SECTION 2.6 Quorum and Adjournment. The holders of a majority of the stock
issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum for holding all meetings of
stockholders, except as otherwise provided by applicable law or by the
Certificate of Incorporation; provided, however, that the stockholders present
at a duly called or held meeting at which a quorum is present may continue to
transact business until adjournment notwithstanding the withdrawal of enough
stockholders to leave less than a quorum, if any action taken (other than
adjournment) is approved by at least a majority of the shares required to
constitute a quorum. If it shall appear that such quorum is not present or
represented at any meeting of stockholders, the Chairman of the meeting shall
have power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than thirty (30) days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting. The Chairman of the meeting may determine that
a quorum is present based upon any reasonable evidence of the presence in person
or by proxy of stockholders holding a majority of the outstanding votes,
including without limitation, evidence from any record of stockholders who have
signed a register indicating their presence at the meeting.
SECTION 2.7 Voting. In all matters, when a quorum is present at any
meeting, the vote of the holders of a majority of the capital stock having
voting power present in person or represented by proxy shall decide any question
brought before such meeting, unless the question is one upon which by express
provision of applicable law or of the Certificate of Incorporation, a different
vote is required in which case such express provision shall govern and control
the decision of such question. Such vote may be by voice or by written ballot;
provided, however, that the Board may, in its discretion, require a written
ballot for any vote, and further provided that all elections for directors must
be by written ballot upon demand made by a stockholder at any election and
before the voting begins.
3
<PAGE> 4
Unless otherwise provided in the Certificate of Incorporation each
stockholder shall at every meeting of the stockholders be entitled to one vote
in person or by proxy for each share of the capital stock having voting power
held by such stockholder.
SECTION 2.8 Proxies. Each stockholder entitled to vote at a meeting of
stockholders may authorize in writing another person or persons to act for such
holder by proxy, but no proxy shall be voted or acted upon after three years
from its date, unless the person executing the proxy specifies therein the
period of time for which it is to continue in force.
SECTION 2.9 Inspectors of Election. The Corporation shall, in advance of
any meeting of stockholders, appoint one or more inspectors to act at the
meeting and make a written report thereof. The Corporation or the Chairman of
the meeting shall appoint one or more alternate inspectors to replace any
inspector who fails to act. Each inspector, before undertaking his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall ascertain the number of shares outstanding and the
voting power of each, determine the shares represented at the meeting and the
validity of the proxies and ballots, count all votes and ballots, determine and
retain for a reasonable period a record of the disposition of any challenges
made to any determination by the inspectors and certify their determination of
the number of shares represented at the meeting and their count of all votes and
ballots. Each inspector shall perform his or her duties and shall make all
determinations in accordance with the Delaware General Corporation Law
including, without limitation, Section 231 of the Delaware General Corporation
Law.
The date and time of the opening and closing of the polls for each matter
upon which the stockholders will vote at a meeting shall be announced at the
meeting. No ballot, proxies or votes, nor revocations thereof or changes
thereto, shall be accepted by the inspectors after the closing of the polls
unless the Court of Chancery upon application by a stockholder shall determine
otherwise.
The appointment of inspectors of election shall be in the discretion of the
Board except that so long as the Corporation has a class of voting stock that is
(i) listed on a national securities exchange, (ii) authorized for quotation on
an interdealer quotation system of a registered national securities association,
or (iii) held of record by more than 2,000 stockholders, appointment of
inspectors shall be obligatory.
ARTICLE III
DIRECTORS
SECTION 3.1 Powers. The Board shall have the power to manage or direct the
management of the property, business and affairs of the Corporation, and except
as expressly limited by law, to exercise all of its corporate powers. The Board
may establish procedures and rules, or may authorize the Chairman of any meeting
of stockholders to establish procedures and rules, for the fair and orderly
conduct of any meeting of stockholders including, without limitation,
registration of the stockholders attending the meeting, adoption of an agenda,
establishing the order of business at the meeting, recessing and adjourning the
meeting for the
4
<PAGE> 5
purposes of tabulating any votes and receiving the results thereof, the timing
of the opening and closing of the polls, and the physical layout of the
facilities for the meeting.
SECTION 3.2 Number, Election and Tenure. The number of directors shall be
eight until changed by resolution adopted by the Board. The directors shall be
divided into three classes as nearly equal in number as possible, designated
Class I, Class II and Class III. The initial term of office of Class I directors
shall expire at the 1996 annual meeting of stockholders; of Class II directors
at the 1997 annual meeting of stockholders; and of Class III directors at the
1998 annual meeting stockholders. At each annual meeting of stockholders,
successors to the class of directors whose terms of office expire in that year
shall be elected to hold office for a term of three (3) years. Each director
shall hold office until his successor is elected and qualified or until his
earlier resignation. No decrease in the number of directors shall shorten the
term of any incumbent director
SECTION 3.3 Intentionally Omitted.
SECTION 3.4 Meetings. The Board may hold meetings, both regular and
special, either within or outside the State of Delaware.
SECTION 3.5 Annual Meeting. The Board shall meet as soon as practicable
after each annual election of directors.
SECTION 3.6 Regular Meetings. Regular meetings of the Board shall be held
without call or notice at such time and place as shall from time to time be
determined by resolution of the Board.
SECTION 3.7 Special Meetings. Special meetings of the Board may be called
at any time, and for any purpose permitted by law, by the Chairman of the Board,
or by the Secretary on the written request of any two members of the Board
unless the Board consists of only one director in which case the special meeting
shall be called on the written request of the sole director, which meetings
shall be held at the time and place designated by the person or persons calling
the meeting. Notice of the time, place and purpose of any such meeting shall be
given to the directors by the Secretary, or in case of the Secretary's absence,
refusal or inability to act, by any other officer. Any such notice may be given
by mail, by facsimile, by telephone, by personal service, or by any combination
thereof as to different directors. If the notice is by mail, then it shall be
deposited in a United States Post Office at least seventy-two (72) hours before
the time of the meeting; if by facsimile, by telephone or by personal service,
communicated or delivered at least twenty-four (24) hours before the time of the
meeting.
SECTION 3.8 Quorum. At all meetings of the Board, a majority of the total
number of directors shall be necessary and sufficient to constitute a quorum for
the transaction of business, and the affirmative vote of a majority of the
directors present at a meeting at which a quorum is present shall be necessary
to constitute the act of the Board. Any meeting of the Board may be adjourned to
meet again at a stated day and hour. Even though a quorum is not present, as
required in this Article III, Section 3.8, a majority of the directors present
at any meeting of the
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<PAGE> 6
Board, either regular or special, may adjourn from time to time until a quorum
is present. Notice of any adjourned meeting need not be given.
SECTION 3.9 Fees and Compensation. Each director and each member of a
committee of the Board shall receive such fees and reimbursement of expenses
incurred on behalf of the Corporation or in attending meetings as the Board may
from time to time determine. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor.
SECTION 3.10 Meetings by Telephonic Communication. Members of the Board or
any committee thereof may participate in a regular or special meeting of such
Board or committee by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation in a meeting pursuant to this Article III, Section
3.10 shall constitute presence in person at such meeting.
SECTION 3.11 Committees. The Board may designate committees, each committee
to consist of one or more of the directors of the Corporation. Any such
committee, to the extent provided in the resolution of the Board, shall have and
may exercise all the powers and authority of the Board in the management of the
business and affairs of the Corporation, and may authorize the seal of the
Corporation to be affixed to all papers that may require it. Notwithstanding the
foregoing, no committee of the Board shall have the power or authority in
reference to: (i) approving or adopting, or recommending to the stockholders,
any action or matter expressly required by the Delaware General Corporation Law
to be submitted to stockholders for approval or (ii) adopting, amending or
repealing any bylaw of the Corporation. Unless the resolution appointing such
committee or the Certificate of Incorporation expressly so provides, no such
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock or to adopt a certificate of ownership and
merger pursuant to Section 253 of the Delaware General Corporation Law. Each
committee shall have such name as may be determined from time to time by
resolution adopted by the Board. Each committee shall keep minutes of its
meetings and report to the Board when required.
SECTION 3.12 Action Without Meetings. Unless otherwise restricted by
applicable law or by the Certificate of Incorporation or by these Bylaws, any
action required or permitted to be taken at any meeting of the Board or of any
committee thereof may be taken without a meeting if all members of the Board or
of such committee, as the case may be, consent thereto in writing, and the
writing or writings are filed with the minutes of the proceedings of the Board
or committee.
SECTION 3.13 Filling of Vacancies. Any vacancy on the Board, including any
newly created directorship resulting from an increase in the number of
directors, or any nominee for election as a director at a meeting of the
stockholders, may be filled or nominated by the stockholders of this
Corporation, by a majority of the whole Board or by a duly constituted committee
of the Board so authorized. The member or members of any committee of the Board
authorized to fill vacancies on the Board, or to nominate persons for election
as directors at a meeting of the stockholders, as set forth in the immediately
preceding sentence that are present at
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<PAGE> 7
any meeting and not disqualified from voting, whether or not he/she or they
constitute a quorum, may unanimously appoint another member of the Board to act
at the meeting in the place of any absent or disqualified member of such
committee.
ARTICLE IV
OFFICERS
SECTION 4.1 Appointment and Salaries. The senior officers of the
Corporation shall be appointed by the Board and shall be a Chairman of the
Board, a Chief Executive Officer, a President, a Chief Operating Officer, a
Treasurer and a Chief Financial Officer. The Chairman of the Board or the
President, as the Board shall determine, shall be the Chief Executive Officer of
the Corporation. The Board or the Chief Executive Officer may appoint one or
more Vice Presidents, a Secretary and such other officers (including assistant
secretaries and financial officers) as the Board or the Chief Executive Officer
may deem necessary or desirable. The senior officers, and any other officers
appointed by the Board, shall hold their offices for such terms and shall
exercise such powers and perform such duties as shall be determined from time to
time by the Board. Each other officer appointed by the Chief Executive Officer
shall hold office for such term and shall exercise such powers and perform such
duties as shall be determined from time to time by the Chief Executive Officer
or the Board. The Board shall fix the salaries of all officers appointed by it.
Unless prohibited by applicable law or by the Certificate of Incorporation or by
these Bylaws, one person may be elected or appointed to serve in more than one
official capacity. Any vacancy occurring in any senior office of the Corporation
may be filled only by the Board.
SECTION 4.2 Removal and Resignation. Any officer may be removed, either
with or without cause, by the Board or, in the case of an officer other than a
senior officer, by the Board or the Chief Executive Officer. Any officer may
resign at any time by giving notice to the Board, the Chief Executive Officer or
the Secretary. Any such resignation shall take effect at the date of receipt of
such notice or at any later time specified therein and, unless otherwise
specified in such notice, the acceptance of the resignation shall not be
necessary to make it effective.
SECTION 4.3 Chairman of the Board. The Chairman of the Board shall, unless
otherwise determined by the Board, preside at all meetings of the stockholders
and the Board; and shall have such other powers and duties as may from time to
time be assigned by the Board.
SECTION 4.4 Chief Executive Officer. The Chief Executive Officer shall be
the senior executive officer of the Corporation, with the authority to supervise
and direct the other officers and employees of the Corporation, and with
authority from time to time to delegate to other officers such executive and
other powers and duties as he or she shall deem appropriate, subject in all
respects to the authority of the Board.
SECTION 4.5 President. If the Chairman of the Board is not the Chief
Executive Officer, the President shall have all of the authority of the Chief
Executive Officer of the Corporation. The President shall have such other powers
and duties as the Board or Chief Executive Officer may from time to time
prescribe.
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SECTION 4.6 Chief Operating Officer. Subject to the powers of the Chief
Executive Officer, the Chief Operating Officer shall be the principal officer in
charge of the operations of the Corporation other than those areas of
responsibility as the Board may from time to time assign to the President.
SECTION 4.7 Vice President. In the absence of the President, or in the
event of the President's inability or refusal to act, the Vice President, if
any, (or if there be more than one Vice President, the Vice Presidents in the
order of their rank or, if of equal rank, then in the order designated by the
Board or, in the absence of any designation, then in the order of their
appointment) shall perform the duties of the President and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. The rank of Vice Presidents in descending order shall be Executive
Vice President, Senior Vice President and Vice President. The Vice Presidents
shall perform such other duties and have such other powers as the Board or the
Chief Executive Officer may from time to time prescribe.
SECTION 4.8 Secretary and Assistant Secretary. The Secretary shall attend
all meetings of the Board (unless the Board shall otherwise determine) and all
meetings of the stockholders and record all the proceedings of the meetings of
the Corporation and of the Board in a book to be kept for that purpose and shall
perform like duties for the committees when required. The Secretary shall give,
or cause to be given, notice of all meetings of stockholders and special
meetings of the Board. The Secretary shall have custody of the corporate seal of
the Corporation and shall (as well as any Assistant Secretary) have authority to
affix the same to any instrument requiring it and to attest it. The Secretary
shall perform such other duties and have such other powers as the Board or the
Chief Executive Officer may from time to time prescribe.
SECTION 4.9 Chief Financial Officer. Subject to the powers of the Chief
Executive Officer, the Chief Financial Officer shall be the principal officer in
charge of the financial affairs of the Corporation and shall perform such other
duties and have such other powers as the Board or the Chief Executive Officer
from time to time prescribe.
SECTION 4.10 Treasurer. Subject to the powers of the Chief Financial
Officer, the Treasurer shall have custody of the corporate funds and securities
and shall keep full and accurate accounts of receipts and disbursements in books
belonging to the Corporation and shall deposit all monies and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board. Subject to the powers of the Chief Financial
Officer, the Treasurer may disburse the funds of the Corporation as may be
ordered by the Board, taking proper vouchers for such disbursements, and shall
render to the Board at its regular meetings, or when the Board so requires, an
account of transactions and of the financial condition of the Corporation. The
Treasurer shall perform such other duties and have such other powers as the
Board or the Chief Executive Officer may from time to time prescribe.
SECTION 4.11 Bonds. If required by the Board and at the expense of the
Corporation, the Chief Financial Officer, the Treasurer, and the Assistant
Treasurer, if any, shall give the Corporation a bond (which shall be renewed at
such times as specified by the Board) in such sum and with such surety or
sureties as shall be satisfactory to the Board for the faithful performance
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<PAGE> 9
of the duties of such person's office and for the restoration to the
Corporation, in case of such person's death, resignation, retirement or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in such person's possession or under such person's control
belonging to the Corporation.
SECTION 4.12 Assistant Officers. An assistant officer shall, in the absence
of the officer to whom such person is an assistant or in the event of such
officer's inability or refusal to act (or, if there be more than one such
assistant officer, the assistant officers in the order designated by the Board,
in the absence of any designation, then in the order of their appointment),
perform the duties and exercise the powers of such officer. An assistant officer
shall perform such other duties and have such other powers as the Board or the
officer appointing any such assistant officer may from time to time prescribe.
ARTICLE V
SEAL
It shall not be necessary to the validity of any instrument executed by any
authorized officer or officers of the Corporation that the execution of such
instrument be evidenced by the corporate seal, and all documents, instruments,
contracts and writings of all kinds signed on behalf of the Corporation by any
authorized officer or officers shall be as effectual and binding on the
Corporation without the corporate seal, as if the execution of the same had been
evidenced by affixing the corporate seal thereto. The Board may give general
authority to any officer to affix the seal of the Corporation and to attest the
affixing by signature.
ARTICLE VI
FORM OF STOCK CERTIFICATE
Every holder of stock in the Corporation shall be entitled to have a
certificate signed by, or in the name of, the Corporation by the Chairman of the
Board or Vice-Chairman of the Board, if any, or by the President or a
Vice-President, and by the Treasurer or an Assistant Treasurer or the Chief
Financial Officer, or the Secretary or an Assistant Secretary certifying the
number of shares owned of the Corporation. Any or all of the signatures on the
certificate may be a facsimile signature. If any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer, transfer agent or registrar at
the date of the issuance.
If the Corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences or rights shall be set forth in full or
summarized on the face or back of the certificate that the Corporation shall
issue to represent such class or series of stock. Except as otherwise provided
in Section 202 of the General Corporation Law of Delaware, in lieu of the
foregoing requirements, there may be set forth on the face or back of the
certificate a statement that the Corporation will furnish without charge to each
stockholder who so requests the powers, designations, preferences and relative,
participating, optional or other special rights
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<PAGE> 10
of each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences or rights.
ARTICLE VII
REPRESENTATION OF SHARES OF OTHER CORPORATIONS
Any and all shares of any other corporation or corporations standing in the
name of the Corporation shall be voted, and all rights incident thereto shall be
represented and exercised on behalf of the Corporation, as follows: (i) as the
Board of the Corporation may determine from time to time, or (ii) in the absence
of such determination, by the Chief Executive Officer or such other officer as
may be designated from time to time by the Chief Executive Officer. The
foregoing authority may be exercised either by any such officer in person or by
any other person authorized so to do by proxy or power of attorney duly executed
by said officer.
ARTICLE VIII
TRANSFERS OF STOCK
Upon surrender of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
ARTICLE IX
LOST, STOLEN OR DESTROYED CERTIFICATES
The Board may direct a new certificate or certificates be issued in place
of any certificate theretofore issued alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of the fact by the person claiming
the certificate to be lost, stolen or destroyed. When authorizing such issue of
a new certificate, the Board may, in its discretion and as a condition precedent
to the issuance, require the owner of such certificate or certificates, or such
person's legal representative, to give the Corporation a bond in such sum as it
may direct as indemnity against any claim that may be made against the
Corporation with respect to the lost, stolen or destroyed certificate.
ARTICLE X
RECORD DATE
The Board may fix in advance a date, which shall not be more than sixty
(60) days nor less than ten (10) days preceding the date of any meeting of
stockholders, nor more than sixty (60) days prior to any other action, as a
record date for the determination of stockholders entitled to notice of or to
vote at any such meeting and any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise the rights in respect of any change, conversion or exchange of stock,
and in such case such stockholders, and only such stockholders as shall be
stockholders of record on the date so fixed shall be entitled to such notice of,
and to vote at, such meeting and any adjournment thereof, or to receive payment
of
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<PAGE> 11
such dividend, or to receive such allotment of rights, or to exercise such
rights, or to give such consent, as the case may be, notwithstanding any
transfer of any stock on the books of the Corporation after any such record date
fixed as aforesaid.
ARTICLE XI
REGISTERED STOCKHOLDERS
The Corporation shall be entitled to treat the holder of record of any
share or shares of stock of the Corporation as the holder in fact thereof and
shall not be bound to recognize any equitable or other claim to or interest in
such share on the part of any other person, whether or not it shall have express
or other notice thereof, except as expressly provided by applicable law.
ARTICLE XII
FISCAL YEAR
The fiscal year of the Corporation shall be fixed by resolution of the
Board.
ARTICLE XIII
AMENDMENTS
Subject to any contrary or limiting provisions contained in the Certificate
of Incorporation, these Bylaws may be amended or repealed, or new Bylaws may be
adopted (i) by the affirmative vote of the holders of at least a majority of the
Common Stock of the Corporation, or (ii) by the affirmative vote of the majority
of the whole Board at any regular or special meeting. Any Bylaws adopted or
amended by the stockholders may be amended or repealed by the Board or the
stockholders.
ARTICLE XIV
DIVIDENDS
SECTION 14.1 Declaration. Dividends on the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board at any regular or special meeting, pursuant to
law, and may be paid in cash, in property or in shares of capital stock.
SECTION 14.2 Set Aside Funds. Before payment of any dividend, there may be
set aside out of any funds of the Corporation available for dividends such sums
as the directors from time to time, in their absolute discretion, think proper
as a reserve or reserves to meet contingencies, or for equalizing dividends, or
for repairing or maintaining any property of the Corporation, or for such other
purpose as the directors shall determine to be in the best interest of the
Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
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ARTICLE XV
INDEMNIFICATION AND INSURANCE
SECTION 15.1 Right to Indemnification. Each person who was or is a party or
is threatened to be made a party to or is involved in any action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
or inaction in an official capacity or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held harmless by
the Corporation to the fullest extent permitted by the laws of the State of
Delaware, as the same exist or may hereafter be amended, against all costs,
charges, expenses, liabilities and losses (including attorneys' fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith, and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that the
Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was authorized by the Board. The right to
indemnification conferred in this Article shall be a contract right and shall
include the right to be paid by the Corporation the expenses incurred in
defending any such proceeding in advance of its final disposition; provided,
however, that, if the Delaware General Corporation Law requires, the payment of
such expenses incurred by a director or officer in his or her capacity as a
director of officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer, including, without
limitation, service to an employee benefit plan) in advance of the final
disposition of a proceeding, shall be made only upon delivery to the Corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Article XV, Section 15.1 or
otherwise. The Corporation may, by action of the Board, provide indemnification
to employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
SECTION 15.2 Right of Claimant to Bring Suit. If a claim under Article XV,
Section 15.1 is not paid in full by the Corporation within thirty (30) days
after a written claim has been received by the Corporation, the claimant may at
any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim and, if successful in whole or in part, the claimant shall
be entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation ) that the claimant has failed to meet a standard of
conduct which makes it permissible under Delaware law for the Corporation to
indemnify the claimant for the amount claimed. Neither the failure of the
Corporation (including its Board, independent legal counsel, or its
stockholders) to have made a determination prior to
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<PAGE> 13
the commencement of such action that indemnification of the claimant is
permissible in the circumstances because he or she has met such standard of
conduct, nor an actual determination by the Corporation (including its Board,
independent legal counsel, or its stockholders) that the claimant has not met
such standard of conduct, shall be a defense to the action or create a
presumption that the claimant has failed to meet such standard of conduct.
SECTION 15.3 Non-Exclusivity of Rights. The right to indemnification and
the payment of expenses incurred in defending a proceeding in advance of its
final disposition conferred in this Article shall not be exclusive of any other
right which any person may have or hereafter acquire under any statute,
provision of the Certificate of Incorporation, bylaw, agreement, vote of
stockholders or disinterested directors or otherwise.
SECTION 15.4 Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
Corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under Delaware law.
SECTION 15.5 Expenses as a Witness. To the extent that any director,
officer, employee or agent of the Corporation, is by reason of such position, or
a position with another entity at the request of the Corporation, a witness in
any action, suit or proceeding, he or she shall be indemnified against all costs
and expenses actually and reasonably incurred by him or her or on his or her
behalf in connection therewith.
SECTION 15.6 Indemnity Agreements. The Corporation may enter into
agreements with any director, officer, employee or agent of the Corporation
providing for indemnification to the full extent permitted by Delaware law.
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<PAGE> 1
NUMBER SHARES
COMMON STOCK COMMON STOCK
$.001 PAR VALUE $.001 PAR VALUE
THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR CERTAIN DEFINITIONS
IN MINNEAPOLIS OR NEW YORK CUSIP 037933 10 8
APRIA HEALTHCARE GROUP INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK OF
CERTIFICATE OF STOCK
APRIA HEALTHCARE GROUP INC.
DELAWARE
CORPORATE
SEAL
1991
<PAGE> 2
The class or series of shares represented by this certificate has
rights, privileges, restrictions or conditions attached to it. The Corporation
will furnish to a stockholder, on demand and without charge, a full copy of the
text of the rights, privileges, restrictions and conditions attached to each
class authorized to be issued and to each series insofar as they have been fixed
by the directors, and the authority of the directors to fix the rights,
privileges, restrictions and conditions of subsequent series.
This certificate also evidences and entitles the holder hereof to
certain Rights as set forth in a Rights Agreement between Apria Healthcare Group
Inc. and the Rights Agent specified therein, dated as of February 8, 1995, as
the same may be amended from time to time (the "Rights Agreement"), the terms of
which are hereby incorporated herein by reference and a copy of which is on file
at the principal executive offices of Apria Healthcare Group Inc. Under certain
circumstances, as set forth in the Rights Agreement, such Rights will be
evidenced by separate certificates and will no longer be evidenced by this
certificate. Apria Healthcare Group Inc. will mail to the holder of this
certificate a copy of the Rights Agreement without charge after receipt of a
written request therefor. As described in the Rights Agreement, Rights which are
held by or have been held by Acquiring Persons or Associates or Affiliates
thereof (as defined in the Rights Agreement) shall become null and void.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <S>
TEN COM -- as tenants in common UNIF GIFT MIN ACT____________Custodian___________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ____________________________
in common UNIF TRF MIN ACT_______Custodian (until age)_____
(Cust)
_________under Uniform Transfer
to Minors Act____________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, _____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
| |
- --------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
- -------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
--------------------------------------------
Attorney to transfer the said
- ----------------------------------------------
stock on the books of the within named Corporation with full power of
substitution in the premises.
Dated _____________________________
X ___________________________________________
X ___________________________________________
Notice: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON
THE FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed
By___________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND
CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15
<PAGE> 1
EXHIBIT 10.27
RESIGNATION AND GENERAL RELEASE AGREEMENT
THIS RESIGNATION AND GENERAL RELEASE AGREEMENT (this
"AGREEMENT"), made as of the 7th day of November, 1997, by and between Gary L.
Mangiofico, an individual ("MR. MANGIOFICO"), and APRIA HEALTHCARE GROUP INC., a
Delaware corporation ("APRIA"), is a resignation agreement which includes a
general release of claims. In consideration of the covenants undertaken and the
releases contained in this Agreement, Mr. Mangiofico and Apria agree as follows:
1. Mr. Mangiofico shall voluntarily resign from his position as an
employee of Apria and all of its affiliates and subsidiaries by executing
EXHIBIT A attached hereto, such resignation to be effective November 7, 1997.
2. Mr. Mangiofico shall return to Apria and shall not take or copy in
any form or manner any financial information, lists of customers, prices, and
similar confidential and proprietary materials or information of Apria.
3. Apria shall pay to Mr. Mangiofico the following amounts:
a. $168,050 in severance compensation, subject to standard
withholding for federal and state taxes, which shall be payable as follows.
On November 11, 1997, Apria shall make a lump-sum payment to Mr. Mangiofico
of $56,000. The remaining $112,050 shall be payable in accordance with
Apria's regular payroll procedures in 26 substantially equal installments
over a 12-month period ending on the first regular payroll date after
November 11, 1998; and
b. All earned but unpaid vacation pay, and any salary amounts
earned but not yet paid, payable as promptly as practicable following
November 11, 1997.
4. Neither this Agreement nor anything in this Agreement shall be
construed to be or shall be admissible in any proceeding as evidence of an
admission by Apria or Mr. Mangiofico of any violation of Apria's policies or
procedures, or state or federal laws or regulations. This Agreement may be
introduced, however, in any proceeding to enforce the Agreement. Such
introduction shall be pursuant to an order protecting its confidentiality.
5. Except for (i) those obligations created by or arising out of this
Agreement for which receipt or satisfac tion has not been acknowledged herein,
(ii) any rights Mr. Mangiofico may have under stock option agreements with Apria
and any retirement, 401(k), SERP or similar benefit plans of Apria (including
the Abbey Healthcare Group Incorporated Employees' Retirement Plan), and (iii)
the continuing right to indemnification as provided by applicable law
<PAGE> 2
or in Apria's bylaws and articles of incorporation in connection with acts,
suits or proceedings by reason of the fact that he was an officer or employee of
Apria where the basis of the claims against him consists of acts or omissions
taken or made in such capacity, Mr. Mangiofico on behalf of himself, his
descendants, dependents, heirs, executors, administrators, assigns, and
successors, and each of them, hereby covenants not to sue and fully releases and
discharges Apria, and its predecessors, subsidiaries and affiliates, past and
present, and each of them, as well as its and their trustees, directors,
officers, agents, attorneys, insurers, employees, stockholders, representatives,
assigns, and successors, past and present, and each of them, hereinafter
together and collectively (including Apria) referred to as the "APRIA
RELEASEES," with respect to and from any and all claims, wages, demands, rights,
liens, agreements, contracts, covenants, actions, suits, causes of action,
obligations, debts, costs, expenses, attorneys' fees, damages, judgments, orders
and liabilities of whatever kind or nature in law, equity or otherwise, whether
now known or unknown, suspected or unsuspected, and whether or not concealed or
hidden, which he now owns or holds or he has at any time heretofore owned or
held as against the Apria Releasees, arising out of or in any way connected with
his employment relationship with any Apria Releasee, or his voluntary
resignation from employment with the Apria Releasees or any other transactions,
occurrences, actions, omissions, claims, losses, damages or injuries whatsoever,
known or unknown, suspected or unsuspected, resulting from any act or omission
by or on the part of any Apria Releasee committed or omitted prior to the date
of this Agreement, including, without limiting the generality of the foregoing,
any claim under Title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act, the Americans with Disabilities Act, the
Family and Medical Leave Act of 1993, the California Fair Employment and Housing
Act, the California Family Rights Act, or any claim for severance pay, bonus,
sick leave, holiday pay, vacation pay, life insurance, health or medical
insurance or any other fringe benefit, workers' compensation or disability.
Except for those obligations created by or arising out of this
Agreement for which receipt or satisfaction has not been acknowledged herein,
and except as provided below, Apria on behalf of itself and the Apria Releasees
(to the extent the matter in question arises on the basis of their relationship
to Apria) hereby acknowledges full and complete satisfaction of and releases and
discharges, and covenants not to sue, Mr. Mangiofico and his descendants,
dependents, heirs, executors, administrators, assigns, and successors, and each
of them, hereinafter together and collectively (including Mr. Mangiofico)
referred to as the "Mangiofico Releasees," from and with respect to any and all
claims, demands, rights, liens, agreements, obligations losses, damages,
injuries, contracts, covenants, actions, suits, causes of action, obligations,
debts, costs, expenses, attorneys' fees, damages, judgments, orders and
liabilities of whatever kind or nature in law, equity or otherwise, whether
known or unknown, suspected or unsuspected, whether or not concealed or hidden,
arising out of or in any way connected with Mr. Mangiofico's employment
relationship with Apria or its successor, or his voluntary resignation from
employment with Apria, or any other transactions, occurrences, actions,
omissions, claims, losses, damages or injuries whatsoever, known or unknown,
suspected or unsuspected, which Apria now owns or holds or has at any time
heretofore owned or held as against any of the Mangiofico Releasees.
6. It is the intention of Apria and Mr. Mangiofico in executing this
Agreement that the same shall be effective as a bar to each and every claim,
demand and cause of action hereinabove
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<PAGE> 3
specified. In furtherance of this intention, Apria and Mr. Mangiofico hereby
expressly waive any and all rights and benefits conferred upon them by the
provisions of SECTION 1542 OF THE CALIFORNIA CIVIL CODE and expressly consent
that this Agreement shall be given full force and effect according to each and
all of its express terms and provisions, including those related to unknown and
unsuspected claims, demands and causes of action, if any, as well as those
relating to any other claims, demands and causes of action hereinabove
specified. SECTION 1542 provides:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
Apria and Mr. Mangiofico, and each of them, acknowledge that either may
hereafter discover claims or facts in addition to or different from those which
either or both of them now knows or believes to exist with respect to the
subject matter of this Agreement and which, if known or suspected at the time of
executing this Agreement, may have materially affected this settlement.
Nevertheless, Apria and Mr. Mangiofico each hereby waive any right, claim or
cause of action that might arise as a result of such different or additional
claims or facts. Apria and Mr. Mangiofico each acknowledge that it or he
understands the significance and consequence of such release and such specific
waiver of SECTION 1542.
7. The terms and conditions of this Agreement shall remain
confidential as between the parties and professional advisers to the parties and
neither of them shall disclose them to any other person, except as provided
herein or as required by the rules and regulations of the Securities and
Exchange Commission ("SEC") or as otherwise may be required by law or court
order. Without limiting the generality of the foregoing, neither Apria nor Mr.
Mangiofico will respond to or in any way participate in or contribute to any
public discussion concerning, or in any way relating to, the execution of this
Agreement or the events which led to its execution. Except as provided above
with respect to SEC rules and regulations or as otherwise may be required by law
or court order, if inquiry is made of Apria concerning any of the claims
released by this Agreement or relating to Mr. Mangiofico's employment with
Apria, Apria shall provide to third parties only Mr. Mangiofico's dates of
employment with Apria and its predecessors and his job titles during such
employment, in accordance with the normal practices of Apria's human resources
department, and Mr. Mangiofico may disclose that he resigned from Apria's
employment.
8. Mr. Mangiofico will continue to keep confidential all confidential
and proprietary Apria information, as required by Section 10 of the Executive
Severance Agreement dated June 28, 1997 between Mr. Mangiofico and Apria. In
this regard, Mr. Mangiofico acknowledges the continuing effectiveness, in
accordance with their respective terms, of Sections 9 and 10 of said Executive
Severance Agreement.
9. Mr. Mangiofico expressly acknowledges and agrees that, by entering
into this Agreement, he is waiving any and all rights or claims that may have
arisen under the Age Discrimination in
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<PAGE> 4
Employment Act of 1967, as amended, which have arisen on or before the date of
execution of this Agreement. Mr. Mangiofico further expressly acknowledges that:
a. He is hereby advised in writing by this
Agreement to consult with an attorney before signing this
Agreement;
b. He was given a copy of this Agreement on November 3, 1997, and
informed that he had 21 days within which to consider the Agreement; and
c. He was informed that he has seven (7) days following the date
of his execution of the Agreement in which to revoke the Agreement.
10. Apria and Mr. Mangiofico each warrant and represent that neither
has heretofore assigned or transferred to any person not a party to this
Agreement any released matter or any part or portion thereof and each shall
defend, indemnify and hold harmless the other from and against any claim
(including the payment of attorneys' fees and costs actually incurred whether or
not litigation is commenced) based on or in connection with or arising out of
any such assignment or transfer made, purported or claimed.
11. Apria and Mr. Mangiofico acknowledge that any employment or
contractual relationship between them will termi nate on November 7, 1997, that
they have no further employment or contractual relationship except as may arise
out of this Agreement and that Mr. Mangiofico waives any right or claim to
reinstatement as an employee of Apria and will not seek employment in the future
with Apria.
12. Mr. Mangiofico agrees that he shall be exclusively liable for the
payment of all of his share of federal and state taxes which may be due as the
result of the consideration received from the settlement of disputed claims as
set forth herein.
13. Mr. Mangiofico agrees that, following the termination of his
employment with Apria, (i) he will, at no cost to him, cooperate with any
reasonable request Apria may make for information or assistance with respect to
any matter involving Mr. Mangiofico during his period of employment, and (ii) he
will not disparage Apria at any time. Apria, on behalf of itself and the Apria
Releasees, agrees that it will use its best efforts to cause its officers and
directors not to disparage Mr. Mangiofico in any manner.
14. This Agreement is an integrated document and constitutes and
contains the entire agreement and understanding concerning Mr. Mangiofico's
employment, voluntary resignation from the same and the other subject matters
addressed herein between the parties, and supersedes and replaces all prior
negotiations and all agreements, proposed or otherwise, whether written or oral,
concerning the subject matter hereof, and expressly releases all Apria Releasees
from any obligations not covered herein, including, but not limited to Apria's
Severance Pay Plan and, except as provided in the last sentence of Paragraph 8
above, the Executive Severance Agreement, dated June 28, 1997, between Mr.
Mangiofico and Apria. This Agreement does not,
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<PAGE> 5
however, affect Mr. Mangiofico's rights under any Apria retirement, 401(k), SERP
or similar benefit plan, including the Abbey Healthcare Group Incorporated
Employees' Retirement Plan. This Agreement also does not modify the provisions
of any of Mr. Mangiofico's stock options.
15. If any provision of this Agreement or the application thereof is
held invalid, the invalidity shall not affect the other provisions or
applications of this Agreement which can be given effect without the invalid
provisions or applications and to this end the provisions of this Agreement are
declared to be severable.
16. This Agreement has been executed and delivered within the State of
California, and the rights and obligations of the parties hereunder shall be
construed and enforced in accordance with, and governed by, the laws of the
State of California without regard to principles of conflict of laws.
17. This Agreement may be executed in counter parts, and each
counterpart, when executed, shall have the efficacy of a signed original.
Photographic copies of such signed counterparts may be used in lieu of the
originals for any purpose.
18. Any dispute or controversy between Mr. Mangiofico on the one hand,
and Apria (or any other Apria Releasee), on the other hand, in any way arising
out of, related to, or connected with this Agreement or the subject matter
hereof, or otherwise in any way arising out of, related to, or connected with
Mr. Mangiofico's employment with any Apria Releasee or the termination of Mr.
Mangiofico' s employment with any Apria Releasee, shall be submitted for
resolution by arbitration in accordance with the provisions of Section 15 of the
Executive Severance Agreement between the parties dated as of June 28, 1997.
APRIA AND MR. MANGIOFICO ACKNOWLEDGE, UNDERSTAND AND AGREE THAT IN THE EVENT OF
A DISPUTE UNDER THIS AGREEMENT, EACH PARTY HAS WAIVED ANY RIGHT TO A JURY TRIAL
AND A JUDICIAL RESOLUTION OF THE DISPUTE.
19. No waiver of any breach of any term or provi sion of this
Agreement shall be construed to be, or shall be, a waiver of any other breach of
this Agreement. No waiver shall be binding unless in writing and signed by the
party waiving the breach.
20. In entering this Agreement, the parties represent that they have
relied upon the advice of their attor neys, who are attorneys of their own
choice, and that they have read the Agreement and have had the opportunity to
have the Agreement explained to them by their attorneys, and that those terms
are fully understood and voluntarily accepted by them.
21. All parties agree to cooperate fully and to execute any and all
supplementary documents and to take all additional actions that may be necessary
or appropriate to give full force to the terms and intent of this Agreement and
which are not inconsistent with its terms.
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<PAGE> 6
22. Mr. Mangiofico hereby declares as follows:
I, Gary L. Mangiofico, hereby acknowledge that I was given 21
days to consider the foregoing Agreement and voluntarily chose to sign the
Agreement prior to the expiration of the 21-day period.
I have read the foregoing Agreement and I accept and agree to the
provisions it contains and hereby execute it voluntarily with full understanding
of its consequences.
I declare under penalty of perjury under the laws of the State of
California that the foregoing is true and correct.
IN WITNESS WHEREOF, the undersigned have executed and delivered
this Agreement as of the 7th day of November, 1997.
------------------------------------
Gary L. Mangiofico
APRIA HEALTHCARE GROUP INC.
By:
---------------------------------
6
<PAGE> 7
EXHIBIT A
November 7, 1997
Mr. Jeremy M. Jones
Chief Executive Officer and
Chairman of the Board of Directors
Apria Healthcare Group Inc.
3560 Hyland Avenue
Costa Mesa, California 92626
Dear Jerry:
This is to advise you that effective November 7, 1997, I hereby
voluntarily resign my position as Senior Vice President, Clinical Services and
my employment in any other capacity with Apria Healthcare Group Inc. or any of
its affiliates or subsidiaries.
Sincerely yours,
-------------------
Gary L. Mangiofico
<PAGE> 8
EXHIBIT B
[Press Release - to be supplied]
<PAGE> 1
EXHIBIT 10.29
RESIGNATION AND GENERAL RELEASE AGREEMENT
THIS RESIGNATION AND GENERAL RELEASE AGREEMENT (this "AGREEMENT"),
made January 19, 1998, by and between Jeremy M. Jones, an individual
("EXECUTIVE"), and Apria Healthcare Group Inc., a Delaware corporation
("APRIA"), is a resignation agreement which includes a general release of
claims. In consideration of the covenants undertaken and the releases contained
in this Agreement, Executive and Apria agree as follows:
1. Executive shall voluntarily resign from his position as an officer
of Apria and all of its affiliates and subsidiaries, including his positions as
Chairman of the Board of Directors and Chief Executive Officer of Apria (but not
his position as director of Apria), as well as from his employment with Apria
and its affiliates or subsidiaries in any other capacity, by executing EXHIBIT A
attached hereto, such resignations to be effective immediately.
2. Apria shall pay to Executive the following consideration:
(a) $1,753,900.50 representing an amount equal to three times the
sum of Executive's annual base salary and the average of the last two
annual cash incentive bonuses actually paid to Executive by Apria, subject
to standard withholding for federal and state taxes and paid within eight
days of Executive's execution of this Agreement;
(b) Apria will provide Executive with an office and associated
services (such as secretarial, photocopying, telephone and delivery) at a
mutually acceptable location in Orange County, California for a period of
two years from the date hereof;
(c) Within 45 days of the date hereof, Executive shall submit
appropriate documentation of any unreimbursed business expenses incurred by
Executive prior to the date hereof in accordance with the Employment
Agreement. Apria shall reimburse such expenses within 20 days after
submission of such documentation; and
(d) All of Executive's vested rights under retirement, 401K, SERP
or similar benefit plans of any of Apria Releasee (as defined in Section 5
of this Agreement), in the amounts and at the times provided for in such
plans.
(e) An amount equal to the single sum actuarial equivalent of
"Additional Benefits" as defined in Section 6(a)(2) of Executive's
Employment Agreement dated June 26, 1995; such sum to be determined by the
actuarial consulting firm of Hewitt and paid by Apria within 20 days of
this Agreement.
(f) An amount equal to any "Accrued Obligations" as defined in
Section 6(a)(6) of Executive's Employment Agreement dated June 26, 1995;
such sum to be paid within eight days of Executive's execution of this
Agreement.
No amount under this Section 2 shall be required to be paid by Apria
before the 8th day after execution of this Agreement.
<PAGE> 2
3. As further consideration, Apria shall provide the following
non-cash severance benefits to Executive:
(a) Until January 19, 2001, Apria shall continue to provide
welfare benefits and fringe benefits and other perquisites to Executive
and/or Executive's family at least equal to those which would have been
provided to them if Executive's employment had not been terminated in
accordance with the most favorable plans, practices, programs or policies
of Apria and its affiliated companies applicable generally to other peer
executives and their families immediately preceding the Date of
Termination; provided, however, that if Executive becomes reemployed with
another employer and is eligible to receive medical or other welfare
benefits under another employer-provided plan, the medical and other
welfare benefits described herein shall be secondary to those provided
under such other plan during such applicable period of eligibility. For
purposes of determining eligibility (but not the time of commencement of
benefits) of Executive for retiree benefits pursuant to such plans,
practices, programs and policies, Executive shall be considered to have
remained employed until January 19, 2001 and to have retired on the last
day of such period;
(b) Executive was granted on April 1, 1992 an option to acquire
300,000 shares of Apria's Common Stock, on March 23, 1995 an option to
acquire 200,000 shares of Apria's Common Stock, and on October 28, 1996 an
option to acquire 20,000 shares of Apria's Common Stock (each an "Option").
Each Option is evidenced by an option agreement (each an "Option
Agreement") entered into by and between Executive and Apria. Prior to the
eighth day after execution of this Agreement, Apria shall deliver to
Executive amendments to the Option Agreements which will provide that: (i)
each Option shall be exercisable by Executive for the stated term of the
Option as though Executive had not severed employment with Apria, and (ii)
each Option shall be immediately fully vested; in each case subject,
however, to all of the other terms and conditions of the applicable Option
Agreement and any other early termination provisions contained therein.
(c) To the extent not theretofore paid or provided, Apria shall
timely pay or provide Executive any other amounts or benefits required to
be paid or provided or which Executive is eligible to receive under any
plan, program, policy, practice, contract or agreement of Apria and its
affiliated companies (such other amounts and benefits being hereinafter
referred to as "Other Benefits") in accordance with the terms of such plan,
program, policy, practice, contract or agreement.
4. Executive agrees that, following the termination of his employment
with Apria, he will, at no cost to him, cooperate with any reasonable request
Apria may make for information and assistance with respect to any matter
involving Executive during his period of employment.
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<PAGE> 3
5. Except for those obligations created by or arising out of this
Agreement for which receipt or satisfaction has not been acknowledged herein,
and with the exception of (a) rights to indemnity that Executive in his capacity
as an officer or director or consultant to Apria or its predecessors or any
subsidiaries or affiliates, past and present, of Apria or its predecessors
(collectively, including Apria, the "APRIA RELEASEES") under provision of
Delaware law, the Certificate of Incorporation or Bylaws of any Apria Releasee,
or any indemnification agreement for the benefit of or between Executive and any
Apria Releasee and (b) any rights Executive may have under stock option plans or
agreements, retirement, 401K, SERP or similar benefit plans of any Apria
Releasee, Executive on behalf of himself, his descendants, dependents, heirs,
executors, administrators, assigns and successors, and each of them, hereby
covenants not to sue and fully releases and discharges the Apria Releasees, and
each of them, with respect to and from any and all claims, wages, demands,
rights, liens, agreements, contracts, covenants, actions, suits, causes of
action, obligations, debts, costs, expenses, attorneys' fees, damages,
judgments, orders and liabilities of whatever kind or nature in law, equity or
otherwise, whether now known or unknown, suspected or unsus pected, and whether
or not concealed or hidden, which he now owns or holds or he has at any time
heretofore owned or held or may in the future hold as against any Apria
Releasee, arising out of or in any way connected to his consulting with,
employment by and/or director relationship with any Apria Releasee, or his
voluntary resignation as a director or employee or any other transactions,
occurrences, actions, claims or omissions or any loss, damage or injury
whatsoever, known or unknown, suspected or unsuspected, resulting from any act
or omission by or on the part of the Apria Releasees, or any of them, committed
or omitted prior to the date of this Agreement, including, without limiting the
generality of the foregoing, any claim under Title VII of the Civil Rights Act
of 1964, the Age Discrimination in Employment Act, the Americans with
Disabilities Act, the Family and Medical Leave Act of 1993, the California Fair
Employment and Housing Act, the California Family Rights Act, or any claim for
severance pay, bonus, sick leave, holiday pay, vacation pay, life insurance,
health or medical insurance or any other fringe benefit, workers' compensation
or disability.
6. Except for those obligations created by or arising out of this
Agreement, Apria, on behalf of itself and all Apria Releasees, hereby covenants
not to sue and fully releases and discharges Executive with respect to and from
any and all claims, demands, rights, liens, agreements, contracts, covenants,
actions, suits, causes of action, obligations, debts, costs, expenses,
attorneys' fees, damages, judgments, orders and liabilities of whatever kind or
nature in law, equity or otherwise, whether now known or unknown, suspected or
unsuspected, and whether or not concealed or hidden, which any Apria Releasee
now owns or holds or has at any time heretofore owned or held or may in the
future hold as against Executive, arising out of or in any way connected to
Executive's consulting with, employment by and/or director relationship with or
his voluntary resignation as an employee or director from any Apria Releasee or
any other transactions, occurrences, actions, claims or omissions or any loss,
damage or injury whatsoever, known or unknown, suspected or unsuspected,
resulting from any act or omission by or on the part of Executive committed or
omitted prior to the date of this Agreement.
7. It is the intention of Executive and Apria in executing this
Agreement that the same shall be effective as a bar to each and every claim,
demand and cause of action hereinabove specified. In furtherance of this
intention, Executive and Apria hereby expressly waive any and all rights and
benefits conferred upon them, and each of them, by the provisions
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<PAGE> 4
of SECTION 1542 OF THE CALIFORNIA CIVIL CODE, and expressly consent that this
Agreement shall be given full force and effect according to each and all of its
express terms and provisions, including those related to unknown and unsuspected
claims, demands and causes of action, if any, as well as those relating to any
other claims, demands and causes of action hereinabove specified. SECTION 1542
provides:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF
EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY
AFFECTED HIS SETTLEMENT WITH THE DEBTOR."
Executive and Apria both acknowledge that they or either of them may hereafter
discover claims or facts in addition to or different from those which each now
knows or believes to exist with respect to the subject matter of this Agreement
and which, if known or suspected at the time of executing this Agreement, may
have materially affected this settlement. Nevertheless, Executive and Apria and
each of them hereby waive any right, claim or cause of action that might arise
as a result of such different or additional claims or facts. Executive and Apria
and each of them acknowledge that they understand the significance and
consequence of such release and such specific waiver of SECTION 1542.
8. Executive expressly acknowledges and agrees that, by entering into
this Agreement, he is waiving any and all rights or claims that he may have
arising under the Age Discrimination in Employment Act of 1967, as amended,
which have arisen on or before the date of execution of this Agreement.
Executive further expressly acknowledges and agrees that:
(a) In return for this Agreement, he will receive compensation beyond
that which he was already entitled to receive before entering into this
Agreement;
(b) He was orally advised and is hereby advised in writing by this
Agreement to consult with an attorney before signing this Agreement;
(c) He has consulted with an attorney before signing this Agreement;
(d) He was given a copy of this Agreement on January 16, 1998, and
informed that he had twenty-one days within which to consider this
Agreement; and
(e) He was informed that he has seven days following the date of
execution of this Agreement in which to revoke this Agreement.
9. Executive and the Apria Releasees shall keep confidential, and
Apria shall use its reasonable best efforts to cause the officers and directors
of the Apria Releasees to keep confidential, the fact or existence of this
Agreement, the terms and conditions of this Agreement, all communications made
during the negotiation of this Agreement, all facts and claims upon
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<PAGE> 5
which this Agreement is based (collectively referred to as the "CONFIDENTIAL
INFORMATION"), and shall not directly or indirectly, whether orally, in writing,
by signal, gesture or any other means, disclose such Confidential Information to
any person or entity (including, but not limited to, any current or former
employee, agent, partner or contractor of Apria or its affiliates, past or
present) or in any way respond to, participate in or contribute to, whether
orally, in writing, by signal, gesture or any other means, any inquiry,
discussion, notice or publicity concerning any aspect of the Confidential
Information. The only exceptions to the obligations imposed by this paragraph
are that Executive may disclose Confidential Information as required by law, or
to (i) his medical or health care providers, but only such portion as essential
for the provision of health care services; (ii) pastoral counselors or
psychotherapists, but only such portion as essential for the provision of such
counselling or therapy services; (iii) professional accountants and tax
advisers, but only such portion as essential for the provision of such
professional accounting or tax services; and (iv) attorneys, but only such
portion as essential for the provision of such professional legal services;
provided, however, that Executive shall be permitted to make the disclosures
permitted by the preceding clauses only if, before such disclosure is made, the
person or entity that will be receiving the disclosure is informed of and agrees
to be bound by this confidentiality provision. Apria may disclose Confidential
Information as necessary to effectuate the terms of this Agreement or as
required by law. The parties agree to the Press Release attached hereto as
EXHIBIT B, and agree that such Press Release may be issued on or after January
19, 1998. Nothing in this section shall be construed to preclude Executive or
Apria from complying with a lawful court order or process requiring disclosure,
written, oral or otherwise, of any Confidential Information, provided that the
party served gives immediate written notice to the other by hand delivery at its
or his business address, of such court order or process and cooperates fully
with and supports through all reasonable means all efforts by the other to
oppose any such disclosure of Confidential Information. Executive and Apria
agree that disclosure by either of them of Confidential Information shall, at
the option of the nondisclosing party, constitute and shall be treated as a
material breach of this Agreement. In any arbitration alleging a breach of this
section, the arbitrator shall have the authority to award compensatory and/or
punitive damages. Executive agrees that he will not disparage in any manner any
of the Apria Releasees and Apria, on behalf of itself and all of the Apria
Releasees, agrees that it will not, and Apria shall use its reasonable best
efforts to cause the officers and directors of the Apria Releasees to not,
disparage Executive in any manner.
10. Executive and Apria each warrant and represent that neither has
heretofore assigned or transferred to any person not a party to this Agreement
any released matter or any part or portion thereof and each shall defend,
indemnify and hold harmless the other from and against any claim (including the
payment of attorneys' fees and costs actually incurred whether or not litigation
is commenced) based on or in connection with or arising out of any such
assignment or transfer made, purported or claimed.
11. All amounts payable under this Agreement or any other compensation
payable to Executive shall be subject to any tax withholding required by law.
(a) Notwithstanding anything contained in this Agreement to the
contrary, in the event it shall be finally determined (as defined below)
that any payment or
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<PAGE> 6
distribution by Apria or its predecessors or the subsidiaries or affiliates
of Apria or its predecessors to or for the benefit of Executive (whether
paid or payable or distributed or distributable pursuant to the terms of
this Agreement or otherwise, but determined without regard to any
additional payments required under this Section 13) (a "PAYMENT") is or was
subject to the excise tax imposed by Section 4999 of the Internal Revenue
Code of 1986, as amended, or any interest or penalties are or were incurred
by Executive with respect to such excise tax (such excise tax, together
with any such interest and penalties, are hereinafter collectively referred
to as the "EXCISE TAX"), then, within 10 days after such final
determination, Apria shall pay to Executive an additional cash payment or
additional cash payments (hereinafter referred to in the aggregate as a
"GROSS-UP PAYMENT") in an aggregate amount such that after payment by
Executive of all taxes (including any interest or penalties imposed with
respect to such taxes), including, without limitation, any income taxes
(and any interest and penalties imposed with respect thereto) and Excise
Tax imposed upon the Gross-Up Payment, Executive retains an amount of the
Gross-Up Payment equal to 80% of the first $1,000,000 of the Excise Tax
imposed upon the Payments and 100% of the Excise Tax in excess of
$1,000,000 imposed upon the Payments. For purposes of this Section 13,
whether the Excise Tax is applicable to a Payment shall be deemed to be
finally determined upon the earliest of (i) the expiration of 30 days
following the rendering of a decision by the Internal Revenue Service or a
court of competent jurisdiction unless, within such 30-day period, Apria
notifies Executive in writing of its intent to contest such decision, (ii)
the rendering of a decision by the Internal Revenue Service or a court of
competent jurisdiction, from which decision no further right of appeal
exists, or (iii) the expiration of the statutory period (including any
extensions thereto) for the assessment and collection of the Excise Tax.
(b) Executive shall notify Apria in writing of any claim by the
Internal Revenue Service that, if successful, would require the payment by
Apria of the Gross-Up Payment. Such notification shall be given as soon as
practicable but no later than 30 days after Executive receives written
notice of such claim and shall apprise Apria of the nature of such claim
and the date on which such claim is requested to be paid. Executive shall
not pay such claim prior to the expiration of the 30-day period following
the date on which he gives such notice to Apria (or such shorter period
ending on the date that any payment of taxes with respect to such claim is
due). If Apria notifies Executive in writing prior to the expiration of
such period that it desires to contest such claim (and demonstrates its
ability to make the payments to Executive which may ultimately be required
under this section before assuming responsibility for the claim), Executive
shall:
(i) give Apria any information reasonably
requested by Apria relating to such claim,
(ii) take such action in connection with contesting such
claim as Apria shall reasonably request in writing from time to time,
including, without limitation, accepting legal representation with
respect to such claim by an attorney selected by Apria that is
reasonably acceptable to Executive,
(iii) cooperate with Apria in good faith in order
effectively to contest
6
<PAGE> 7
such claim, and
(iv) permit Apria to participate in any proceedings relating
to such claim;
provided, however, that Apria shall bear and pay directly all costs and
expenses (including additional interest and penalties) incurred in
connection with such contest and shall indemnify and hold Executive
harmless, on an after-tax basis, for any Excise Tax, income or FICA taxes
(including interest and penalties with respect thereto) imposed as a result
of such representation and payment of costs and expenses. Without
limitation on the foregoing provisions of this Section 13, Apria shall
control all proceedings taken in connection with such contest and, at its
sole option, may pursue or forgo any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect
of such claim and may, at its sole option, either direct Executive to pay
the tax claimed and sue for a refund or contest the claim in any
permissible manner, and Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as Apria shall determine;
provided, however, that if Apria directs Executive to pay such claim and
sue for a refund, Apria shall advance an amount equal to such payment to
Executive, on an interest-free basis and shall indemnify and hold Executive
harmless, on an after-tax basis, from any Excise Tax, income or FICA taxes
(including interest or penalties with respect thereto) imposed with respect
to such advance up to but not in excess of the amount of the required
Gross-Up Payment or with respect to any imputed income with respect to such
advance; and further provided that any extension of the statute of
limitations relating to payment of taxes for the taxable year of Executive
with respect to which such contested amount is claimed to be due is limited
solely to such contested amount; further, provided, that any settlement of
any claim shall be reasonably acceptable to Executive. Furthermore, Apria's
control of the contest shall be limited to issues with respect to which a
Gross-Up Payment would be payable hereunder and Executive shall be entitled
to settle or contest, as the case may be, any other issue raised by the
Internal Revenue Service or any other taxing authority.
(c) If, after receipt by Executive of an amount advanced by Apria
pursuant to Section 13(b), Executive becomes entitled to receive any refund
with respect to such claim, Executive shall (subject to Apria's complying
with the requirements of Section 13(b)) promptly pay to Apria an amount
equal to such refund (together with any interest paid or credited thereon
after taxes applicable thereto). If, after the receipt by Executive of an
amount advanced by Apria pursuant to Section 13(b), it is finally
determined (as defined above) that Executive is not entitled to any refund
with respect to such claim, then such advance shall be forgiven and shall
not be required to be repaid and the amount of such advance shall offset,
to the extent thereof, the amount of Gross-Up Payment required to be paid.
7
<PAGE> 8
12. This Agreement constitutes and contains the entire agreement and
understanding concerning Executive's employment and directorship, voluntary
resignation from the same and the other subject matters addressed herein between
the parties, and supersedes and replaces all prior negotiations and all
agreements proposed or otherwise, whether written or oral, concerning the
subject matters hereof. This is an integrated document.
13. Executive may revoke this Agreement in its entirety during the
seven days following execution of this Agreement by Executive. Any revocation of
this Agreement must be in writing and hand delivered to General Counsel of Apria
during the revocation period.
14. If any provision of this Agreement or the application thereof is
held invalid, the invalidity shall not affect other provisions or applications
of this Agreement which can be given effect without the invalid provisions or
applica tions and to this end the provisions of this Agreement are declared to
be severable.
15. This Agreement has been executed and delivered within the State of
California, and the rights and obligations of the parties hereunder shall be
construed and enforced in accordance with, and governed by, the laws of the
State of California without regard to principles of conflict of laws.
16. Each party has cooperated in the drafting and preparation of this
Agreement. Hence, in any construction to be made of this Agreement, the same
shall not be construed against any party on the basis that the party was the
drafter.
17. This Agreement may be executed in counterparts, and each
counterpart, when executed, shall have the efficacy of a signed original.
Photographic copies of such signed counterparts may be used in lieu of the
originals for any purpose.
18. Any dispute or controversy between Executive, on the one hand, and
Apria (or any other Apria Releasee), on the other hand, in any way arising out
of, related to, or connected with this Agreement or the subject matter hereof,
or otherwise in any way arising out of, related to, or connected with
Executive's employment with Apria or any Apria Releasee or the termination of
Executive's employment with Apria or any Apria Releasee, shall be resolved
through final and binding arbitration in Orange County, California, pursuant to
California Civil Procedure Code Sections 1282-1284.2, with the exception of
Sections 1283 and 1283.05. In the event of such arbitration, the prevailing
party shall be entitled to recover all reasonable costs and expenses incurred by
such party in connection therewith, including attorneys' fees. The nonprevailing
party shall also be solely responsible for all costs of the arbitration,
including, but not limited to, the arbitrator's fees, court reporter fees, and
any and all other administrative costs of the arbitration, and promptly shall
reimburse the prevailing party for any portion of such costs previously paid by
the prevailing party. Any dispute as to the reasonableness of costs and expenses
shall be determined by the arbitrator. Except as may be necessary to enter
judgment upon the award or to the extent required by applicable law, all claims,
defenses and proceedings (including, without limiting the generality of the
foregoing, the existence of the controversy and the fact that there is an
arbitration proceeding) shall be treated in a confidential manner by the
arbitrator, the parties and their counsel, and each of their agents, and
employees and all others
8
<PAGE> 9
acting on behalf of or in concert with them. Without limiting the generality of
the foregoing, no one shall divulge to any third party or person not directly
involved in the arbitration the contents of the pleadings, papers, orders,
hearings, trials, or awards in the arbitration, except as may be necessary to
enter judgment upon an award as required by applicable law. Any court
proceedings relating to the arbitration hereunder, including, without limiting
the generality of the foregoing, to prevent or compel arbitration or to confirm,
correct, vacate or otherwise enforce an arbitration award, shall be filed under
seal with the court, to the extent permitted by law.
19. No waiver of any breach of any term or provision of this Agreement
shall be construed to be, or shall be, a waiver of any other breach of this
Agreement. No waiver shall be binding unless in writing and signed by the party
waiving the breach.
20. In entering this Agreement, the parties represent that they have
relied upon the advice of their attorneys, who are attorneys of their own
choice, and that the terms of this Agreement have been completely read and
explained to them by their attorneys, and that those terms are fully understood
and voluntarily accepted by them.
21. After execution of this Agreement, Apria may, but is not required
to, present for approval to the Workers' Compensation Appeals Board an
appropriate stipulation or compromise and release extinguishing any and all
rights or claims Executive may have under applicable workers' compensation
provisions.
22. All parties agree to cooperate fully and to execute any and all
supplementary documents and to take all additional actions that may be necessary
or appropriate to give full force to the basic terms and intent of this
Agreement and which are not inconsistent with its terms.
23. Apria agrees to pay Executive's attorney all reasonable legal fees
and costs and expenses incurred in representing Executive in connection with
this Agreement.
I have read the foregoing Agreement and I accept and agree to the
provisions it contains and hereby execute it voluntarily with full understanding
of its consequences.
I declare under penalty of perjury under the laws of the State of
California that the foregoing is true and correct.
9
<PAGE> 10
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Agreement this January 19, 1998, at Orange County, California.
Executive
-----------------------------------
Jeremy M. Jones
Approved as to content and form:
PAUL, HASTINGS, JANOFSKY & WALKER, L.L.P
JAMES W. HAMILTON
- ----------------------------------
James W. Hamilton
Attorney for Executive
APRIA HEALTHCARE GROUP INC.
By:------------------------------
Lawrence M. Higby
President and Chief Operating Officer
Apria Healthcare Group Inc.
Approved as to content and form:
ROBERT S. HOLCOMBE
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
APRIA HEALTHCARE GROUP INC.
By:-----------------------------
Robert S. Holcombe
Attorney for Apria Healthcare Group Inc.
10
<PAGE> 11
ENDORSEMENT
I, Jeremy M. Jones, hereby acknowledge that I was given twenty-one
days to consider the foregoing Agreement and voluntarily chose to sign this
Agreement prior to the expiration of the twenty-one day period.
I declare under penalty of perjury under the laws of the State of
California that the foregoing is true and correct.
EXECUTED this nineteenth day of January, 1998, at Orange County,
California.
----------------------------
Jeremy M. Jones
11
<PAGE> 12
EXHIBIT A
<PAGE> 13
Apria Healthcare Group Inc.
3560 Hyland Avenue
Costa Mesa, California 92626
Gentlemen:
This is to advise you that effective January 19, 1998, I hereby
voluntarily resign my positions as Chairman of the Board of Directors and Chief
Executive Officer of Apria Healthcare Group Inc. and my employment in any other
capacity with Apria Healthcare Group Inc. and its affiliates or subsidiaries,
other than my position as director of Apria Healthcare Group, Inc.
Sincerely yours,
-----------------------------
Jeremy M. Jones
<PAGE> 14
EXHIBIT B
<PAGE> 15
[INSERT APPROPRIATE PRESS RELEASE]
1
<PAGE> 16
[INSERT APPROPRIATE PRESS RELEASE]
<PAGE> 1
EXHIBIT 10.30
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into by and between
APRIA HEALTHCARE GROUP INC. (the "Company") and LAWRENCE M. HIGBY (the
"Executive"), as of the 26th day of January, 1998.
I. EMPLOYMENT.
The Company hereby employs the Executive and the Executive hereby accepts
such employment, upon the terms and conditions hereinafter set forth, from
January 26, 1998, to and including January 18, 2001. The period of employment
covered by this Agreement shall be automatically extended for an additional year
until January 18, 2002, unless either party shall send the other a notice prior
to October 1, 2000, declining to accept such extension.
II. DUTIES.
A. The Executive shall serve during the course of his employment as the
President and Chief Operating Officer of the Company, reporting to the Chief
Executive Officer, provided, however, that in the event of a vacancy in the
position of Chief Executive Officer, he shall also assume the duties of the
Chief Executive Officer for such period of time as may be requested by the Board
of Directors. He shall have responsibility for all operating field management,
the corporate-wide sales, marketing and revenue management functions and such
other duties and responsibilities as shall be determined from time to time by
the Chief Executive Officer or the Board of Directors of the Company.
B. The Executive agrees to devote substantially all of his time, energy and
ability to the business of the Company. Nothing herein shall prevent the
Executive, upon approval of the Board of Directors of the Company, from serving
as a director or trustee of other corporations or businesses which are not in
competition with the business of the Company or in competition with any present
or future affiliate of the Company. Nothing herein shall prevent the Executive
from investing in real estate for his own account or from becoming a partner or
a stockholder in any corporation, partnership or other venture not in
competition with the business of the Company or in competition with any present
or future affiliate of the Company.
III. COMPENSATION.
A. The Company will pay to the Executive a base salary at the rate of
$400,000 per year. Such salary shall be payable in periodic installments in
accordance with the Company's customary practices. Amounts payable shall be
reduced by standard withholdings and other authorized deductions. The
Executive's salary may be increased from time to time at the discretion of the
Company's Board of Directors or its Compensation Committee.
B. Annual Bonus, Incentive, Savings and Retirement Plans. The Executive
shall be entitled to participate in all annual bonus, incentive, savings and
retirement plans, practices, policies and programs applicable generally to other
executives of the Company, including
<PAGE> 2
without limitation the Company's Incentive Compensation Plan at the 40% target
level, with eligibility for over-achievement up to 80% of base salary.
C. Welfare Benefit Plans. The Executive and/or his family, as the case may
be, shall be eligible for participation in and shall receive all benefits under
welfare benefit plans, practices, policies and programs provided by the Company
(including, without limitation, medical, prescription, dental, disability,
salary continuance, group life, accidental death and travel accident insurance
plans and programs) to the extent applicable generally to other executives of
the Company. The Company reserves the right to modify, suspend or discontinue
any and all of the above plans, practices, policies and programs at any time
without recourse by the Executive so long as such action is taken generally with
respect to other similarly situated peer executives and does not single out the
Executive.
D. Expenses. The Executive shall be entitled to receive prompt
reimbursement for all reasonable employment expenses incurred by him in
accordance with the policies, practices and procedures as in effect generally
with respect to other executives of the Company.
E. Fringe Benefits. The Executive shall be entitled to fringe benefits,
including without limitation (i) a car allowance of $8,400 per year, payable in
periodic installments in accordance with the Company's customary practices, (ii)
reasonable access to the Company's independent auditors for personal financial
planning, (iii) reasonable travel and entertainment expenses of the Executive's
spouse, on an actually incurred basis when necessary in connection with
participation in Company events, and (iv) such other benefits in accordance with
the plans, practices, programs and policies as may be in effect generally with
respect to other executives of the Company.
F. Vacation. The Executive shall be entitled to four weeks of paid vacation
annually, to be available and prorated monthly during the term of this Agreement
and otherwise to be consistent with the vacation policy and practice applicable
to other executives of the Company.
G. Stock Options.
(a) Within five days following the execution and delivery of this
Agreement, the Company shall deliver to the Executive a signed amendment to his
stock option agreement dated November 7, 1997, providing that (i) the 30,000
share portion of that option originally scheduled to vest and become exercisable
on July 1, 1998, shall instead vest and become exercisable on January 26, 1998,
and (ii) all vested portions of that option shall remain exercisable for a
period of three years following any termination of the Executive's employment
other than for Cause.
(b) No later than the first to occur of (i) the date on which stock options
are next granted to other officers and key employees of the Company, or (ii)
March 31, 1998, the Company shall grant and deliver to the Executive one or more
stock option agreements
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<PAGE> 3
evidencing the Executive's right to purchase a total of 150,000 shares of the
Company's common stock at a price per share equal to the closing price of such
stock on the New York Stock Exchange on the date of such grant. Such stock
options shall have a ten-year term, shall become exercisable in five equal
annual installments of 30,000 shares each beginning with the first installment
becoming exercisable on January 26, 1999, and shall otherwise be consistent with
the form of stock options generally provided to the Company's executives, except
that such options shall also provide that (i) in the event the Executive's
employment is terminated other than for Cause and other than pursuant to Section
V hereof, all unvested portions of said options shall immediately vest and
become exercisable, (ii) in the event the Executive's employment is terminated
pursuant to Section V hereof, one half of the unvested portions of said options
shall immediately vest and become exercisable, and (iii) all vested portions of
such options shall remain exercisable for a period of three years following any
termination of the Executive's employment other than for Cause.
IV. TERMINATION.
A. Death or Disability. The Executive's employment shall terminate
automatically upon the Executive's death. If the Company determines in good
faith that the Disability of the Executive has occurred (pursuant to the
definition of Disability set forth below), it may give to the Executive written
notice in accordance with Section XVIII of its intention to terminate the
Executive's employment. In such event, the Executive's employment with the
Company shall terminate effective on the 30th day after receipt of such notice
by the Executive, provided that, within the 30 days after such receipt, the
Executive shall not have returned to full-time performance of his duties. For
purposes of this Agreement, "Disability" shall mean a physical or mental
impairment which substantially limits a major life activity of the Executive and
which renders the Executive unable to perform the essential functions of his
position, even with reasonable accommodation which does not impose an undue
hardship on the Company. The Company reserves the right, in good faith, to make
the determination of Disability under this Agreement based upon information
supplied by the Executive and/or his medical personnel, as well as information
from medical personnel (or others) selected by the Company or its insurers.
B. Cause. The Company may terminate the Executive's employment for Cause.
For purposes of this Agreement, "Cause" shall mean that the Company, acting in
good faith based upon the information then known to the Company, determines that
the Executive has engaged in or committed: willful misconduct; theft, fraud or
other illegal conduct; refusal or unwillingness to substantially perform his
duties (other than such failure resulting from the Executive's Disability) for a
30-day period after written demand for substantial performance is delivered by
the Company that specifically refers to this paragraph and identifies the manner
in which the Company believes the Executive has not substantially performed his
duties; insubordination; any willful act that is likely to and which does in
fact have the effect of injuring the reputation or business of the Company;
violation of any fiduciary duty; violation of the Executive's duty of loyalty to
the Company; or a breach of any term of this Agreement. For purposes of this
paragraph, no act, or failure to act, on the Executive's part shall be
considered willful unless done or omitted to be done, by him not in good faith
and without reasonable
3
<PAGE> 4
belief that his action or omission was in the best interest of the Company.
Notwithstanding the foregoing, the Executive shall not be deemed to have been
terminated for Cause without delivery to the Executive of a notice of
termination signed by the Company's Chairman of the Board or Chief Executive
Officer stating that the Board of Directors of the Company has determined that
the Executive has engaged in or committed conduct of the nature described in the
second sentence of this paragraph, and specifying the particulars thereof in
detail.
C. Other than Cause or Death or Disability. The Executive or the Company
may terminate the Executive's employment at any time, without Cause, by giving
the other party to this Agreement at least 30 days advance written notice of
such termination, subject to the provisions of this Agreement.
D. Obligations of the Company Upon Termination.
1. Death or Disability. If the Executive's employment is terminated by
reason of the Executive's death or Disability, this Agreement shall terminate
without further obligations to the Executive or his legal representatives under
this Agreement, other than for (a) payment of the sum of (i) the Executive's
base salary through the date of termination to the extent not theretofore paid,
plus (ii) any earned vacation pay, to the extent not theretofore paid (the sum
of the amounts described in clauses (i) and (ii) shall be hereinafter referred
to as the "Accrued Obligations"), which shall be paid to the Executive or his
estate or beneficiary, as applicable, in a lump sum in cash within 30 days of
the date of termination; and (b) payment to the Executive or his estate or
beneficiary, as applicable, any amounts due pursuant to the terms of any
applicable welfare benefit plans.
2. Cause. If the Executive's employment is terminated by the Company for
Cause, this Agreement shall terminate without further obligations to the
Executive other than for the timely payment of the Accrued Obligations. If it is
subsequently determined that the Company did not have Cause for termination
under this Section IV-D-2, then the Company's decision to terminate shall be
deemed to have been made under Section IV-D-3 and the amounts payable thereunder
shall be the only amounts the Executive may receive for his termination.
3. Other than Cause or Death or Disability.
(a) If, during the term of this Agreement and subsequent to June 30, 1998,
(i) the Company terminates the Executive's employment for other than Cause
or death or Disability, or (ii) the Executive terminates his employment
hereunder with Good Reason (as defined below), this Agreement shall
terminate and the Executive shall be entitled to receive a severance
payment payable in one lump sum upon the termination of his employment in
an amount equal to 300% of his Annual Compensation (as defined below). If,
during the term of this Agreement and prior to July 1, 1998, (i) the
Company terminates the Executive's employment for other than Cause or death
or Disability, or (ii) the Executive terminates his employment hereunder
with Good Reason (as defined below), this Agreement shall terminate and the
Executive shall be
4
<PAGE> 5
entitled to receive a severance payment payable in one lump sum upon the
termination of his employment in an amount determined as follows:
<TABLE>
<CAPTION>
If Executive's employment is Executive shall receive the following
terminated during the month of: percentage of his Annual Compensation:
------------------------------- --------------------------------------
<S> <C>
January, 1998 200.0%
February, 1998 216.7%
March, 1998 233.3%
April, 1998 250.0%
May, 1998 266.7%
June, 1998 283.3%
</TABLE>
Any payment made pursuant to this Section IV-D-3(a) shall be reduced by all
amounts required to be withheld by applicable law, and shall only be made
in exchange for a valid release of all claims the Executive may have
against the Company in a form acceptable to the Company. Such payment shall
constitute the sole and entire obligation of the Company to provide any
compensation or benefits to the Executive upon termination, except for
obligations under the Company's 401(k) Savings Plan, obligations pursuant
to the terms of any outstanding stock option agreements and the Company's
obligation to provide the benefits required by Section IV-D-3(d) below, and
except that the Company will also pay to the Executive any Accrued
Obligations (as defined in Section IV-D-1).
(b) The term "Good Reason" means:
i) if the Executive's annual base salary is reduced, except for a
general one-time "across-the board" salary reduction not
exceeding ten percent (10%) which is imposed simultaneously on
all officers of the Company; or
(ii) if the Company requires the Executive to be based at an office
location which will result in an increase of more than thirty
(30) miles in the Executive's one-way commute; or
(iii) if the Company's Board of Directors or Chief Executive Officer
does not permit the Executive to continue to serve as the
President and Chief Operating Officer with the responsibilities
as described in Section II-A or another mutually acceptable
senior executive position.
(c) The term "Annual Compensation" means an amount equal to the Executive's
annual base salary at the rate in effect on the date on which the Executive
received or gave written notice of his termination, plus the sum of (i) an
amount equal to the average of the Executive's two most recent annual
bonuses, if any, received under the Company's Incentive Compensation Plan
prior to the notice of termination, (ii) the
5
<PAGE> 6
Executive's annual car allowance, if any, and (iii) an amount determined by
the Company from time to time in its sole discretion to be equal to the
average annual cost for Company employees of obtaining medical, dental and
vision insurance under COBRA, which amount is hereby initially determined
to be $5,000. In the event that the Executive's bonus for one of the two
calendar years preceding the calendar year in which the Executive receives
or gives written notice of termination was a prorated bonus due to
Executive having worked a partial year, then solely for purposes of
calculating Annual Compensation, the Executive's prorated bonus will be
recalculated to reflect the bonus the Executive would have received had the
Executive worked for the entire year. In the event that such notice of
termination is received or given by the Executive prior to the first date
subsequent to the commencement of the Executive's employment by the Company
on which annual bonuses are generally paid to other executives of the
Company, then solely for purposes of calculating Annual Compensation, the
Executive's average of his two most recent annual bonuses shall be deemed
to be his applicable target bonus pursuant to Section III-B, with no
over-achievement.
(d) In the event of any termination of the Executive's employment pursuant
to Section IV-D-3(a) or pursuant to Section V, the Company shall, for a
period of one year following the termination date, provide the Executive
with appropriate office space in a furnished office suite, including
reasonable secretarial, telephone, copying and delivery services. The
Company shall not be required to spend more than a total of $50,000 to
provide this benefit to the Executive.
4. Exclusive Remedy. The Executive agrees that the payments contemplated by
this Agreement shall constitute the exclusive and sole remedy for any
termination of his employment and the Executive covenants not to assert or
pursue any other remedies, at law or in equity, with respect to any termination
of employment.
V. SPECIAL SEVERANCE OPTION.
In the event that the Company employs a new Chief Executive Officer and the
Executive continues to work in good faith as the President and Chief Operating
Officer for a period of six months, then at any time during the three-month
period following the expiration of such six months, the Executive shall have the
right to terminate his employment by sending the Chairman and the Chief
Executive Officer a written notice terminating his employment pursuant to this
Section V on a date not less than 30 days subsequent to the date of such notice.
In such event, this Agreement and the Executive's employment shall terminate on
the date specified, and the Executive shall be entitled to receive a severance
payment payable in one lump sum upon the termination of his employment in an
amount equal to 150% of his Annual Compensation (as defined in Section
IV-D-3(c)). Any payment made pursuant to this Section V shall be reduced by all
amounts required to be withheld by applicable law, and shall only be made in
exchange for a valid release of all claims the Executive may have against the
Company in a form acceptable to the Company. Such payment shall constitute the
sole and entire
6
<PAGE> 7
obligation of the Company to provide any compensation or benefits to the
Executive upon termination, except for obligations under the Company's 401(k)
Savings Plan, obligations pursuant to the terms of any outstanding stock option
agreements and the Company's obligation to provide the benefits required by
Section IV-D-3(d), and except that the Company will also pay to the Executive
any earned but unused vacation time at the rate of pay in effect on the date of
the notice of termination.
VI. ARBITRATION.
Any dispute or controversy arising under or in connection with this
Agreement or Executive's employment by the Company shall be settled exclusively
by arbitration, conducted before a single neutral arbitrator in accordance with
the American Arbitration Association's National Rules for Resolution of
Employment Disputes as then in effect. Judgment may be entered on the
arbitrator's award in any court having jurisdiction; provided, however, that the
Company shall be entitled to seek a restraining order or injunction in any court
of competent jurisdiction to prevent any continuation of any violation of the
provisions of Sections VII, VIII, or IX of this Agreement and the Executive
hereby consents that such restraining order or injunction may be granted without
the necessity of the Company's posting any bond, and provided, further, that the
Executive shall be entitled to seek specific performance of his right to be paid
until the date of employment termination during the pendency of any dispute or
controversy arising under or in connection with this Agreement. The fees and
expenses of the arbitrator shall be borne by the Company.
VII. ANTISOLICITATION.
The Executive promises and agrees that during the term of this Agreement
(including any renewal) and for a period of one year thereafter, he will not
influence or attempt to influence customers of the Company or any of its present
or future subsidiaries or affiliates, either directly or indirectly, to divert
their business to any individual, partnership, firm, corporation or other entity
then in competition with the business of the Company or any subsidiary or
affiliate of the Company.
VIII. SOLICITING EMPLOYEES.
The Executive promises and agrees that, for a period of one year following
termination of his employment, he will not directly or indirectly solicit any of
the Company employees who earned annually $50,000 or more as a Company employee
during the last six months of his or her own employment to work for any other
business, individual, partnership, firm, corporation, or other entity.
IX. CONFIDENTIAL INFORMATION.
A. The Executive, in the performance of his duties on behalf of the
Company, shall have access to, receive and be entrusted with confidential
information, including but not limited to systems technology, field operations,
reimbursement, development, marketing,
7
<PAGE> 8
organizational, financial, management, administrative, clinical, customer,
distribution and sales information, data, specifications and processes presently
owned or at any time in the future developed, by the Company or its agents or
consultants, or used presently or at any time in the future in the course of its
business that is not otherwise part of the public domain (collectively, the
"Confidential Material"). All such Confidential Material is considered secret
and will be available to the Executive in confidence. Except in the performance
of duties on behalf of the Company, the Executive shall not, directly or
indirectly for any reason whatsoever, disclose or use any such Confidential
Material, unless such Confidential Material ceases (through no fault of the
Executive's) to be confidential because it has become part of the public domain.
All records, files, drawings, documents, notes, disks, diskettes, tapes,
magnetic media, photographs, equipment and other tangible items, wherever
located, relating in any way to the Confidential Material or otherwise to the
Company's business, which the Executive prepares, uses or encounters during the
course of his employment, shall be and remain the Company's sole and exclusive
property and shall be included in the Confidential Material. Upon termination of
this Agreement by any means, or whenever requested by the Company, the Executive
shall promptly deliver to the Company any and all of the Confidential Material,
not previously delivered to the Company, that may be or at any previous time has
been in the Executive's possession or under the Executive's control.
B. The Executive hereby acknowledges that the sale or unauthorized use or
disclosure of any of the Company's Confidential Material by any means whatsoever
and at any time before, during or after the Executive's employment with the
Company shall constitute unfair competition. The Executive agrees that he shall
not engage in unfair competition either during the time employed by the Company
or any time thereafter.
X. PARACHUTE LIMITATION.
Notwithstanding any other provision of this Agreement, the Executive shall
not have any right to receive any payment or other benefit under this Agreement,
any other agreement, or any benefit plan if such right, payment or benefit,
taking into account all other rights, payments or benefits to or for the
Executive under this Agreement, all other agreements, and all benefit plans,
would cause any right, payment or benefit to the Executive under this Agreement
to be considered a "parachute payment" within the meaning of Section 280G(b)(2)
of the Internal Revenue Code as then in effect (a "Parachute Payment"). In the
event that the receipt of any such right or any other payment or benefit under
this Agreement, any other agreement, or any benefit plan would cause the
Executive to be considered to have received a Parachute Payment under this
Agreement, then the Executive shall have the right, in the Executive's sole
discretion, to designate those rights, payments or benefits under this
Agreement, any other agreements, and/or any benefit plans, that should be
reduced or eliminated so as to avoid having the right, payment or benefit to the
Executive under this Agreement be deemed to be a Parachute Payment.
XI. SUCCESSORS.
8
<PAGE> 9
A. This Agreement is personal to the Executive and shall not, without the
prior written consent of the Company, be assignable by the Executive.
B. This Agreement shall inure to the benefit of and be binding upon the
Company, its subsidiaries and its successors and assigns and any such
subsidiary, successor or assignee shall be deemed substituted for the Company
under the terms of this Agreement for all purposes. As used herein, "successor"
and "assignee" shall include any person, firm, corporation or other business
entity which at any time, whether by purchase, merger or otherwise, directly or
indirectly acquires the stock of the Company or to which the Company assigns
this Agreement by operation of law or otherwise.
XII. WAIVER.
No waiver of any breach of any term or provision of this Agreement shall be
construed to be, nor shall be, a waiver of any other breach of this Agreement.
No waiver shall be binding unless in writing and signed by the party waiving the
breach.
XIII. MODIFICATION.
This Agreement may not be amended or modified other than by a written
agreement executed by the Executive and the Company's Chairman or Chief
Executive Officer.
XIV. SAVINGS CLAUSE.
If any provision of this Agreement or the application thereof is held
invalid, such invalidity shall not affect any other provisions or applications
of the Agreement which can be given effect without the invalid provisions or
applications and, to this end, the provisions of this Agreement are declared to
be severable.
XV. COMPLETE AGREEMENT.
This Agreement constitutes and contains the entire agreement and final
understanding concerning the Executive's employment with the Company and the
other subject matters addressed herein between the parties. It is intended by
the parties as a complete and exclusive statement of the terms of their
agreement. It supersedes and replaces all prior negotiations and all agreements
proposed or otherwise, whether written or oral, concerning the subject matter
hereof, including without limitation the Executive's Employment Agreement dated
November 7, 1997. Any representation, promise or agreement not specifically
included in this Agreement shall not be binding upon or enforceable against
either party. This is a fully integrated agreement.
XVI. GOVERNING LAW.
This Agreement shall be deemed to have been executed and delivered within
the State of California and the rights and obligations of the parties hereunder
shall be construed and
9
<PAGE> 10
enforced in accordance with, and governed by, by the laws of the State of
California without regard to principles of conflict of laws.
XVII. CONSTRUCTION.
In any construction to be made of this Agreement, the same shall not be
construed against any party on the basis that the party was the drafter. The
captions of this Agreement are not part of the provisions hereof and shall have
no force or effect.
XVIII. COMMUNICATIONS.
All notices, requests, demands and other communications hereunder shall be
in writing and shall be deemed to have been duly given if delivered by hand or
by courier, or if mailed by registered or certified mail, postage prepaid,
addressed to the Executive at 5004 River Avenue, Newport Beach, California 92663
or addressed to the Company at 3560 Hyland Avenue, Costa Mesa, California 92626,
Attention: Chief Executive Officer, with a copy to the attention of the Senior
Vice President, Human Resources. Either party may change the address at which
notice shall be given by written notice given in the above manner.
XIX. EXECUTION.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. Xerographic copies of such signed counterparts may be used
in lieu of the originals for any purpose.
XX. LEGAL COUNSEL.
The Executive and the Company recognize that this is a legally binding
contract and acknowledge and agree that they have each had the opportunity to
consult with legal counsel of their choice.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
APRIA HEALTHCARE GROUP INC. THE EXECUTIVE
By ---------------------------- ------------------------------
George L. Argyros Lawrence M. Higby
Chairman
10
<PAGE> 1
EXHIBIT 10.31
THIRD AMENDMENT TO CREDIT AGREEMENT AND WAIVER
THIS THIRD AMENDMENT TO CREDIT AGREEMENT AND WAIVER (this "Amendment")
dated as of January 30, 1998 is made between APRIA HEALTHCARE GROUP INC., a
corporation organized and existing under the laws of the State of Delaware
("Apria") and the Subsidiaries of Apria identified on the signature pages of
this Amendment and any Subsidiary of Apria that, subject to Section 9.13 of the
Credit Agreement, shall have executed a Joinder Agreement (Apria and such
Subsidiaries are referred to individually as a "Borrower" and, collectively, as
the "Borrowers"), each of the financial institutions listed on Schedule I to the
Credit Agreement or that, pursuant to Section 13.4 of the Credit Agreement,
shall become a "Bank" thereunder (individually, a "Bank" and, collectively, the
"Banks"), NATIONSBANK OF TEXAS, N.A., as the Syndication Agent, and BANK OF
AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as the Administrative Agent.
RECITALS
I. The Borrowers, the Banks, the Syndication Agent and the
Administrative Agent are parties to the Credit Agreement dated as of August 9,
1996 (the "Credit Agreement"), as amended by the First Amendment to Credit
Agreement dated as of April 22, 1997 (the "First Amendment") and the Second
Amendment to Credit Amendment dated as of August 8, 1997, pursuant to which the
Banks extended certain credit to the Borrowers.
II. The Borrowers have provided notice to the Administrative Agent and
the Banks pursuant to Section 9.1(e) of the Credit Agreement that an Event of
Default has occurred and is continuing under the Credit Agreement as a result of
the Borrowers' breach of the provisions of Sections 10.9 and 10.10 of the Credit
Agreement (the "Existing Defaults").
III. The Borrowers acknowledge that as a result of the Existing
Defaults, the Borrowers are not entitled to make any Borrowings under the Credit
Agreement, including the conversion or continuation of Loans to Eurodollar
Loans, and that the Banks are entitled to exercise their rights and remedies as
set forth in the Credit Agreement.
IV. The Borrowers have requested that the Banks refrain from
exercising remedies under the Credit Agreement as a result of the Existing
Defaults during the Waiver Period (as defined in Section 6.1 of this Amendment)
to enable the Borrowers, the Administrative Agent and the Banks to restructure
<PAGE> 2
the Credit Agreement to address the current status of the Borrowers, and in
connection with such proposed restructuring the Borrowers have agreed to (i)
grant to the Administrative Agent, for the benefit of the Banks, a security
interest in all of their personal property assets to secure the Obligations and
(ii) use their best efforts and negotiate in good faith to amend such other
terms and conditions of the Credit Agreement as the Banks shall request.
V. The Borrowers have requested that the Banks continue to permit
limited Borrowings under the Credit Agreement and allow the Borrowers to
maintain Loans as Eurodollar Loans during the Waiver Period.
VI. The Borrowers have also requested that the Total Revolving Loan
Commitment be reduced to $450,000,000, with the Revolving Loan Commitment of
each Bank commensurately reduced by 25%.
VII. The Borrowers have requested that the Credit Agreement be amended
to reflect the foregoing.
VIII. The Banks are willing to accommodate the requests of the
Borrowers on the terms and conditions specified in this Amendment.
AGREEMENT
In consideration of the foregoing premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties to this Amendment agree as follows:
1. Defined Terms. Capitalized terms used but not defined in this
Amendment shall have the respective meanings assigned to such terms in the
Credit Agreement.
2. Amendment to Recitals. The Recitals to the Credit Agreement are
hereby amended by deleting the amount "$600,000,000" on the third line of the
first Recital and replacing it with the amount "$450,000,000".
3. Amendment to Section 1.1.
3.1 The definition of "Applicable Margin" in Section 1.1 of the Credit
Agreement is hereby amended to read in its entirety as follows:
-2-
<PAGE> 3
"Applicable Margin" shall mean, with respect to (a) all
Eurodollar Loans 1.50% and (b) the Revolving Loan Commitment Fee, 0.375%.
3.2 The definition of "Total Revolving Loan Commitment" in Section 1.1
of the Credit Agreement is hereby amended to read in its entirety as follows:
"Total Revolving Loan Commitment" shall mean, at any time, the
sum of the Revolving Loan Commitments of each of the Banks. The principal
amount of the Total Revolving Loan Commitment is $450,000,000 as of January
30, 1998.
4. Amendment to Section 2.8(c). Section 2.8(c) of the Credit Agreement
is hereby amended in its entirety to read as follows:
"Upon the occurrence and during the continuance of an Event of
Default, all Obligations shall bear interest at a rate per annum equal
to 2% in excess of the rate of interest then applicable to such
Obligation, with such interest to be payable on demand."
5. Amendment to Schedule I. Schedule I to the Credit Agreement is
hereby deleted in its entirety and replaced with Attachment A to this Amendment.
6. Agreement Relating to Defaults.
6.1 Temporary Waiver. Subject to the satisfaction of the
conditions set forth in Section 9 of this Amendment and so long as no
Default or Event of Default (other than the Existing Defaults) has occurred
and is continuing, the Administrative Agent and the Banks agree that,
except with respect to the provisions of Sections 2.13, 9.13, 10.3, 10.12,
12.9 and 13.4, they shall waive their rights and remedies with respect to
the Existing Defaults until the earlier of (i) March 16, 1998, (ii) the
occurrence or disclosure of any Default or Event of Default (other than the
Existing Defaults) or (iii) Apria's knowledge that (a) the aggregate amount
of any and all reserves, charges and adjustments made or taken by Apria in
the fourth quarter of its 1997 fiscal year (the "Charges") is or is likely
to be in excess of $225,000,000 or (b) the portion of the Charges not
associated with goodwill is or is likely to be in excess of $75,000,000, of
which knowledge Apria shall immediately notify the Administrative Agent,
(the "Waiver Period"), at which time such waiver shall
-3-
<PAGE> 4
terminate automatically without any notice from or act by the
Administrative Agent or the Banks, the Existing Defaults shall be
reinstated and the Administrative Agent and the Banks shall be entitled to
exercise all rights and remedies with respect to the Existing Defaults.
Except to the extent expressly set forth in this Section 6.1, this
Amendment shall not limit or otherwise affect any rights that the Banks may
have with respect to any other or future Default or Event of Default by the
Borrowers and the Borrowers shall be bound to perform all their Obligations
under the Credit Agreement (other than with respect to the Existing
Defaults during the Waiver Period), subject to the terms and conditions of
the Credit Agreement.
6.2 Availability. The Banks hereby agree that during the Waiver
Period, conditioned on (a) the Borrowers' compliance with all provisions of
the Credit Agreement (including Section 7.1, except with respect to the
Existing Defaults) and (b) the Administrative Agents' receipt of an opinion
of counsel to the Borrowers, satisfactory in form and substance to the
Administrative Agent, that the incurrence of additional Indebtedness is
permitted by the terms of the Indenture, the Banks will make available to
the Borrowers, in addition to the Loans outstanding on the date of this
Amendment, up to $20,000,000 (of which up to $3,000,000 may be used for
Swingline Loans) of the $450,000,000 Revolving Loan Commitment; provided
that no new Letters of Credit will be available.
6.3 Interest. The Borrowers and the Banks hereby agree that the
increase in the Applicable Margin as set forth in Section 3.1 of this
Amendment shall be retroactive to January 1, 1998.
6.4 Default Interest. The Borrowers and the Banks hereby agree
that the amendment to Section 2.8(c) of the Credit Agreement set forth in
Section 4 of this Amendment shall not take effect until the expiration of
the Waiver Period and shall only apply prospectively from such date.
6.5 Eurodollar Loans. The Banks hereby agree that during the
Waiver Period the Borrowers may (a) continue existing Eurodollar Loans on
the expiration of the Interest Period thereof to new Eurodollar Loans or
convert Base Rate Loans to Eurodollar Loans and (b) subject to Section 6.2
of this Amendment make new Borrowings as Eurodollar Loans; provided that no
Interest Period may expire subsequent to March 16, 1998. The Banks hereby
agree that during the
-4-
<PAGE> 5
Waiver Period, Interest Periods may be shorter than the one month minimum
set forth in the Credit Agreement, with the duration of such Interest
Periods to be agreed to by the Administrative Agent and the Borrowers.
7. Amendment Fees. If the Required Banks consent to this Amendment,
the Borrowers shall pay to the Administrative Agent for distribution to each
Bank that consents to this Amendment on or prior to January 30, 1998 an
amendment fee equal to .15% of such Bank's Commitment Amount as in effect
subsequent to the reductions set forth in this Amendment. The amendment fee
shall be deemed earned when paid.
8. Representations. Each of the Borrowers represents and warrants to
the Banks that (a) it has the corporate or partnership power to execute, deliver
and perform the terms and provisions of this Amendment and has taken all
necessary corporate or partnership action to authorize the execution, delivery
and performance by it of this Amendment and (b) except with respect to the
Existing Defaults, no Default or Event of Default has occurred and is continuing
under the Credit Agreement. Each of Apria and its Material Subsidiaries has duly
executed and delivered this Amendment and this Amendment constitutes its legal,
valid and binding obligation enforceable in accordance with its terms, except as
enforceability may be limited by bankruptcy, reorganization, moratorium or
similar laws relating to or limiting creditors' rights generally or by equitable
principles relating to enforceability.
9. Conditions Precedent. The effectiveness of this Amendment is
subject to (a) the Administrative Agent's receipt of the consent of the Required
Banks, (b) except with respect to the occurrence and continuance of the Existing
Defaults, each of the representations and warranties contained in Section 8 of
the Credit Agreement being true and correct in all material respects as of the
date of this Amendment, (c) the receipt by the Administrative Agent of this
Amendment, duly executed and delivered by each of the Borrowers, (d) the payment
of the fees set forth in Section 7 of this Amendment, (e) the payment to the
Administrative Agent of a "work fee" in the amount of $150,000, against which
the first $150,000 of reasonable costs, expenses and charges incurred by the
Agents in connection with this Amendment and the proposed restructuring will be
credited, with any amounts of such work fee unused by December 31, 1998 being
returned to the Borrowers and (f) the payment to the Agents of the fees set
forth in the fee letters dated on or about January 26, 1998.
-5-
<PAGE> 6
10. Reference to and Effect on the Credit Agreement, Notes and
Guaranty.
(a) Except as specifically amended by this Amendment, the Credit
Agreement shall remain in full force and effect and is hereby ratified and
confirmed.
(b) This Amendment shall be construed as one with the Credit
Agreement and the Credit Agreement shall, where the context requires, be read
and construed throughout so as to incorporate this Amendment.
(c) All documents executed in connection with the Credit
Agreement, including, but not limited to, the Notes and the Guaranty shall
remain in full force and effect and are hereby ratified and confirmed with
respect to the Credit Agreement, as amended hereby.
11. Entire Agreement. This Amendment, together with the Credit
Agreement and the other documents referred to in, or executed in connection
with, the Credit Agreement supersedes all prior agreements and understandings,
written or oral, among the parties with respect to the subject matter of this
Amendment.
12. Expenses. The Borrowers shall reimburse the Agents on demand for
all reasonable costs, expenses and charges (including, without limitation,
reasonable fees and charges of legal counsel and other consultants for the
Agents) incurred by the Agents in connection with the preparation, performance
or enforcement of this Amendment.
13. Successors and Assigns. This Amendment shall be binding upon and
inure to the benefit of its parties and their respective successors and
permitted assigns.
14. Severability. Any provision of this Amendment that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Amendment and any such prohibition
or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
15. Captions. The captions and section headings appearing in this
Amendment are included solely for convenience of reference and are not intended
to affect the interpretation of any provision of this Amendment.
16. Counterparts. This Amendment may be executed in
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<PAGE> 7
any number of counterparts all of which when taken together shall constitute one
and the same instrument and any of the parties to this Amendment may execute
this Amendment by signing any such counterpart; signature pages may be detached
from multiple separate counterparts and attached to a single counterpart so that
all signatures are physically attached to the same document.
17. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
INTERPRETED AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF
CALIFORNIA.
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<PAGE> 8
IN WITNESS WHEREOF, the parties to this Amendment have caused their duly
authorized officers to execute and deliver this Amendment as of the date first
above written.
APRIA HEALTHCARE GROUP INC.
APRIA HEALTHCARE, INC.
APRIACARE MANAGEMENT SYSTEMS,INC.
APRIA NUMBER TWO, INC.
APRIA HEALTHCARE OF NEW YORK STATE, INC.
By:
-------------------------------------
Name:
Title:
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION,
as Administrative Agent
By:
-------------------------------------
Name:
Title:
<PAGE> 9
ATTACHMENT A SCHEDULE I
COMMITMENTS
<TABLE>
<CAPTION>
Pro Rata
Bank Commitment Share
- ------------------------ ------------- ----------
<S> <C> <C>
Bank of America
National Trust and
Savings Association $ 50,625,000 11.250%
NationsBank of Texas, N.A. $ 42,187,500 9.375%
ABN AMRO Bank N.V.,
Los Angeles International
Branch $ 14,062,500 3.125%
The Bank of New York $ 19,687,500 4.375%
The Bank of Nova Scotia $ 33,750,000 7.500%
Banque Nationale de Paris $ 28,125,000 6.250%
Banque Paribas $ 25,312,500 5.625%
Credit Lyonnais,
New York Branch $ 19,687,500 4.375%
Deutsche Bank AG,
New York Branch and/or
Cayman Islands Branch $ 11,250,000 2.500%
The First National Bank
of Chicago $ 14,062,500 3.125%
First Union National
Bank of North Carolina $ 14,062,500 3.125%
The Fuji Bank Limited,
Los Angeles Agency $ 8,437,500 1.875%
The Industrial Bank of
Japan, Ltd.,
Los Angeles Agency $ 19,687,500 4.375%
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
Pro Rata
Bank Commitment Share
- ------------------------ ------------- ----------
<S> <C> <C>
The Long-Term Credit
Bank of Japan, Ltd. $ 30,937,500 6.875%
Mellon Bank, N.A. $ 14,062,500 3.125%
The Mitsubishi Trust
and Banking Corporation $ 8,437,500 1.875%
The Sakura Bank Limited $ 8,437,500 1.875%
The Sanwa Bank Limited $ 8,437,500 1.875%
The Sumitomo Bank Limited $ 8,437,500 1.875%
Toronto Dominion (Texas),
Inc. $ 25,312,500 5.625%
Union Bank of California,
N.A. $ 25,312,500 5.625%
Wells Fargo Bank, N.A. $ 19,687,500 4.375%
------------ ------
TOTAL $450,000,000 100%
</TABLE>
<PAGE> 1
EXHIBIT 10.34
RESIGNATION AND GENERAL RELEASE AGREEMENT
THIS RESIGNATION AND GENERAL RELEASE AGREEMENT (this "AGREEMENT"), made as
of the 4th day of February, 1998, by and between JEROME J. LYDEN, an individual
("MR. LYDEN"), and APRIA HEALTHCARE GROUP INC., a Delaware corporation
("Apria"), is a resignation agreement which includes a general release of
claims. In consideration of the covenants undertaken and the releases contained
in this Agreement, Mr. Lyden and Apria agree as follows:
1. Mr. Lyden shall voluntarily resign from his position as an officer and
employee of Apria and all of its affiliates and subsidiaries by executing
EXHIBIT A attached hereto, such resignation to be effective February 6, 1998.
2. Mr. Lyden shall return to Apria and shall not take or copy in any form
or manner any financial information, lists of customers, prices, and similar
confidential and proprietary materials or information of Apria.
3. a. Apria shall pay to Mr. Lyden the following amounts:
(i) $250,000 in severance compensation, subject to standard
withholding for federal and state taxes, which shall be payable as follows.
On February 11, 1998, Apria shall make a lump-sum payment to Mr. Lyden of
$83,000. The remaining $167,000 shall be payable in accordance with Apria's
regular payroll procedures in 26 substantially equal installments over a
12-month period ending on the first regular payroll date after February 11,
1999; and
(ii) All earned but unpaid vacation pay, and any salary
amounts earned but not yet paid, payable as promptly as practicable
following February 6, 1998.
b. In the event that, prior to March 20, 1998, Mr. Lyden becomes
entitled to additional severance benefits pursuant to the terms of the
letter attached hereto as EXHIBIT B, Apria shall make an additional lump
sum payment to Mr. Lyden of $83,000 on the date of the change of control
referenced in said letter, and an additional $167,000 shall be payable in
accordance with Apria's regular payroll procedures in 26 substantially
equal installments over a 12-month period ending on the first regular
payroll date after the first anniversary date of said change of control.
c. In the event that other comparable executives of Apria receive a
discretionary payment under Apria's 1997 incentive compensation or other
bonus plan, Apria shall pay Mr. Lyden, at the same time as the payments to
such other executives, the amount of $10,000 in full satisfaction of any
obligation to or entitlement of Mr. Lyden under such plan.
<PAGE> 2
4. Neither this Agreement nor anything in this Agreement shall be construed
to be or shall be admissible in any proceeding as evidence of an admission by
Apria or Mr. Lyden of any violation of Apria's policies or procedures, or state
or federal laws or regulations. This Agreement may be introduced, however, in
any proceeding to enforce the Agreement. Such introduction shall be pursuant to
an order protecting its confidentiality.
5. Except for (i) those obligations created by or arising out of this
Agreement for which receipt or satisfaction has not been acknowledged herein,
(ii) any rights Mr. Lyden may have under Apria's incentive compensation or other
bonus plan for 1997 or under his stock option agreements with Apria and any
retirement, 401(k), SERP or similar benefit plans of Apria (including the Abbey
Healthcare Group Incorporated Employees' Retirement Plan), and (iii) the
continuing right to indemnification as provided by applicable law or in Apria's
bylaws and articles of incorporation in connection with acts, suits or
proceedings by reason of the fact that he was an officer or employee of Apria
where the basis of the claims against him consists of acts or omissions taken or
made in such capacity, Mr. Lyden on behalf of himself, his descendants,
dependents, heirs, executors, administrators, assigns, and successors, and each
of them, hereby covenants not to sue and fully releases and discharges Apria,
and its predecessors, subsidiaries and affiliates, past and present, and each of
them, as well as its and their trustees, directors, officers, agents, attorneys,
insurers, employees, stockholders, representatives, assigns, and successors,
past and present, and each of them, hereinafter together and collectively
(including Apria) referred to as the "Apria Releasees," with respect to and from
any and all claims, wages, demands, rights, liens, agreements, contracts,
covenants, actions, suits, causes of action, obligations, debts, costs,
expenses, attorneys' fees, damages, judgments, orders and liabilities of
whatever kind or nature in law, equity or otherwise, whether now known or
unknown, suspected or unsuspected, and whether or not concealed or hidden, which
he now owns or holds or he has at any time heretofore owned or held as against
the Apria Releasees, arising out of or in any way connected with his employment
relationship with any Apria Releasee, or his voluntary resignation from
employment with the Apria Releasees or any other transactions, occurrences,
actions, omissions, claims, losses, damages or injuries whatsoever, known or
unknown, suspected or unsuspected, resulting from any act or omission by or on
the part of any Apria Releasee committed or omitted prior to the date of this
Agreement, including, without limiting the generality of the foregoing, any
claim under Title VII of the Civil Rights Act of 1964, the Age Discrimination in
Employment Act, the Americans with Disabilities Act, the Family and Medical
Leave Act of 1993, the California Fair Employment and Housing Act, the
California Family Rights Act, or any claim for severance pay, bonus, sick leave,
holiday pay, vacation pay, life insurance, health or medical insurance or any
other fringe benefit, workers' compensation or disability.
Except for those obligations created by or arising out of this Agreement
for which receipt or satisfaction has not been acknowledged herein, and except
as provided below, Apria on behalf of itself and the Apria Releasees (to the
extent the matter in question arises on the basis of their relationship to
Apria) hereby acknowledges full and complete satisfaction of and releases and
discharges, and covenants not to sue, Mr. Lyden and his descendants, dependents,
heirs, executors, administrators, assigns, and successors, and each of them,
hereinafter together and collectively (including Mr. Lyden) referred to as the
"Lyden Releasees," from and with respect to
2
<PAGE> 3
any and all claims, demands, rights, liens, agreements, obligations, losses,
damages, injuries, contracts, covenants, actions, suits, causes of action,
obligations, debts, costs, expenses, attorneys' fees, damages, judgments, orders
and liabilities of whatever kind or nature in law, equity or otherwise, whether
known or unknown, suspected or unsuspected, whether or not concealed or hidden,
arising out of or in any way connected with Mr. Lyden's employment relationship
with Apria or its successor, or his voluntary resignation from employment with
Apria, or any other transactions, occurrences, actions, omissions, claims,
losses, damages or injuries whatsoever, known or unknown, suspected or
unsuspected, which Apria now owns or holds or has at any time heretofore owned
or held as against any of the Lyden Releasees.
6. It is the intention of Apria and Mr. Lyden in executing this Agreement
that the same shall be effective as a bar to each and every claim, demand and
cause of action hereinabove specified. In furtherance of this intention, Apria
and Mr. Lyden hereby expressly waive any and all rights and benefits conferred
upon them by the provisions of SECTION 1542 OF THE CALIFORNIA CIVIL CODE and
expressly consent that this Agreement shall be given full force and effect
according to each and all of its express terms and provisions, including those
related to unknown and unsuspected claims, demands and causes of action, if any,
as well as those relating to any other claims, demands and causes of action
hereinabove specified. SECTION 1542 provides:
"A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR
DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH
THE DEBTOR."
Apria and Mr. Lyden, and each of them, acknowledge that either may hereafter
discover claims or facts in addition to or different from those which either or
both of them now knows or believes to exist with respect to the subject matter
of this Agreement and which, if known or suspected at the time of executing this
Agreement, may have materially affected this settlement. Nevertheless, Apria and
Mr. Lyden each hereby waive any right, claim or cause of action that might arise
as a result of such different or additional claims or facts. Apria and Mr. Lyden
each acknowledge that it or he understands the significance and consequence of
such release and such specific waiver of SECTION 1542.
7. a. The terms and conditions of this Agreement shall remain confidential
as between the parties and professional advisers to the parties and neither of
them shall disclose them to any other person, except as provided herein or as
required by the rules and regulations of the Securities and Exchange Commission
("SEC") or as otherwise may be required by law or court order. Without limiting
the generality of the foregoing, neither Apria nor Mr. Lyden will respond to or
in any way participate in or contribute to any public discussion concerning, or
in any way relating to, the execution of this Agreement or the events which led
to its execution.
b. Apria shall refer all requests for employment references or other
inquiries relating to Mr. Lyden's employment with Apria from potential employers
to either Mr. Dennis Walsh, Executive Vice President, Sales or Mr. Lawrence
Higby, President and Chief Operating
3
<PAGE> 4
Officer, for response. Apria agrees that Mr. Walsh and Mr. Higby shall provide a
positive, non-derogatory reference for Mr. Lyden that is consistent with the
outline attached to this Agreement as EXHIBIT "C".
8. Mr. Lyden will continue to keep confidential all confidential and
proprietary Apria information, as required by Section 10 of the Executive
Severance Agreement dated June 28, 1997 between Mr. Lyden and Apria. In this
regard, Mr. Lyden acknowledges the continuing effectiveness, in accordance with
their respective terms, of Sections 9 and 10 of said Executive Severance
Agreement.
9. Mr. Lyden expressly acknowledges and agrees that, by entering into this
Agreement, he is waiving any and all rights or claims that may have arisen under
the Age Discrimination in Employment Act of 1967, as amended, which have arisen
on or before the date of execution of this Agreement. Mr. Lyden further
expressly acknowledges that:
a. He is hereby advised in writing by this Agreement
to consult with an attorney before signing this Agreement;
b. He was given a copy of this Agreement on January 5, 1998, and
informed that he had 21 days within which to consider the Agreement; and
c. He was informed that he has seven (7) days following the date of
his execution of the Agreement in which to revoke the Agreement.
10. Apria and Mr. Lyden each warrant and represent that neither has
heretofore assigned or transferred to any person not a party to this Agreement
any released matter or any part or portion thereof and each shall defend,
indemnify and hold harmless the other from and against any claim (including the
payment of attorneys' fees and costs actually incurred whether or not litigation
is commenced) based on or in connection with or arising out of any such
assignment or transfer made, purported or claimed.
11. Apria and Mr. Lyden acknowledge that any employment or contractual
relationship between them will terminate on February 6, 1998, that they have no
further employment or contractual relationship except as may arise out of this
Agreement and that Mr. Lyden waives any right or claim to reinstatement as an
employee of Apria and will not seek employment in the future with Apria.
12. Mr. Lyden agrees that he shall be exclusively liable for the payment of
all of his share of federal and state taxes which may be due as the result of
the consideration received from the settlement of disputed claims as set forth
herein.
13. Mr. Lyden agrees that, following the termination of his employment with
Apria, (i) he will, at no cost to him, cooperate with any reasonable request
Apria may make for information or assistance with respect to any matter
involving Mr. Lyden during his period of employment, and (ii) he will not
disparage Apria at any time. Apria, on behalf of itself and the
4
<PAGE> 5
Apria Releasees, agrees that it will, to the extent reasonably practicable,
cause its officers and directors not to disparage Mr. Lyden in any manner.
14. This Agreement is an integrated document and constitutes and contains
the entire agreement and understanding concerning Mr. Lyden's employment,
voluntary resignation from the same and the other subject matters addressed
herein between the parties, and supersedes and replaces all prior negotiations
and all agreements, proposed or otherwise, whether written or oral, concerning
the subject matter hereof, and expressly releases all Apria Releasees from any
obligations not covered herein, including, but not limited to Apria's Severance
Pay Plan and, except as provided in the last sentence of Paragraph 8 above, the
Executive Severance Agreement, dated June 28, 1997, between Mr. Lyden and Apria.
This Agreement does not, however, affect Mr. Lyden's rights under any Apria
retirement, 401(k), SERP or similar benefit plan, including the Abbey Healthcare
Group Incorporated Employees' Retirement Plan. This Agreement also does not
modify the provisions of any of Mr. Lyden's stock options. Prior to the
execution and delivery of this Agreement, however, the Compensation Committee of
Apria's Board of Directors has authorized amendments to Mr. Lyden's stock option
agreements to provide that all of Mr. Lyden's vested stock options, representing
the currently exercisable right to purchase a total of 27,460 shares of Apria's
common stock, shall continue to be exercisable for said 27,460 shares during the
six-month period following the termination of Mr. Lyden's employment, until
August 6, 1998. Amendments confirming the extension of Mr. Lyden's right to
exercise said options shall be executed and delivered to Mr. Lyden on or prior
to February 11, 1998.
15. If any provision of this Agreement or the application thereof is held
invalid, the invalidity shall not affect the other provisions or applications of
this Agreement which can be given effect without the invalid provisions or
applications and to this end the provisions of this Agreement are declared to be
severable.
16. This Agreement has been executed and delivered within the State of
California, and the rights and obligations of the parties hereunder shall be
construed and enforced in accordance with, and governed by, the laws of the
State of California without regard to principles of conflict of laws.
17. This Agreement may be executed in counterparts, and each counterpart,
when executed, shall have the efficacy of a signed original. Photographic copies
of such signed counterparts may be used in lieu of the originals for any
purpose.
18. Any dispute or controversy between Mr. Lyden on the one hand, and Apria
(or any other Apria Releasee), on the other hand, in any way arising out of,
related to, or connected with this Agreement or the subject matter hereof, or
otherwise in any way arising out of, related to, or connected with Mr. Lyden's
employment with any Apria Releasee or the termination of Mr. Lyden' s employment
with any Apria Releasee, shall be submitted for resolution by arbitration in
accordance with the provisions of Section 15 of the Executive Severance
Agreement between the parties dated as of June 28, 1997. APRIA AND MR. LYDEN
ACKNOWLEDGE, UNDERSTAND AND AGREE THAT IN THE EVENT OF A DISPUTE
5
<PAGE> 6
UNDER THIS AGREEMENT, EACH PARTY HAS WAIVED ANY RIGHT TO A JURY TRIAL AND A
JUDICIAL RESOLUTION OF THE DISPUTE.
19. No waiver of any breach of any term or provision of this Agreement
shall be construed to be, or shall be, a waiver of any other breach of this
Agreement. No waiver shall be binding unless in writing and signed by the party
waiving the breach.
20. In entering this Agreement, the parties represent that they have relied
upon the advice of their attorneys, who are attorneys of their own choice, and
that they have read the Agreement and have had the opportunity to have the
Agreement explained to them by their attorneys, and that those terms are fully
understood and voluntarily accepted by them.
21. All parties agree to cooperate fully and to execute any and all
supplementary documents and to take all additional actions that may be necessary
or appropriate to give full force to the terms and intent of this Agreement and
which are not inconsistent with its terms.
22. Mr. Lyden hereby declares as follows:
I, Jerome J. Lyden, hereby acknowledge that I was given 21 days to
consider the foregoing Agreement and voluntarily chose to sign the Agreement
prior to the expiration of the 21-day period.
I have read the foregoing Agreement and I accept and agree to the
provisions it contains and hereby execute it voluntarily with full understanding
of its consequences.
I declare under penalty of perjury under the laws of the State of
California that the foregoing is true and correct.
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Agreement as of the ____ day of February, 1998.
-------------------------------------------
Jerome J. Lyden
APRIA HEALTHCARE GROUP INC.
By:
----------------------------------------
6
<PAGE> 7
EXHIBIT A
February 6, 1998
Mr. Lawrence M. Higby
President and Chief Operating Officer
Apria Healthcare Group Inc.
3560 Hyland Avenue
Costa Mesa, California 92626
Dear Larry:
This is to advise you that, effective February 6, 1998, I hereby
voluntarily resign my position as Senior Vice President, Sales and my employment
in any other capacity with Apria Healthcare Group Inc. or any of its affiliates
or subsidiaries.
Sincerely yours,
--------------------------------
Jerome J. Lyden
7
<PAGE> 8
EXHIBIT C
List of Discussion Points
Hire Date: January 13, 1992
Abbey -- Vice President Managed Care 08/92 - 09/94
Abbey -- Senior Vice President Sales 09/94 - 06/95
Apria -- Vice President Managed Care 06/95 - 04/97
Apria -- Senior Vice President Sales 04/97 - 02/98
Voluntary resignation to pursue other interests, February 6, 1998.
RESULTS:
Managed Care:
- - Built department from $18.0M in annual sales with 300 contracts and a staff
of 3 to $400.0M in annual sales with 2,700 contracts and total staff of 85.
- - Built Apria Direct (central intake) to 42,000 monthly calls, 3,000 orders
and $1.6M in revenue per month.
- - Built centralized contracting function.
- - Conducted "Audit for Profit" gross profit analysis of
$300.0M in managed care revenue.
Senior Vice President Sales:
Abbey:
- - 1994 second half turnaround.
- - Q3, Q4 1994 revenues of $232.6M versus Q1, Q2 1994 of $206.0M or 13% sales
increase.
- - Q3, Q4 1994 operating income $32.4M versus Q1, Q2 1994 of
$22.5M or 42% increase.
- - Q3, Q4 1994 EPS of $.87 versus Q1, Q2 1994 of $.51 or 70%
increase.
- - June 1995 revenue of $236.0M versus June 1994 revenue of $206.0M or 14%
increase.
- - Built three-tiered sales force.
Apria:
- - Increased gross profit from 66% in April 1997 to 67.5% in
December 1997 YTD.
- - Launched aggressive Account Executive Expansion program resulting in 100
additional new hires in six months.
- - Developed direct mail program to 5,000 pulmonologists with a
6% return rate.
- - Increased weekly sales call activity by 20%.
- - Designed company's first corporate sales training program.
<PAGE> 1
EXHIBIT 10.35
FOURTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER (this
"Amendment") dated as of March 13, 1998 is made between APRIA HEALTHCARE GROUP
INC., a corporation organized and existing under the laws of the State of
Delaware ("Apria") and the Subsidiaries of Apria identified on the signature
pages of this Amendment and any Subsidiary of Apria that, subject to Section
9.13 of the Credit Agreement, shall have executed a Joinder Agreement (Apria and
such Subsidiaries are each referred to individually as a "Borrower" and,
collectively, as the "Borrowers"), each of the financial institutions listed on
Schedule I to the Credit Agreement or that, pursuant to Section 13.4 of the
Credit Agreement, shall become a "Bank" thereunder (individually, a "Bank" and,
collectively, the "Banks"), NATIONSBANK OF TEXAS, N.A., as the Syndication
Agent, and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, as the
Administrative and Collateral Agent ("Administrative and Collateral Agent").
RECITALS
I. The Borrowers, the Banks, the Syndication Agent and the
Administrative and Collateral Agent are parties to the Credit Agreement dated as
of August 9, 1996, as amended by the First Amendment to Credit Agreement dated
as of April 22, 1997 (the "First Amendment"), the Second Amendment to Credit
Amendment dated as of August 8, 1997 (the "Second Amendment") and the Third
Amendment to Credit Agreement and Waiver, dated as of January 30, 1998, as
modified by the Consent dated February 26, 1998 (the "Third Amendment"),
pursuant to which the Banks extended certain credit to the Borrowers (the
"Credit Agreement").
II. The Borrowers previously provided notice to the Administrative and
Collateral Agent and the Banks pursuant to Section 9.1(e) of the Credit
Agreement that an Event of Default has occurred and is continuing under the
Credit Agreement as a result of the Borrowers' breach of the provisions of
Sections 10.9, 10.10 and 10.11 of the Credit Agreement (the "Existing
Defaults").
III. The Borrowers and the Banks, at the Borrower's request, entered
into the Third Amendment pursuant to which the Banks agreed during the Waiver
Period (as defined in Section 6.1 of the Third Amendment) to (a) temporarily
waive, for limited purposes, the Defaults existing as a result of the breach of
Sections 10.9 and 10.10 of the Credit Agreement and (b) continue to permit
limited Borrowings under the Credit Agreement and allow the Borrowers to
continue Loans as, or convert Loans to, Eurodollar Loans during the Waiver
Period.
<PAGE> 2
IV. Subsequent to the execution and delivery of the Third Amendment,
Joseph Littlejohn & Levy ("JLL") and CIBC WG Argosy Merchant Fund 2 LLC ("CIBC")
agreed to make an equity investment in Apria (the "JLL/CIBC Investment")
pursuant to the Stock Purchase Agreement and the Stockholder Agreement, each
dated as of February 3, 1998, between, among others, JLL, CIBC and Apria.
V. The Borrowers have requested that the Banks agree to extend the
Waiver Period until June 30, 1998, to provide sufficient time to consummate the
JLL/CIBC Investment.
VI. The Borrowers have agreed in consideration of the extension of the
Waiver Period (and the initial Waiver Period as provided in the Third Amendment)
to (i) grant the Administrative and Collateral Agent, for the benefit of the
Banks, a security interest in all of their personal property assets to secure
the Obligations, (ii) amend certain provisions of the Credit Agreement and (iii)
use their best efforts and negotiate in good faith to resyndicate the credit
facilities in connection with the consummation of the JLL/CIBC Investment by
June 30, 1998 or, in the event the JLL/CIBC Investment is not consummated,
restructure the Credit Agreement as the Banks shall reasonably request by June
30, 1998.
VII. The Borrowers have advised the Agent that (a) Protocare of
Metropolitan New York, Inc., a Borrower under the Credit Agreement has merged
with and into Apria Healthcare, Inc., also a Borrower under the Credit
Agreement, (b) Apria Number One, Inc., has changed its name to ApriaCare
Management Systems, Inc., and (c) Homedco of New York State, Inc., has changed
its name to Apria Healthcare of New York State, Inc. and have requested that the
Credit Documents reflect the foregoing.
VIII. The Borrowers have requested that the Credit Agreement be
amended to reflect the foregoing.
IX. The Required Banks are willing to accommodate the requests of the
Borrowers on the terms and conditions specified in this Amendment.
AGREEMENT
In consideration of the foregoing premises and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Borrowers and the Banks agree as follows:
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<PAGE> 3
1. Defined Terms. Capitalized terms used but not defined in this
Amendment shall have the respective meanings assigned to such terms in the
Credit Agreement. In addition, the following terms shall have the following
meanings:
"Extended Waiver Period" shall mean the period beginning on the date
of this Amendment and ending on the earlier of (i) June 30, 1998, (ii) the
occurrence or disclosure of any Default or Event of Default (other than the
Existing Defaults), (iii) Apria's knowledge that (a) the aggregate amount of the
1997 Fourth Quarter Charges and Reserves is likely to be in excess of
$225,000,000, or (b) the tangible portion of the 1997 Fourth Quarter Charges and
Reserves is or is likely to be in excess of $85,000,000, of which knowledge
Apria shall immediately notify the Administrative and Collateral Agent and (iv)
the termination of the JLL/CIBC Investment (provided that the Borrowers shall
have 30 days (but in no event later than June 30, 1998) to cure such default) or
the failure of the JLL/CIBC Investment to be consummated by June 30, 1998.
"1997 Fourth Quarter Charges and Reserves" shall mean any and all
reserves, charges and adjustments made or taken by Apria in the fourth quarter
of its 1997 fiscal year.
2. Amendment to Section 1.1.
(a) The following definitions are hereby added to Section 1.1 of the
Credit Agreement in the appropriate alphabetical order:
"Authorized Company Employees" shall mean employees of Apria
designated in writing to the Agent as such from time to time by the chief
financial officer or the treasurer of Apria, and as to whom the Company has
provided to the Administrative and Collateral Agent a certificate of the
Secretary or Assistant Secretary of Apria certifying that the Board of
Directors of Apria has delegated such authority to the chief financial
officer or the treasurer, as the case may be, of Apria.
"CIBC" shall mean CIBC WG Argosy Merchant Fund 2 LLC.
"Confirmation of Security Agreement" shall mean the Confirmation
of Security Agreement, dated as of March 13, 1998, by Apria, to be filed
with the Patent and Trademark Office.
"JLL" shall mean Joseph Littlejohn & Levy.
"JLL/CIBC Investment" shall mean the agreement by
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<PAGE> 4
JLL and CIBC to make an equity investment in Apria in an amount not less
than $172,200,000 pursuant to the Stock Purchase Agreement and the
Stockholder Agreement.
"Security Agreement" shall mean the Security Agreement, dated as
of March 13, 1998, among the Borrowers and the Administrative and
Collateral Agent.
"Security Documents" shall mean, collectively, the Security
Agreement, the Confirmation of Security Agreement, all Uniform Commercial
Code financing statements and all other filings or recordings with any
Governmental Authority required by the Administrative and Collateral Agent
in connection with this Agreement or the Security Agreement.
"Stock Purchase Agreement" shall mean the Stock Purchase
Agreement, dated as of February 3, 1998, between, among others, JLL, CIBC
and Apria.
"Stockholder Agreement" shall mean the Stockholder Agreement,
dated as of February 3, 1998, between, among others, JLL, CIBC and Apria.
(b) The defined term "Administrative Agent" is hereby replaced
throughout the Credit Agreement with the defined term "Administrative and
Collateral Agent" and shall read as follows:
"Administrative and Collateral Agent" shall mean BofA in its
capacity as Administrative and Collateral Agent for the Banks under this
Agreement, and shall include any successor to the Administrative and
Collateral Agent appointed pursuant to Section 12.9.
(c) The definition of "Credit Documents" in Section 1.1 of the Credit
Agreement is hereby amended by adding "the Security Documents," after the word
"Note," on the second line of such definition.
(d) The definition of "Permitted Senior Subordinated Notes" in Section
1.1 of the Credit Agreement is hereby deleted in its entirety.
3. Amendment to Article 2. Article 2 of the Credit Agreement is hereby
amended by adding at the end thereof the following new Section 2.15:
"2.15 Notices of Borrowing; Notices of
Conversion; Authorized Employees. Notices of Borrowing
and Notices of Conversion shall only be executed by
officers of Apria or Authorized Employees.
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<PAGE> 5
4. Amendment to Section 8.3. Section 8.3 of the Credit Agreement is
hereby amended to add the following parenthetical at the end of the tenth line
of such section:
"(except for the Liens created pursuant to the Security Documents)"
5. Amendment to Section 8.4. Section 8.4 of the Credit Agreement is
hereby amended in its entirety to read as follows:
"Other than filings and recordings required to be made in respect
of the Liens created pursuant to the Security Documents, no material
order, consent, approval, license, authorization or validation of, or
filing, recording or registration with (except as have been obtained
or made prior to the Initial Borrowing Date), or exemption by, any
Governmental Authority is required (i) to authorize the execution,
delivery and performance of any Credit Document by any Credit Party or
(ii) to establish the legality, validity, binding effect or
enforceability of any such Credit Document against such Credit Party."
6. Amendment to Section 9.1. Section 9.1 of the Credit Agreement is
hereby amended by adding at the end thereof the following new paragraph:
(e) Monthly Financial Statements. Within 10 days after the close of
each monthly accounting period in each fiscal year of Apria, (i) the
consolidated balance sheet of Apria and its Subsidiaries as at the end of
such monthly period and the related consolidated statements of income,
retained earnings and cash flow, (ii) pro forma statements of cash flow,
including sources and uses of cash, for Apria and its Subsidiaries for the
next succeeding three month period, in form and substance reasonably
satisfactory to the Administrative and Collateral Agent and the Required
Banks and (iii) the percentage of Specified Assets located in the Filing
States.
7. Amendment to Section 10.1. Section 10.1 of the Credit Agreement is
hereby amended by deleting the word "and" at the end of clause (x), deleting the
period at the end of clause (xi) and replacing it with "; and" and inserting the
following as a new clause (xii):
"(xii) Liens created pursuant to the Security Documents."
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<PAGE> 6
8. Amendment to Section 10.5. Section 10.5 of the Credit Agreement is
hereby amended by (a) deleting the parenthetical relating to refinancings of
Permitted Senior Subordinated Notes contained in Section 10.5(d), and (b)
deleting the term "Permitted Senior Subordinated Notes" contained in Section
10.5(h) and substituting the term "Senior Subordinated Notes" for such term.
9. Amendment to Article 11. Article 11 of the Credit Agreement is
hereby amended by adding at the end thereof the following new Sections 11.10 and
11.11.
"11.10 Security Documents. Except for an
expiration in accordance with its terms, any Security
Document shall be terminated or shall cease to be in
full force and effect, for whatever reason, or any of
the Credit Parties shall attempt to revoke any Security
Document."
"11.11 JLL/CIBC Investment. The termination of the JLL/CIBC
Investment (provided that the Borrowers shall have 30 days (but in no
event later than June 30, 1998) to cure such default) or the failure
of the JLL/CIBC Investment to be consummated by June 30, 1998."
10. Amendment to Section 13.13. Section 13.13(a) of the Credit
Agreement is hereby amended by adding the following words at the end of clause
(iv) of such section:
"or release any material portion of the Collateral (as defined in the
Security Agreement) other than the release of Collateral in connection with
any sale expressly permitted by the terms of any Credit Document".
11. Amendment to Notices. The address for notices to the
Administrative and Collateral Agent set forth on the signature pages to the
Credit Agreement is hereby deleted in its entirety, with the following
substituted therefor:
1455 Market Street
San Francisco, California 94103
Attn: Christine Cordi
Agency Management Dept., 10831
Telephone: (415) 436-2790
Facsimile: (415) 436-3425
12. Agreement Relating to Defaults.
(a) Temporary Waiver. Subject to the
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<PAGE> 7
satisfaction of the conditions set forth in Section 17 of this Amendment
and so long as no Default or Event of Default (other than the Existing
Defaults) has occurred and is continuing, the Administrative and Collateral
Agent and the Banks agree that, except with respect to the provisions of
Sections 2.13, 9.13 (except as set forth in Section 10(e) of this
Amendment), 10.3, 10.12, 12.9 and 13.4, they shall waive their rights and
remedies with respect to the Existing Defaults during the Extended Waiver
Period, at the conclusion of which time such waiver shall terminate
automatically without any notice from or act by the Administrative and
Collateral Agent or the Banks, the Existing Defaults shall be reinstated
and the Administrative and Collateral Agent and the Banks shall be entitled
to exercise all rights and remedies with respect to the Existing Defaults.
Except to the extent expressly set forth in this Section 11, this Amendment
shall not limit or otherwise affect any rights that the Banks may have with
respect to any other or future Default or Event of Default by the Borrowers
and the Borrowers shall be bound to perform all their Obligations under the
Credit Agreement (other than with respect to the Existing Defaults during
the Extended Waiver Period), subject to the terms and conditions of the
Credit Agreement.
(b) Availability. The Banks hereby agree that during the Extended
Waiver Period, conditioned on (a) the Borrowers' compliance with all
provisions of the Credit Agreement (including Section 7.1, except with
respect to the Existing Defaults) and (b) the Administrative and Collateral
Agent's receipt of an opinion of counsel to the Borrowers, satisfactory in
form and substance to the Administrative and Collateral Agent, that the
incurrence of additional Indebtedness is permitted by the terms of the
Indenture, the Banks will make available to the Borrowers, in addition to
the Loans outstanding on the date of the Third Amendment, up to $20,000,000
(of which up to $3,000,000 may be used for Swingline Loans) of the
$450,000,000 Revolving Loan Commitment; provided that no new Letters of
Credit will be available.
(c) Default Interest. The Borrowers and the Banks hereby agree
that the amendment to Section 2.8(c) of the Credit Agreement set forth in
the Third Amendment shall not take effect until the expiration of the
Extended Waiver Period and shall only apply prospectively from such date.
(d) Eurodollar Loans. The Banks hereby agree that during the
Extended Waiver Period the Borrowers may (a) continue existing Eurodollar
Loans on the expiration of the Interest Period thereof to new Eurodollar
Loans or convert
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<PAGE> 8
Base Rate Loans to Eurodollar Loans and (b) subject to Section 11(b) of
this Amendment make new Borrowings as Eurodollar Loans; provided that no
Interest Period may expire subsequent to June 30, 1998. The Banks hereby
agree that during the Extended Waiver Period, Interest Periods may be
shorter than the one month minimum set forth in the Credit Agreement, with
the duration of such Interest Periods to be agreed to by the Administrative
and Collateral Agent and the Borrowers.
(e) Permitted Transactions. During the Extended Waiver Period,
irrespective of the existence of the Existing Defaults, but conditioned
upon no other Default having occurred and being continuing, Apria may
effect Permitted Transactions in accordance with Section 9.13 of the Credit
Agreement; provided that (a) the aggregate consideration for all such
Permitted Transactions does not exceed $20,000,000 and (b) the aggregate
portion of the consideration consisting of cash or the assumption of
Indebtedness by Apria or any of its Subsidiaries does not exceed
$15,000,000.
13. Modification of Section 10.9 during the Extended Waiver Period.
During the Extended Waiver Period, compliance with Section 10.9 of the Credit
Agreement shall be determined as follows (provided that such calculations shall
not include the 1997 Fourth Quarter Charges and Reserves):
<TABLE>
<CAPTION>
Fiscal Quarter End Ratio
--------------------- -------
<S> <C>
March 31, 1998 2.10
June 30, 1998 1.75
</TABLE>
14. Modification to Section 10.10 during the Extended Waiver Period.
During the Extended Waiver Period compliance with Section 10.10 of the Credit
Agreement shall be determined as follows:
"Apria will not permit its Consolidated Net Worth at the end of any fiscal
quarter (commencing with the fiscal quarter ending on March 31, 1998 ) to
be less than (a) an amount equal to 70% of its Consolidated Net Worth as of
December 31, 1997, plus (b) an amount equal to 50% of Consolidated Net
Income (in excess of zero) for each fiscal quarter commencing with the
fiscal quarter ending March 31, 1998, which amount shall be added to
Consolidated Net Worth as of the last day of each such fiscal quarter, plus
(c) 100% of the net proceeds of issuances of Apria Common Stock."
15. Modification to Section 10.11 during the Extended
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<PAGE> 9
Waiver Period. During the Extended Waiver Period compliance with Section 10.11
of the Credit Agreement shall be determined as follows (provided that such
calculations shall not include the 1997 Fourth Quarter Charges and Reserves):
"Apria will not permit the Consolidated Funded Indebtedness to Consolidated
EBITDA Ratio at the end of the fiscal quarter ended (a) March 31, 1998 to
be greater than 3.0 to 1 and (b) June 30, 1998 to be greater than 3.25 to
1."
16. Representations. Each of the Borrowers represents and warrants to
the Banks that:
(a) it has the corporate or partnership power to execute, deliver and
perform the terms and provisions of this Amendment and has taken all necessary
corporate or partnership action to authorize the execution, delivery and
performance by it of each of this Amendment and the Security Agreement;
(b) the representations and warranties contained in Section 8 of the
Credit Agreement are true and correct in all material respects as of the date of
this Amendment, except to the extent that a particular representation was made
as of a specific date, in which case such representation was true and correct as
of such date;
(c) except with respect to the Existing Defaults, no Default or Event
of Default has occurred and is continuing under the Credit Agreement; and
(d) the Accounts (as defined in the Security Agreement) of the
Borrowers, together with the tangible personal property assets of the Borrowers
located in California, Colorado, Connecticut, Florida, Indiana and Pennsylvania,
constitute not less than 60% (based on book value) of the total Accounts and
tangible personal property assets of the Borrowers (the "Specified Assets") of
the Borrowers.
(e) each of Apria and its Material Subsidiaries has duly executed and
delivered each of this Amendment and the Security Agreement and each of this
Amendment and the Security Agreement constitutes its legal, valid and binding
obligation enforceable in accordance with its respective terms, except as
enforceability may be limited by bankruptcy, reorganization, moratorium or
similar laws relating to or limiting creditors' rights generally or by equitable
principles relating to enforceability.
17. Conditions Precedent. The effectiveness of this Amendment is
subject to the following:
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<PAGE> 10
(a) the receipt by the Administrative and Collateral
Agent of the consent of the Required Banks;
(b) the receipt by the Administrative and Collateral Agent of this
Amendment, duly executed and delivered by each of the Borrowers;
(c) the receipt by the Administrative and Collateral Agent of a
Security Agreement substantially in the form of Exhibit A to this Amendment,
duly executed and delivered by each of the Credit Parties;
(d) the receipt by the Administrative and Collateral Agent of duly
executed UCC-1 financing statements naming the Borrowers as Debtors and the
Administrative and Collateral Agent as secured party for the states of
California, Colorado, Connecticut, Florida, Indiana and Pennsylvania;
(e) the receipt by the Administrative and Collateral Agent of the
Confirmation of Security Agreement, duly executed and delivered by Apria;
(f) the receipt by the Administrative and Collateral Agent of an
opinion of counsel to the Borrowers, satisfactory in form and substance to the
Administrative and Collateral Agent; and
(g) except with respect to the occurrence and continuance of the
Existing Defaults, each of the representations and warranties contained in
Section 8 of the Credit Agreement being true and correct in all material
respects as of the date of this Amendment with references to the Agreement being
references to the Agreement as amended by this Amendment.
18. Reference to and Effect on the Credit Agreement, Notes and
Guaranty.
(a) Except as specifically amended by this Amendment, the Credit
Agreement shall remain in full force and effect and is hereby ratified and
confirmed.
(b) This Amendment shall be construed as one with the Credit
Agreement and the Credit Agreement shall, where the context requires, be read
and construed throughout so as to incorporate this Amendment.
(c) All documents executed in connection with the Credit
Agreement, including, but not limited to, the Notes and the Guaranty shall
remain in full force and effect and are hereby ratified and confirmed with
respect to the Credit Agreement, as amended hereby.
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<PAGE> 11
(d) Notwithstanding anything to the contrary contained in this
Section 18, upon the expiration of the Extended Waiver Period, the text of the
provisions in this Amendment which were designated as amended only for the
duration of the Extended Waiver Period, shall read as originally set forth in
the Credit Agreement, as amended by the First Amendment, the Second Amendment
and the Third Amendment.
19. JLL/CIBC Investment. Nothing in this Amendment shall operate as
(a) the Banks' consent to the JLL/CIBC Investment or (b) a waiver of any
provision in the Credit Agreement prohibiting the JLL/CIBC Investment without
the Banks' consent pursuant to Section 13.13 of the Credit Agreement.
20. Entire Agreement. This Amendment, together with the Credit
Agreement and the other documents referred to in, or executed in connection
with, the Credit Agreement supersedes all prior agreements and understandings,
written or oral, among the parties with respect to the subject matter of this
Amendment.
21. Expenses. The Borrowers shall reimburse the Agents on demand for
all reasonable costs, expenses and charges (including, without limitation,
reasonable fees and charges of legal counsel and other consultants for the
Agents) incurred by the Agents in connection with the preparation, performance
or enforcement of this Amendment.
22. Successors and Assigns. This Amendment shall be binding upon and
inure to the benefit of its parties and their respective successors and
permitted assigns.
23. Severability. Any provision of this Amendment that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Amendment and any such prohibition
or unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
24. Captions. The captions and section headings appearing in this
Amendment are included solely for convenience of reference and are not intended
to affect the interpretation of any provision of this Amendment.
25. Counterparts. This Amendment may be executed in any number of
counterparts all of which when taken together shall constitute one and the same
instrument and any of the parties to this Amendment may execute this Amendment
by signing any such counterpart; signature pages may be detached from multiple
separate counterparts and attached to a single counterpart so
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<PAGE> 12
that all signatures are physically attached to the same document.
26. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED
BY, AND INTERPRETED AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF
THE STATE OF CALIFORNIA.
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<PAGE> 13
IN WITNESS WHEREOF, the parties to this Amendment have caused their duly
authorized officers to execute and deliver this Amendment as of the date first
above written.
APRIA HEALTHCARE GROUP INC.
APRIA HEALTHCARE, INC.
APRIACARE MANAGEMENT SYSTEMS, INC.
APRIA NUMBER TWO, INC.
APRIA HEALTHCARE OF NEW YORK STATE, INC.
By:-----------------------------------
Name: Larry Smallen
Title:Chief Financial Officer
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION,
as Administrative and Collateral Agent
By:------------------------------------
Name: Christine Cordi
Title: Vice President
<PAGE> 1
EXHIBIT 10.36
********************************************************************************
SECURITY AGREEMENT
Dated as of March 13, 1998
between
APRIA HEALTHCARE GROUP INC.
APRIA HEALTHCARE, INC.
APRIACARE MANAGEMENT SYSTEMS, INC.
APRIA NUMBER TWO, INC.
APRIA HEALTHCARE OF NEW YORK STATE, INC.
and
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION,
as Administrative and Collateral Agent for the Banks
********************************************************************************
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Definitions and Interpretation................ 1
1.01 Certain Defined Terms......................... 1
1.02 Interpretation................................ 4
Section 2. Collateral.................................... 4
2.01 Grant......................................... 4
2.02 Intellectual Property......................... 7
2.03 Perfection.................................... 7
2.04 Preservation and Protection of Security.......
Interests..................................... 7
2.05 Attorney-in-Fact.............................. 9
2.06 Special Provisions Relating to Stock..........
Collateral.................................... 9
2.07 Use of Intellectual Property.................. 10
2.08 Instruments................................... 11
2.09 Use of Collateral............................. 11
2.10 Rights and Obligations........................ 11
2.12 Termination................................... 12
Section 3. Representations and Warranties................ 12
3.01 Title......................................... 12
3.02 Pledged Stock................................. 13
3.03 Intellectual Property......................... 13
3.04 Goods......................................... 14
Section 4. Covenants..................................... 14
4.01 Books and Records............................. 14
4.02 Removals, Etc. ............................... 15
4.03 Sales and Other Liens......................... 15
4.04 Stock Collateral.............................. 15
4.05 Intellectual Property......................... 16
4.06 Insurance..................................... 17
4.07 Further Assurances............................ 17
Section 5. Remedies...................................... 17
5.01 Events of Default, Etc. ...................... 17
5.02 Deficiency.................................... 18
5.03 Private Sale.................................. 19
5.04 Application of Proceeds....................... 19
Section 6. Miscellaneous................................. 20
6.01 The Agent..................................... 20
6.02 Waiver........................................ 20
6.03 Notices....................................... 21
6.04 Expenses, Etc. ............................... 21
6.05 Amendments, Etc. ............................. 21
6.06 Successors and Assigns........................ 22
</TABLE>
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<PAGE> 3
<TABLE>
<S> <C> <C>
6.07 Survival.................................... 22
6.08 Agreements Superseded....................... 22
6.09 Severability................................ 22
6.10 Captions.................................... 22
6.11 Counterparts................................ 22
6.12 GOVERNING LAW; SUBMISSION TO JURISDICTION... 22
6.13 WAIVER OF JURY TRIAL........................ 23
ANNEX 1 - PLEDGED STOCK
ANNEX 2 - LIST OF COPYRIGHTS, COPYRIGHT REGISTRATIONS
AND APPLICATIONS FOR COPYRIGHT REGISTRATION
ANNEX 3 - LIST OF TRADE NAMES, TRADEMARKS, SERVICE
MARKS, TRADEMARK AND SERVICE MARK REGISTRATIONS
AND APPLICATIONS FOR TRADEMARK AND SERVICE MARK
REGISTRATIONS
ANNEX 4 - LIST OF CONTRACTS, LICENSES AND OTHER
AGREEMENTS
ANNEX 5 - LIST OF LOCATIONS
</TABLE>
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<PAGE> 4
SECURITY AGREEMENT
This SECURITY AGREEMENT (this "Agreement") dated as of March 13, 1998
is made between Apria Healthcare Group Inc., Apria Healthcare, Inc., ApriaCare
Management Systems, Inc. (formerly known as Apria Number One, Inc.), Apria
Number Two, Inc., Apria Healthcare of New York State, Inc. (formerly known as
Homedco of New York State, Inc.) (collectively, the "Obligors") and Bank of
America National Trust and Savings Association, as Administrative and Collateral
Agent for the Banks (the "Agent").
RECITALS
I. The Borrowers, the Banks, the Syndication Agent and the
Administrative Agent are parties to the Credit Agreement dated as of August 9,
1996 (the "Credit Agreement"), as amended by the First Amendment to Credit
Agreement dated as of April 22, 1997, the Second Amendment to Credit Amendment
dated as of August 8, 1997, the Third Amendment to Credit Agreement and Waiver,
dated as of January 30, 1998, and the Fourth Amendment to Credit Agreement and
Waiver (the "Fourth Amendment"), dated as of March 13, 1998, pursuant to which
the Banks extended certain credit to the Borrowers.
II. It is a condition to the Banks entering into the Fourth Amendment
that each Obligor shall have executed and delivered, and granted the Liens
provided for in, this Agreement.
To induce the Banks to enter into the Fourth Amendment and for other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, each Obligor has agreed to pledge and grant a security interest in
the Collateral as security for the Obligations. Accordingly, the Obligors agree
with the Agent as follows:
Section 1. Definitions and Interpretation.
1.01 Certain Defined Terms. Unless otherwise defined, all capitalized
terms used in this Agreement that are defined in the Credit Agreement (including
those terms incorporated by reference) shall have the respective meanings
assigned to them in the Credit Agreement. In addition, the following terms shall
have the following meanings under this Agreement:
"Accounts" shall have the meaning assigned to that term
in Section 2.01(b).
"Collateral" shall have the meaning assigned to that
term in Section 2.01.
<PAGE> 5
"Copyright Collateral" shall mean all Copyrights, whether now owned or
hereafter acquired by any Obligor, including each Copyright identified in Annex
2. Notwithstanding the foregoing, the Copyright Collateral shall not include any
Copyright which would be rendered invalid, abandoned, void or unenforceable by
reason of its being included as part of the Copyright Collateral.
"Copyrights" shall mean, collectively, (a) all copyrights, copyright
registrations and applications for copyright registrations, (b) all renewals and
extensions of all copyrights, copyright registrations and applications for
copyright registration and (c) all rights, now existing or hereafter coming into
existence, (i) to all income, royalties, damages and other payments (including
in respect of all past, present or future infringements) now or hereafter due or
payable under or with respect to any of the foregoing, (ii) to sue for all past,
present and future infringements with respect to any of the foregoing and (iii)
otherwise accruing under or pertaining to any of the foregoing throughout the
world.
"Documents" shall have the meaning assigned to that
term in Section 2.01(f).
"Equipment" shall have the meaning assigned to that
term in Section 2.01(e).
"Equity Rights" shall mean, with respect to any Person, any
outstanding subscriptions, options, warrants, commitments, preemptive rights or
agreements of any kind (including any stockholders' or voting trust agreements)
for the issuance, sale, registration or voting of, or outstanding securities
convertible into, any additional shares of capital stock of any class, or
partnership or other ownership interests of any type in, such Person.
"Filing States" shall mean California, Colorado,
Connecticut, Florida, Indiana and Pennsylvania.
"Instruments" shall have the meaning assigned to that
term in Section 2.01(c).
"Intellectual Property" shall mean all Copyright Collateral and all
Trademark Collateral, together with (a) all inventions, processes, production
methods, proprietary information, know-how and trade secrets; (b) all licenses
or user or other agreements granted to any Obligor with respect to any of the
foregoing, in each case whether now or hereafter owned or used, including the
licenses or other agreements with respect to
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<PAGE> 6
the Copyright Collateral or the Trademark Collateral listed in Annex 3; (c) all
information, customer lists, identification of suppliers, data, plans,
blueprints, specifications, designs, drawings, recorded knowledge, surveys,
engineering reports, test reports, manuals, materials standards, processing
standards, performance standards, catalogs, computer and automatic machinery
software and programs; (d) all field repair data, sales data and other
information relating to sales or service of products now or hereafter
manufactured; (e) all accounting information and all media in which or on which
any information or knowledge or data or records may be recorded or stored and
all computer programs used for the compilation or printout of such information,
knowledge, records or data; (f) all governmental approvals now held or hereafter
obtained by any Obligor in respect of any of the foregoing; and (g) all causes
of action, claims and warranties now owned or hereafter acquired by any Obligor
in respect of any of the foregoing. It is understood that Intellectual Property
shall include all of the foregoing owned or acquired by each Obligor on a
worldwide basis.
"Inventory" shall have the meaning assigned to that
term in Section 2.01(d).
"Issuers" shall mean, collectively, each Material Subsidiary, directly
or indirectly, of Apria that issues any shares of capital stock now owned or
hereafter acquired by any Obligor, including the respective corporations
identified in Annex 1 under the caption "Issuer."
"Obligations" shall mean (a) any and all Obligations and (b) any and
all obligations of the Obligors for the performance of their agreements,
covenants and undertakings under or in respect of the Credit Documents.
"Pledged Stock" shall have the meaning assigned to that term in
Section 2.01(a).
"Stock Collateral" shall have the meaning assigned to that term in
Section 2.01(a).
"Trademark Collateral" shall mean all Trademarks, whether now owned or
hereafter acquired by any Obligor, including each Trademark identified in Annex
3. Notwithstanding the foregoing, the Trademark Collateral shall not include any
Trademark which would be rendered invalid, abandoned, void or unenforceable by
reason of its being included as part of the Trademark Collateral.
"Trademarks" shall mean, collectively, (a) all trade names, trademarks
and service marks, logos, trademark and service mark registrations and
applications for trademark and service
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<PAGE> 7
mark registrations, (b) all renewals and extensions of any of the foregoing and
(c) all rights, now existing or hereafter coming into existence, (i) to all
income, royalties, damages and other payments (including in respect of all past,
present and future infringements) now or hereafter due or payable under or with
respect to any of the foregoing, (ii) to sue for all past, present and future
infringements with respect to any of the foregoing and (iii) otherwise accruing
under or pertaining to any of the foregoing throughout the world, together, in
each case, with the product lines and goodwill of the business connected with
the use of, or otherwise symbolized by, each such trade name, trademark and
service mark.
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in
effect in the State of California from time to time or, by reason of mandatory
application, any other applicable jurisdiction.
Section 1.02 Interpretation. In this Agreement, unless otherwise
indicated, the singular includes the plural and the plural the singular; words
importing either gender include the other gender; references to statutes or
regulations are to be construed as including all statutory or regulatory
provisions consolidating, amending or replacing the statute or regulation
referred to; references to "writing" include printing, typing, lithography and
other means of reproducing words in a tangible visible form; the words
"including," "includes" and "include" shall be deemed to be followed by the
words "without limitation"; references to articles, sections (or subdivisions of
sections), exhibits, annexes or schedules are to this Agreement; references to
agreements and other contractual instruments shall be deemed to include all
subsequent amendments, extensions and other modifications to such instruments
(without, however, limiting any prohibition on any such amendments, extensions
and other modifications by the terms of any Credit Document); and references to
Persons include their respective permitted successors and assigns and, in the
case of Governmental Authority, Persons succeeding to their respective functions
and capacities.
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<PAGE> 8
Section 2. Collateral.
2.01 Grant. As collateral security for the prompt payment in full when
due (whether at stated maturity, by acceleration or otherwise) and performance
of the Obligations, each Obligor hereby pledges and grants to the Agent, for the
benefit of the Agent and the Banks, a security interest in all of such Obligor's
right, title and interest in and to the following property, whether now owned or
hereafter acquired by such Obligor and whether now existing or hereafter coming
into existence (collectively, the "Collateral"):
(a) (i) all of the shares of capital stock of the Issuers represented
by the respective certificates identified in Annex 1 under the name of such
Obligor and all other shares of capital stock of whatever class of the Issuers,
now owned or hereafter acquired by such Obligor, together with in each case the
certificates representing the same (collectively, the "Pledged Stock");
(ii) all shares, securities, moneys or property (a) representing
a dividend on, or a distribution or return of capital in respect of, any of the
Pledged Stock, (b) resulting from a split-up, revision, reclassification or
other like change of any of the Pledged Stock or (c) otherwise received in
exchange for any of the Pledged Stock and all Equity Rights issued to the
holders of, or otherwise in respect of, any of the Pledged Stock; and
(iii) without affecting the obligations of any Obligor under any
provision prohibiting such action under any Credit Document, in the event of any
consolidation or merger in which any Issuer is not the surviving corporation,
all shares of each class of the capital stock of the successor corporation
(unless such successor corporation is an Obligor) formed by or resulting from
such consolidation or merger (collectively, and together with the property
described in clauses (i) and (ii) above, the "Stock Collateral");
(b) all accounts and general intangibles (each as defined in the
Uniform Commercial Code) of such Obligor constituting a right to the payment of
money, whether or not earned by performance, including all moneys due and to
become due to such Obligor in repayment of any loans or advances, in payment for
goods (including Inventory and Equipment) sold or leased or for services
rendered, in payment of tax refunds and in payment of any guarantee of any of
the foregoing (collectively, the "Accounts");
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<PAGE> 9
(c) all instruments, chattel paper or letters of credit (each as
defined in the Uniform Commercial Code) of such Obligor evidencing,
representing, arising from or existing in respect of, relating to, securing or
otherwise supporting the payment of, any of the Accounts (collectively, the
"Instruments");
(d) all inventory (as defined in the Uniform Commercial Code) and all
other goods of such Obligor that are held by such Obligor for sale, lease or
furnishing under a contract of service (including to its Subsidiaries or
Affiliates), that are so leased or furnished or that constitute raw materials,
work in process or material used or consumed in its business, including all
spare parts and related supplies, all goods obtained by such Obligor in exchange
for any such goods, all products made or processed from any such goods and all
substances, if any, commingled with or added to any such goods (collectively,
the "Inventory");
(e) all equipment (as defined in the Uniform Commercial Code) and all
other goods of such Obligor that are used or bought for use primarily in its
business, including all spare parts and related supplies, all goods obtained by
such Obligor in exchange for any such goods, all substances, if any, commingled
with or added to such goods and all upgrades and other improvements to such
goods, in each case to the extent not constituting Inventory (collectively, the
"Equipment");
(f) all documents of title (as defined in the Uniform Commercial Code)
or other receipts of such Obligor covering, evidencing or representing Inventory
or Equipment (collectively, the "Documents");
(g) all contracts and other agreements of such Obligor relating to the
sale or other disposition of all or any part of the Inventory, Equipment or
Documents and all rights, warranties, claims and benefits of such Obligor
against any Person arising out of, relating to or in connection with all or any
part of the Inventory, Equipment or Documents of such Obligor, including any
such rights, warranties, claims or benefits against any Person storing or
transporting any such Inventory or Equipment or issuing any such Documents;
(h) all other accounts or general intangibles of such Obligor not
constituting Accounts, including, to the extent related to all or any part of
the other Collateral, all books, correspondence, credit files, records,
invoices, tapes, cards, computer runs and other papers and documents in the
possession or under the control of such Obligor or any computer bureau or
service company from time to time acting for such Obligor;
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<PAGE> 10
(i) all other tangible and intangible property of such Obligor,
including all Intellectual Property; and
(j) all proceeds and products in whatever form of all or any part of
the other Collateral, including all proceeds of insurance and all condemnation
awards and all other compensation for any event of loss with respect to all or
any part of the other Collateral (together with all rights to recover and
proceed with respect to the same), and all accessories to, substitutions for and
replacements of all or any part of the other Collateral.
2.02 Intellectual Property. For the purpose of enabling the Agent to
exercise its rights, remedies, powers and privileges under Section 5 at such
time or times as the Agent shall be lawfully entitled to exercise such rights,
remedies, powers and privileges, and for no other purpose, each Obligor hereby
grants to the Agent, to the extent assignable, an irrevocable, nonexclusive
license (exercisable without payment of royalty or other compensation to such
Obligor) to use, assign, license or sublicense any of the Intellectual Property
of such Obligor, together with reasonable access to all media in which any of
the licensed items may be recorded or stored and to all computer programs used
for the compilation or printout of such items.
2.03 Perfection. Concurrently with the execution and delivery of this
Agreement, each Obligor shall (i) file such financing statements and other
documents in such offices as shall be necessary or as the Agent may reasonably
request to perfect and establish the priority (subject only to Liens permitted
under Section 10.1 of the Credit Agreement) of the Liens granted by this
Agreement, (ii) deliver and pledge to the Agent any and all Instruments,
endorsed or accompanied by such instruments of assignment and transfer in such
form and substance as the Agent may reasonably request, (iii) deliver to the
Agent all certificates identified in Annex 1, accompanied by undated stock
powers duly executed in blank and (iv) take all such other actions as shall be
necessary or as the Agent may reasonably request to perfect and establish the
priority (subject only to such permitted Liens) of the Liens granted by this
Agreement, including, if requested by the Agent, the filing of additional
financing statements subsequent to the date of this Agreement in states other
than the Filing States.
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<PAGE> 11
2.04 Preservation and Protection of Security Interests.
Each Obligor shall:
(a) upon the acquisition after the date of this Agreement by such
Obligor of any Stock Collateral, promptly either (x) transfer and deliver to the
Agent all such Stock Collateral (together with the certificates representing
such Stock Collateral securities duly endorsed in blank or accompanied by
undated stock powers duly executed in blank) or (y) take such other action as
the Agent shall reasonably deem necessary or appropriate to perfect, and
establish the priority of (subject to Permitted Liens), the Liens granted by
this Agreement in such Stock Collateral;
(b) upon the acquisition after the date of this Agreement by such
Obligor of any Instrument in a principal amount equal to or in excess of
$100,000, promptly deliver and pledge to the Agent all such Instruments,
endorsed or accompanied by such instruments of assignment and transfer in such
form and substance as the Agent may request;
(c) upon the acquisition after the date of this Agreement by such
Obligor of any Equipment covered by a certificate of title or ownership having a
value in excess of $100,000 promptly notify the Agent of such acquisition and,
if requested by the Agent, cause the Agent to be listed as the lienholder on
such certificate of title and within 90 days of the acquisition of such
Equipment deliver evidence of the same to the Agent;
(d) upon such Obligor's acquiring, or otherwise becoming entitled to
the benefits of, any Copyright (or copyrightable material), patent (or
patentable invention), Trademark (or associated goodwill) or other Intellectual
Property or upon or prior to such Obligor's filing, either directly or through
any agent, licensee or other designee, of any application with any Governmental
Authority for any Copyright, patent, Trademark, or other Intellectual Property,
in each case after the date of this Agreement, execute and deliver such
contracts, agreements and other instruments as the Agent may reasonably request
to evidence, validate, perfect and establish the priority (subject only to Liens
permitted under Section 10.1 of the Credit Agreement) of the Liens granted by
this Agreement in such and any related Intellectual Property and, if requested
by the Agent, amend Annex 2 or 3 (as the case may be) to reflect the inclusion
of any such Intellectual Property as part of the Collateral (it being understood
that the failure to amend any such Annex shall not affect the Liens granted by
this Agreement on any such Intellectual Property); and
-8-
<PAGE> 12
(e) give, execute, deliver, file or record any and all financing
statements, notices, contracts, agreements or other instruments, obtain any and
all governmental approvals and take any and all steps that may be necessary or
as the Agent may reasonably request to create, perfect, establish the priority
(subject only to Liens permitted under Section 10.1 of the Credit Agreement) of,
or to preserve the validity, perfection or priority (subject only to such
permitted Liens) of, the Liens granted by this Agreement or to enable the Agent
to exercise and enforce its rights, remedies, powers and privileges under this
Agreement with respect to such Liens, including subsequent to the occurrence of
an Event of Default, causing any or all of the Stock Collateral to be
transferred of record into the name of the Agent or its nominee (and the Agent
agrees that if any Stock Collateral is transferred into its name or the name of
its nominee, the Agent will thereafter promptly give to such Obligor copies of
any notices and communications received by it with respect to the Stock
Collateral pledged by such Obligor).
2.05 Attorney-in-Fact. Subject to the rights of such Obligor under
Sections 2.06, 2.07, 2.08 and 2.09, the Agent is hereby appointed the
attorney-in-fact of each Obligor for the purpose of carrying out the provisions
of this Agreement and taking any action and executing any instruments which the
Agent may reasonably deem necessary or advisable to accomplish the purposes of
this Agreement, to preserve the validity, perfection and priority (subject only
to Liens permitted under Section 10.1 of the Credit Agreement) of the Liens
granted by this Agreement and, following any Event of Default (other than the
Existing Defaults (as defined in the Fourth Amendment) during the Waiver Period
(as defined in the Fourth Amendment)) to exercise its rights, remedies, powers
and privileges under this Agreement. This appointment as attorney-in-fact is
irrevocable and coupled with an interest. Without limiting the generality of the
foregoing, the Agent shall be entitled under this Agreement upon the occurrence
and continuation of any Event of Default (other than the Existing Defaults
during the Waiver Period) (i) to ask, demand, collect, sue for, recover, receive
and give receipt and discharge for amounts due and to become due under and in
respect of all or any part of the Collateral; (ii) to receive, endorse and
collect any Instruments or other drafts, instruments, documents and chattel
paper in connection with clause (i) above (including any draft or check
representing the proceeds of insurance or the return of unearned premiums);
(iii) to file any claims or take any action or proceeding that the Agent may
deem necessary or advisable for the collection of all or any part of the
Collateral, including the collection of any compensation due and to become due
under any contract or agreement with respect to all or any part of the
Collateral; and (iv) to execute, in connection with any sale or disposition of
the collateral under
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<PAGE> 13
Section 5, any endorsements, assignments, bills of sale or other instruments of
conveyance or transfer with respect to all or any part of the Collateral.
2.06 Special Provisions Relating to Stock Collateral.
(a) So long as no Event of Default (other than the Existing Defaults
during the Waiver Period) shall have occurred and be continuing, the Obligors
shall have the right to exercise all voting, consensual and other powers of
ownership pertaining to the Stock Collateral for all purposes not inconsistent
with the terms of any Credit Document, provided that the Obligors jointly and
severally agree that they will not vote the Stock Collateral in any manner that
is inconsistent with the terms of any Credit Document; and the Agent shall, at
the Obligors' expense, execute and deliver to the Obligors or cause to be
executed and delivered to the Obligors all such proxies, powers of attorney,
dividend and other orders and other instruments, without recourse, as the
Obligors may reasonably request for the purpose of enabling the Obligors to
exercise the rights and powers which they are entitled to exercise pursuant to
this Section 2.06(a).
(b) So long as no Event of Default (other than the Existing Defaults
during the Waiver Period) shall have occurred and be continuing, the Obligors
shall be entitled to receive and retain any dividends on the Stock Collateral
paid in cash out of earned surplus.
(c) If any Event of Default (other than the Existing Defaults during
the Waiver Period) shall have occurred and be continuing, and whether or not the
Agent or any Bank exercises any available right to declare any Obligation due
and payable or seeks or pursues any other right, remedy, power or privilege
available to it under applicable law, this Agreement or any other Credit
Document, all dividends and other distributions on the Stock Collateral shall be
paid directly to the Agent and retained by it in the Collateral Account as part
of the Stock Collateral, subject to the terms of this Agreement, and, if the
Agent shall so request, the Obligors jointly and severally agree to execute and
deliver to the Agent appropriate additional dividend, distribution and other
orders and instruments to that end, provided that if such Event of Default is
cured, any such dividend or distribution paid to the Agent prior to such cure
shall, upon request of the Obligors (except to the extent applied to the
Obligations), be returned by the Agent to the Obligors.
2.07 Use of Intellectual Property. Subject to such action not
otherwise constituting a Default and so long as no Event of Default (other than
the Existing Defaults during the
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<PAGE> 14
Waiver Period) shall have occurred and be continuing, the Obligors will be
permitted to exploit, use, enjoy, protect, license, sublicense, assign, sell,
dispose of or take other actions with respect to the Intellectual Property in
the ordinary course of the business of the Obligors. In furtherance of the
foregoing, so long as no Event of Default (other than the Existing Defaults
during the Waiver Period) shall have occurred and be continuing, the Agent shall
from time to time, upon the request of the Obligors through Apria, execute and
deliver any instruments, certificates or other documents, in the form so
requested, which such Obligors through Apria shall have certified are
appropriate (in their judgment) to allow them to take any action permitted above
(including relinquishment of the license provided pursuant to Section 2.02 as to
any specific Intellectual Property). The exercise of rights, remedies, powers
and privileges under Section 5 by the Agent shall not terminate the rights of
the holders of any licenses or sublicenses theretofore granted by the Obligors
in accordance with the first sentence of this Section 2.07.
2.08 Instruments. So long as no Event of Default (other than the
Existing Defaults during the Waiver Period) shall have occurred and be
continuing, each Obligor may retain for collection in the ordinary course of
business any Instruments obtained by it in the ordinary course of business, and
the Agent shall, promptly upon the request, and at the expense of, such Obligor
through Apria, make appropriate arrangements for making any Instruments pledged
by the Obligors available to the respective Obligor for purposes of
presentation, collection or renewal. Any such arrangement shall be effected, to
the extent deemed appropriate by the Agent, against trust receipt or like
document.
2.09 Use of Collateral. So long as no Event of Default (other than the
Existing Defaults during the Waiver Period) shall have occurred and be
continuing, each Obligor shall, in addition to its rights under Sections 2.06,
2.07 and 2.08 in respect of the Collateral contemplated in those sections, be
entitled to use and possess the other Collateral and to exercise its rights,
title and interest in all contracts, agreements, licenses and governmental
approvals, subject to the rights, remedies, powers and privileges of the Agent
under Section 5 and to such use, possession or exercise not otherwise
constituting a Default.
2.10 Rights and Obligations.
(a) Each Obligor shall remain liable to perform its duties and
obligations under the contracts and agreements included in the Collateral in
accordance with their respective
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<PAGE> 15
terms to the same extent as if this Agreement had not been executed and
delivered. The exercise by the Agent or any Bank of any right, remedy, power or
privilege in respect of this Agreement shall not release any Obligor from any of
its duties and obligations under such contracts and agreements. Neither the
Agent nor any Bank shall have any duty, obligation or liability under such
contracts and agreements or in respect to any Governmental Approval included in
the Collateral by reason of this Agreement or any other Credit Document, nor
shall the Agent or any Bank be obligated to perform any of the duties or
obligations of any Obligor under any such contract or agreement or any such
Governmental Approval or to take any action to collect or enforce any claim (for
payment) under any such contract or agreement or Governmental Approval.
(b) No Lien granted by this Agreement in the Obligors' right, title
and interest in any contract, agreement or Governmental Approval shall be deemed
to be a consent by the Agent or any Bank to any such contract, agreement or
Governmental Approval.
(c) No reference in this Agreement to proceeds or to the sale or other
disposition of Collateral shall authorize any Obligor to sell or otherwise
dispose of any Collateral except to the extent otherwise expressly permitted by
the terms of any Credit Document.
(d) In connection with any sale of Collateral or all of the capital
stock of any Obligor expressly permitted by the terms of any Credit Document,
the Liens granted pursuant to this Agreement shall automatically terminate with
respect to such Collateral or the assets owned by such Obligor, as applicable.
(e) Neither the Agent nor any Bank shall be required to take steps
necessary to preserve any rights against prior parties to any part of the
Collateral.
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<PAGE> 16
2.12 Termination. When all Obligations shall have been paid in full
and the Revolving Loan Commitments and all Letter of Credit Outstandings shall
have expired or been terminated, this Agreement shall terminate, and the Agent
shall forthwith cause to be assigned, transferred and delivered, against receipt
but without any recourse, warranty or representation whatsoever, any remaining
Collateral and money received in respect of the Collateral, to or on the order
of the respective Obligors and to be released, canceled and granted back all
licenses and rights referred to in Section 2.02. The Agent shall also execute
and deliver to the respective Obligors upon such termination such Uniform
Commercial Code termination statements and such other documentation as shall be
reasonably requested by the respective Obligors to effect the termination and
release of the Liens granted by this Agreement on the Collateral.
Section 3. Representations and Warranties. As of the date of this
Agreement and as of the date of each extension of credit by the Banks, each
Obligor represents and warrants to the Banks and the Agent as follows:
3.01 Title. Each Obligor is the sole beneficial owner of the
Collateral in which it purports to grant a Lien pursuant to this Agreement, and
such Collateral is free and clear of all Liens (and, with respect to the Stock
Collateral, of any Equity Right in favor of any other Person), except for Liens
permitted under Section 10.1 of the Credit Agreement. The Liens granted by this
Agreement in favor of the Agent for the benefit of the Agent and the Banks have
attached and constitute a perfected security interest in all of such Collateral
(other than Instruments having a principal amount of less than $100,000) prior
to all other Liens (except such permitted Liens) to the extent that such
security interest can be perfected by possession, the filing of UCC financing
statements in the Filing States or filing with the Patent and Trademark Office.
3.02 Pledged Stock.
(a) The Pledged Stock evidenced by the certificates identified in
Annex 1 is duly authorized, validly existing, fully paid and nonassessable, and
none of such Pledged Stock is subject to any contractual restriction, or any
restriction under the charter or by-laws of the respective Issuer of such
Pledged Stock, upon the transfer of such Pledged Stock (except for any such
restriction contained in any Credit Document).
(b) The Pledged Stock evidenced by the certificates
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identified in Annex 1 constitutes all of the issued and outstanding shares of
capital stock of any class of the Issuers beneficially owned by such Obligor on
the date of this Agreement (whether or not registered in the name of such
Obligor), and Annex 1 correctly identifies, as at the date of this Agreement,
the respective Issuers of such Pledged Stock, the respective class and par value
of the shares comprising such Pledged Stock and the respective number (and
registered owners) of the shares evidenced by each such certificate.
3.03 Intellectual Property.
(a) Annexes 2 and 3 set forth completely and correctly all Copyrights
and Trademarks owned and federally registered by each respective Obligor on the
date of this Agreement; except pursuant to licenses and other user agreements
entered into by such Obligor in the ordinary course of business and listed in
Annex 4, such Obligor owns and possesses the right to use, and has done nothing
to authorize or enable any other Person to use, any Copyright or Trademark
listed in Annex 2 or 3 under the name of such Obligor; all registrations listed
in Annexes 2 and 3 are valid and in full force and effect; and, except as may be
set forth in Annex 4, each Obligor owns and possesses the right to use all
Copyrights and Trademarks listed in Annexes 2 and 3 under the name of such
Obligor.
(b) Annex 4 sets forth completely and correctly all licenses and other
user agreements included in the Intellectual Property on the date of this
Agreement;
(c) To any Obligor's knowledge, (i) there is no violation by others of
any material right of any Obligor with respect to any Copyright or Trademark
listed in Annex 2 or 3 under the name of such Obligor and (ii) no Obligor is
infringing in any material respect upon any Copyright or Trademark of any other
Person; and no proceedings have been instituted, are pending against any Obligor
or, to any Obligor's knowledge, have been threatened against, and no claim has
been received by, any Obligor, alleging any such violation or except as will not
have a material adverse effect upon the value of such Copyright or Trademark
Collateral.
(d) No Obligor owns any Trademarks registered in the United States of
America to which the last sentence of the definition of Trademark Collateral
applies.
3.04 Goods. Any goods now or hereafter manufactured or otherwise
produced by any Obligor or any of its Subsidiaries included in the Collateral
have been and will be produced in compliance in all material respects with the
requirements of the
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Fair Labor Standards Act.
Section 4. Covenants.
4.01 Books and Records. Each Obligor shall:
(a) keep full and accurate books and records relating to the
Collateral and stamp or otherwise mark such books and records in such manner as
the Agent may reasonably require in order to reflect the Liens granted by this
Agreement;
(b) furnish to the Agent and the Banks from time to time (but, unless
a Default (other than the Existing Defaults during the Waiver Period) shall have
occurred and be continuing, no more frequently than quarterly) statements and
schedules further identifying and describing the Copyright Collateral and the
Trademark Collateral and such other reports in connection with the Copyright
Collateral and the Trademark Collateral as the Agent or the Banks may reasonably
request, all in reasonable detail;
(c) prior to filing, either directly or through an agent, licensee or
other designee, any application for any Copyright or Trademark, furnish to the
Agent prompt notice of such proposed filing; and
(d) permit representatives of the Agent and the Banks, upon reasonable
notice, at any time during normal business hours to inspect and make abstracts
from its books and records pertaining to the Collateral.
4.02 Removals, Etc. Without at least 30 days' prior written notice to
the Agent, no Obligor shall (i) maintain any of its books and records with
respect to the Collateral at any office or maintain its principal place of
business at any place, other than at the address initially indicated for notices
to it under Section 6 or at one of the locations identified in Annex 5 under its
name; (ii) change its corporate name, or the name under which it does business,
from the name shown on the signature pages to this Agreement or (iii) permit
less than 60% of the Specified Assets (as defined in the Fourth Amendment) to be
located anywhere other than in one of the Filing States or in transit from one
Filing State to another; provided, that, if in the Ordinary Course of Business,
less than 60% of the Obligor's Specified Assets are located in the Filing
States, the Obligors shall within five (5) Business Days of such becoming aware
of such occurrence, duly execute and file UCC-1 financing statement(s) in such
other states as may be necessary to maintain the perfection of the Agent's Lien
in not less than 60% of the Specified Assets and, in connection therewith, the
definition of
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<PAGE> 19
"Filing States" in Section 1 of this Agreement shall be automatically amended to
include such new states.
4.03 Sales and Other Liens. Except as otherwise permitted under
Section 10.1 or 10.2 of the Credit Agreement, without the prior written consent
of the Agent (granted with the authorization of the Banks as specified in
Section 13.13 of the Credit Agreement), the Obligors shall not dispose of any
Collateral, create, incur, assume or suffer to exist any Lien upon any
Collateral or file or suffer to be on file or authorize to be filed, in any
jurisdiction, any financing statement or like instrument with respect to all or
any part of the Collateral in which the Agent is not named as the sole secured
party for the benefit of the Banks.
4.04 Stock Collateral. The Obligors will cause the Stock Collateral to
constitute at all times 100% of the total number of shares of each class of
capital stock of each Issuer then outstanding. The Obligors shall cause all such
shares to be duly authorized, validly issued, fully paid and nonassessable and
to be free of any contractual restriction or any restriction under the charter
or bylaws of the respective Issuer of such Stock Collateral upon the transfer of
such Stock Collateral (except for any such restriction contained in any Credit
Document).
4.05 Intellectual Property.
(a) Each Obligor (either itself or through licensees) will, for each
Trademark, (i) to the extent consistent with past practice and good business
judgment, continue to use such Trademark on each and every trademark class of
goods applicable to its current line as reflected in its current catalogs,
brochures and price lists in order to maintain such Trademark in full force and
effect free from any claim of abandonment for nonuse, (ii) maintain as in the
past the quality of products and services offered under such Trademark, (iii)
employ such Trademark with the appropriate notice of registration and (iv) not
(and not permit any licensee or sublicensee to) do any act or knowingly omit to
do any act whereby any Trademark material to the conduct of its business may
become invalidated.
(b) Each Obligor shall notify the Agent immediately if it knows or has
reason to know that any Intellectual Property material to the conduct of its
business may become abandoned or dedicated, or of any adverse determination or
development (including the institution of, or any such determination or
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<PAGE> 20
development in, any proceeding before any Governmental Authority) regarding each
Obligor's ownership of any Intellectual Property material to its business, its
right to copyright, patent or register the same (as the case may be), or its
right to keep, use and maintain the same.
(c) In the event that any Intellectual Property material to the
conduct of its business is infringed, misappropriated or diluted by a third
party, each Obligor shall notify the Agent within (10) days after it learns of
such event and shall, if consistent with good business practice, promptly sue
for infringement, misappropriation or dilution, seek temporary restraints and
preliminary injunctive relief to the extent practicable, seek to recover any and
all damages for such infringement, misappropriation or dilution and take such
other actions as are appropriate under the circumstances to protect such
Collateral.
(d) Subsequent to the occurrence of an Event of Default (other than
the Existing Defaults during the Waiver Period), the Agent shall have the right
but shall in no way be obligated to bring suit in its own name to enforce the
Copyrights and Trademarks and any license under such Intellectual Property, in
which event each Obligor shall, at the request of the Agent, do any and all
lawful acts and execute and deliver any and all proper documents required by the
Agent in aid of such enforcement action.
4.06 Insurance. Each Obligor agrees that it shall keep the Collateral
continuously insured against such risks as are customarily insured against by
businesses of like size and type engaged in the same or similar operations. In
addition, if requested by the Agent, each Obligor shall cause the Agent to be
named as loss payee with respect to any such insurance policies covering all or
any part of the Collateral to the extent of the interest of the Agent and the
Banks in the Collateral (other than Pledged Stock) and shall be named as
additional insured with respect to the general liability insurance policies of
the Obligors to the extent of the interest of the Agent and the Banks in the
Collateral (other than Pledged Stock).
4.07 Further Assurancess. Each Obligor agrees that, from time to time
upon the written request of the Agent, such Obligor will execute and deliver
such further documents and do such other acts and things as the Agent may
reasonably request in order fully to effect the purposes of this Agreement.
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Section 5. Remedies.
5.01 Events of Default, Etc. If any Event of Default shall have
occurred and be continuing (other than the Existing Defaults during the Waiver
Period):
(a) The Agent in its discretion may require each Obligor to, and each
Obligor shall, assemble the Collateral owned by it at such place or places,
reasonably convenient to both the Agent and such Obligor, designated in the
Agent's request;
(b) the Agent in its discretion may make any reasonable compromise or
settlement it deems desirable with respect to any of the Collateral and may
extend the time of payment, arrange for payment in installments, or otherwise
modify the terms of, all or any part of the Collateral;
(c) the Agent in its discretion may, in its name or in the name of the
Obligors or otherwise, demand, sue for, collect or receive any money or property
at any time payable or receivable on account of or in exchange for all or any
part of the Collateral, but shall be under no obligation to do so;
(d) the Agent in its discretion may, upon ten business days' prior
written notice to the Obligors of the time and place, with respect to all or any
part of the Collateral which shall then be or shall thereafter come into the
possession, custody or control of the Agent, the Banks or any of their
respective agents, sell, lease or otherwise dispose of all or any part of such
Collateral, at such place or places as the Agent deems best, for cash, for
credit or for future delivery (without thereby assuming any credit risk) and at
public or private sale, without demand of performance or notice of intention to
effect any such disposition or of time or place of any such sale (except such
notice as is required above or by applicable statute and cannot be waived), and
the Agent or any Bank or any other Person may be the purchaser, lessee or
recipient of any or all of the Collateral so disposed of at any public sale (or,
to the extent permitted by law, at any private sale) and thereafter hold the
same absolutely, free from any claim or right of whatsoever kind, including any
right or equity of redemption (statutory or otherwise), of the Obligors, any
such demand, notice and right or equity being hereby expressly waived and
released. In the event of any sale, license or other disposition of any of the
Trademark Collateral, the goodwill connected with and symbolized by the
Trademark Collateral subject to such disposition shall be included, and the
Obligors shall supply to the Agent or its designee, for inclusion in such sale,
assignment or other disposition, all Intellectual Property relating to such
Trademark Collateral. The Agent may, without notice or publication,
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<PAGE> 22
adjourn any public or private sale or cause the same to be adjourned from time
to time by announcement at the time and place fixed for the sale, and such sale
may be made at any time or place to which the sale may be so adjourned; and
(e) the Agent shall have, and in its discretion may exercise, all of
the rights, remedies, powers and privileges with respect to the Collateral of a
secured party under the Uniform Commercial Code (whether or not the Uniform
Commercial Code is in effect in the jurisdiction where such rights, remedies,
powers and privileges are asserted) and such additional rights, remedies, powers
and privileges to which a secured party is entitled under the laws in effect in
any jurisdiction where any rights, remedies, powers and privileges in respect of
this Agreement or the Collateral may be asserted, including the right, to the
maximum extent permitted by law, to exercise all voting, consensual and other
powers of ownership pertaining to the Collateral as if the Agent were the sole
and absolute owner of the Collateral (and each Obligor agrees to take all such
action as may be appropriate to give effect to such right).
The proceeds of, and other realization upon, the Collateral by virtue of the
exercise of remedies under this Section 5.01 and of the exercise of the license
granted to the Agent in Section 2.02 shall be applied in accordance with Section
5.04.
5.02 Deficiency. If the proceeds of, or other realization upon, the
Collateral by virtue of the exercise of remedies under Section 5.01 and of the
exercise of the license granted by the Agent in Section 2.02 are insufficient to
cover the costs and expenses of such exercise and the payment in full of the
other Obligations, the Obligors shall remain liable for any deficiency.
5.03 Private Sale.
(a) The Agent and the Banks shall incur no liability as a result of
the sale, lease or other disposition of all or any part of the Collateral at any
private sale pursuant to Section 5.01 conducted in a commercially reasonable
manner. Each Obligor hereby waives any claims against the Agent or any Bank
arising by reason of the fact that the price at which the Collateral may have
been sold at such a private sale was less than the price which might have been
obtained at a public sale or was less than the aggregate amount of the
Obligations, even if the Agent accepts the first offer received and does not
offer the Collateral to more than one offeree.
(b) The Obligors recognize that, by reason of certain prohibitions
contained in the Securities Act of 1933 and
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applicable state securities laws, the Agent may be compelled, with respect to
any sale of all or any part of the Collateral, to limit purchasers to those who
will agree, among other things, to acquire the Collateral for their own account,
for investment and not with a view to distribution or resale. The Obligors
acknowledge that any such private sales may be at prices and on terms less
favorable to the Agent than those obtainable through a public sale without such
restrictions, and, notwithstanding such circumstances, agree that any such
private sale shall be deemed to have been made in a commercially reasonable
manner and that the Agent shall have no obligation to engage in public sales and
no obligation to delay the sale of any Collateral for the period of time
necessary to permit the respective Issuer of such Collateral to register it for
public sale.
5.04 Application of Proceeds. Except as otherwise expressly provided
in this Agreement and except as provided below in this Section 5.04, the
proceeds of, or other realization upon, all or any part of the Collateral by
virtue of the exercise of remedies under Section 5.01 or of the exercise of the
license granted in Section 2.02, and any other cash at the time held by the
Agent under this Section 5, shall be applied by the Agent:
First, to the payment of the costs and expenses of such exercise of
remedies, including reasonable out-of-pocket costs and expenses of the Agent,
the fees and expenses of its agents and counsel and all other expenses incurred
and advances made by the Agent in that connection;
Next, to the payment in full of the remaining Obligations equally and
ratably in accordance with their respective amounts then due and owing or as the
Banks holding the same may otherwise agree; and
Finally, to the payment to the respective Obligor, or its respective
successors or assigns, or as a court of competent jurisdiction may direct, of
any surplus then remaining.
As used in this Section 5, "proceeds" of Collateral shall mean cash,
securities and other property realized in respect of, and distributions in kind
of, Collateral, including any property received under any bankruptcy,
reorganization or other similar proceeding as to any Obligor or any issuer of,
or account debtor or other obligor on, any of the Collateral.
Section 6. Miscellaneous.
6.01 The Agent. As provided in Section 12.1 of the Credit Agreement,
each Bank has appointed Bank of America National Trust and Savings Association
as its Agent for purposes of this Agreement. In such capacity, Bank of America
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<PAGE> 24
National Trust and Savings Association shall be entitled to all of the rights
and benefits accorded the Agent by Section 12 of the Credit Agreement. Following
the payment in full of all Obligations outstanding under the Credit Agreement
and the termination or expiration of the Commitments of the Banks and Letter of
Credit Outstandings, the provisions of Section 12 of the Credit Agreement shall
be deemed to continue in full force and effect for the benefit of the Agent
under this Agreement. In that connection, following such payment and expiration
and termination, the term "Required Banks" (as used in Section 13.13 of the
Credit Agreement) shall be deemed to refer to Banks holding Obligations
representing 50% or more of the aggregate amount of the Revolving Loan
Commitments or, if the Revolving Loan Commitments shall have been terminated,
Banks holding in excess of 50% of the sum of (a) the aggregate unpaid principal
amount of the Loans plus (b) the aggregate amount of all Letter of Credit
Outstandings.
6.02 Waiver. No failure on the part of the Agent or any Bank to
exercise and no delay in exercising, and no course of dealing with respect to,
any right, remedy, power or privilege under this Agreement shall operate as a
waiver of such right, remedy, power or privilege, nor shall any single or
partial exercise of any right, remedy, power or privilege under this Agreement
preclude any other or further exercise of any such right, remedy, power or
privilege or the exercise of any other right, remedy, power or privilege. The
rights, remedies, powers and privileges provided in this Agreement are
cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law.
6.03 Notices. All notices and communications to be given under this
Agreement shall be given or made in writing to the intended recipient at the
address specified below or, as to any party, at such other address as shall be
designated by such party in a notice to each other party. Except as otherwise
provided in this Agreement, all such communications shall be deemed to have been
duly given when transmitted by telex or telecopier, delivered to the telegraph
or cable office or personally delivered or, in the case of a mailed notice, upon
receipt, in each case, given or addressed as provided in this Section 6.03:
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To the Obligors: 3560 Hyland Avenue
Costa Mesa, California 92626
Attn: Lawrence H. Smallen
Tel: (714) 427-4935
Fax: (714) 540-4475
To the Agent: 1455 Market Street
San Francisco, California 94103
Attn: Christine Cordi
Agency Management Dept., 10831
Telephone: (415) 436-2790
Facsimile: (415) 436-3425
6.04 Expenses, Etc. The Obligors jointly and severally agree to pay
or to reimburse the Agent and the Banks for all reasonable costs and expenses
(including reasonable attorney's fees and expenses) that may be incurred by the
Agent or the Banks in any effort to enforce any of the provisions of Section 5
or any of the obligations of the Obligors in respect of the Collateral or in
connection with (a) the preservation of the Lien of, or the rights of the Agent
under this Agreement or (b) any actual or attempted sale, lease, disposition,
exchange, collection, compromise, settlement or other realization in respect of,
or care of, the Collateral, including all such reasonable costs and expenses
(and reasonable attorney's fees and expenses) incurred in any bankruptcy,
reorganization, workout or other similar proceeding.
6.05 Amendments, Etc. Any provision of this Agreement may be modified,
supplemented or waived only by an instrument in writing duly executed by each
Obligor and the Agent (with the consent of the Banks as specified in Section
13.13 of the Credit Agreement). Any such modification, supplement or waiver
shall be for such period and subject to such conditions as shall be specified in
the instrument effecting the same and shall be binding upon the Agent and each
Bank, each holder of any of the Obligations and each Obligor, and any such
waiver shall be effective only in the specific instance and for the purposes for
which given.
6.06 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of each Obligor, the Agent, the Banks and each holder of
any of the Obligations and their respective successors and permitted assigns. No
Obligor shall assign or transfer its rights under this Agreement without the
prior written consent of the Agent (with the further consent of the Banks as
specified in Section 13.13 of the Credit Agreement).
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<PAGE> 26
6.07 Survival. All representations and warranties made in this
Agreement or in any certificate or other document delivered pursuant to or in
connection with this Agreement shall survive the execution and delivery of this
Agreement or such certificate or other document (as the case may be) or any
deemed repetition of any such representation or warranty.
6.08 Agreements Superseded. This Agreement supersedes all prior
agreements and understandings, written or oral, among the parties with respect
to the subject matter of this Agreement.
6.09 Severability. Any provision of this Agreement that is prohibited
or unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions of this Agreement, and any such
prohibition or unenforceability in any jurisdiction shall not invalidate or
render unenforceable such provision in any other jurisdiction.
6.10 Captions. The table of contents and captions and section headings
appearing in this Agreement are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this
Agreement.
6.11 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties to this Agreement may execute this Agreement
by signing any such counterpart.
6.12 GOVERNING LAW; SUBMISSION TO JURISDICTION. THIS AGREEMENT SHALL
BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF
CALIFORNIA. EACH OBLIGOR HEREBY SUBMITS TO THE NONEXCLUSIVE JURISDICTION OF THE
UNITED STATES DISTRICT COURT FOR THE CENTRAL DISTRICT OF CALIFORNIA AND OF ANY
CALIFORNIA STATE COURT SITTING IN LOS ANGELES, CALIFORNIA FOR THE PURPOSES OF
ALL LEGAL PROCEEDINGS ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH OBLIGOR IRREVOCABLY WAIVES, TO
THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION WHICH IT MAY NOW
OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH PROCEEDING BROUGHT IN
SUCH A COURT AND ANY CLAIM THAT ANY SUCH PROCEEDING BROUGHT IN SUCH A COURT HAS
BEEN BROUGHT IN AN INCONVENIENT FORUM.
6.13 WAIVER OF JURY TRIAL. EACH OBLIGOR, THE AGENT AND THE BANKS
HEREBY IRREVOCABLY WAIVE, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY
AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT.
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IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed and delivered as of the day and year first above written.
APRIA HEALTHCARE GROUP INC.
APRIA HEALTHCARE, INC.
APRIACARE MANAGEMENT SYSTEMS, INC.
APRIA NUMBER TWO, INC.
APRIA HEALTHCARE OF NEW YORK STATE, INC.
By:
-------------------------------
Name: Larry Smallen
Title: Chief Financial Officer
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION, as
Administrative and Collateral Agent
By:
-----------------------------------
Name: Christine Cordi
Title: Vice President
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ANNEX 1
COMPANY TO PROVIDE
Annex 1 to Security Agreement
-1-
<PAGE> 29
ANNEX 2
LIST OF COPYRIGHTS, COPYRIGHT REGISTRATIONS AND
APPLICATIONS FOR COPYRIGHT REGISTRATIONS
None.
Annex 2 to Security Agreement
-1-
<PAGE> 30
ANNEX 3
COMPANY TO PROVIDE
Annex 3 to Security Agreement
-1-
<PAGE> 31
ANNEX 4
LIST OF CONTRACTS, LICENSES AND OTHER AGREEMENTS
NONE.
Annex 5 to Security Agreement
-1-
<PAGE> 32
ANNEX 5
LIST OF LOCATIONS
COMPANY TO PROVIDE
Annex 5 to Security Agreement
-1-
<PAGE> 1
EXHIBIT 21.1
APRIA HEALTHCARE GROUP INC.
LIST OF SUBSIDIARIES
Apria Healthcare, Inc.
Apria Healthcare of New York State, Inc.
ApriaCare Management Systems, Inc.
Apria Number Two, Inc.
As of March 25, 1998
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, 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 11, 1998, except for Notes 5, 12 and 14,
as to which the dates are April 2, 1998, April 9, 1998 and April 3, 1998,
respectively, with respect to the consolidated financial statements and schedule
of Apria Healthcare Group Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 1997.
ERNST & YOUNG LLP
Orange County, California
April 14, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND 1996 AND CONSOLIDATED
INCOME STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1997 AND 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 16,317 26,930
<SECURITIES> 0 0
<RECEIVABLES> 315,258 409,425
<ALLOWANCES> 58,413 73,809
<INVENTORY> 26,082 55,733
<CURRENT-ASSETS> 311,573 493,747
<PP&E> 600,639 646,792
<DEPRECIATION> 328,352 313,160
<TOTAL-ASSETS> 757,170 1,149,110
<CURRENT-LIABILITIES> 142,483 181,756
<BONDS> 540,220 623,276
0 0
0 0
<COMMON> 51 51
<OTHER-SE> 74,416 342,884
<TOTAL-LIABILITY-AND-EQUITY> 757,170 1,149,110
<SALES> 1,180,694 1,181,143
<TOTAL-REVENUES> 1,180,694 1,181,143
<CGS> 451,182 400,675
<TOTAL-COSTS> 451,182 400,675
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 121,908 67,040
<INTEREST-EXPENSE> 49,393 49,249
<INCOME-PRETAX> (236,058) 52,028
<INCOME-TAX> 36,550 18,728
<INCOME-CONTINUING> (272,608) 33,300
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (272,608) 33,300
<EPS-PRIMARY> (5.30) 0.66
<EPS-DILUTED> (5.30) 0.64
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS 6-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1997 SEP-30-1996 JUN-30-1996 MAR-31-1996
<CASH> 17,709 25,046 20,089 24,052
<SECURITIES> 0 0 0 0
<RECEIVABLES> 439,422 437,842 419,661 397,321
<ALLOWANCES> 72,379 83,504 85,075 90,341
<INVENTORY> 57,907 33,170 60,127 54,140
<CURRENT-ASSETS> 497,949 500,810 489,760 465,055
<PP&E> 651,300 581,280 556,735 511,486
<DEPRECIATION> 320,797 263,135 258,632 240,524
<TOTAL-ASSETS> 1,142,732 1,144,937 1,111,478 1,059,123
<CURRENT-LIABILITIES> 161,640 164,738 153,575 170,543
<BONDS> 614,175 608,701 609,200 567,190
0 0 0 0
0 0 0 0
<COMMON> 51 51 51 51
<OTHER-SE> 364,171 371,447 348,652 321,339
<TOTAL-LIABILITY-AND-EQUITY> 1,142,732 1,144,937 1,111,478 1,059,123
<SALES> 313,863 907,908 601,882 295,303
<TOTAL-REVENUES> 313,863 907,908 601,882 295,303
<CGS> 104,679 284,951 191,034 94,091
<TOTAL-COSTS> 104,679 284,951 191,034 94,091
<OTHER-EXPENSES> 0 0 0 0
<LOSS-PROVISION> 15,764 42,976 27,858 13,298
<INTEREST-EXPENSE> 12,759 35,927 23,111 11,108
<INCOME-PRETAX> 29,151 98,406 65,911 31,760
<INCOME-TAX> 9,911 35,423 23,757 11,434
<INCOME-CONTINUING> 19,240 62,983 42,234 20,326
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 19,240 62,983 42,234 20,326
<EPS-PRIMARY> 0.38 1.24 0.84 0.41
<EPS-DILUTED> 0.37 1.20 0.81 0.39
</TABLE>
