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 March 31, 2002
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)
26220 ENTERPRISE COURT, LAKE FOREST, CA 92630
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (949) 639-2000
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 54,364,302 shares of common stock, $.001 par value, outstanding at
May 7, 2002.
APRIA HEALTHCARE GROUP INC.
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2002
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements (unaudited)
- Condensed Consolidated Balance Sheets
- Condensed Consolidated Income Statements
- Condensed Consolidated Statements of Cash Flows
- Notes to Condensed 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
----------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) 2002 2001
-------------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................................... $ 7,389 $ 9,359
Accounts receivable, less allowance for doubtful accounts of $33,266
and $32,073 at March 31, 2002 and December 31, 2001, respectively ..... 175,381 162,092
Inventories, net ........................................................ 25,249 25,084
Deferred income taxes ................................................... 33,169 33,017
Prepaid expenses and other current assets ............................... 10,279 10,271
--------- ---------
TOTAL CURRENT ASSETS ............................................ 251,467 239,823
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $349,596
and $342,010 at March 31, 2002 and December 31, 2001, respectively ...... 165,381 165,471
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ................................. 49,055 47,312
DEFERRED INCOME TAXES ..................................................... 28,590 37,838
GOODWILL, NET ............................................................. 195,458 193,458
INTANGIBLE ASSETS, NET .................................................... 4,752 4,863
OTHER ASSETS .............................................................. 7,067 7,017
--------- ---------
$ 701,770 $ 695,782
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ........................................................ $ 62,371 $ 71,198
Accrued payroll and related taxes and benefits .......................... 36,240 33,907
Accrued insurance ....................................................... 10,814 10,376
Income taxes payable .................................................... 12,736 9,060
Other accrued liabilities ............................................... 26,076 34,754
Current portion of long-term debt ....................................... 21,335 15,455
--------- ---------
TOTAL CURRENT LIABILITIES ....................................... 169,572 174,750
LONG-TERM DEBT, net of current portion .................................... 284,429 278,234
COMMITMENTS AND CONTINGENCIES (Note I)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value: 10,000,000 shares authorized;
none issued ........................................................... - -
Common stock, $.001 par value: 150,000,000 shares authorized;
54,932,737 and 54,690,267 shares issued at March 31, 2002 and
December 31, 2001, respectively; 53,846,837 and 54,604,167
outstanding at March 31, 2002 and December 31, 2001, respectively ..... 55 55
Additional paid-in capital .............................................. 371,648 368,231
Treasury stock, at cost; 1,085,900 and 86,100 shares at March 31, 2002
and December 31, 2001, respectively ................................... (22,631) (961)
Accumulated deficit ..................................................... (101,559) (124,554)
Accumulated other comprehensive income .................................. 256 27
--------- ---------
247,769 242,798
--------- ---------
$ 701,770 $ 695,782
========= =========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
----------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001
------------------------------------------------------------------------------------------------
Net revenues ......................................................... $301,345 $271,354
Costs and expenses:
Cost of net revenues:
Product and supply costs ....................................... 55,162 51,927
Patient service equipment depreciation ......................... 23,417 20,964
Nursing services ............................................... 271 354
Other .......................................................... 3,269 3,033
-------- --------
TOTAL COST OF NET REVENUES ................................. 82,119 76,278
Selling, distribution and administrative .......................... 166,108 148,394
Provision for doubtful accounts ................................... 11,511 8,150
Amortization of goodwill and intangible assets .................... 671 2,836
-------- --------
TOTAL COSTS AND EXPENSES ................................... 260,409 235,658
-------- --------
OPERATING INCOME ........................................... 40,936 35,696
Interest expense, net ................................................ 4,144 8,408
-------- --------
INCOME BEFORE TAXES ........................................ 36,792 27,288
Income tax expense ................................................... 13,797 10,212
-------- --------
NET INCOME ................................................. $ 22,995 $ 17,076
======== ========
Basic net income per common share .................................... $ 0.42 $ 0.32
======== ========
Diluted net income per common share .................................. $ 0.41 $ 0.31
======== ========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
--------------------
(DOLLARS IN THOUSANDS) 2002 2001
-----------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income ............................................................... $ 22,995 $ 17,076
Items included in net income not requiring cash:
Provision for doubtful accounts ....................................... 11,511 8,150
Depreciation and amortization ......................................... 28,111 27,487
Amortization of deferred debt issuance costs .......................... 325 617
Deferred income taxes and other ....................................... 10,101 9,412
Changes in operating assets and liabilities, exclusive of
effects of acquisitions:
Accounts receivable ................................................... (24,999) (17,848)
Inventories, net ...................................................... (165) 661
Prepaid expenses and other assets ..................................... 71 373
Accounts payable, exclusive of outstanding checks ..................... (5,315) (1,494)
Accrued payroll and related taxes and benefits ........................ 2,333 2,644
Income taxes payable .................................................. 3,676 459
Accrued expenses ...................................................... (7,385) 1,007
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ........................ 41,259 48,544
INVESTING ACTIVITIES
Purchases of patient service equipment and property,
equipment and improvements, exclusive of effects of acquisitions ...... (27,083) (30,029)
Proceeds from disposition of assets ...................................... 94 41
Cash paid for acquisitions, including payments of deferred consideration.. (3,320) (25,299)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ............................ (30,309) (55,287)
FINANCING ACTIVITIES
Proceeds from revolving credit facilities ................................ 89,200 17,200
Payments on revolving credit facilities .................................. (78,100) (17,200)
Payments on term loans ................................................... (438) -
Payments on other long-term debt ......................................... (660) (214)
Outstanding checks included in accounts payable .......................... (3,512) (3,363)
Repurchases of common stock .............................................. (21,670) -
Issuances of common stock ................................................ 2,260 4,833
-------- --------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES .............. (12,920) 1,256
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................................. (1,970) (5,487)
Cash and cash equivalents at beginning of period ........................... 9,359 16,864
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ................................. $ 7,389 $ 11,377
======== ========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Apria Healthcare Group Inc. ("Apria" or "the company") and its
subsidiaries. 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, 2001, included in the company's 2001 Form 10-K.
NOTE B - RECLASSIFICATIONS, ACCOUNTING ESTIMATES AND RECENT ACCOUNTING
PRONOUNCEMENTS
Reclassifications: Certain amounts from prior periods have been reclassified to
conform to the current period 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.
Recent Accounting Pronouncements: Effective January 1, 2002, Apria adopted
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets" in its entirety. SFAS No. 142 addresses the financial
accounting and reporting for goodwill and other intangible assets. The statement
provides that goodwill or other intangible assets with indefinite lives will no
longer be amortized, but shall be tested for impairment annually, or more
frequently if circumstances indicate potential impairment. The effect of
adoption of SFAS No. 142 on the consolidated financial statements is shown in
Note E - Goodwill and Intangible Assets.
Effective January 1, 2002, Apria was required to adopt SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets". This statement supercedes
SFAS No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" and amends other guidance related to the
accounting and reporting of long-lived assets. SFAS No. 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale.
Discontinued operations will be measured similarly to other long-lived assets
classified as held for sale at the lower of its carrying amount or fair value
less cost to sell. Future operating losses will no longer be recognized before
they occur. SFAS No. 144 also broadens the presentation of discontinued
operations to include a component of an entity when operations and cash flows
can be clearly distinguished, and establishes criteria to determine when a
long-lived asset is held for sale. Adoption of this statement did not have a
material effect on Apria's financial statements.
NOTE C - REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
Net revenues are recognized on the date services and related products are
provided to patients and are recorded at amounts expected to be received under
reimbursement arrangements with third-party payors, including private insurers,
prepaid health plans, 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. 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.
Management performs various analyses to evaluate the net realizable value of
accounts receivable. Specifically, management considers historical realization
data, accounts receivable aging trends, other operating trends 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.
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
income statements from the date of acquisition. During the three-month period
ended March 31, 2002, cash paid for acquisitions was $3,320,000, which included
amounts deferred from prior years of $1,059,000. At March 31, 2002, outstanding
deferred consideration totaled $2,763,000.
For the acquisitions that were completed during the three-month period ended
March 31, 2002, $2,260,000 was allocated to goodwill, including amounts not yet
paid, $103,000 to intangible assets and $273,000 to patient service equipment.
NOTE E - GOODWILL AND INTANGIBLE ASSETS
In July 2001, Apria adopted SFAS No. 141, "Business Combinations", which
requires that the purchase method of accounting be applied to all business
combinations completed after June 30, 2001 and which also addresses the criteria
for initial recognition of intangible assets and goodwill. Effective January 1,
2002, the company adopted SFAS No. 142, "Goodwill and Other Intangible Assets",
in its entirety. SFAS No. 142 addresses the financial accounting and reporting
for goodwill and other intangible assets. The statement provides that goodwill
and other intangible assets with indefinite lives will no longer be amortized,
but shall be tested for impairment annually, or more frequently if circumstances
indicate potential impairment. If the carrying value of goodwill or an
intangible asset exceeds its fair value, an impairment loss shall be recognized.
In the year of adoption, SFAS No. 142 requires that a transitional goodwill
impairment test be performed and that the results be measured as of the
beginning of the year. The test is conducted at a "reporting unit" level and
compares each reporting unit's fair value to its carrying value. The company has
determined that its fifteen geographic regions best align with SFAS No. 142's
definition of a reporting unit. The measurement of fair value for each region
was based on an evaluation of future discounted cash flows and was further
tested using a multiple of earnings approach. The transitional test, which has
been completed, indicated that no impairment exists and accordingly, no loss was
recognized.
In conjunction with the transitional impairment test and based on the criteria
established in SFAS No. 141, management reviewed the useful lives and the
amounts previously recorded for intangible assets and determined that no
adjustments were necessary.
The following table sets forth the reconciliation of net income and earnings per
share as adjusted for the non-amortization provisions of SFAS No. 142:
THREE MONTHS ENDED
MARCH 31,
----------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001
--------------------------------------------------------------------------------------------------
Reported net income .................................................. $ 22,995 $ 17,076
Add: goodwill amortization, net of taxes ............................ - 1,384
-------- --------
Adjusted net income .................................................. $ 22,995 $ 18,460
======== ========
BASIC INCOME PER COMMON SHARE:
Reported net income ............................................. $ 0.42 $ 0.32
Goodwill amortization, net of taxes ............................. - 0.03
-------- --------
Adjusted net income ............................................. $ 0.42 $ 0.35
======== ========
DILUTED INCOME PER COMMON SHARE:
Reported net income .................................................. $ 0.41 $ 0.31
Goodwill amortization, net of taxes ............................. - 0.02
-------- --------
Adjusted net income ............................................. $ 0.41 $ 0.33
======== ========
Goodwill and intangible assets consist of the following:
MARCH 31, DECEMBER 31,
(DOLLARS IN THOUSANDS) 2002 2001
---------------------------------------------------------------------------------------------------------------
Goodwill from business combinations completed on or before June 30, 2001 ......... $ 203,077 $ 203,077
Less accumulated amortization .................................................... (48,490) (48,490)
--------- ---------
$ 154,587 $ 154,587
Goodwill from business combinations completed after June 30, 2001 ................ 40,871 38,871
--------- ---------
$ 195,458 $ 193,458
========= =========
Intangible assets subject to amortization, comprised of covenants not to compete.. 16,555 16,180
Less accumulated amortization .................................................... (11,803) (11,317)
--------- ---------
$ 4,752 $ 4,863
========= =========
For the three months ended March 31, 2002, the net change in the carrying amount
of goodwill of $2,000,000 is the result of business combinations. All of the
goodwill recorded in conjunction with business combinations completed after June
30, 2001 is expected to be deductible for tax purposes.
Covenants not to compete relating to business combinations completed after June
30, 2001 have a weighted-average life of five years. Amortization expense
related to the covenants amounts to $671,000 for the three months ended March
31, 2002. The estimated amortization expense for each of the fiscal years ended
December 31, is presented below:
FOR THE YEAR ENDED
(DOLLARS IN THOUSANDS) DECEMBER 31,
-----------------------------------------------------------------------
2002........................................... $ 2,233
2003........................................... $ 1,498
2004........................................... $ 1,049
2005........................................... $ 424
2006........................................... $ 217
2007........................................... $ 2
NOTE F - LONG-TERM DEBT
At March 31, 2002, borrowings under the revolving credit facility were
$18,900,000, outstanding letters of credit totaled $1,000,000 and credit
available under the revolving facility was $80,100,000. At March 31, 2002, Apria
was in compliance with all of the financial covenants required by the credit
agreement.
NOTE G - EQUITY
For the three months ended March 31, 2002, changes to stockholders' equity are
comprised of the following amounts:
(DOLLARS IN THOUSANDS)
--------------------------------------------------------------------------
Net income................................................ $22,995
Proceeds from the exercise of stock options............... 2,260
Tax benefit related to the exercise of stock options...... 1,157
Other comprehensive income, net of taxes.................. 229
Repurchased common shares held in treasury................ (21,670)
-------
$ 4,971
For the three months ended March 31, 2002, the difference between net income and
comprehensive income is attributable to unrealized gains on two interest rate
swap agreements. There was no difference between net income and comprehensive
income for the same period of the previous year.
In February 2002, Apria announced a plan to repurchase up to $35,000,000 of
outstanding common stock during the first two quarters of 2002. Depending on
market conditions and other factors, repurchases will be made from time to time
in open market transactions. The company repurchased 999,800 shares during the
quarter ended March 31, 2002.
NOTE H - INCOME TAXES
Income taxes for the three months ended March 31, 2002 and 2001 have been
provided at the effective tax rates expected to be applicable for the respective
year.
At December 31, 2001, Apria had federal net operating loss carryforwards of
approximately $89,000,000, expiring in varying amounts in the years 2003 through
2018, and various state operating loss carryforwards that began to expire in
1997. Additionally, the company has an alternative minimum tax credit
carryforward of approximately $7,600,000. As a result of an ownership change in
1992 that 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 operating loss carryforwards may expire unused. The net
operating loss carryforward amount in the related deferred tax asset excludes
such amount. In 2002, for federal tax purposes, the company expects to utilize
its entire net operating loss carryforward amount not subject to limitation.
NOTE I - COMMITMENTS AND CONTINGENCIES
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. The
consolidated amended class action 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 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 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.
Following a series of settlement discussions, the parties reached in early 2002
a tentative agreement to settle both the consolidated federal and state class
actions described above for a total of $42 million. Under the terms of the
settlement, Apria has paid $1 million and its insurance carriers have paid $41
million into a settlement escrow account. Apria has also agreed to provide
various indemnities to certain current and former Apria officers and directors
who would be entitled to receive such indemnification under applicable law. The
parties are in the process of putting into place the final documentation of the
settlement. Apria cannot provide any assurances that all of the agreements
necessary to finalize the settlement will be obtained or that the Court
ultimately will approve the settlement as reasonable and fair to the settlement
class. However, in the opinion of Apria's management, the ultimate disposition
of these class actions will not have a material adverse effect on Apria's
results of operations or financial condition.
Apria and its former Chief Executive Officer are also defendants in a class
action lawsuit, J.E.B. Capital Partners, LP v. Apria Healthcare Group Inc. and
Philip L. Carter, filed on August 27, 2001 in the U.S. District Court for the
Central District of California, Southern Division (Case No. SACV01-813 GLT).
Among other things, the operative complaint alleges that the defendants made
false and/or misleading public statements by not announcing until July 16, 2001
the amount of potential damages asserted by the U.S. Attorney's office in Los
Angeles and counsel for the plaintiffs in the qui tam actions referred to below.
Apria believes that it has meritorious defenses to the plaintiff's claims and it
intends to vigorously defend itself. In the opinion of Apria's management, the
ultimate disposition of this class action will not have a material adverse
effect on Apria's results of operations or financial condition.
As previously reported, since mid-1998 Apria has been the subject of
investigations conducted by several U.S. Attorneys' offices and the U.S.
Department of Health and Human Services. These investigations concern the
documentation supporting Apria's billing for services provided to patients whose
healthcare costs are paid by Medicare and other federal programs. Apria is
cooperating with the government in connection with these investigations and is
responding to various document requests and subpoenas. A criminal investigation
conducted by the U.S. Attorney's office in Sacramento was closed in mid-1999
with no charges being filed. Potential claims resulting from an investigation by
the U.S. Attorney's office in San Diego were settled in mid-2001 in exchange for
a payment by Apria of $95,000.
Apria has been informed by the U.S. Attorney's office in Los Angeles that the
investigation being conducted by that office is the result of civil qui tam
litigation filed on behalf of the government against Apria. The complaints in
the litigation are under seal, however, and the government has not informed
Apria of either the identities of the plaintiffs, the court or courts where the
proceedings are pending, the date or dates instituted or the factual bases
alleged to underlie the proceedings. To date, the U.S. Attorney's office has not
informed Apria of any decision to intervene in the qui tam actions; however, it
could reach a decision with respect to intervention at any time.
On July 12, 2001, government representatives and counsel for the plaintiffs in
the qui tam actions asserted that, by a process of extrapolation from a sample
of 300 patient files to all of Apria's billings to the federal government during
the three-and-one-half year sample period, Apria could be liable to the
government under the False Claims Act for more than $9 billion, consisting of
extrapolated overpayment liability, plus treble damages and penalties of up to
$10,000 for each allegedly false claim derived from the extrapolation.
Apria has acknowledged that there may be errors and omissions in supporting
documentation affecting a portion of its billings. However, it considers the
assertions and amounts described in the preceding paragraph to be unsupported
both legally and factually and believes that most of the alleged documentation
errors and omissions should not give rise to any liability, for overpayment
refunds or otherwise. Accordingly, Apria believes that the claims asserted are
unwarranted and that it is in a position to assert numerous meritorious
defenses. Nevertheless, Apria cannot provide any assurances as to the outcome of
these proceedings. Management cannot estimate the possible loss or range of loss
that may result from these proceedings and therefore has not recorded any
related accruals.
If a judge, jury or administrative agency were to determine that false claims
were submitted to federal healthcare programs or that there were significant
overpayments by the government, Apria could face civil and administrative claims
for refunds, 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.
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 Apria's results of operations or financial condition.
NOTE J - PER SHARE AMOUNTS
The following table sets forth the computation of basic and diluted per share
amounts:
THREE MONTHS ENDED
MARCH 31,
-----------------------
(in thousands, except per share data) 2002 2001
------------------------------------------------------------------------------------------------------------------------------
NUMERATOR:
Net income..................................................................................... $ 22,995 $ 17,076
Numerator for basic and diluted per share amounts - income available to common stockholders.... $ 22,995 $ 17,076
DENOMINATOR:
Denominator for basic per share amounts - weighted average shares.............................. 54,292 53,392
Effect of dilutive securities:
Employee stock options - dilutive potential common shares................................... 1,326 2,092
--------- ---------
Denominator for diluted per share amounts - adjusted weighted average shares................... 55,618 55,484
========= =========
Basic net income per common share................................................................ $ 0.42 $ 0.32
========= =========
Diluted net income per common share.............................................................. $ 0.41 $ 0.31
========= =========
Employee stock options excluded from the computation of diluted per share
amounts:
Shares for which exercise price exceeds average market price of common stock................... 2,641 2,160
Average exercise price per share that exceeds average market price of common stock............. $ 25.51 $ 26.93
================================================================================
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 which are partly or entirely 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, 2001, as filed with the Securities and Exchange
Commission on April 1, 2002. 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:
- the ability of the company to resolve issues pertaining to the
collectibility of its accounts receivable;
- the effectiveness of the company's operating systems and controls;
- 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; and
- the successful implementation of the company's acquisition strategy.
In addition, the terrorist attacks of September 11, 2001 and the military and
security activities which followed, their impacts on the United States economy
and government spending priorities, and the effects of any further such
developments pose risks and uncertainties to all U.S.-based businesses,
including Apria. Among other things, deficit spending by the government as the
result of adverse developments in the economy and costs of the government's
response to the terrorist attacks could lead to the increased pressure to reduce
government expenditures for other purposes, including governmentally-funded
programs such as Medicare.
================================================================================
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Apria operates in the home healthcare segment of the healthcare industry
and provides services in the home respiratory therapy, home infusion therapy and
home medical equipment areas. In all three lines, Apria provides patients with a
variety of clinical services and related products and supplies, most of which
are prescribed by a physician as part of a care plan. Apria provides these
services to patients in the home throughout the United States through
approximately 400 branch locations.
CRITICAL ACCOUNTING POLICIES. Apria's management considers the accounting
policies that govern revenue recognition and the determination of the net
realizable value of accounts receivable to be the most critical in relation to
the company's consolidated financial statements. These policies require
management's most complex and subjective judgments. Other accounting policies
requiring significant judgment are those related to goodwill and income taxes.
These policies are presented in detail in Apria's 2001 Form 10-K-Management's
Discussion and Analysis of Financial Condition and Results of Operations.
SEGMENT REPORTING. Apria's branch locations are organized into geographic
regions. Each region consists of a number of branches and a regional office that
provides key support services such as billing, purchasing, patient service
equipment maintenance, repair and warehousing. Management evaluates operating
results on a geographic basis, and therefore views each region as an operating
segment. All regions provide the same products and services, including
respiratory therapy, infusion therapy and home medical equipment and supplies.
For financial reporting purposes, all the company's operating segments are
aggregated into one reportable segment in accordance with the aggregation
criteria in paragraph 17 of Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
RECENT ACCOUNTING PRONOUNCEMENTS. Effective January 1, 2002, Apria adopted
SFAS No. 142, "Goodwill and Other Intangible Assets", in its entirety. SFAS No.
142 addresses the financial accounting and reporting for goodwill and other
intangible assets. The statement provides that goodwill or other intangible
assets with indefinite lives will no longer be amortized, but shall be tested
for impairment annually, or more frequently if circumstances indicate potential
impairment. Upon adoption, a transitional goodwill impairment test must be
performed. The test is conducted at the "reporting unit" level and compares each
reporting unit's fair value to its carrying value. Apria's management has
determined that its fifteen geographic regions best align with SFAS No. 142's
definition of a reporting unit. Apria's transitional goodwill impairment test
utilized a discounted cash flow approach in determining fair value, which was
further tested by a multiple of earnings approach. The transitional test has
been completed; no goodwill impairment is indicated at any of Apria's reporting
units. See "Amortization of Goodwill and Intangible Assets".
Effective January 1, 2002 Apria adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 requires that one
accounting model be used for long-lived assets to be disposed of by sale.
Discontinued operations will be measured similarly to other long-lived assets
classified as held for sale at the lower of its carrying amount or fair value
less cost to sell. Future operating losses will no longer be recognized before
they occur. SFAS No. 144 also broadens the presentation of discontinued
operations to include a component of an entity when operations and cash flows
can be clearly distinguished, and establishes criteria to determine when a
long-lived asset is held for sale. Adoption of this statement did not have a
material effect on Apria's financial statements.
RESULTS OF OPERATIONS
NET REVENUES. Net revenues were $301.3 million in the first quarter of 2002
compared to $271.4 million in the corresponding period of 2001. The increase is
due to volume increases, new contracts with regional and national payors, the
acquisition of complementary businesses and price increases in certain managed
care agreements.
Apria's acquisition strategy generally results in the rapid integration of
acquired businesses into existing operating locations. This limits management's
ability to separately track the amount of revenue generated by an acquired
business. Estimating the revenue contribution from acquisitions therefore
requires certain assumptions. Based on its analyses, Apria management estimates
that approximately one-third of the revenue growth between the periods presented
was derived from acquisitions.
The following table sets forth a summary of net revenues by service line:
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2002 2001
----------------- -----------------
(DOLLARS IN THOUSANDS) $ % $ %
------------------------------------------------------------------------------------------------------------
Respiratory therapy...................................... $203,232 67.4% $178,330 65.7%
Infusion therapy......................................... 53,783 17.9% 52,385 19.3%
HME/other................................................ 44,330 14.7% 40,639 15.0%
-------- ------ -------- ------
Total net revenues $301,345 100.0% $271,354 100.0%
======== ====== ======== ======
Home Respiratory Therapy. Respiratory therapy revenues are derived
primarily from the provision of oxygen systems, home ventilators, sleep apnea
equipment, nebulizers, respiratory medications and related services. The
respiratory therapy service line increased by 14.0% in the first quarter of 2002
as compared to the first quarter of 2001. Apria's focus on the acquisition of
respiratory therapy businesses contributed to this growth.
Home Infusion Therapy. The infusion therapy service line involves the
administration of a drug or nutrient directly into the body intravenously
through a needle or catheter. Examples include: parenteral nutrition,
anti-infectives, pain management, chemotherapy and other medications and related
services. The infusion line also includes enteral nutrition, which is the
administration of nutrients directly into the gastrointestinal tract through a
feeding tube. Infusion therapy revenues increased by 2.7% between the first
quarter periods presented, which represents the effect of a 16.3% increase in
enteral nutrition as offset by a 4.1% decrease in the remainder of the infusion
line. The increase in enteral nutrition is attributable to a renewed focus on
this product resulting from a program (initiated in mid-2001) that centralized
the enteral intake and distribution functions at the regional level. The
offsetting decrease was largely due to the cessation of an infusion product
offering within a certain large contract. The structure of the contract was
yielding very low margins on that product.
Home Medical Equipment/Other. Home medical equipment/other revenues are
derived from the provision of patient safety items, ambulatory and patient room
equipment. Home medical equipment/other revenues increased by 9.1% between the
first quarter of 2002 and the first quarter of 2001. The increase between
periods reflects the restoration in 2001 of the full Medicare cost of living
adjustment for certain durable medical equipment products and services that had
been frozen since 1998 pursuant to the Balanced Budget Act of 1997. Revenues in
the first quarter of 2001 did not yet include this increase as the increase for
the first half of the year was effected through a transitional allowance applied
to amounts reimbursed during the second half of the year. The 2002 reimbursement
amounts incorporate the 2001 adjustments as if they had been applied evenly
throughout the year. Medicare reimbursement amounts for 2002 include only
minimal cost of living increases. Restoration of the full cost of living
adjustment was effective for 2001 only.
Revenue Recognition and Certain Concentrations. 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
third-party payors, including private insurers, prepaid health plans, 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, which could have an impact on the
consolidated financial statements.
Approximately 30% of Apria's revenues are reimbursed under arrangements
with Medicare and Medicaid. No other third-party payor represents 10% 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 9.3% of total net revenues for
the first quarter of 2002.
Medicare and Medicaid Reimbursement. The Balanced Budget Act of 1997
significantly reduced the Medicare reimbursement rates for home oxygen therapy
and included other provisions that have impacted or may impact reimbursement
rates in the future, such as potential reimbursement reductions under an
inherent reasonableness procedure and competitive bidding. Also currently at
issue is the potential adoption of an alternative pricing methodology for
certain drugs and biologicals. These issues are discussed in detail in Apria's
2001 Form 10-K.
GROSS PROFIT. Gross margins were 72.7% in the first quarter of 2002 and
71.9% in the first quarter of 2001. The increase reflects continued improvement
from management's strategy to increase the proportion of higher-margin
respiratory revenues to total revenues. The gross margin improvement can also be
partially attributed to more favorable pricing negotiated for certain patient
service equipment items and pharmaceuticals.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts was
$11.5 million or 3.8% of net revenues in the first quarter of 2002 compared to
$8.2 million or 3.0% in the first quarter of 2001. The provision for doubtful
accounts results from management's estimate of the net realizable value of
accounts receivable after considering actual write-offs of specific receivables.
The increase in the provision can be attributed to accounts receivable increases
primarily in the 31 to 90 day age range. Accounts aged in excess of 180 days
decreased between the periods in both dollars and as a percentage of total
accounts receivable. At March 31, 2002 total accounts receivable, before
allowance for doubtful accounts, increased by $16.7 million since March 31, 2001
and by $14.5 million since December 31, 2001. The growth since year-end is
partially due to two large acquisitions that were completed in the fourth
quarter of 2001. Such acquisitions require the integration of a significant
number of patients into Apria's information systems and document files which can
delay the billing and collection process. Also contributing to the accounts
receivable growth are the following factors that are typical with the start of a
new calendar year: (1) patient payor and/or benefit changes that can slow the
billing and collection process as the new payor information is obtained; and (2)
patient deductible requirements that can also slow the collection process. These
new-year factors were also present in the first quarter of 2001, however the
magnitude was greater in 2002 due to revenue growth and the recent acquisitions.
See "Accounts Receivable - Evaluation of Net Realizable Value."
SELLING, DISTRIBUTION AND ADMINISTRATIVE. Selling, distribution and
administrative expenses are comprised of expenses incurred in direct support of
operations and those associated with administrative functions. Expenses incurred
by the operating locations include salaries and other expenses in the following
functional areas: selling, distribution, clinical, intake, reimbursement,
warehousing and repair. Many of these operating costs are directly variable with
revenue growth patterns. Certain expenses, such as facility lease and fuel
costs, are also very sensitive to market-driven price fluctuations. The
administrative expenses include overhead costs incurred by the operating
locations and corporate support functions. These expenses do not vary as closely
with revenue growth as do the operating costs. Selling, distribution and
administrative expenses, expressed as percentages of net revenues, were 55.1% in
the first quarter of 2002, compared to 54.7% in the corresponding period last
year. The first quarter of 2002 includes $2.7 million in contract termination
costs related to the departure of the former Chief Executive Officer. Absent
this one-time charge, the margin improved slightly between the subject periods.
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS. Amortization of goodwill
and intangible assets was $671,000 in the first quarter of 2002 and $2.8 million
in the first quarter of 2001. Upon adoption of SFAS No. 142, goodwill
amortization ceased. Amortization of goodwill was $2.2 million for the first
quarter of 2001. The effect of adding this amount back as though SFAS No. 142
were adopted at the beginning of the prior year would have been increases of
$1.3 million and $0.02 to net income and income per common share, respectively.
See "Recent Accounting Pronouncements" and "Business Combinations."
INTEREST EXPENSE. Interest expense was $4.1 million in the first quarter of
2002, compared to $8.4 million in the first quarter of 2001. The significant
decrease between the periods is due to a number of factors. From March 31, 2001
to March 31, 2002, long-term debt decreased by $36 million. Also, the July 2001
refinancing replaced the 9 1/2% senior subordinated notes with debt at
significantly more favorable interest rates and resulted in lower rates on the
bank loans. In connection with the refinancing, deferred debt issuance costs on
the 9 1/2% notes and former bank debt were written off; the issuance costs
incurred upon refinancing resulted in a lower monthly amortization expense.
Finally, the dramatic decreases in market-driven interest rates over the course
of 2001 contributed to the overall decrease in Apria's interest expense. See
"Long-Term Debt."
INCOME TAXES. Income taxes for the three months ended March 31, 2002 and in
the corresponding period of 2001, have been provided at the effective tax rates
expected to be applicable for the respective year.
At December 31, 2001, Apria had federal net operating loss carryforwards of
approximately $89 million, expiring in varying amounts in the years 2003 through
2018 and various state operating loss carryforwards that began to expire in
1997. Additionally, the company has an alternative minimum tax credit
carryforward of approximately $7.6 million. As a result of an ownership change
in 1992 that 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 operating loss carryforwards may expire unused. The net
operating loss carryforward amount in the related deferred tax asset excludes
such amount. In 2002, for federal tax purposes, the company expects to utilize
its entire net operating loss carryforward not subject to limitation.
LIQUIDITY AND CAPITAL RESOURCES
Apria's principal source of liquidity is its operating cash flow, which is
supplemented by a $100 million revolving credit facility. Apria's ability to
generate operating cash flows in excess of its operating needs has afforded it
the ability, among other things, to pursue its acquisition strategy and fund
patient service equipment expenditures to support revenue growth. Apria's
management believes that its operating cash flow and revolving credit line will
continue to be sufficient to fund its operations and growth strategies. However,
sustaining the current cash flow levels is dependent on many factors, some of
which are not within Apria's control, such as government reimbursement levels
and the financial health of its payors.
CASH FLOW. Cash provided by operating activities was $41.3 million in the
first quarter of 2002 and $48.5 million in the first quarter of 2001. The
increase between periods in net income (before items not requiring cash) was
offset by the increase in accounts receivable and increases in payments against
accounts payable and other expense accruals.
Cash used in investing activities was $30.3 million in the first three
months of 2002, compared to $55.3 million in the corresponding period last year.
The decrease in cash used is directly attributable to the difference in
acquisition activity between the periods.
Cash used in financing activities was $12.9 million in the first quarter of
2002 versus $1.3 million provided by financing activities in the first quarter
of 2001. The difference is mainly due to the stock repurchases effected in the
2002 period and the net increase in the revolving credit line. See "Treasury
Stock."
CONTRACTUAL CASH OBLIGATIONS. The following table summarizes Apria's long
term cash payment obligations to which the company is contractually bound (the
years presented below represent twelve-month rolling periods from the date of
this report):
(DOLLARS IN MILLIONS) YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6+ TOTALS
------------------------------------------------------------------------------------------------------------------
Term loans.............................. $ 19 $ 26 $ 28 $ 29 $ 98 $ 83 $283
Revolving loans......................... - - - - 19 - 19
Capitalized lease obligations........... 2 1 1 - - - 4
Operating leases........................ 52 43 34 27 17 21 194
Deferred acquisition payments........... 3 - - - - - 3
---- ---- ---- ---- ---- ---- ----
$ 76 $ 70 $ 63 $ 56 $134 $104 $503
==== ==== ==== ==== ==== ==== ====
Total contractual cash obligations.
ACCOUNTS RECEIVABLE. Accounts receivable before allowance for doubtful
accounts increased by $14.5 million during the first quarter of 2002, which is
attributable to the revenue increase, fourth quarter acquisitions and certain
factors inherent in the start of a new year. 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) were 52 at
March 31, 2002, compared to 50 at December 31, 2001. See "Provision for Doubtful
Accounts."
Evaluation of Net Realizable Value. Management performs various analyses to
evaluate accounts receivable balances to ensure that recorded amounts reflect
estimated net realizable value. Management applies specified percentages to the
accounts receivable aging to estimate the amount that will ultimately be
uncollectible and therefore should be reserved. The percentages are increased as
the accounts age; accounts aged in excess of 360 days are reserved at 100%.
Management establishes and monitors these percentages through extensive analyses
of historical realization data, accounts receivable aging trends, other
operating trends, the extent of contracted business and business combinations.
Also considered are relevant business conditions such as governmental and
managed care payor claims processing procedures and system changes. If indicated
by such analyses, management may periodically adjust the uncollectible estimate
and corresponding percentages. Further, focused reviews of certain large and/or
problematic payors are performed to determine if additional reserves are
necessary.
Unbilled Receivables. Included in accounts receivable are earned but
unbilled receivables of $30.4 million and $26.9 million at March 31, 2002 and
December 31, 2001, respectively. Delays, ranging from a day up to several weeks,
between the date of service and billing can occur due to delays in obtaining
certain required payor-specific documentation from internal and external
sources. Earned but unbilled receivables are aged from date of service and are
considered in Apria's analysis of net realizable value. The increase during the
first quarter of 2002 is largely due to acquisitions effected late in 2001. The
time-consuming processes of converting patient files onto Apria's systems and
obtaining provider numbers from government payors routinely delay billing of the
newly acquired business.
INVENTORIES AND PATIENT SERVICE EQUIPMENT. Inventories consist primarily of
pharmaceuticals and disposable articles used in conjunction with patient service
equipment. Patient service equipment consists of respiratory and home medical
equipment that is provided to in-home patients for the course of their care plan
and subsequently returned to Apria for reuse. Continued revenue growth is
directly dependent on Apria's ability to fund its inventory and patient service
equipment requirements.
LONG-TERM DEBT. Apria has a $400 million senior secured credit agreement
with a syndicate of lenders led by Bank of America, N.A. The credit agreement
consists of a $100 million five-year revolving credit facility, a $125 million
five-year term loan and a $175 million six-year term loan. The $125 million term
loan is repayable in 20 consecutive quarterly installments of $5.5 million to $7
million each. The $175 million term loan is repayable in 20 consecutive
quarterly installments of $437,500 each, followed by three consecutive quarterly
installments of $41.6 million each, and a final payment of $41.5 million due on
July 20, 2007. In December 2001, the company made a voluntary prepayment of $11
million, which was applied against future scheduled quarterly payments,
effectively eliminating any payment requirements on the five-year term loan
until September 2002.
On March 31, 2002, total borrowings under the credit agreement were $301.5
million, which included $18.9 million in borrowings on the revolving credit
facility. Outstanding letters of credit totaled $1.0 million and credit
available under the revolving facility was $80.1 million. At March 31, 2002, the
company was in compliance with all of the financial covenants required by the
credit agreement.
Hedging Activities. Apria is exposed to interest rate fluctuations on its
underlying variable rate long-term debt. Apria's policy for managing interest
rate risk is to evaluate and monitor all available relevant information,
including but not limited to, the structure of its interest-bearing assets and
liabilities, historical interest rate trends and interest rate forecasts
published by major financial institutions. The tools Apria may utilize to
moderate its exposure to fluctuations in the relevant interest rate indices
include, but are not limited to: (1) strategic determination of repricing
periods and related principal amounts, and (2) derivative financial instruments
such as interest rate swap agreements, caps or collars. Apria does not use
derivative financial instruments for trading or other speculative purposes.
Apria has two interest rate swap agreements with a total notional amount of
$100 million that fix its LIBOR-based variable rate debt at 2.58% (before the
applicable margin). The swap agreements terminate March 2003. The swaps are
being accounted for as cash flow hedges under SFAS No. 133. Accordingly, the
difference between the interest received and interest paid is reflected as an
adjustment to interest expense. For the first quarter of 2002, Apria paid a net
settlement amount of $153,000. At March 31, 2002, the swap agreements are
reflected in the accompanying balance sheet in other assets at their fair value
of $410,000. Unrealized gains on the fair value of the swap agreements are
reflected, net of taxes, in other comprehensive income.
Apria does not anticipate losses due to counterparty nonperformance as its
counterparty to the swap agreements is a nationally-recognized financial
institution with a strong credit rating.
TREASURY STOCK. In February 2002, Apria announced a plan to repurchase up
to $35 million of outstanding common stock during the first two quarters of
2002. Depending on market conditions and other considerations, repurchases will
be made from time to time in open market transactions. During the first quarter
of 2002, Apria repurchased 999,800 shares for $21.7 million. All repurchased
common shares are being held in treasury. Apria's credit agreement limits common
stock repurchases to $35 million in any fiscal year and $100 million in the
aggregate over the term of the agreement.
BUSINESS COMBINATIONS. Pursuant to one of its primary growth strategies,
Apria periodically acquires complementary businesses in specific geographic
markets. These 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 dates of acquisition. Effective with the adoption of SFAS
No. 142, goodwill is no longer being amortized. Covenants not to compete are
being amortized over the life of the respective agreements.
The aggregate consideration for acquisitions that closed during the first
quarter of 2002 was $2.7 million. Allocation of this amount includes $2.3
million to goodwill, $103,000 to intangible assets and $273,000 to patient
service equipment. During the first quarter of 2001, the aggregate consideration
for acquisitions was $26.7 million. Cash paid for acquisitions, which includes
amounts deferred from prior year acquisitions, totaled $3.3 million and $25.3
million in the first quarters of 2002 and 2001, respectively.
The success of Apria's acquisition strategy is directly dependent on
Apria's ability to maintain and/or generate sufficient liquidity to fund such
purchases.
FEDERAL INVESTIGATIONS. As previously reported, since mid-1998 Apria has
been the subject of investigations conducted by several U.S. Attorneys' offices
and the U.S. Department of Health and Human Services. These investigations
concern the documentation supporting Apria's billing for services provided to
patients whose healthcare costs are paid by Medicare and other federal programs.
Apria is cooperating with the government in connection with these investigations
and is responding to various document requests and subpoenas. A criminal
investigation conducted by the U.S. Attorney's office in Sacramento was closed
in mid-1999 with no charges being filed. Potential claims resulting from an
investigation by the U.S. Attorney's office in San Diego were settled in
mid-2001 in exchange for a payment by Apria of $95,000.
Apria has been informed by the U.S. Attorney's office in Los Angeles that
the investigation being conducted by that office is the result of civil qui tam
litigation filed on behalf of the government against Apria. The complaints in
the litigation are under seal, however, and the government has not informed
Apria of either the identities of the plaintiffs, the court or courts where the
proceedings are pending, the date or dates instituted or the factual bases
alleged to underlie the proceedings. To date, the U.S. Attorney's office has not
informed Apria of any decision to intervene in the qui tam actions; however, it
could reach a decision with respect to intervention at any time.
On July 12, 2001, government representatives and counsel for the plaintiffs
in the qui tam actions asserted that, by a process of extrapolation from a
sample of 300 patient files to all of Apria's billings to the federal government
during the three-and-one-half year sample period, Apria could be liable to the
government under the False Claims Act for more than $9 billion, consisting of
extrapolated overpayment liability, plus treble damages and penalties of up to
$10,000 for each allegedly false claim derived from the extrapolation.
Apria has acknowledged that there may be errors and omissions in supporting
documentation affecting a portion of its billings. However, it considers the
assertions and amounts described in the preceding paragraph to be unsupported
both legally and factually and believes that most of the alleged documentation
errors and omissions should not give rise to any liability, for overpayment
refunds or otherwise. Accordingly, Apria believes that the claims asserted are
unwarranted and that it is in a position to assert numerous meritorious
defenses. Nevertheless, Apria cannot provide any assurances as to the outcome of
these proceedings. Management cannot estimate the possible loss or range of loss
that may result from these proceedings and therefore has not recorded any
related accruals.
If a judge, jury or administrative agency were to determine that false
claims were submitted to federal healthcare programs or that there were
significant overpayments by the government, Apria could face civil and
administrative claims for refunds, sanctions and penalties for amounts that
would be highly material to its business, results of operations and financial
condition, including the exclusion of Apria from participation in federal
healthcare programs.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Apria is exposed to interest rate fluctuations on its underlying variable
rate long-term debt. Apria utilizes interest rate swap agreements to moderate
such exposure. Apria does not use derivative financial instruments for trading
or other speculative purposes.
At March 31, 2002, Apria's term loan borrowings totaled $283 million. The
bank credit agreement governing the term loans provides interest rate options
based on the following indices: Federal Funds Rate, Prime Rate or LIBOR. All
such interest rate options are subject to the application of an interest margin
as specified in the bank credit agreement. At March 31, 2002, all of Apria's
outstanding term debt was tied to LIBOR. Apria has two interest rate swap
agreements with a total notional amount of $100 million that fix its LIBOR-based
debt at 2.58% (before application of the interest margin). Both agreements
expire March 2003.
Based on the term debt outstanding and the swap agreements in place at
March 31, 2002, a 100 basis point change in LIBOR would increase or decrease
Apria's annual cash flow and pretax earnings by approximately $1.8 million.
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. The
consolidated amended class action 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 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 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.
Following a series of settlement discussions, the parties reached
in early 2002 a tentative agreement to settle both the consolidated
federal and state class actions described above for a total of $42
million. Under the terms of the settlement, Apria has paid $1
million and its insurance carriers have paid $41 million into a
settlement escrow account. Apria has also agreed to provide various
indemnities to certain current and former Apria officers and
directors who would be entitled to receive such indemnification
under applicable law. The parties are in the process of putting
into place the final documentation of the settlement. Apria cannot
provide any assurances that all of the agreements necessary to
finalize the settlement will be obtained or that the Court
ultimately will approve the settlement as reasonable and fair to
the settlement class. However, in the opinion of Apria's
management, the ultimate disposition of these class actions will
not have a material adverse effect on Apria's results of operations
or financial condition.
Apria and its former Chief Executive Officer are also defendants in
a class action lawsuit, J.E.B. Capital Partners, LP v. Apria
Healthcare Group Inc. and Philip L. Carter, filed on August 27,
2001 in the U.S. District Court for the Central District of
California, Southern Division (Case No. SACV01-813 GLT). Among
other things, the operative complaint alleges that the defendants
made false and/or misleading public statements by not announcing
until July 16, 2001 the amount of potential damages asserted by the
U.S Attorney's office in Los Angeles and counsel for the plaintiffs
in the qui tam actions referred to below. Apria believes that it
has meritorious defenses to the plaintiff's claims and it intends
to vigorously defend itself. In the opinion of Apria's management,
the ultimate disposition of this class action will not have a
material adverse effect on Apria's results of operations or
financial condition.
As previously reported, since mid-1998 Apria has been the subject
of investigations conducted by several U.S. Attorneys' offices and
the U.S. Department of Health and Human Services. These
investigations concern the documentation supporting Apria's billing
for services provided to patients whose healthcare costs are paid
by Medicare and other federal programs. Apria is cooperating with
the government in connection with these investigations and is
responding to various document requests and subpoenas. A criminal
investigation conducted by the U.S. Attorney's office in Sacramento
was closed in mid-1999 with no charges being filed. Potential
claims resulting from an investigation by the U.S. Attorney's
office in San Diego were settled in mid-2001 in exchange for a
payment by Apria of $95,000.
Apria has been informed by the U.S. Attorney's office in Los
Angeles that the investigation being conducted by that office is
the result of civil qui tam litigation filed on behalf of the
government against Apria. The complaints in the litigation are
under seal, however, and the government has not informed Apria of
either the identities of the plaintiffs, the court or courts where
the proceedings are pending, the date or dates instituted or the
factual bases alleged to underlie the proceedings. To date, the
U.S. Attorney's office has not informed Apria of any decision to
intervene in the qui tam actions; however, it could reach a
decision with respect to intervention at any time.
On July 12, 2001, government representatives and counsel for the
plaintiffs in the qui tam actions asserted that, by a process of
extrapolation from a sample of 300 patient files to all of Apria's
billings to the federal government during the three-and-one-half
year sample period, Apria could be liable to the government under
the False Claims Act for more than $9 billion, consisting of
extrapolated overpayment liability, plus treble damages and
penalties of up to $10,000 for each allegedly false claim derived
from the extrapolation.
Apria has acknowledged that there may be errors and omissions in
supporting documentation affecting a portion of its billings.
However, it considers the assertions and amounts described in the
preceding paragraph to be unsupported both legally and factually
and believes that most of the alleged documentation errors and
omissions should not give rise to any liability, for overpayment
refunds or otherwise. Accordingly, Apria believes that the claims
asserted are unwarranted and that it is in a position to assert
numerous meritorious defenses. Nevertheless, Apria cannot provide
any assurances as to the outcome of these proceedings. Management
cannot estimate the possible loss or range of loss that may result
from these proceedings and therefore has not recorded any related
accruals.
If a judge, jury or administrative agency were to determine that
false claims were submitted to federal healthcare programs or that
there were significant overpayments by the government, Apria could
face civil and administrative claims for refunds, sanctions and
penalties for amounts that would be highly material to its
business, results of operations and financial condition, including
the exclusion of Apria from participation in federal healthcare
programs.
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 Apria'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
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10.1 Employment Agreement effective April 4, 2002 between
Registrant and Lawrence A. Mastrovich.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which
this report is filed.
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.
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Registrant
May 15, 2002 /s/ JAMES E. BAKER
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James E. Baker
Chief Financial Officer
(Principal Financial and Accounting Officer)