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 September 30, 2000
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 52,559,629 shares of common stock, $.001 par value, outstanding at
November 8, 2000.
<PAGE>
APRIA HEALTHCARE GROUP INC.
FORM 10-Q
For the period ended September 30, 2000
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
Consolidated Income Statements
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
<CAPTION>
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
(dollars in thousands) 2000 1999
--------------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents..................................................... $ 65,373 $ 20,493
Accounts receivable, less allowance for doubtful accounts of $49,188
and $44,652 at September 30, 2000 and December 31, 1999, respectively....... 145,725 149,767
Inventories................................................................... 18,351 18,505
Deferred income taxes......................................................... 40,268 42,595
Prepaid expenses and other current assets..................................... 6,012 7,665
-------- --------
TOTAL CURRENT ASSETS.................................................. 275,729 239,025
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $305,096
and $277,915 at September 30, 2000 and December 31, 1999, respectively........ 126,914 126,486
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET....................................... 40,848 41,503
DEFERRED INCOME TAXES........................................................... 70,415 95,974
INTANGIBLE ASSETS, NET.......................................................... 128,579 125,641
OTHER ASSETS.................................................................... 1,771 422
-------- --------
$644,256 $629,051
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.............................................................. $ 46,344 $ 47,202
Accrued payroll and related taxes and benefits................................ 32,373 26,478
Accrued insurance............................................................. 10,259 10,866
Other accrued liabilities..................................................... 47,983 51,307
Current portion of long-term debt............................................. 36,635 23,528
-------- --------
TOTAL CURRENT LIABILITIES............................................. 173,594 159,381
LONG-TERM DEBT.................................................................. 351,727 394,201
COMMITMENTS AND CONTINGENCIES...................................................
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value:
10,000,000 shares authorized; none issued................................... - -
Common stock, $.001 par value:
150,000,000 shares authorized; 52,435,543 and 52,054,974 shares
issued at September 30, 2000 and December 31, 1999, respectively;
52,349,443 and 52,054,874 outstanding at September 30, 2000 and
December 31, 1999, respectively............................................. 52 52
Additional paid-in capital.................................................... 331,663 328,897
Retained deficit.............................................................. (211,819) (253,477)
Treasury stock, at cost; 86,100 shares at September 30, 2000
and 100 shares at December 31, 1999......................................... (961) (3)
-------- --------
118,935 75,469
-------- --------
$644,256 $629,051
======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED INCOME STATEMENTS
(unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ----------------------
(dollars in thousands, except per share data) 2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenues.................................................... $252,588 $237,367 $755,880 $697,701
Costs and expenses:
Cost of net revenues:
Product and supply costs.................................. 45,230 45,493 141,643 136,595
Patient service equipment depreciation.................... 19,172 18,455 57,435 54,681
Nursing services.......................................... 467 500 1,337 1,588
Other..................................................... 2,541 2,158 7,877 6,560
-------- -------- -------- --------
67,410 66,606 208,292 199,424
Selling, distribution and administrative..................... 140,115 129,970 411,377 381,977
Provision for doubtful accounts.............................. 6,767 9,305 25,785 25,376
Amortization of intangible assets............................ 2,601 2,101 7,527 5,958
-------- -------- -------- --------
216,893 207,982 652,981 612,735
-------- -------- -------- --------
OPERATING INCOME...................................... 35,695 29,385 102,899 84,966
Interest expense, net........................................... 10,167 10,490 31,075 32,305
-------- -------- -------- --------
INCOME BEFORE TAXES................................... 25,528 18,895 71,824 52,661
Income taxes.................................................... 10,722 - 30,166 400
-------- -------- -------- --------
NET INCOME............................................ $ 14,806 $ 18,895 $ 41,658 $ 52,261
======== ======== ======== ========
Basic income per common share................................... $ 0.28 $ 0.36 $ 0.80 $ 1.01
======== ======== ======== ========
Diluted income per common share................................. $ 0.28 $ 0.35 $ 0.77 $ 0.98
======== ======== ======== ========
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Nine Months Ended
September 30,
------------------------
(dollars in thousands) 2000 1999
-------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C>
Net income...................................................................... $ 41,658 $ 52,261
Items included in net income not requiring cash:
Provision for doubtful accounts............................................... 25,785 25,376
Depreciation and amortization................................................. 78,091 75,091
Amortization of deferred debt costs........................................... 2,025 3,794
Deferred income taxes and other............................................... 27,037 2,311
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable............................................... (18,202) (35,152)
Decrease (increase) in inventories............................................ 155 (4,054)
Decrease (increase) in prepaids and other assets.............................. 998 (1,056)
Decrease in accounts payable.................................................. (858) (1,701)
Increase in accrued payroll and related taxes and benefits.................... 5,895 1,584
Decrease in accrued expenses and other liabilities............................ (3,594) (6,208)
Net purchases of patient service equipment, net of effects of acquisitions...... (57,053) (48,647)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES............................. 101,937 63,599
INVESTING ACTIVITIES
Purchases of property, equipment and improvements,
net of effects of acquisitions.............................................. (9,500) (6,191)
Proceeds from disposition of assets........................................... 482 1,007
Acquisitions and payments of contingent consideration......................... (15,400) (28,524)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES................................. (24,418) (33,708)
FINANCING ACTIVITIES
Payments on term loan......................................................... (30,062) (64,938)
Payments on other long-term debt.............................................. (3,402) (4,666)
Capitalized debt costs, net................................................... (983) (1,811)
Purchases of common stock..................................................... (958) -
Issuances of common stock..................................................... 2,766 2,643
-------- --------
NET CASH USED IN FINANCING ACTIVITIES................................. (32,639) (68,772)
-------- --------
NET INCREASE (DECREASE) IN CASH................................................. 44,880 (38,881)
Cash and cash equivalents at beginning of period................................ 20,493 75,475
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD...................................... $ 65,373 $ 36,594
======== ========
See notes to consolidated financial statements.
</TABLE>
<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. ("Apria" or "the company") 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, 1999, included in the company's 1999 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 accounting principles generally accepted in the United States of
America requires management to make assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual results could differ
from those estimates.
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.
Due to the nature of the industry and the reimbursement environment in which
Apria operates, certain estimates are required to record net revenues and
accounts receivable at their net realizable values. Inherent in these estimates
is the risk that they will have to be revised or updated as additional
information becomes available to management. Specifically, the complexity of
many third-party billing arrangements and the uncertainty of reimbursement
amounts for certain services from certain payors may result in adjustments to
amounts originally recorded. Such adjustments are typically identified and
recorded at the point of cash application, claim denial or account review.
Accounts receivable are reduced by an allowance for doubtful accounts which
provides 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 evaluate the net realizable value of
accounts receivable. Specifically, management considers historical realization
data, accounts receivable aging trends, operating statistics and relevant
business conditions. Also, focused reviews of certain large and/or problematic
payors are performed. Because of continuing changes in the healthcare industry
and third-party reimbursement, it is possible that management's estimates could
change in the near term, which could have an impact on operations and cash
flows.
The company is required to adopt Staff Accounting Bulletin No. 101 ("SAB 101"),
"Revenue Recognition in Financial Statements", in the fourth quarter of 2000.
SAB 101 provides guidance on the proper timing of revenue recognition in
accordance with generally accepted accounting principles. The adoption of SAB
101 will not have a material effect on the company's consolidated results of
operations or financial position.
<PAGE>
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
statements of operations from the date of acquisition. During the nine-month
period ended September 30, 2000, cash paid for acquisitions and related
contingent consideration was $15,400,000. For the acquisitions that closed
during that same period, $9,493,000 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 for the fifth and sixth times in March and September of 2000,
respectively. The earlier amendment increased the limitation on capital
expenditures while the most recent amendment extended the maturity of the
agreement to September 30, 2002. The sixth amendment also reduced the interest
rate on borrowings by .75%, increased the aggregate amount of permitted
acquisitions to $200,000,000 annually and increased the revolving line of credit
to $50,000,000, none of which has been drawn. In conjunction with the September
amendment, Apria also reduced the outstanding term loan by $20,062,000.
At September 30, 2000, total borrowings under the credit agreement were
$189,000,000, outstanding letters of credit totaled $1,000,000 and credit
available under the revolving facility was $49,000,000. On October 20, 2000,
Apria further reduced the outstanding term loan to $159,000,000 by making a
voluntary prepayment of $30,000,000.
NOTE F - EQUITY
The change in stockholders' equity, other than from net income, is attributable
to the exercise of stock options and purchases of the company's common stock on
the open market. For the nine months ended September 30, 2000, proceeds from the
exercise of stock options amounted to $2,766,000 and stock purchases totaled
$958,000.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" ("FIN 44"). FIN 44
provides clarification for issues that have arisen in applying APB Opinion No.
25, Accounting for Stock Issued to Employees, including: the definition of an
employee for purposes of applying APB Opinion No. 25; the criteria for
determining whether a plan qualifies as a noncompensatory plan; the accounting
consequences of various modifications to the terms of previously fixed stock
options or awards; and the accounting for an exchange of stock compensation
awards in a business combination. FIN 44 became effective July 1, 2000, but
certain conclusions in FIN 44 cover specific events that occur after either
December 15, 1998 or January 12, 2000. Apria adopted FIN 44 during the third
quarter of 2000. The adoption of FIN 44 did not have a material effect on
Apria's consolidated results of operations or financial position.
NOTE G - INCOME TAXES
Income taxes for the nine months ended September 30, 2000 have been provided at
the effective tax rate that is expected to be applicable for the year.
At December 31, 1999 Apria's federal net operating loss carryforwards ("NOLs")
approximated $239,000,000, expiring in 2003 through 2013. Additionally, the
company has various state NOLs which began expiring 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 NOLs
generated prior to 1992 is limited to approximately $5,000,000 each per year.
Because of the annual limitation, approximately $57,000,000 of Apria's federal
and state NOLs may expire unused. The company excludes the $57,000,000 of
potentially expiring NOLs from its deferred tax assets.
<PAGE>
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 outcomes of which are 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
losses related to certain matters when such losses are considered probable and
capable of estimation. No provision for losses is made in respect of claims
which do not meet such requirements.
NOTE I - PER SHARE AMOUNTS
The following table sets forth the computation of basic and diluted per share
amounts:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- --------------------
(in thousands, except per share data) 2000 1999 2000 1999
---------------------------------------------------------------------------------------------------------------------
Numerator:
<S> <C> <C> <C> <C>
Net income.................................................... $ 14,806 $ 18,895 $ 41,658 $ 52,261
Numerator for basic per share amounts - income
available to common stockholders............................ $ 14,806 $ 18,895 $ 41,658 $ 52,261
Numerator for diluted per share amounts - income
available to common stockholders............................ $ 14,806 $ 18,895 $ 41,658 $ 52,261
Denominator:
Denominator for basic per share
amounts - weighted average shares........................... 52,324 52,024 52,280 51,905
Effect of dilutive securities:
Employee stock options...................................... 1,380 1,866 1,491 1,583
-------- -------- -------- --------
Dilutive potential common shares............................ 1,380 1,866 1,491 1,583
-------- -------- -------- --------
Denominator for diluted per share amounts -
adjusted weighted average shares............................ 53,704 53,890 53,771 53,488
======== ======== ======== ========
Basic income per common share................................... $ 0.28 $ 0.36 $ 0.80 $ 1.01
======== ======== ======== ========
Diluted income per common share................................. $ 0.28 $ 0.35 $ 0.77 $ 0.98
======== ======== ======== ========
Employee stock options excluded from the
computation of diluted per share amounts:
Exercise price exceeds average market
price of common stock..................................... 2,650 1,573 2,607 1,747
Average exercise price per share that exceeds
average market price of common stock.......................... $ 18.31 $ 19.51 $ 18.37 $ 19.11
======== ======== ======== ========
</TABLE>
<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, 1999, as filed with the Securities and Exchange Commission on March
27, 2000. 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 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. Those risks include: whether
the company will be able to resolve issues pertaining to the collectibility of
its accounts receivable, 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
the company's operating systems and controls, and the successful implementation
of the company's acquisition strategy.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
NET REVENUES AND GROSS MARGIN. Net revenues were $252.6 million in the
third quarter of 2000, compared to $237.4 million for the third quarter of 1999.
For the nine months ended September 30, 2000, net revenues were $755.9 million,
representing an increase of 8.3% year-to-year. The increases in net revenues are
due to volume increases from traditional referral sources, new contracts with
regional and national payors, the acquisition of complementary businesses and
price increases in certain managed care agreements.
The table below sets forth a summary of net revenues by service line. The
largest increase is in the respiratory therapy service line, which is largely
due to a sales focus on this higher-margin line and to the impact of
acquisitions consummated during the fourth quarter of 1999 and in 2000. The
increase between periods in the infusion therapy service line is due
predominantly to volume increases.
Nine Months Ended September 30,
----------------------------------------
2000 1999
----------------- -----------------
(dollars in thousands) $ % $ %
-------------------------------------------------------------------------------
Respiratory therapy.......... $488,601 64.6% $444,121 63.7%
Infusion therapy............. 144,981 19.2% 131,728 18.9%
HME/other.................... 122,298 16.2% 121,852 17.4%
-------- ------ -------- ------
Total net revenues $755,880 100.0% $697,701 100.0%
======== ====== ======== ======
Gross margins for the third quarter and nine months ended September 30,
2000 were 73.3% and 72.4%, respectively, compared to 71.9% and 71.4% for the
corresponding periods last year. The majority of this improvement is due to the
increase in respiratory revenues as a percentage of total revenues.
Use of Estimates in Recording Net Revenues. Substantially all of Apria's
revenues are reimbursed by third party payors, including Medicare, Medicaid and
managed care organizations. 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 as additional information becomes
available to management. Specifically, the complexity of many third-party
billing arrangements and the uncertainty of reimbursement amounts for certain
services from certain payors may result in adjustments to amounts originally
recorded. Such adjustments are typically identified and recorded at the point of
cash application, claim denial or account review.
Medicare Reimbursement Update. Earlier in 2000, the Secretary of the U.S.
Department of Health and Human Services ("HHS") indicated that she intends to
recommend that the Medicare claims processors base their payments for certain
drugs on pricing schedules other than the Average Wholesale Price listing, which
historically has been the industry's basis for drug reimbursement. The alternate
pricing methodology the Secretary intends to propose would reduce reimbursement
levels on certain drugs to more closely approximate a provider's acquisition
cost without an accompanying service fee component. If the alternative pricing
is implemented by all the Medicare carriers that process claims for drugs,
including infusion and respiratory therapy medications, Apria's management
estimates that the impact to revenues would be less than 5% on an annual basis.
The healthcare industry has taken issue with HHS's approach for several reasons,
primarily because it fails to consider the accompanying costs of delivering and
administering these types of drug therapies. Patient access to these drug
therapies may also be jeopardized if providers choose to discontinue providing
these services.
Legislation currently being considered by Congress would delay the drug
pricing changes until such time that the General Accounting Office could conduct
a thorough study (including consultation with the homecare industry) to
recommend alternative payment methodologies. Also included in the set of
Medicare proposals being considered by Congress is full restoration, in 2001, of
the Cost of Living Adjustment ("COLA") which would increase the Consumer Price
Index-based reimbursement increases for durable medical equipment providers. It
is uncertain whether either of these proposals will pass in their current form
or at all.
SELLING, DISTRIBUTION AND ADMINISTRATIVE. Selling, distribution and
administrative expense, as a percentage of net revenue, was 55.5% and 54.4% for
the third quarter and nine months ended September 30, 2000, respectively, versus
54.8% for both of the corresponding periods in 1999. Management continues to
monitor and optimize its fixed and controllable expense structure to support
increasing business levels.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts was
2.7% and 3.4% of net revenues for the three and nine-month periods ended
September 30, 2000, respectively, compared to 3.9% and 3.6% for the
corresponding periods in 1999. The decrease between the three-month periods is
largely attributable to an improvement in 2000 cash collections.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization expense was $2.6 million
and $7.5 million for the third quarter and nine months ended September 30, 2000,
respectively, compared to $2.1 million and $6.0 million in the corresponding
periods of 1999. The increase is directly attributable to intangible assets that
were recorded in conjunction with acquisitions that were consummated in the
fourth quarter of 1999 and in 2000.
INTEREST EXPENSE. Interest expense was $10.2 million for the third quarter
ended September 30, 2000, down from $10.5 million for the third quarter of 1999.
For the nine months ended September 30, 2000, interest expense was $31.1 million
compared to $32.3 million in the prior year. The decreases are primarily due to
the reduction in long-term debt levels from 1999 to 2000 partially offset by
increases in interest rates.
INCOME TAXES. Income taxes were $30.2 million for the first nine months of
2000 versus $400,000 for the first nine months last year. At December 31, 1999,
management concluded that it was more likely than not that Apria would realize
its net deferred tax assets. As a result, the company released the remaining
deferred tax valuation allowance during the fourth quarter of 1999. The increase
in income tax expense for the first nine months of 2000, as compared to the
first nine months of 1999, is primarily attributable to Apria's partial release
of its deferred tax valuation allowance in 1999.
At December 31, 1999 Apria's federal NOLs approximated $239 million,
expiring in the years 2003 through 2013. Additionally, Apria has various state
NOLs which began expiring 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 NOLs generated prior to 1992 is
limited to approximately $5 million each per year. Because of the annual
limitation, approximately $57 million of Apria's federal and state NOLs may
expire unused. Apria excludes the $57 million of potentially expiring NOLs from
its deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
OPERATING CASH FLOW. Operating cash flow was $101.9 million for the
nine-month period ended September 30, 2000, compared with $63.4 million for the
corresponding period in 1999. The primary reasons for the improvement in
operating cash flow were the increase in net income, before items not requiring
cash, plus a smaller increase in accounts receivable for the nine-month period
of 2000 as compared to the corresponding period of 1999. To a lesser extent, a
decrease in inventories and an increase in accrued payroll and related taxes and
benefits (due to the number of payroll days accrued at the respective
period-ends) also contributed to the increase in operating cash flow. Purchases
of patient service equipment increased during the nine-month period to support
the growth in the respiratory therapy service line.
ACCOUNTS RECEIVABLE. Collection of accounts receivable remains one of
Apria's primary focuses. Accounts receivable, before allowance for doubtful
accounts, increased by only $500,000 from December 31, 1999 to September 30,
2000. 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 52 days at September 30, 2000 from 56 days
at December 31, 1999. Accounts aged in excess of 180 days as a percentage of
total accounts receivable increased to 28.2% at September 30, 2000 compared to
24.1% at December 31, 1999.
Evaluation of Net Realizable Value. Management performs various analyses to
evaluate the net realizable value of accounts receivable. Specifically,
management considers historical realization data, accounts receivable aging
trends, operating statistics and relevant business conditions. Also, focused
reviews of certain large and/or problematic payors are performed. Because of
continuing changes in the healthcare industry and third-party reimbursement, it
is possible that management's estimates could change in the near term, which
could have an impact on operations and cash flows.
Unbilled Receivables. Included in accounts receivable are earned but
unbilled receivables of $23.3 million and $23.0 million at September 30, 2000
and December 31, 1999, 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 was amended for the sixth time in
September 2000. This latest amendment extends the maturity of the agreement to
September 30, 2002, reduces the interest rate on borrowings under the agreement
by 0.75%, increases the aggregate amount of permitted acquisitions from $125.0
million to $200.0 million and increases the revolving line of credit from $30.0
million to $50.0 million. In conjunction with the September amendment, Apria
also reduced the outstanding term loan by $20 million. In March 2000, the fifth
amendment to the credit agreement was effected to increase the amount of
permitted capital expenditures.
At September 30, 2000, total borrowings under the credit agreement were
$189.0 million (none of which were advanced from the revolving credit facility),
outstanding letters of credit totaled $1.0 million and credit available under
the revolving facility was $49.0 million. On October 20, 2000, Apria further
reduced the outstanding term loan to $159.0 million by making a voluntary
prepayment of $30.0 million.
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 statements of operations from the
date of acquisition. During the nine-month period ended September 30, 2000, cash
paid for acquisitions and related contingent consideration was $15.4 million.
For acquisitions that closed during the same period, approximately $9.5 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.
OTHER. Apria's management believes that cash provided by operations
together with cash invested in its money market account and amounts available
under its existing credit facility will be sufficient to finance its current
operations for at least the next year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Apria does not currently utilize 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 September 30, 2000 and the
current market perception, a 75 basis point increase in the applicable interest
rates would decrease Apria's annual cash flow and earnings by approximately $1.6
million. Consideration of scheduled repayments and the $30 million prepayment
made in October 2000 would reduce the annual impact to approximately $1.1
million over the next twelve months.
<PAGE>
PART II - OTHER INFORMATION
---------------------------
ITEMS 1-3. NOT APPLICABLE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Annual Meeting of Stockholders of the company on July 19, 2000.
(b) Directors re-elected at the Annual Meeting for a term of one
year:
David H. Batchelder
Philip L. Carter
David L. Goldsmith
Richard H. Koppes
Philip R. Lochner, Jr.
Beverly Benedict Thomas
Ralph V. Whitworth
(c) Matters Voted Upon at Annual Meeting:
Election of Directors
---------------------
The company's Board of Directors consists of seven members
who will serve for one year or until the election and
qualification of their successors. The results of the
Stockholder voting were as follows:
FOR WITHHOLD
---------- --------
David H. Batchelder 49,228,115 392,946
Philip L. Carter 49,228,113 392,948
David L. Goldsmith 49,228,015 393,046
Richard H. Koppes 49,228,254 392,807
Philip R. Lochner, Jr. 49,228,654 392,407
Beverly Benedict Thomas 49,228,654 392,407
Ralph V. Whitworth 49,228,115 392,946
ITEM 5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Reference
------- ---------
10.1 Sixth Amendment to Amended and Restated Credit
Agreement dated September 22, 2000, among Registrant
and certain of its subsidiaries, Bank of America
National Trust and Savings Association and other
financial institutions party to the Credit Agreement.
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
November 14, 2000 /s/ JOHN C. MANEY
---------------------------
John C. Maney
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
