<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment No. 2
FORM 10-K/A
[Mark One]
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 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 New York Stock Exchange, was approximately $339,870,030.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE> 2
This Amendment No. 2 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997 is filed to correct an error contained in
Note 6 to the Registrant's Consolidated Financial Statements which indicated
that rights under the Registrant's preferred stock purchase rights plan may
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 Registrant's general voting power. As previously reported by the
Registrant, the percentage of the Registrant's general voting power necessary to
cause the rights to become exercisable was reduced from 20% to 15% in a June 30,
1997 amendment to the preferred stock purchase rights plan.
PART II
Item 8 of Part II and Item 14 of Part IV of the Annual Report on Form 10-K
for the fiscal year ended December 31, 1997 are amended in their entirety as
follows:
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.
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.
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>
26
<PAGE> 3
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 13,
1998, April 9, 1998 and April 3,
1998, respectively)
F-1
<PAGE> 4
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> 5
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> 6
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> 7
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> 8
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> 9
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> 10
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> 11
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> 12
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> 13
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> 14
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> 15
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 15% 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> 16
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> 17
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> 18
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> 19
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> 20
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> 21
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> 22
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> 23
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> 24
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> 25
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> 26
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> 27
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> 28
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: September 4, 1998
APRIA HEALTHCARE GROUP INC.
By: /s/ JAMES E. BAKER
---------------------------------------
Vice President, Controller
(Principal Accounting Officer)
<PAGE> 29
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE/REF.
------- ----------- ---------
<C> <S> <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
"Apria Healthcare Group Inc." (i)
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. (t)
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 Corporation. (p)
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, 1994. (k)
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 Gateway
Business Center, Costa Mesa, California. (l)
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 executed by C.J.
Segerstrom & Sons, a California general partnership, as of
July 24, 1995. (j)
</TABLE>
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE/REF.
------- ----------- ---------
<C> <S> <C>
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, 1995, between the parties. (n)
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 Inc. (n)
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 and Savings Association. (m)
10.14 Employment Agreement dated April 1, 1997, between Apria
Healthcare Group Inc. and Merl A. Wallace. (o)
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 Agreement. (o)
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 Agreement. (o)
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE/REF.
------- ----------- ---------
<C> <S> <C>
10.26 Resignation and General Release Agreement dated September
26, 1997, between Apria Healthcare Group Inc. and Steven T.
Plochocki. (q)
10.27 Resignation and General Release Agreement dated November 7,
1997, between Apria Healthcare Group Inc. and Gary L.
Mangiofico. (t)
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. (t)
10.30 Executive Employment Agreement dated January 26, 1998,
between Apria Healthcare Group Inc. and Lawrence M. Higby. (t)
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. (t)
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. (t)
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. (t)
10.36 Security Agreement, dated March 13, 1998, between Apria
Healthcare Group Inc., Apria Healthcare, Inc., and certain
of its subsidiaries and Bank of America National Trust and
Savings Association. (t)
10.37 Fifth Amendment to Credit Agreement and Waiver, dated April
15, 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. (u)
10.38 First Amendment to Security Agreement dated April 15, 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. (u)
21.1 List of Subsidiaries. (t)
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule. (t)
27.2 Restated Quarterly Financial Data Schedule. (t)
</TABLE>
- ---------------
(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.
<PAGE> 32
(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.
(t) Incorporated by reference to the Registrants' Annual Report on Form 10-K
for the year ended December 31, 1997.
(u) Incorporated by reference to the Registrants' Amendment No.1 to the Annual
Report on Form 10-K/A for the year ended December 31, 1997.
<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 13, 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
September 4, 1998
