UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-14316
APRIA HEALTHCARE GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0488566
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3560 HYLAND AVENUE, COSTA MESA, CA 92626
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 427-2000
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
--- ---
There were 52,030,894 shares of common stock, $.001 par value, outstanding at
August 2, 1999.
<PAGE>
APRIA HEALTHCARE GROUP INC.
FORM 10-Q
For the period ended June 30, 1999
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED BALANCE SHEETS
<CAPTION>
June 30, December 31,
1999 1998
----------- ------------
(unaudited)
(dollars in thousands)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents .............................. $ 22,020 $ 75,475
Accounts receivable, less allowance for doubtful
accounts of $40,767 and $35,564 at June 30, 1999
and December 31, 1998, respectively .................. 142,930 132,028
Inventories ............................................ 18,564 16,617
Prepaid expenses and other current assets .............. 6,888 4,917
--------- ---------
TOTAL CURRENT ASSETS ........................... 190,402 229,037
PATIENT SERVICE EQUIPMENT, less accumulated
depreciation of $268,850 and $249,921 at June 30,
1999 and December 31, 1998, respectively ............... 131,078 130,652
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ................ 46,466 51,996
INTANGIBLE ASSETS, NET ................................... 102,310 84,365
OTHER ASSETS ............................................. 489 548
--------- ---------
$ 470,745 $ 496,598
========= =========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable ....................................... $ 51,897 $ 51,252
Accrued payroll and related taxes and benefits ......... 30,676 25,455
Accrued insurance ...................................... 10,986 13,092
Other accrued liabilities .............................. 45,911 49,870
Current portion of long-term debt ...................... 22,636 74,439
--------- ---------
TOTAL CURRENT LIABILITIES ...................... 162,106 214,108
LONG-TERM DEBT ........................................... 404,687 414,147
COMMITMENTS AND CONTINGENCIES ............................ - -
STOCKHOLDERS' DEFICIT Preferred stock, $.001 par
value: 10,000,000 shares authorized; none issued ....... - -
Common stock, $.001 par value: 150,000,000 shares
authorized; 51,978,368 and 51,785,263 shares
issued and outstanding at June 30, 1999 and
December 31, 1998, respectively ...................... 52 52
Additional paid-in capital ............................. 328,146 325,903
Retained deficit ....................................... (424,246) (457,612)
--------- ---------
(96,048) (131,657)
--------- ---------
$ 470,745 $ 496,598
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
(dollars in thousands, except per share data)
<S> <C> <C> <C> <C>
Net revenues ................................. $ 232,040 $ 240,627 $ 460,334 $ 491,165
Costs and expenses:
Cost of net revenues:
Product and supply costs ............... 45,557 56,674 90,882 117,817
Patient service equipment depreciation.. 18,480 19,852 36,226 39,907
Nursing services ....................... 537 897 1,088 1,632
Other .................................. 2,175 3,374 4,622 7,299
--------- --------- --------- ---------
66,749 80,797 132,818 166,655
Selling, distribution and administrative... 127,558 140,404 252,007 282,350
Provision for doubtful accounts ........... 7,442 12,816 16,071 26,611
Amortization of intangible assets ......... 1,984 3,501 3,857 7,065
--------- --------- --------- ---------
203,733 237,518 404,753 482,681
--------- --------- --------- ---------
OPERATING INCOME ................... 28,307 3,109 55,581 8,484
Interest expense, net ........................ 10,503 11,565 21,815 23,047
--------- --------- --------- ---------
INCOME (LOSS) BEFORE TAXES ......... 17,804 (8,456) 33,766 (14,563)
Income taxes ................................. - 500 400 1,000
--------- --------- --------- ---------
NET INCOME (LOSS) .................. $ 17,804 $ (8,956) $ 33,366 $ (15,563)
========= ========= ========= =========
Basic income (loss) per common share ......... $ 0.34 $ (0.17) $ 0.64 $ (0.30)
========= ========= ========= =========
Diluted income (loss) per common share ....... $ 0.33 $ (0.17) $ 0.63 $ (0.30)
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Six Months Ended
June 30,
--------------------
1999 1998
-------- --------
(dollars in thousands)
OPERATING ACTIVITIES
<S> <C> <C>
Net income (loss) ............................................. $ 33,366 $(15,563)
Items included in net income (loss) not requiring
(providing) cash:
Provision for doubtful accounts ............................ 16,071 26,611
Provision for inventory and patient service
equipment shortages/obsolescence ......................... 2,341 5,091
Depreciation ............................................... 45,909 54,728
Amortization of intangible assets .......................... 3,857 7,065
Amortization of deferred debt costs ........................ 3,174 819
Gain on disposition of assets .............................. (107) (118)
Changes in operating assets and liabilities, net
of effects of acquisitions:
(Increase) decrease in accounts receivable ................. (25,263) 18,314
(Increase) decrease in inventories ......................... (3,522) 672
(Increase) decrease in prepaids and other assets ........... (186) 7,195
Decrease in accounts payable ............................... (2,975) (4,510)
Increase (decrease) in accrued payroll and
other liabilities ........................................ 705 (7,068)
Net purchases of patient service equipment, net
of effects of acquisitions .................................. (34,003) (17,878)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........... 39,367 75,358
INVESTING ACTIVITIES
Purchases of property, equipment and improvements,
net of effects of acquisitions ........................... (4,069) (10,727)
Proceeds from disposition of assets ........................ 276 149
Acquisitions and payments of contingent
consideration ............................................ (25,110) (1,722)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ............... (28,903) (12,300)
FINANCING ACTIVITIES
Payments on term loan ...................................... (60,938) -
Payments on other long-term debt ........................... (3,350) (4,807)
Capitalized debt costs, net ................................ (1,811) (1,442)
Issuances of common stock .................................. 2,180 1,586
-------- --------
NET CASH USED IN FINANCING ACTIVITIES ............... (63,919) (4,663)
-------- --------
NET (DECREASE) INCREASE IN CASH ............................... (53,455) 58,395
Cash and cash equivalents at beginning of period .............. 75,475 16,317
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................... $ 22,020 $ 74,712
======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE>
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Apria
Healthcare Group Inc. and its subsidiaries. All significant intercompany
transactions and accounts have been eliminated.
In the opinion of management, all adjustments, consisting of normal recurring
accruals necessary for a fair presentation of the results of operations for the
interim periods presented, have been reflected herein. The unaudited results of
operations for interim periods are not necessarily indicative of the results to
be expected for the entire year. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended
December 31, 1998, included in Apria's 1998 Form 10-K.
NOTE B - RECLASSIFICATIONS AND USE OF ACCOUNTING ESTIMATES
Reclassifications: Certain amounts from prior periods have been reclassified to
conform to the current year presentation.
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. Due to
the nature of the industry and the reimbursement environment in which the
company operates, certain estimates are required in recording net revenues.
Inherent in these estimates is the risk that they will have to be revised or
updated, and the changes recorded in subsequent periods, as additional
information becomes available to management.
NOTE C - 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, managed care organizations, Medicare and Medicaid.
Apria establishes allowances for revenue adjustments which are normally
identified and recorded at the point of cash application or upon account review.
Revenue adjustments result from differences between estimated and actual
reimbursement amounts, failure to obtain authorizations acceptable to the payor
or other specified billing documentation, changes in coverage or payor and other
reasons unrelated to credit risk. The allowance for revenue adjustments is
deducted directly from gross accounts receivable. Management also establishes
allowances for those accounts from which payment is not expected to be received,
although services were provided and revenue was earned.
Management performs various analyses to estimate the revenue adjustment
allowance and the allowance for doubtful accounts. Specifically, management
considers historical realization data, accounts receivable aging trends,
operating statistics and relevant business conditions. Apria 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. The company's policy is to reserve 100% of all receivables aged
over 360 days. This policy is in addition to reserves provided on receivables
aged less than 360 days and to amounts accrued for specific payors. Because of
continuing changes in the healthcare industry and third-party reimbursement, it
is reasonably possible that management's estimates of net collectible revenues
could change in the near term, which could have a favorable or unfavorable
impact on operations and cash flows.
NOTE D - BUSINESS COMBINATIONS
Apria periodically makes acquisitions of complementary businesses in specific
geographic markets. The transactions are accounted for as purchases and the
results of operations of the acquired companies are included in the accompanying
statement of operations from the date of acquisition. Acquisitions that closed
during the six-month period ended June 30, 1999 resulted in cash payments of
$25,110,000. Of that amount, approximately $21,800,000 was allocated to
intangible assets. Goodwill is being amortized over 20 years and covenants not
to compete are being amortized over the life of the respective agreements.
NOTE E - LONG-TERM DEBT
Apria's credit agreement with Bank of America and a syndicate of banks was
amended and restated for the third time in April of 1999. The agreement was
amended to remove the requirement that the company issue $50,000,000 in senior
subordinated notes or senior subordinated convertible debentures by April 23,
1999. In connection with this amendment, the company made a required $50,000,000
repayment of the term loan. The agreement was also amended to remove the
requirement that the company maintain minimum cash balances of $35,000,000
through the consummation of the debt offering.
NOTE F - EQUITY
The change in stockholders' equity, other than from net income, resulted
primarily from the exercise of stock options. For the six-month period ended
June 30, 1999, proceeds from the exercise of stock options amounted to
$2,180,000.
NOTE G - INCOME TAXES
Current year income tax expense includes federal and state tax amounts payable
on a basis other than or in addition to taxable income.
At December 31, 1998, Apria's federal net operating loss carryforwards ("NOLs")
approximated $380,000,000, expiring in varying amounts in the years 2003 through
2013. 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 Apria's federal and
state NOLs may expire unused. At December 31, 1998, the company's net deferred
tax asset had been reduced to zero by a valuation allowance. In 1999, NOLs are
being realized to the extent of the company's taxable income.
NOTE H - COMMITMENTS AND CONTINGENCIES
Apria 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 is not
determinable at this time. 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 Apria's
consolidated results of operations and financial position. Apria provides for
probable losses related to certain matters arising in each period and revises
estimates for certain matters arising in previous periods. Management is unable
to estimate the range of possible loss for all other claims and lawsuits.
<PAGE>
NOTE I - PER SHARE AMOUNTS
<TABLE>
The following table sets forth the computation of basic and diluted per share
amounts:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
-------- -------- -------- --------
(in thousands, except per share data)
Numerator:
<S> <C> <C> <C> <C>
Net income (loss) ................................ $ 17,804 $ (8,956) $ 33,366 $(15,563)
Numerator for basic per share amounts - income
(loss) available to common stockholders ......... $ 17,804 $ (8,956) $ 33,366 $(15,563)
Numerator for diluted per share amounts - income
(loss) available to common stockholders ......... $ 17,804 $ (8,956) $ 33,366 $(15,563)
Denominator:
Denominator for basic per share
amounts - weighted average shares .............. 51,896 51,731 51,846 51,693
Effect of dilutive securities:
Employee stock options ......................... 2,013 - 1,440 -
-------- -------- -------- --------
Dilutive potential common shares ............... 2,013 - 1,440 -
-------- -------- -------- --------
Denominator for diluted per share amounts -
adjusted weighted average shares ............... 53,909 51,731 53,286 51,693
======== ======== ======== ========
Basic income (loss) per common share ............... $ 0.34 $ (0.17) $ 0.64 $ (0.30)
======== ======== ======== ========
Diluted income (loss) per common share ............. $ 0.33 $ (0.17) $ 0.63 $ (0.30)
======== ======== ======== ========
Employee stock options excluded from the
computation of diluted per share amounts:
Exercise price exceeds average market
price of common stock ........................ 877 3,786 1,261 2,933
Other .......................................... - 57 - 106
-------- -------- -------- --------
877 3,843 1,261 3,039
======== ======== ======== ========
Average exercise price per share that exceeds
average market price of common stock ............. $ 20.85 $ 14.72 $ 19.34 $ 16.37
======== ======== ======== ========
</TABLE>
Due to the net loss reported for the three and six months ended June 30, 1998,
the impact of employee stock options is antidilutive. There is no difference
between basic and diluted per share amounts.
<PAGE>
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: Apria's business is subject to
a number of risks, some of which are beyond the company's control. The company
has described certain of those risks in its Form 10-K for the fiscal year ended
December 31, 1998, as filed with the Securities and Exchange Commission on April
5, 1999. This report may be used for purposes of the Private Securities
Litigation Reform Act of 1995 as a readily available document containing
meaningful cautionary statements identifying important risk factors that could
cause actual results to differ materially from those projected in any
forward-looking statements the company may make from time to time. These risks
include whether Apria will be able to resolve issues pertaining to management
stability and recruiting, the collectibility of its accounts receivable, the
cost of and the company's ability to implement its reorganization plan, Apria's
ability to service its debt, healthcare reform and the effect of federal and
state healthcare regulations, the ongoing government investigations regarding
patients covered by Medicare and other federal programs, pricing pressures from
large payors and changes in governmental reimbursement levels, the effectiveness
of Apria's information systems and controls, including its ability to resolve
any remaining year 2000 compliance issues, the highly competitive market, recent
losses, and Apria's high leverage and restrictions on its borrowing capacity.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
NET REVENUES: Apria had net revenues of $232 million for the second quarter
of 1999, compared to $240.6 million for the second quarter of 1998. For the six
months ended June 30, 1999, net revenues were $460.3 million compared to $491.2
million for the same period last year. The decline in revenues is attributable
to (1) the recent exit from the infusion therapy service line in certain
geographic markets, (2) the 5% reduction in Medicare reimbursement rates in 1999
for home oxygen therapy, and (3) the exit from contractual arrangements that
were not meeting minimum profitability standards. The variances between the
second quarter and six-month periods ended June 30, 1999 and the same periods of
1998 attributable to the exit from the infusion business in selected markets are
approximately $12.9 million and $25.6 million, respectively. The provisions of
the Balanced Budget Act of 1997 mandated a 5% reduction in reimbursement rates
for home oxygen therapy, effective January 1, 1999, which decreased second
quarter and year-to-date revenues by approximately $2.5 million and $5 million,
respectively. Additionally, starting in late 1997 and continuing into 1998,
Apria performed a comprehensive review of its managed care contracts and
renegotiated or terminated those not meeting profitability standards. An
unfavorable consequence of the infusion therapy exit and the termination of the
low-margin managed care contracts was the unquantifiable loss of related
business that Apria would have preferred to retain.
The table below sets forth a summary of net revenues by service line.
Revenues from respiratory therapy increased as a percent of sales, despite
Medicare reimbursement reductions, due to a sales focus on the respiratory
business. The year-to-date decrease in infusion therapy revenues is largely
explained by the exit of this business in selected areas as described above. The
infusion line was also impacted by the termination of low-margin contracts. The
decrease in the HME/other line was primarily attributable to the contract review
process and, to a lesser extent, decreases in the medical supply and nursing
lines which Apria began exiting in late 1997.
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------------
1999 1998
------------------- -------------------
$ % $ %
-------- ------ -------- ------
(dollars in thousands)
<S> <C> <C> <C> <C>
Respiratory therapy........ $292,709 63.6% $284,213 57.9%
Infusion therapy........... 86,836 18.9% 114,313 23.2%
HME/other.................. 80,789 17.5% 92,639 18.9%
-------- ------ -------- ------
Total net revenues $460,334 100.0% $491,165 100.0%
======== ====== ======== ======
</TABLE>
Due to the nature of the industry and the reimbursement environment in
which Apria operates, certain estimates are required in recording net revenues.
Inherent in these estimates is the risk that they will have to be revised or
updated, and the changes recorded in subsequent periods, as additional
information becomes available to management. Specifically, the complexity of
many third-party billing arrangements and uncertainty of reimbursement amounts
for certain services and/or from certain payors result in adjustments to billed
amounts. Such adjustments are fairly common and are typically identified and
recorded at the point of cash application, claim denial or upon account review.
Examples of revenue adjustments include subsequent changes to estimated revenue
amounts or denials for services not covered due to changes in the patient's
coverage; failure to obtain written confirmation of authorization or other
necessary documentation subsequent to service delivery; and differences in
contract prices due to complex contract terms or a biller's lack of familiarity
with a contract or payor.
GROSS PROFIT: Gross margins for the second quarter and the six months ended
June 30, 1999 were 71.2% and 71.1%, respectively, compared to 66.4% and 66.1%
for the same periods last year. The improvement is largely attributable to the
exit from low-profit service lines and contracts and better pricing negotiated
for inventory, patient service equipment and related goods. Improvements in
gross margin are slightly offset by increased patient service equipment
depreciation resulting from an increase in purchases necessitated by the
implementation of a new utilization model and a recently-signed national
contract.
Gross margins for the six months ended June 30, 1999 for respiratory
therapy, infusion therapy and home medical equipment/other were 78.4%, 60.0% and
57.0%, respectively.
SELLING, DISTRIBUTION AND ADMINISTRATIVE: Selling, distribution and
administrative expenses as a percentage of net revenues were 55.0% and 54.7% for
the second quarter and first half of 1999, respectively, compared with 58.4% and
57.5% for the same periods last year. On a dollar basis, selling, distribution
and administrative expenses decreased by $12.8 million and $30.3 million between
the comparable three- and six-month periods, respectively. Labor expense
reductions are the primary component of the decrease. Early in 1998, Apria
reduced its workforce in response to the 25% Medicare reimbursement reductions
and the financial results did not yet reflect the full savings of that labor
reduction effort. Since then, Apria has continued to reduce staffing levels,
particularly in the functional area of reimbursement, an area that experienced
significant staffing increases during the period of billing and collection
difficulties arising from the 1995 Abbey/Homedco merger. During the second half
of 1998, Apria also effected significant labor reductions at its corporate
headquarters and reduced staff in conjunction with the exit of selected infusion
therapy businesses.
Depreciation expense decreased by $2.6 million and $5.1 million for the
second quarter and six months ended June 30, 1999, as compared to the same
periods last year. The decrease is attributable to the impairment of computer
hardware and software recognized in the third quarter of 1998 and reductions in
capital expenditures in the latter half of 1998 and early 1999.
PROVISION FOR DOUBTFUL ACCOUNTS: The provision for doubtful accounts, as a
percentage of net revenues, was 3.2% and 3.5% for the quarter and six-month
periods ended June 30, 1999, respectively, as compared to 5.3% and 5.4% for the
same periods in the prior year. On a dollar basis, the provision decreased $5.4
million and $10.5 million over the three- and six-month periods ended June 30,
1999. The decrease in the provision rate is largely due to an improvement in the
aging of accounts receivable as demonstrated by a decrease in accounts aged in
excess of 180 days from 30.9% of total accounts receivable at June 30, 1998 to
22.1% at June 30, 1999. Additionally, days sales outstanding (calculated as of
each period-end by dividing accounts receivable, less allowance for doubtful
accounts, by the 90-day rolling average of net revenues) decreased to 55 days at
June 30, 1999, from 79 days at June 30, 1998.
During the second half of 1998, management reviewed the historic
performance and collectibility of Apria's accounts receivable portfolio.
Management considered the continued high level of bad debt write-offs and
reviewed its existing policies and procedures for estimating the collectibility
of its accounts receivable. As a result of this review, management decided to
change the collection policy and formally shifted the focus of the collection
function to the more current balances and is assigning the older accounts to
outside collection agencies. Management believes this concentration on more
current balances will limit the amount of receivables that age beyond 180 days.
Consequently, the accounts that do age beyond 180 days are likely to be more
difficult to collect. The company's policy is to reserve 100% of all receivables
aged over 360 days. This policy is in addition to reserves provided on
receivables aged less than 360 days and to amounts accrued for specific payors.
AMORTIZATION OF INTANGIBLE ASSETS: Amortization of intangible assets was $2
million and $3.9 million for the second quarter and first six months of 1999,
respectively, as compared to $3.5 million and $7.1 million for the same periods
in the prior year. The decrease is the result of the impairment and write-off of
$76.2 million of intangible assets in the third quarter of 1998 and, to a lesser
extent, the expiration of certain non-compete covenants. The decrease was
slightly offset by amortization expense recorded in conjunction with a number of
business acquisitions consummated during the first half of 1999.
INTEREST EXPENSE: Interest expense was $10.5 million and $21.8 million for
the three- and six-month periods ended June 30, 1999, respectively, compared to
$11.6 million and $23 million for the same periods in 1998. Although there was a
21% reduction in the average long-term debt balance between the two periods,
Apria is now incurring interest on its bank loans at higher rates as a result of
its November 1998 amended and restated credit agreement
INCOME TAXES: Income taxes were $400,000 for the first six months of 1999
versus $1 million for the same period last year. The recorded amounts for both
periods include federal and state taxes payable on a basis other than or in
addition to taxable income. At December 31, 1998, Apria's federal net operating
loss carryforwards ("NOLs") approximated $380 million, expiring in varying
amounts in the years 2003 through 2013. 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 million per year. Because of the annual limitation,
approximately $57 million of each of Apria's federal and state NOLs may expire
unused. At December 31, 1998, the company's net deferred tax asset had been
reduced to zero by a valuation allowance. In 1999, NOLs are being realized to
the extent of the company's taxable income.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
OPERATING CASH FLOW: Cash provided by operating activities was $39.4
million for the six-month period ended June 30, 1999, compared to $75.4 million
for the same period in 1998. The higher net income in the 1999 period was offset
by an increase in accounts receivable, as compared to a decrease last year, an
increase in patient service equipment purchases and an increase in the number of
payroll days accrued compared to the same period last year. During early 1998,
receivables were being reduced by cash received on Medicare billings at
reimbursement rates existing prior to the 25% reimbursement reduction while
being increased by billings that reflect the reduced reimbursement rates.
Patient service equipment purchases increased during the first half of 1999,
primarily to support the growing respiratory therapy patient base.
ACCOUNTS RECEIVABLE: Accounts receivable, before allowance for doubtful
accounts, increased to $183.7 million at June 30, 1999 from $167.6 million at
December 31, 1998. The increase is largely attributable to a trend of increasing
net revenues which began in the third quarter of 1998. Consequently, days sales
outstanding at June 30, 1999 has increased slightly to 55 days from 53 days at
December 31, 1998.
During the last three fiscal years, results of operations have been
adversely impacted by high levels of accounts receivable write-offs. Initially
caused by the disruptive effects of system conversions and branch
consolidations, the high level of accounts receivable write-offs were largely
due to billing problems such as untimely billing, improper and/or untimely
preparation of, and deficiencies in, reimbursement documentation, problems with
the billing systems and the high concentration of managed care payors from whom
it has been difficult to collect.
Also during the last three years, management has instituted a number of
measures in response to these problems. During 1998, management reorganized its
field operations to create a separate "revenue management" organization which
encompasses the functions of order-taking, patient qualification, documentation
coordination, timely filing and prompt follow-up. The revenue management
organization reports directly to corporate headquarters and specifically to an
Executive Vice President. The new organization structure was intended to
facilitate improved communications and accountability. In conjunction with the
reorganization, processes and procedures were reviewed to identify additional
opportunities for improvement. As a result, personnel were placed in quality
assurance positions to help ensure that products and services were more
accurately and timely billed and responsibilities were consolidated to allow
specifically qualified personnel to support, direct and train the revenue
management staff. Task forces were formed to visit the billing centers to ensure
compliance with policies and standard procedures. Software enhancements to
simplify the order-intake process were introduced and the billing and accounts
receivable modules are being modified to improve their functionality. Although
management has been proactive in addressing the issues leading to the high level
of accounts receivable write-offs recognized in recent periods, there can be no
assurance that the collectibility of Apria's recorded accounts receivable will
continue to improve in the near future.
Included in accounts receivable are earned but unbilled receivables of
$22.9 million and $25.3 million at June 30, 1999 and December 31, 1998,
respectively. Delays in billings can occur, from a few days to several weeks or
more, from the date of service due to delays in obtaining certain required
payor-specific documentation from internal and external sources. Such
documentation would include internal records of proof-of-service and written
authorizations from physicians and other referral sources. Earned but unbilled
receivables are aged from date of service and are considered in Apria's analysis
of historical performance and collectibility.
LONG-TERM DEBT: Apria's credit agreement with Bank of America and a
syndicate of banks was amended and restated for the third time in April of 1999.
The agreement was amended to remove the requirement that the company issue $50
million in senior subordinated notes or senior subordinated convertible
debentures by April 23, 1999. In connection with this amendment, the company
made a required $50 million repayment of the term loan. The agreement was also
amended to remove the requirement that the company maintain minimum cash
balances of $35 million through the consummation of the debt offering.
At June 30, 1999, total borrowings under the credit agreement were $227.1
million, outstanding letters of credit totaled $10 million and credit available
under the revolving facility was $20 million (subject to a temporary borrowing
restriction under the indenture governing Apria's $200 million 9 1/2% senior
subordinated notes).
BUSINESS COMBINATIONS: Apria periodically makes acquisitions of
complementary businesses in specific geographic markets. The transactions are
accounted for as purchases and the results of operations of the acquired
companies are included in the accompanying statement of operations from the date
of acquisition. Acquisitions that closed during the six-month period ended June
30, 1999 resulted in cash payments of approximately $25.1 million. Of that
amount, approximately $21.8 million was allocated to intangible assets. Goodwill
is being amortized over 20 years and covenants not to compete are being
amortized over the life of the respective agreements.
YEAR 2000 COMPLIANCE: As the year 2000 approaches, an issue impacting all
companies has emerged regarding how existing application software programs and
operating systems can accommodate this date value. In brief, many existing
application programs in the marketplace were designed to accommodate a two-digit
date position which represents the year (e.g., "95" is stored on the system and
represents the year 1995). Consequently, the year 1999 could be the maximum date
value that systems would be able to accurately process.
Internal operating systems. Beginning in late 1997, Apria conducted a
comprehensive review of its operating and field information systems, including
an assessment of the nature and potential extent of the impact of the year 2000
issue. As a result, Apria began the modification process of its software in
order for its computer systems to function properly in the year 2000 and
thereafter. Apria utilized internal resources to reprogram and test the software
for the necessary year 2000 modifications. Apria's systems also underwent two
external assessments of the year 2000 issue and received a "low" risk rating.
The modification and testing were completed on schedule and management now
considers its operating and field information systems year 2000-compliant. To
further ensure a smooth transition into the year 2000, management has formed a
special team to address any related problems that may arise and will, among
other measures, suspend software updates between November 1999 and January 2000.
Apria has not developed a formal contingency plan in the event that the
modifications to its internal operating systems prove to be inadequate. Such
inadequacies could result in system failure or miscalculations. This would cause
disruptions to normal business processes including, among other things, the
temporary inability to process transactions and generate billings. If such a
disruption continued for an extended period, it could have a material adverse
effect on the results of operations, cash flow and financial condition of Apria.
Apria is currently in the process of assessing and addressing any potential
issues with its ancillary software packages that perform less-critical functions
and any other electronic mechanisms that could have date-sensitive
microprocessors.
External risks. Apria depends on electronic interfaces with numerous
business partners to conduct many of its day-to-day functions. Such functions
include payments to and from suppliers and payors, the transfer of funds between
Apria's banks, and electronic billing and supply ordering. Apria has been
working closely with its more critical business partners to obtain assurance of
their year 2000-readiness. Of the four Medicare carriers responsible for
processing approximately one-fourth of Apria's total reimbursements, two have
successfully completed live tests with the company and testing on the remaining
two is in the planning stage. As a contingency, in the event of failure on the
part of an external agent, the exchange of data and payments can continue via
paper documents and more traditional methods. Further, Apria has revised
contracts with certain of its managed care payors to include remedies should the
payors fail to reimburse the company on a timely basis due to their own year
2000 problems.
Another area of potential risk is with certain patient service equipment
items that have microprocessors with date functionality that could malfunction
in the year 2000. Although Apria has found that the majority of such
microprocessors include duration time clocks and not date time clocks,
management has initiated formal communications with its suppliers to obtain
assurance that the equipment they supply is year 2000-compliant. To date, Apria
has received year 2000-compliance certification letters from substantially all
of its primary vendors and approximately 77% of the entire set of vendors from
which it requested such assurance.
If Apria is unable to resolve all its year 2000 issues with external
agents, it may have a material adverse effect on the company's business, results
of operations or financial condition.
Costs. Apria does not believe the costs of its year 2000 remediation
efforts are material. To date, such costs have been expensed as incurred.
Management's expectations about year 2000-related costs yet to be incurred are
subject to various uncertainties that could cause the actual costs to differ
materially from those expectations. Such uncertainties include the adequacy of
the modifications made to Apria's operating and field information systems, the
success of the company in identifying and resolving any problems with its
ancillary systems or electronic mechanisms and the year 2000-readiness of
Apria's business partners.
Other: Apria's management believes that cash provided by operations
together with cash invested in its money market account will be sufficient to
finance its current operations for at least the next year or until the borrowing
restriction described above is eliminated.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Apria currently utilizes no material derivative financial instruments that
expose the company to significant market risk. However, Apria is subject to
interest rate changes on its variable rate term loan under the company's bank
credit agreement that may affect the fair value of that debt and cash flow and
earnings. Based on the term debt outstanding at June 30, 1999 and the current
market perception, a 50 basis point increase in the applicable interest rates
would decrease Apria's annual cash flow and earnings by approximately $1.2
million. Conversely, a 50 basis point decrease in the applicable interest rates
would increase annual cash flow and earnings by $1.2 million.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Apria and certain of its present and former officers and/or
directors are defendants in a class action lawsuit, In Re Apria
Healthcare Group Securities Litigation, filed in the U.S. District
Court for the Central District of California, Southern Division (Case
No. SACV98-217 GLT). This case is a consolidation of three similar
class actions filed in March and April, 1998. Pursuant to a court
order dated May 27, 1998, the plaintiffs in the original three class
actions filed a Consolidated Amended Class Action Complaint on August
6, 1998. The amended complaint purports to establish a class of
plaintiff shareholders who purchased Apria's common stock between May
22, 1995 and January 20, 1998. No class has been certified at this
time. The amended complaint alleges, among other things, that the
defendants made false and/or misleading public statements regarding
Apria and its financial condition in violation of federal securities
laws. The amended complaint seeks compensatory and punitive damages as
well as other relief.
Two similar class actions were filed during July, 1998 in the
Superior Court for the State of California for the County of Orange:
Schall v. Apria Healthcare Group Inc., et al. (Case No. 797060) and
Thompson v. Apria Healthcare Group Inc., et al. (Case No. 797580).
These two actions were consolidated by a court order dated October 22,
1998 (Master Case No. 797060). On June 14, 1999, the plaintiffs filed
a Consolidated Amended Class Action Complaint asserting claims founded
on state law and on Sections 11 and 12(2) of the 1933 Securities Act.
Apria believes that it has meritorious defenses to the
plaintiffs' claims, and it intends to vigorously defend itself in both
the federal and state cases. In the opinion of Apria's management, the
ultimate disposition of these class actions will not have a material
adverse effect on the company's results of operations or financial
condition.
Apria has received a number of subpoenas and document requests
from U.S. Attorneys' offices and from the U.S. Department of Health
and Human Services. The subpoenas and requests generally ask for
documents, including patient files, billing records and agreements
with customers, related to the company's patients whose healthcare
costs are paid by Medicare and other federal programs. On July 8,
1999, Apria announced that the company had received notification that
the U. S. Attorney's office in Sacramento has closed its criminal
investigation file relating to eight subpoenas that had been issued by
that office. Apria is continuing to cooperate with the government's
document requests and has substantially completed responding to the
subpoenas issued by the U.S. Attorneys' offices.
Apria has acknowledged that there may be errors and omissions in
supporting documentation affecting a portion of its billings. If the
U. S. Department of Justice were to conclude that such errors and
omissions constituted criminal violations, or were to conclude that
such errors and omissions resulted in the submission of false claims
to federal healthcare programs, Apria could face criminal charges
and/or civil claims, administrative sanctions and penalties for
amounts that would be highly material to its business, results of
operations and financial condition, including exclusion of Apria from
participation in federal healthcare programs. Such amounts could
include claims for treble damages and penalties of up to $10,000 per
false claim submitted by Apria to a federal healthcare program. It is
Apria's position that the assertion of criminal charges or the
assertion of any such claims would be unwarranted. If any such charges
or claims were asserted, Apria believes that it would be in a position
to assert numerous defenses. However, no assurance can be provided as
to the outcome of any such possible proceedings.
Presently, Apria is unaware of what claims or proceedings, if
any, the government may be contemplating with respect to these
investigations.
Apria was named as a defendant in a qui tam lawsuit filed in
January 1998 in the U.S. District Court for the Northern District of
Georgia, Atlanta Division, Corsello v. Lincare, Inc., et al. (Case No.
1:98-CV-O204-ODE). Apria was never served with the Complaint. On July
14, 1999, the plaintiff filed an Amended Complaint that does not
include Apria among the defendants.
Apria is also engaged in the defense of certain claims and
lawsuits arising out of the ordinary course and conduct of its
business, the outcomes of which are not determinable at this time.
Apria 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 Apria upon the resolution of these
claims and lawsuits will not, in the aggregate, have a material
adverse effect on the company's results of operations or financial
condition.
ITEMS 2-5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Reference
------- ---------
3.1 Certificate of Amendment of Certificate of Incorporation
of Apria Healthcare Group Inc.
4.1 Amendment No.2 to the Rights Agreement dated as of April
20, 1999, by and between Apria Healthcare Group Inc. and
Norwest Bank Minnesota, N.A. Incorporated by reference
to the Registrant's Form 8-A/A, filed on April 21, 1999.
4.2 Amendment No.3 to the Rights Agreement dated as of May
17, 1999, by and between Apria Healthcare Group Inc. and
Norwest Bank Minnesota, N.A. Incorporated by reference
to the Registrant's Form 8-A/A, filed on May 19, 1999.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for
which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APRIA HEALTHCARE GROUP INC.
---------------------------
Registrant
August 12, 1999 /s/ JOHN C. MANEY
----------------------------------------------------
John C. Maney
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 3.1
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
APRIA HEALTHCARE GROUP INC.,
a Delaware corporation
Apria Healthcare Group Inc., a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (this
"Corporation"), DOES HEREBY CERTIFY:
FIRST: That the Board of Directors of this Corporation has adopted the
following resolution setting forth a proposed amendment of the Restated
Certificate of Incorporation of this Corporation:
"RESOLVED FURTHER, that the Restated Certificate of Incorporation of
this Corporation be amended by changing Article VI thereof so that, as
amended, Article VI shall read in its entirety as follows:
ARTICLE VI
The business and affairs of the Corporation shall be managed and
controlled by a Board of Directors. The number of directors
constituting the Board of Directors shall be fixed, initially, by the
Bylaws of the Corporation; thereafter the number of directors shall be
fixed or altered exclusively by resolutions adopted by the Board of
Directors. At each annual meeting of stockholders, all directors shall
be elected to hold office until the next annual meeting of
stockholders. Each director shall hold office until his successor is
elected and qualified or until his earlier resignation. No decrease in
the number of directors shall shorten the term of any incumbent
director. Elections of directors need not be by ballot unless the
Bylaws so provide."
SECOND: That at the Corporation's 1999 annual meeting of stockholders, a
majority of the outstanding stock entitled to vote
thereon voted in favor of the amendment.
THIRD: That the above amendment was duly adopted in accordance with the
applicable provisions of Section 242 of the General Corporation Law of the State
of Delaware.
IN WITNESS WHEREOF, Apria Healthcare Group Inc. has caused this Certificate
to be signed by Philip L. Carter, its Chief Executive Officer, as of the 21st
day of July, 1999.
APRIA HEALTHCARE GROUP INC.
By: ______________________________
Philip L. Carter
Chief Executive Officer
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1999
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