UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-14316
APRIA HEALTHCARE GROUP INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 33-0488566
(State of incorporation) (I.R.S. Employer Identification Number)
26220 ENTERPRISE COURT, LAKE FOREST, CA 92630-8405
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (949) 639-2000
Securities registered pursuant to Section 12(b) of the Act:
COMMON STOCK, $0.001 PAR VALUE PER SHARE
(Title of class)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No
--- ---
As of June 28, 2002, there were outstanding 54,876,118 shares of the
Registrant's common stock, par value $0.001, which is the only class of common
stock of the Registrant (not including 1,090,900 shares held in treasury). As of
June 28, 2002 the aggregate market value of the shares of common stock held by
non-affiliates of the Registrant, computed based on the closing sale price of
$22.40 per share as reported by the New York Stock Exchange, was approximately
$1,098,440,291.
DOCUMENTS INCORPORATED BY REFERENCE: None
PART I
ITEM 1. BUSINESS
Apria Healthcare Group Inc. provides a broad range of home healthcare
services through approximately 410 branch locations which serve patients in all
50 states. Apria has three major service lines: home respiratory therapy, home
infusion therapy and home medical equipment. The following table provides
examples of the services and products in each:
SERVICE LINE EXAMPLES OF SERVICES AND PRODUCTS
------------ --------------------------------
Home respiratory therapy Provision of oxygen systems, home ventilators,
sleep apnea equipment, nebulizers and
respiratory medications and related services
Home infusion therapy Intravenous administration of anti-infectives,
pain management, chemotherapy, nutrients (also
administered through a feeding tube) and other
medications and related services
Home medical equipment Provision of patient safety items, and
ambulatory and in-home equipment, such as
wheelchairs and hospital beds
STRATEGY
Apria is pursuing an operating strategy to increase its market share and
improve its profitability. Key elements of this strategy are as follows:
MAINTAIN FOCUS ON EXISTING SERVICE OFFERINGS. Apria continues to focus on
growth in its core businesses of home respiratory therapy, home infusion therapy
and home medical equipment. Offering all three services gives Apria a
competitive advantage with its managed care, hospital and certain physician
customers and enables it to maintain a diversified revenue base. Apria continues
its emphasis on growth in the home respiratory therapy line, which historically
has produced higher gross margins than the other service lines.
SUPPLEMENT INTERNAL GROWTH WITH SELECTIVE ACQUISITIONS. Apria continues to
pursue strategically complementary acquisition opportunities, also with an
emphasis on home respiratory therapy businesses. Apria operates in a highly
fragmented market, which provides an attractive opportunity to drive growth
through acquisitions. During 2002, Apria completed 17 acquisitions comprised
largely of respiratory therapy businesses for an aggregate consideration of
$78.3 million.
REDUCE COSTS AND INCREASE MARGINS AND CASH FLOWS. Apria's management team
continues to develop and apply "best practices" and productivity improvement
programs throughout the company with the aim of achieving greater
standardization and enhanced productivity. Success with such programs has
resulted in reduced costs and increased margins and cash flow. Apria has
implemented standardized clinical and delivery models, billing and collection
practices and common operating procedures in its field locations and has
centralized purchasing for inventory, patient service equipment and supplies.
Apria continues to focus resources on identifying opportunities for further
productivity improvements.
SERVICE LINES
In each of its three service lines, Apria provides patients with a variety
of clinical and ancillary services, as well as related products and supplies,
most of which are prescribed by a physician as part of a care plan. These
services include:
- providing in-home respiratory care, infusion and respiratory pharmacy
management and high-tech infusion nursing;
- educating patients and their caregivers about illnesses and instructing
them on self-care and the proper use of products in the home;
- monitoring patients' individualized treatment plans;
- reporting patient progress and status to the physician and/or managed
care organization;
- maintaining and repairing equipment; and
- processing claims to third-party payors.
The following table sets forth a summary of net revenues by service line,
expressed as percentages of total net revenues:
YEAR ENDED DECEMBER 31,
-------------------------------
2002 2001 2000
-------------------------------------------------------------------------------
Home respiratory therapy.............. 67% 66% 65%
Home infusion therapy................. 18% 19% 19%
Home medical equipment/other.......... 15% 15% 16%
---- ---- ----
Total net revenues.............. 100% 100% 100%
==== ==== ====
HOME RESPIRATORY THERAPY. Apria provides home respiratory therapy services
to patients with a variety of conditions, including:
- chronic obstructive pulmonary diseases such as emphysema, chronic
bronchitis and asthma;
- nervous system-related respiratory conditions such as Lou Gehrig's
disease and quadriplegia;
- obstructive sleep apnea;
- congestive heart failure; and
- lung cancer.
Apria employs a nationwide clinical staff of respiratory care professionals to
provide support to its home respiratory therapy patients under
physician-directed treatment plans and Apria's proprietary acuity program.
Apria derives approximately 70% of its respiratory therapy revenues from
the provision of oxygen systems, home ventilators, nebulizers and home-delivered
respiratory medications. The company derives most of its remaining respiratory
revenues from the provision of:
- infant apnea monitors;
- continuous positive airway pressure devices; and
- noninvasive positive pressure ventilation.
HOME INFUSION THERAPY. Home infusion therapy involves the administration of
a drug or nutrient directly into the body intravenously through a needle or a
catheter. Examples of such therapies include:
- total parenteral (intravenous) nutrition;
- anti-infective and anti-fungal medications;
- chemotherapy; and
- pain management.
The home infusion therapy service line also includes enteral nutrition, which is
the administration of nutrients directly into the gastrointestinal tract through
a feeding tube.
Depending on the therapy, a broad range of venous access devices and pump
technologies may be used to facilitate homecare and patient independence. Apria
employs licensed pharmacists and registered high-tech infusion nurses who have
specialized skills in the delivery of home infusion therapy. They are available
to respond to emergencies and questions regarding therapy and to provide
training and education to the patient and caregiver. Other support services
include patient service, supply replenishment, pump management, preventive
maintenance, direct billing of Medicare, Medicaid and other payors, assistance
with insurance questions and outcome reporting. Apria currently operates 31
internal pharmacy locations to serve its home infusion patients.
HOME MEDICAL EQUIPMENT/OTHER. Apria's primary emphasis in the home medical
equipment service line is on the provision of patient safety items, ambulatory
devices and in-home equipment. The company is also expanding its rehabilitation
product offering in selective markets in the United States. Apria's integrated
service approach allows patients, hospital and physician referral sources and
managed care systems accessing either respiratory or infusion therapy services
to also access needed home medical equipment through a single source.
As Apria's managed care organization customer base has grown, Apria
management has recognized the need to expand its ability to provide value-added
services to these customers. Rather than provide certain non-core services
directly, Apria sometimes aligns itself with other segment leaders, such as home
health nursing organizations and providers of home-delivered routine medical
supplies, through formal relationships or ancillary networks. Such networks must
be credentialed and qualified by Apria's clinical services department.
ORGANIZATION AND OPERATIONS
ORGANIZATION. Apria's approximately 410 branch locations are organized into
four geographic divisions, which are further divided into 16 geographic regions.
Each of the regions is operated as a separate business unit and consists of a
number of branches and a regional office. The regional office provides each of
its branches with key support services such as billing, purchasing, equipment
maintenance, repair and warehousing. The branch delivers home healthcare
products and services to patients in their homes and other care sites through
the company's delivery fleet, qualified delivery professionals and clinical
employees. This structure is designed to create operating efficiencies
associated with centralized services while promoting responsiveness to local
market needs.
Even though Apria generally operates its regions as separate business
units, the company's sales and business operations functions are vertically
integrated. The operations function is then further divided into revenue
management, clinical services, logistics, regulatory compliance and acquisition
integration. Through this structure, all functions are performed at the region
level and have direct reporting and accountability to corporate headquarters.
Apria believes that this structure provides control over and consistency among
its regions and branches thereby enabling implementation of standardized
policies and procedures and eliminating many of the problems inherent with a
decentralized network.
CORPORATE COMPLIANCE. As a leader in the home healthcare industry, Apria
has implemented a compliance program to further the company's commitment to
providing quality home healthcare services and products while maintaining high
standards of ethical and legal conduct. Apria believes that operating its
business with honesty and integrity is essential. Apria's Corporate Compliance
Program includes a written Code of Ethical Business Conduct that employees
receive as part of their initial orientation process. The program is designed to
accomplish the goals described above through employee education, a confidential
disclosure program, written policy guidelines, periodic reviews, frequent
reinforcement, compliance audits, a formal disciplinary component and other
programs. Compliance oversight is provided by a Corporate Compliance Committee
of the company's Board of Directors which meets quarterly in conjunction with
Apria's internal Corporate Compliance Committee consisting of senior and
mid-level management personnel from various functional disciplines. See
"Business - Risk Factors - Federal Investigation."
OPERATING SYSTEMS AND CONTROLS. Apria's business is dependent, to a
substantial degree, upon the quality of its operating and field information
systems for proper contract administration, accurate order entry and pricing,
billing and collections, as well as inventory and patient service equipment
management. These systems provide reporting that enables management to
effectively monitor and evaluate contract profitability. Apria's information
services department works closely with all of the corporate departments to
ensure that Apria's systems are compliant with government regulations and payor
requirements and to support their business improvement initiatives with
technological solutions. The following are some of the more significant projects
currently underway:
- Apria has developed the functionality that enables the infusion therapy
business to operate on the same computer information system or
"platform" as the respiratory therapy/home medical equipment business.
Previously, the infusion therapy application operated on a separate
platform which had limited support. The new functionality has been
integrated in four regions; the company-wide rollout is expected to be
complete by the end of 2003.
- Apria completed the implementation and integration of supply chain
management software during 2002. Apria is currently working on the
second phase of this project, which is the implementation of production
and distribution planning software to gain further efficiencies in the
delivery of products to patients. Implementation of the production and
distribution planning software is expected to begin mid-year 2003.
- Over the last few years Apria has been consolidating the respiratory
therapy/home medical equipment system processing from field-based
servers to centralized processors. Thus far, this process has reduced
the number of IBM AS400 data servers at field locations from 175 to 12.
To mitigate the risks associated with such a centralization, Apria has
implemented a "hot site" that mirrors the corporate data site at a
separate location that would serve as a backup in case of a disaster or
other equipment failure.
- The Health Insurance Portability and Accountability Act of 1996
("HIPAA") contains standardization provisions that apply to health
information created or maintained by healthcare providers who engage in
certain electronic transactions. Electronically-performed functions
common to healthcare businesses such as billing, reimbursement and
insurance eligibility verification are subject to the HIPAA
standardization rules. The standardization rules require, among other
things, the use of specific file formats and transaction codes for
electronic transmissions between healthcare business affiliates. Apria's
management has committed substantial resources to the implementation of
the standardization rules and expects to complete the process on or
before the October 16, 2003 government-imposed deadline. See "Business -
Government Regulation - HIPAA."
Management believes that the implementation of these changes will improve
its systems. Nonetheless, such implementations could have a disruptive effect on
related transaction processing. See "Business - Risk Factors - Operating Systems
and Controls."
Apria has established performance indicators which measure operating
results against expected thresholds for the purpose of allowing all levels of
management to identify and modify areas requiring improvement and to monitor
progress. Operating models with strategic targets have been developed to move
Apria toward more effectively managing the sales, customer service, accounts
receivable, clinical and distribution areas of its business. Apria's management
team is compensated using performance-based incentives focused on quality
revenue growth and improvement in operating income.
PAYORS. Apria derives substantially all its revenues from third-party
payors, including private insurers, managed care organizations, Medicare and
Medicaid. For 2002, approximately 27% of Apria's net revenues were derived from
Medicare and 7% from Medicaid. Generally, each third-party payor has specific
claims requirements. Apria has policies and procedures in place to manage the
claims submission process, including verification procedures to facilitate
complete and accurate documentation.
RECEIVABLES MANAGEMENT. Apria operates in an environment with complex
requirements governing billing and reimbursement for its products and services.
Initiatives focused specifically on receivables management such as system
enhancements, process refinements and organizational changes have resulted in
improvement and consistency in key accounts receivable indicators.
Apria is utilizing its information systems expertise to increase
utilization of technology such as electronic claims submission and electronic
funds transfer with managed care organizations. This can expedite claims
processing and reduce the administrative cost associated with this activity for
both Apria and its customer/payors. Management is also focusing resources on
certain large third-party payors to develop internal expertise with the payors'
unique reimbursement requirements, thereby reducing subsequent denials and
shortening the related collection periods. See "Legal Proceedings."
MARKETING
Through its field sales force, Apria markets its services primarily to
managed care organizations, physicians, hospitals, medical groups, home health
agencies and case managers. Apria has developed and put into practice several
marketing initiatives, including but not limited to:
AUTOMATED CALL ROUTING THROUGH A SINGLE TOLL-FREE NUMBER. This marketing
initiative allows select managed care organizations to reach any of Apria's
locations and to access the full range of Apria services through a single
central telephone number: 1-800-APRIA-88.
ACCREDITATION BY THE JOINT COMMISSION ON ACCREDITATION OF HEALTHCARE
ORGANIZATIONS ("JCAHO"). JCAHO is a nationally recognized organization which
develops standards for various healthcare industry segments and monitors
compliance with those standards through voluntary surveys of participating
providers. As the home healthcare industry has grown, the need for objective
quality measurements has increased. Accreditation by JCAHO entails a lengthy
review process that is conducted every three years. Accreditation is widely
considered a prerequisite for entering into contracts with managed care
organizations at every level. Because accreditation is expensive and time
consuming, not all providers choose to undergo the process. Due to its
leadership role in establishing quality standards for home healthcare and its
active and early participation in this process, Apria management believes the
company is generally viewed favorably by referring healthcare professionals. All
of Apria's branch locations, including acquired locations, are accredited by or
in the process of receiving accreditation from JCAHO. Apria's most recent
triennial survey cycle began in January 2003 with a successful corporate survey
outcome and is anticipated to be concluded by mid-year 2004.
ESSENTIAL CARE MODEL ("ECM"). Apria has developed the ECM, a proprietary
model that defines the services, supplies and products delivered in conjunction
with prescribed homecare equipment and therapies. The ECM is used to establish
consistent and clear expectations for referral sources, payors and patients.
PHYSICIAN RELATIONS. Apria's physician relations group places phone calls
to physician offices in an effort to educate them about homecare and to
stimulate interest in Apria. Physician relations representatives work closely
with sales professionals throughout the country to identify, develop and
maintain quality relationships.
PATIENT SATISFACTION. Apria has a centralized patient satisfaction survey
function that periodically conducts targeted member satisfaction studies for key
managed care organizations as specified by the various contractual arrangements.
APRIA GREAT ESCAPES(TM) TRAVEL PROGRAM. Apria's 410-branch network
facilitates travel for patients who require oxygen, home infusion or other
products, services and therapies. Apria coordinates equipment and service needs
for thousands of traveling patients annually, which enhances their mobility and
quality of life.
SALES
Apria employs over 500 sales professionals whose primary responsibility is
to target key customers for all of its service lines. Key customers include but
are not limited to hospital-based healthcare professionals, physicians and their
staffs and managed care organizations. Apria provides its sales professionals
with the necessary clinical and technical training to represent Apria's major
service offerings of home respiratory therapy, home infusion therapy and home
medical equipment. As larger segments of the marketplace become involved with
managed care, specific portions of the sales force's working knowledge of
pricing, contracting and negotiating, and specialty-care management programs are
being enhanced as well.
An integral component of Apria's overall sales strategy is to increase
volume through managed care organizations and traditional referral channels. As
the markets that Apria serves continue to evolve, the ultimate decision makers
for healthcare services vary greatly, from closed model managed care
organizations to preferred provider networks which are controlled by more
traditional means. Apria's selling structure and strategies are driven largely
by these changing market factors and will continue to adjust as further changes
in the industry occur. Managed care organizations continue to represent a
significant portion of Apria's business in several of its primary metropolitan
markets. No single account, however, represented more than 10% of Apria's total
net revenues for 2002. Among its more significant managed care agreements, Apria
has contracts with Aetna, Gentiva's CareCentrix group, Kaiser Health Plans and
United HealthCare Group. Apria also offers discount agreements and various
fee-for-service arrangements to hospitals or hospital systems whose patients
have home healthcare needs. See "Business - Risk Factors - Pricing Pressures."
COMPETITION
The segment of the healthcare market in which Apria operates is highly
competitive. In each of its service lines there are a limited number of national
providers and numerous regional and local providers. The competitive factors
most important in the regional and local markets are:
- reputation with referral sources, including local physicians and
hospital-based professionals;
- access and responsiveness;
- price of services;
- overall ease of doing business;
- quality of patient care and associated services; and
- range of home healthcare services.
The competitive factors most important in the larger, national markets are the
foregoing factors and:
- ability to service a wide geographic area;
- ability to develop and maintain contractual relationships with managed
care organizations;
- access to capital; and
- accreditation by JCAHO.
It is increasingly important to be able to integrate a broad range of home
healthcare services to provide customers access through a single source. Apria
believes that it competes effectively in each of its service lines with respect
to all of the above factors and that it has an established record as a quality
provider of home respiratory therapy, home medical equipment and home infusion
therapy as reflected by JCAHO accreditation of Apria's branches.
Other types of healthcare providers, including industrial gas
manufacturers, individual hospitals and hospital systems, home health agencies
and health maintenance organizations have entered, and may continue to enter the
market to compete with Apria's various service lines. Depending on their
individual situations, it is possible that Apria's competitors may have, or may
obtain, significantly greater financial and marketing resources than Apria. See
"Business - Risk Factors - Pricing Pressures."
GOVERNMENT REGULATION
Apria is subject to extensive government regulation, including numerous
laws directed at preventing fraud and abuse and laws regulating reimbursement
under various governmental programs, as more fully described below. Apria
maintains several programs designed to minimize the likelihood that it would
engage in conduct or enter into contracts in violation of the fraud and abuse
laws. Contracts of the types subject to these laws are reviewed and approved by
the corporate contract services and/or legal department personnel. Apria also
maintains various educational programs designed to keep its managers updated and
informed on developments with respect to the fraud and abuse laws and to remind
all employees of Apria's policy of strict compliance in this area. While Apria
believes its discount agreements, billing contracts and various fee-for-service
arrangements with other healthcare providers comply with applicable laws and
regulations, Apria cannot provide any assurance that further administrative or
judicial interpretations of existing laws or legislative enactment of new laws
will not have a material adverse effect on Apria's business.
MEDICARE AND MEDICAID REIMBURSEMENT. As part of the Social Security
Amendments of 1965, Congress enacted the Medicare program which provides for
hospital, physician and other statutorily-defined health benefits for qualified
individuals such as persons over 65 and the disabled. The Medicaid program, also
established by Congress in 1965, is a joint federal and state program that
provides certain statutorily-defined health benefits to financially needy
individuals who are blind, disabled, aged or members of families with dependent
children. In addition, Medicaid generally covers financially needy children,
refugees and pregnant women. A substantial portion of Apria's revenue is
attributable to payments received from third-party payors, including the
Medicare and Medicaid programs. In 2002, approximately 27% of Apria's net
revenue was derived from Medicare and 7% from Medicaid.
Medicare Legislation. The Balanced Budget Act of 1997 contained several
provisions that have affected Apria's Medicare reimbursement levels. Subsequent
legislation - the Medicare Balanced Budget Refinement Act of 1999 and the
Medicare, Medicaid and SCHIP Benefits Improvement and Protection Act of 2000 -
mitigated some of the effects of the original legislation. However, there are
some pending issues that may further impact Medicare reimbursement to Apria in
the future.
The Balanced Budget Act of 1997 granted streamlined authority to the
Secretary of the U.S. Department of Health and Human Services ("HHS") to
increase or reduce the reimbursement for home medical equipment, including
oxygen, by up to 15% each year under an inherent reasonableness authority. In
December 2002, the Centers for Medicare and Medicaid Services ("CMS") issued an
interim final rule that establishes a process by which such adjustments may be
made. The rule applies to virtually all Medicare Part B services provided by
Apria.
Further, the Balanced Budget Act of 1997 mandated that CMS conduct up to
five competitive bidding market demonstrations for Medicare Part B-covered items
and services. CMS conducted demonstration projects in Polk County, Florida and
San Antonio, Texas. These demonstration projects have been completed. The
demonstrations could provide CMS and Congress with a model for implementing
competitive pricing in all Medicare programs. Initial reports from government
agencies allege cost savings that vary by product line, but the reports do not
include costs incurred by the government to administer the program. If such a
competitive bidding system were implemented, it could result in lower
reimbursement rates, exclude certain items and services from coverage or impose
limits on increases in reimbursement rates. Although not included in the
President's budget, the administration may seek authority to implement
nationwide competitive bidding for all Medicare Part B products and services
other than physicians' services. There are members of Congress who support
legislation to create a national competitive bidding system for durable medical
equipment. The homecare industry is currently working with members of Congress
and the administration to ensure that the negative impact of competitive bidding
on patient choice, small businesses, the economy and other aspects are fully
understood. The industry is also working with the same groups to ensure that the
total costs for the government to establish an infrastructure to administer such
a complicated program as has been proposed are studied and quantified in detail.
It is not clear under what timeframe the government will conduct such analyses,
or whether such initiatives will move ahead.
During 2000, the Secretary of HHS wrote to the durable medical equipment
regional carriers and recommended, but did not mandate, that Medicare and
Medicaid claims processors base their payments for covered outpatient drugs and
biologicals on pricing schedules other than the normally calculated Average
Wholesale Prices, which historically has been the industry's basis for drug
reimbursement. The suggested alternative pricing methodology was offered in an
effort to reduce reimbursement levels for certain drugs to more closely
approximate a provider's acquisition cost, but it would not have covered the
costs that homecare pharmacies incur to prepare, deliver or administer the drugs
to patients. Clinical services, billing, collection and other overhead costs
also would not have been considered. Under current government reimbursement
schedules, these costs are not clearly defined but are implicitly covered within
the reimbursement for the drug. The healthcare industry has taken issue with
HHS's approach for several reasons, but primarily because it fails to consider
the accompanying costs of delivering and administering these types of drug
therapies to patients in their homes. Further, if providers choose to
discontinue providing these drugs due to inadequate reimbursement, patient
access to homecare may be jeopardized. The Medicare, Medicaid and SCHIP Benefits
Improvement and Protection Act of 2000 provided for a moratorium on decreasing
the payment rates in effect as of January 1, 2001, for drugs and biologicals
under the current Medicare payment methodology. This legislation also required
the General Accounting Office ("GAO") to conduct a thorough study, by September
2001, of the adequacy of current payments. The GAO was also directed to
recommend revised payment methodologies and report to Congress and the Secretary
of HHS. The study was completed but the authors acknowledged that 1) the limited
scope and deadline associated with the study did not allow for a thorough
analysis of the homecare pharmacy aspects of covered services, 2) legitimate
service components and related costs do exist, and 3) different methods of
determining drug delivery and administration payments may be necessary for
different types of drugs. Currently, the timing and impact of such pricing
methodology revisions are not known. There is interest in Congress in
legislation that would replace Average Wholesale Price as the basis for Medicare
drug reimbursement, but to date there has been no agreement within Congress as
to what the alternative should be.
Some states have already adopted, or are contemplating adopting, some form
of the proposed alternate pricing methodology for certain drugs and biologicals
under the Medicaid program. In at least 20 states, these changes have reduced
the level of reimbursement received by Apria to an unacceptable level without a
corresponding offset or increase to compensate for the service costs incurred.
In several of those states, Apria has elected to stop accepting new Medicaid
patient referrals for the affected drugs. The company is continuing to provide
services to patients already on service, and for those who receive other
Medicaid-covered respiratory, home medical equipment or infusion therapies. As a
percentage of total business, Medicaid represents a very small percentage of
Apria's home infusion and home-delivered respiratory medication revenues.
Claims Audits. Durable medical equipment regional carriers are private
organizations that contract to serve as the federal government's agents for the
processing of claims for items and services provided under Part B of the
Medicare program. These carriers and Medicaid agencies also periodically conduct
pre-payment and post-payment reviews and other audits of claims submitted.
Medicare and Medicaid agents are under increasing pressure to scrutinize
healthcare claims more closely. In addition, the home healthcare industry is
generally characterized by long collection cycles for accounts receivable due to
complex and time-consuming requirements for obtaining reimbursement from private
and governmental third-party payors. Such long collection cycles or reviews
and/or similar audits or investigations of Apria's claims and related
documentation could result in denials of claims for payment submitted by Apria.
Further, the government could demand significant refunds or recoupments of
amounts paid by the government for claims which, upon subsequent investigation,
are determined by the government to be inadequately supported by the required
documentation. See "Business - Risk Factors - Federal Investigation" and
"Business - Risk Factors - Medicare Reimbursement Rates."
HIPAA. The Health Insurance Portability and Accountability Act of 1996
("HIPAA") is comprised of a number of components, several of which are
applicable to Apria. Pursuant to the administrative simplification section of
HIPAA, HHS has issued three sets of regulations governing the following: (i)
standard electronic transaction and code sets; (ii) privacy of individually
identifiable health information; and (iii) electronic security of individually
identifiable health information. Each of these sets of regulations has a
separate compliance date and requires health care providers, including Apria, in
addition to health plans and clearinghouses, to develop and maintain certain
policies and procedures with respect to individually identifiable health
information, also known as protected health information that is used, disclosed
or requested by covered entities subject to HIPAA regulations.
Regulations concerning the enforcement of the above-referenced regulations
have not yet been issued. However, penalties included in the HIPAA statute for
violations of the privacy regulations range from $100 per violation of the
privacy regulations for unintentional disclosures (with a maximum of $25,000 in
penalties for the same type of violation), to $250,000 in fines and 10 years'
imprisonment for intentional disclosures designed for personal or commercial
gain. The Office for Civil Rights has stated publicly that it intends to enforce
the privacy regulations, at least initially, based on complaints filed by the
public as opposed to conducting random audits and reviews.
The standard electronic transaction and code sets regulations will
standardize how health claims and eligibility information is collected, recorded
and processed, and provide for an October 16, 2003 compliance date if a one-year
extension of time was formally requested on or prior to October 15, 2002. Apria
timely filed for and has obtained such an extension. Apria's management is
currently working to ensure that the systems, procedures, policies and the
methods by which the company communicates with health plans and others, as
applicable, will be materially compliant with these regulations by October 16,
2003.
The standard electronic transaction and code sets regulations also mandate
that standardized codes be used for electronic billing purposes by all payors in
the United States, including both government and private health plans.
Historically, certain billing codes used in the homecare industry have varied by
state Medicaid program and certain health plans. Under HIPAA, authority for
approving, modifying, adding or deleting codes lies solely with the Health Care
Procedure Coding System ("HCPCS") panel, operating under the auspices of CMS. It
is primarily the responsibility of healthcare equipment and supply manufacturers
and state Medicaid programs to seek and obtain codes for their respective
products. It is currently unknown whether every existing local code used by
certain Medicaid and private health plans for products provided in the homecare
setting will have a corresponding HCPCS code by October 16, 2003. The absence of
standardized codes for products or services provided by Apria may preclude the
company from submitting electronic billings (or "claims") to certain payors.
Such an outcome would require submitting paper claims, which could ultimately
result in delays and difficulties in collecting these claims. Apria is currently
supporting industry representatives and manufacturers to obtain the necessary
HCPCS codes.
The privacy regulations will provide patients for whom Apria provides
services with greater information and control regarding the company's request
for, and receipt, use and disclosure of patients' protected health information.
The privacy regulations require the development and implementation of detailed
policies, procedures, contracts and forms for this purpose. The privacy
regulations also require entities subject to the HIPAA regulations to
contractually obligate certain of their contractors, who may receive protected
health information during the course of rendering services on behalf of that
entity, to abide by certain privacy requirements. Apria's privacy policies and
practices must also comply with any state law privacy protections that are more
stringent than the privacy afforded by the privacy regulations. The compliance
date for the privacy regulations is April 14, 2003, and Apria's management has
been working diligently to develop and implement the required policies,
procedures and forms necessary to comply materially with such privacy
regulations and applicable laws.
The final security regulations were recently published in the Federal
Register on February 20, 2003, and have a compliance date of April 20, 2005. In
general, the security regulations require covered entities to implement
reasonable technical, physical and administrative security measures to safeguard
protected health information maintained, used and disclosed in electronic form.
While the compliance date for the security regulations is over two years away,
Apria has begun to evaluate its systems, procedures and policies relative to
protected health information security, and expects to modify them as necessary
to comply materially with the security regulations by the applicable compliance
date. The privacy regulations, which become effective April 14, 2003, also
impose on the company a general reasonable security requirement for protected
health information. In planning to implement policies and procedures necessary
to materially comply with the privacy regulations by the applicable compliance
date, Apria has developed plans to meet that security standard.
At this time, Apria anticipates that it will be able to materially comply
with all of the foregoing HIPAA regulations by their respective mandatory
compliance dates, and believes that the cost of its compliance efforts will not
have a material adverse effect on its business, financial condition or results
of operations.
ANTI-KICKBACK STATUTE. As a provider of services under the Medicare and
Medicaid programs, Apria is subject to the Medicare and Medicaid fraud and abuse
laws, commonly known as the "anti-kickback statute." At the federal level, the
anti-kickback statute prohibits any bribe, kickback or rebate in return for the
referral of patients, products or services covered by federal healthcare
programs. Federal healthcare programs have been defined to include plans and
programs that provide health benefits funded by the United States Government,
including Medicare, Medicaid, and TRICARE (formerly known as the Civilian Health
and Medical Program of the Uniformed Services), among others. Violations of the
anti-kickback statute may result in civil and criminal penalties and exclusion
from participation in the federal healthcare programs. In addition, a number of
states in which Apria operates have laws that prohibit certain direct or
indirect payments (similar to the anti-kickback statute) or fee-splitting
arrangements between healthcare providers, if such arrangements are designed to
induce or encourage the referral of patients to a particular provider. Possible
sanctions for violation of these restrictions include exclusion from
state-funded healthcare programs, loss of licensure and civil and criminal
penalties. Such statutes vary from state to state, are often vague and have
seldom been interpreted by the courts or regulatory agencies.
PHYSICIAN SELF-REFERRALS. Certain provisions of the Omnibus Budget
Reconciliation Act of 1993, commonly known as "Stark II," prohibit Apria,
subject to certain exceptions, from submitting claims to the Medicare and
Medicaid programs for "designated health services" if Apria has a financial
relationship with the physician making the referral for such services or with a
member of such physician's immediate family. The term "designated health
services" includes several services commonly performed or supplied by Apria,
including durable medical equipment and home health services. In addition,
"financial relationship" is broadly defined to include any ownership or
investment interest or compensation arrangement pursuant to which a physician
receives remuneration from the provider at issue. Violations of Stark II may
result in loss of Medicare and Medicaid reimbursement, civil penalties and
exclusion from participation in the Medicare and Medicaid programs. In January
2001, CMS issued the first of two phases of final regulations to clarify the
meaning and application of Stark II. Officials of CMS have stated that they
expect Phase II to be issued by July 2003, however, Phase I addresses the
primary substantive aspects of the prohibition and several key exceptions.
Significantly, the final regulations define previously undefined key terms,
clarify prior definitions, and create several new exceptions for certain
"indirect compensation arrangements," "fair market value" transactions,
arrangements involving non-monetary compensation up to $300, and risk-sharing
arrangements, among others. The regulations also create a new "knowledge"
exception that permits providers to bill for items provided in connection with
an otherwise prohibited referral, if the provider does not know, and does not
act in reckless disregard or deliberate ignorance of, the identity of the
referring physician. The effective date for the bulk of Phase I of the final
regulations was January 4, 2002. In addition, a number of the states in which
Apria operates have similar prohibitions on physician self-referrals. Finally,
recent enforcement activity and resulting case law developments have increased
the legal risks of physician compensation arrangements that do not satisfy the
terms of an exception to Stark II, especially in the area of joint venture
arrangements with physicians.
FALSE CLAIMS. The False Claims Act imposes civil and criminal liability on
individuals or entities that submit false or fraudulent claims for payment to
the government. Violations of the False Claims Act may result in treble damages,
civil monetary penalties and exclusion from the Medicare and Medicaid programs.
The False Claims Act also allows a private individual to bring a qui tam
suit on behalf of the government against a healthcare provider for violations of
the False Claims Act. A qui tam suit may be brought by, with only a few
exceptions, any private citizen who has material information of a false claim
that has not yet been previously disclosed. Even if disclosed, the original
source of the information leading to the public disclosure may still pursue such
a suit. Although a corporate insider is often the plaintiff in such actions, an
increasing number of outsiders are pursuing such suits.
In a qui tam suit, the private plaintiff is responsible for initiating a
lawsuit that may eventually lead to the government recovering money of which it
was defrauded. After the private plaintiff has initiated the lawsuit, the
government must decide whether to intervene in the lawsuit and become the
primary prosecutor. In the event the government declines to join the lawsuit,
the private plaintiff may choose to pursue the case alone, in which case the
private plaintiff's counsel will have primary control over the prosecution
(although the government must be kept apprised of the progress of the lawsuit
and will still receive at least 70% of any recovered amounts). In return for
bringing the suit on the government's behalf, the statute provides that the
private plaintiff is entitled to receive up to 30% of the recovered amount from
the litigation proceeds if the litigation is successful. Recently, the number of
qui tam suits brought against healthcare providers has increased dramatically.
In addition, at least five states - California, Illinois, Florida, Tennessee and
Texas - have enacted laws modeled after the False Claims Act that allow those
states to recover money which was fraudulently obtained by a healthcare provider
from the state (e.g., Medicaid funds provided by the state). See "Business -
Risk Factors - Federal Investigation" and "Legal Proceedings."
OTHER FRAUD AND ABUSE LAWS. HIPAA created, in part, two new federal crimes:
"Health Care Fraud" and "False Statements Relating to Health Care Matters." The
Health Care Fraud statute prohibits knowingly and willfully executing a scheme
or artifice to defraud any healthcare benefit program. A violation of this
statute is a felony and may result in fines and/or imprisonment. The False
Statements statute prohibits knowingly and willfully falsifying, concealing or
covering up a material fact by any trick, scheme or device or making any
materially false, fictitious or fraudulent statement in connection with the
delivery of or payment for healthcare benefits, items or services. A violation
of this statute is a felony and may result in fines and/or imprisonment.
In recent years, the federal government has made a policy decision to
significantly increase the financial resources allocated to enforcing the
healthcare fraud and abuse laws. In addition, private insurers and various state
enforcement agencies have increased their level of scrutiny of healthcare claims
in an effort to identify and prosecute fraudulent and abusive practices in the
healthcare area.
HEALTHCARE REFORM LEGISLATION. Economic, political and regulatory
influences are subjecting the healthcare industry in the United States to
fundamental change. Various healthcare reform proposals are formulated and
proposed by the legislative and administrative branches of the federal
government on a regular basis. In addition, some of the states in which Apria
operates periodically consider various healthcare reform proposals. Apria
anticipates that federal and state governmental bodies will continue to review
and assess alternative healthcare delivery systems and payment methodologies and
public debate of these issues will continue in the future. Due to uncertainties
regarding the ultimate features of reform initiatives and their enactment and
implementation, Apria cannot predict which, if any, of such reform proposals
will be adopted, or when they may be adopted, or that any such reforms will not
have a material adverse effect on Apria's business and results of operations.
Healthcare is an area of extensive and dynamic regulatory change. Changes
in the law or new interpretations of existing laws can have a dramatic effect on
permissible activities, the relative costs associated with doing business and
the amount of reimbursement by government and other third-party payors.
Recommendations for changes may result from an ongoing study of patient access
by the General Accounting Office and from the potential findings of the National
Bipartisan Commission on the Future of Medicare. See "Business - Risk Factors -
Government Regulation; Healthcare Reform."
EMPLOYEES
As of February 28, 2003, Apria had 10,553 employees, of which 9,534 were
full-time and 1,019 were part-time. The company's employees are not currently
represented by a labor union or other labor organization, except for
approximately 18 employees in New York and 31 employees in California.
In February 2003, Apria's full-time equivalents in the functional areas of
sales, operations and administration totaled 512, 8,248 and 1,123, respectively.
Full-time equivalents are computed by dividing the actual number of hours worked
in a given period by the typical number of hours for that period based on a
40-hour week.
WEBSITE ACCESS TO REPORTS
Apria's annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and all amendments thereto are made available, free
of charge, on the company's website as soon as reasonably practicable after such
reports are filed with or furnished to the Securities and Exchange Commission.
Apria's website can be found at www.apria.com.
EXECUTIVE OFFICERS
Set forth below are the names, ages, titles with Apria and past and present
positions of the persons serving as Apria's executive officers as of March 14,
2003:
NAME AND AGE OFFICE AND EXPERIENCE
-----------------------------------------------------------------------------------------------------------
Lawrence M. Higby, 57............ President, Chief Executive Officer and Director. Mr. Higby was
appointed Chief Executive Officer and Director in February 2002. He
joined Apria in November 1997 as President and Chief Operating
Officer.
Lawrence A. Mastrovich, 41 ...... Chief Operating Officer. Mr. Mastrovich joined Apria as Chief
Operating Officer in April 2002. From August 2001 to April 2002, Mr.
Mastrovich served as President and Chief Operating Officer of TechRx,
a pharmacy technology company. From April 2001 to August 2001, Mr.
Mastrovich served as Apria's Executive Vice President, Sales. From
October 1998 to April 2001, Mr. Mastrovich served as Executive Vice
President, Revenue Management. He served as Division Vice President,
Operations for the Northeast Division from December 1997 to October
1998.
James E. Baker, 51 .............. Chief Financial Officer. Mr. Baker was promoted to Chief Financial
Officer in October 2001. He served as Vice President, Controller of
Homedco and, subsequently, Apria, since August 1991.
Anthony S. Domenico, 45.......... Executive Vice President, Sales. Mr. Domenico joined Apria as
Executive Vice President, Sales in August 2001. From 1998 to 2001,
Mr. Domenico served as Chief Operating Officer and Senior Vice
President of Sales and Operations of Perigon Medical Distribution,
Inc.
RISK FACTORS
This report contains forward-looking statements, which are subject to
numerous factors (many of which are beyond the company's control) which could
cause actual results to differ materially from those in the forward-looking
statements. Readers of this report can identify these statements by the use of
words like "may," "will," "could," "should," "project," "believe," "anticipate,"
"expect," "plan," "estimate," "forecast," "potential," "intend," "continue" and
variations of these words or comparable words. Such forward-looking statements
include, but are not limited to, statements as to anticipated future results,
developments and occurrences set forth or implied herein.
Apria has identified below important factors that could cause actual
results to differ materially from those projected in any forward-looking
statements the company may make from time to time.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE -- APRIA'S FAILURE TO MAINTAIN ITS
CONTROLS AND PROCESSES OVER BILLING AND COLLECTING OR THE DETERIORATION OF THE
FINANCIAL CONDITION OF ITS PAYORS COULD REDUCE ITS CASH COLLECTIONS AND INCREASE
ITS ACCOUNTS RECEIVABLE WRITE-OFFS.
The collection of accounts receivable is one of Apria's most significant
challenges and requires constant focus and involvement by management, and
ongoing enhancements to information systems and billing center operating
procedures. Further, some of Apria's payors may experience financial
difficulties, or may otherwise not pay accounts receivable when due, resulting
in increased write-offs. Apria can provide no assurance that it will be able to
maintain its current levels of collectibility and days sales outstanding in
future periods. If Apria is unable to properly bill and collect its accounts
receivable, its results and financial condition will be adversely affected. See
"Business - Organization and Operations - Receivables Management" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
OPERATING SYSTEMS AND CONTROLS -- APRIA'S IMPLEMENTATION OF SIGNIFICANT SYSTEM
MODIFICATIONS COULD HAVE A DISRUPTIVE EFFECT ON RELATED TRANSACTION PROCESSING.
Apria has developed the functionality that enables the infusion therapy
business to operate on the same computer information system or "platform" as the
respiratory therapy/home medical equipment business. Previously, the infusion
therapy application operated on a separate platform which had limited support.
The new system functionality has been introduced in four regions; the
company-wide rollout is expected to continue into late 2003. Additionally, Apria
completed the implementation of supply chain management software during 2002.
Apria is working on the second phase of this project, which is the
implementation of production and distribution planning software. Implementation
is expected to begin mid-year 2003. Finally, Apria is effecting certain changes
to its systems in order to comply with the standard electronic transaction and
code sets provisions of HIPAA by the October 2003 due date. The implementation
of these system changes could have a disruptive effect on related transaction
processing. See "Business - Organization and Operations - Operating Systems and
Controls" and "Business - Government Regulations - HIPAA."
FEDERAL INVESTIGATION -- THE OUTCOME OF THE FEDERAL GOVERNMENT'S INVESTIGATION
OF APRIA'S MEDICARE AND OTHER BILLING PRACTICES COULD RESULT IN THE IMPOSITION
OF MATERIAL LIABILITIES OR PENALTIES AND COULD RESULT IN APRIA'S EXCLUSION FROM
PARTICIPATION IN FEDERAL HEALTHCARE PROGRAMS.
The U.S. Attorney's office in Los Angeles and HHS are conducting an
investigation of Apria's billing documentation. The U.S. Attorney's office has
informed Apria that this investigation is the result of qui tam litigation, one
or more private lawsuits filed by individuals on behalf of the government, but
has not yet informed Apria whether it will intervene in the qui tam actions;
however, it could reach a decision with respect to intervention at any time. 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. Although
Apria believes that the assertions in those actions are unwarranted, and is
prepared to vigorously defend against any attempt to impose material liabilities
or penalties, Apria can provide no assurance as to the outcome of these
proceedings. See "Legal Proceedings."
GOVERNMENT REGULATION; HEALTHCARE REFORM -- APRIA COULD BE SUBJECT TO SEVERE
FINES, FACILITY SHUTDOWNS AND POSSIBLE EXCLUSION FROM PARTICIPATION IN FEDERAL
HEALTHCARE PROGRAMS IF IT FAILS TO COMPLY WITH THE LAWS AND REGULATIONS
APPLICABLE TO ITS BUSINESS OR IF THOSE LAWS AND REGULATIONS CHANGE.
Apria is subject to stringent laws and regulations at both the federal and
state levels, requiring compliance with burdensome and complex billing,
substantiation and record-keeping requirements. Financial relationships between
Apria and physicians and other referral sources are subject to strict and
ambiguous limitations. In addition, the provision of services, pharmaceuticals
and equipment is subject to strict licensing and safety requirements. If Apria
is deemed to have violated these laws and regulations, Apria could be subject to
severe fines, facility shutdowns and possible exclusion from participation in
federal healthcare programs such as Medicare and Medicaid.
Government officials and the public will continue to debate healthcare
reform. Changes in healthcare law, new interpretations of existing laws, or
changes in payment methodology may have a dramatic effect on Apria's business
and results of operations. See "Business - Government Regulation."
MEDICARE REIMBURSEMENT RATES -- CONTINUED REDUCTIONS IN MEDICARE REIMBURSEMENT
RATES COULD RESULT IN REDUCED REVENUES, EARNINGS AND CASH FLOWS.
The Balanced Budget Act of 1997 contained several provisions that have
affected Apria's Medicare reimbursement levels. Subsequent legislation - the
Medicare Balanced Budget Refinement Act of 1999 and the Medicare, Medicaid and
SCHIP Benefits Improvement and Protection Act of 2000 - mitigated some of the
effects of the original legislation. However, there are some pending issues that
may further impact Medicare reimbursement to Apria in the future, such as
potential reimbursement reductions under an inherent reasonableness authority
and competitive bidding for Medicare Part B-covered services and products. Also
currently at issue is the potential adoption of an alternative pricing
methodology for certain drugs and biologicals. Apria can provide no assurance to
prospective investors that further reimbursement reductions will not be made.
Since Medicare accounted for approximately 27% of Apria's net revenues for the
fiscal year 2002, any further reduction in reimbursement rates could result in
lower revenues, earnings and cash flows. See "Business - Government Regulation -
Medicare and Medicaid Reimbursement."
In addition, the terrorist attacks of September 11, 2001 and the military
and security activities which followed, including in particular the conflict in
Iraq, have and could continue to have significant impacts on the United States
economy and government spending priorities. The effects of any further such
developments, including but not limited to a prolonged war with Iraq, pose
significant risks and uncertainties to Apria's business. 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 and
efforts in Iraq, North Korea and elsewhere could lead to increased pressure to
reduce government expenditures for other purposes, including government-funded
programs such as Medicare and Medicaid. See "Business - Government Regulation -
Medicare and Medicaid Reimbursement."
PRICING PRESSURES -- CONTINUED PRESSURE TO REDUCE HEALTHCARE COSTS COULD REDUCE
APRIA'S MARGINS AND LIMIT APRIA'S ABILITY TO MAINTAIN OR INCREASE ITS MARKET
SHARE.
The current market continues to exert pressure on healthcare companies to
reduce healthcare costs, resulting in reduced margins for home healthcare
providers such as Apria. Large buyer and supplier groups exert additional
pricing pressure on home healthcare providers. These include managed care
organizations, which control an increasing portion of the healthcare economy.
Apria has a number of contractual arrangements with managed care organizations,
although no individual arrangement accounted for more than 10% of Apria's net
revenues in 2002. Certain competitors of Apria may have or may obtain
significantly greater financial and marketing resources than Apria. In addition,
relatively few barriers to entry exist in local home healthcare markets. As a
result, Apria could encounter increased competition in the future that may
increase pricing pressure and limit its ability to maintain or increase its
market share. See "Business - Sales" and "Business - Competition."
ACQUISITION STRATEGY -- APRIA MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE ACQUIRED
BUSINESSES, WHICH COULD RESULT IN A SLOWDOWN IN CASH COLLECTIONS AND ULTIMATELY
LEAD TO INCREASES IN APRIA'S ACCOUNTS RECEIVABLE WRITE-OFFS.
In connection with past acquisitions, Apria has found that the
labor-intensive patient qualification process and conversion of patient files
onto Apria's billing systems can shift focus away from Apria's routine
processes. These activities and the time required to obtain provider numbers
from government payors often delay billing of the newly acquired business, which
may delay cash collections. Moreover, excessive delays may make certain items
uncollectible. The successful integration of an acquired business is also
dependent on the size of the acquired business, condition of the patient files,
complexity of system conversions and local management's execution of the
integration plan. If Apria is not successful in integrating acquired businesses,
its results will be adversely affected. See "Business - Strategy."
ITEM 2. PROPERTIES
Apria's headquarters are located in Lake Forest, California and consist of
approximately 100,000 square feet of office space. The lease expires in 2011.
Apria has approximately 410 branch facilities that are organized into 16
regions. The region facilities usually house a branch and various regional
support functions such as warehousing, repair, billing and pharmacy. These
facilities are typically located in light industrial areas and generally range
from 20,000 to 85,000 square feet. The typical branch facility, other than those
that share a building with a region, is a combination warehouse and office, with
approximately 50% of the square footage consisting of warehouse space. These
branch facilities, also located in light industrial areas, can range from 1,000
square feet for a satellite location up to 50,000 square feet. Apria leases
substantially all of its facilities with lease terms of ten years or less.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, since mid-1998 Apria has been the subject of an
investigation conducted by the U.S. Attorney's office in Los Angeles and the
U.S. Department of Health and Human Services. The investigation concerns 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 and has responded to various document requests
and subpoenas.
Apria has been informed that the investigation 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.
Government representatives and counsel for the plaintiffs in the qui tam
actions asserted in July 2001 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, 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.
Apria has been exchanging information and having discussions with
government representatives in an attempt to explore whether it will be possible
to resolve this matter on a basis that would be considered fair and reasonable
by all parties. Apria cannot provide any assurances as to the outcome of these
discussions, however, or as to the outcome of the qui tam litigation in the
absence of a settlement. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Apria's stockholders during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Apria's common stock is traded on the New York Stock Exchange under the
symbol AHG. The table below sets forth, for the calendar periods indicated, the
high and low sales prices per share of Apria common stock:
HIGH LOW
---------- ----------
Year ended December 31, 2002
----------------------------
First quarter $24.95 $20.79
Second quarter 28.50 20.25
Third quarter 25.30 18.90
Fourth quarter 25.68 20.75
Year ended December 31, 2001
----------------------------
First quarter $30.00 $20.40
Second quarter 29.49 23.80
Third quarter 29.85 21.00
Fourth quarter 25.75 19.50
As of March 14, 2003, there were 623 holders of record of Apria common
stock. Apria has not paid any dividends since its inception and does not intend
to pay any dividends on its common stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents Apria's selected financial data for the five
years ended December 31, 2002. The data set forth below have been derived from
Apria's audited Consolidated Financial Statements and are qualified by reference
to, and should be read in conjunction with, the Consolidated Financial
Statements and related notes thereto and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" included in this report.
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002(1) 2001 2000 1999(2) 1998(3,4)
-------------------------------------------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS DATA:
Net revenues.................................... $1,252,196 $1,131,915 $1,014,201 $ 940,024 $ 933,793
Income (loss) before extraordinary charge....... 115,595 73,445 57,006 204,135 (207,938)
Net income (loss)............................... 115,595 71,917 57,006 204,135 (207,938)
Basic income (loss) per common share:
Income (loss) before extraordinary charge... $ 2.12 $ 1.36 $ 1.09 $ 3.93 $(4.02)
Extraordinary charge on debt refinancing,
net of taxes.............................. - 0.03 - - -
------ ------ ------ ------ ------
Net income (loss)................... $ 2.12 $ 1.33 $ 1.09 $ 3.93 $(4.02)
====== ====== ====== ====== ======
Diluted income (loss) per common share:
Income (loss) before extraordinary charge... $ 2.08 $ 1.32 $ 1.06 $ 3.81 $(4.02)
Extraordinary charge on debt refinancing,
net of taxes.............................. - 0.03 - - -
------ ------ ------ ------ ------
Net income (loss)................... $ 2.08 $ 1.29 $ 1.06 $ 3.81 $(4.02)
====== ====== ====== ====== ======
BALANCE SHEET DATA:
Total assets.................................... $ 795,656 $ 695,782 $ 620,332 $ 637,361 $ 504,208
Long-term obligations, including
current maturities........................... 269,368 293,689 343,478 423,094 496,196
Stockholders' equity (deficit).................. 351,309 242,798 146,242 75,469 (131,657)
(1) Net income for 2002 reflects the positive impact of prior year income tax
examinations that were settled in the fourth quarter of 2002. The
components of this impact include: income tax benefit of $11.1 million,
interest income of $4 million and related professional fee expense of $1.7
million. Effective January 1, 2002, Apria adopted Statement of Financial
Accounting Standards No. 142 and accordingly ceased to amortize goodwill.
(2) Net income for 1999 reflects an income tax benefit of $131 million that was
attributable to the release of the company's deferred tax asset valuation
allowance in the fourth quarter of 1999.
(3) Apria recorded a charge of $22.7 million in 1998 to increase the allowance
for doubtful accounts for changes in collection policies and in conjunction
with Apria's exit from certain portions of its existing business.
(4) Included in 1998 are impairment charges of $76.2 million to write-down the
carrying values of intangible assets and $22.2 million to write-off
information systems hardware, internally-developed software and assets
associated with Apria's exit from certain portions of its existing
business.
Apria did not pay any cash dividends on its common stock during any of the
periods set forth in the table above.
ITEM 7. 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 410 branch locations.
STRATEGY. Apria is pursuing an operating strategy to increase market share
and improve profitability. Key elements of the strategy are as follows:
- Focus on growth in its core businesses of home respiratory therapy, home
infusion therapy and home medical equipment. By offering a broad range
of services Apria achieves a competitive advantage with its managed
care, hospital and certain physician customers, enabling it to maintain
a diversified revenue base. In particular, Apria continues its emphasis
on growth in the home respiratory therapy line, which historically
has produced higher gross margins than its home infusion therapy and
home medical equipment service lines.
- Supplement internal growth with strategic acquisitions. Apria operates
in a highly fragmented market, which provides an attractive opportunity
to drive growth through acquisition of complementary businesses.
- Develop and apply "best practices" and productivity improvement
programs throughout the company with the aim of achieving greater
standardization and enhanced productivity. Success with such programs
results in reduced costs and increased margins and cash flows. Apria has
developed and implemented standardized clinical and delivery models,
billing and collection practices and common operating procedures in its
field locations and has centralized purchasing for inventory, patient
service equipment and supplies. Apria continues to focus resources on
identifying opportunities for further productivity improvements.
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. Additionally, the accounting
policies related to goodwill and long-lived assets require significant judgment.
Revenue and Accounts Receivable. 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. 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 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 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 required.
Because of the reimbursement environment in which Apria operates and the
level of subjectivity that is required in recording revenues and accounts
receivable, it is possible that management's estimates could change in the near
term, which could have an impact on the consolidated financial statements.
Goodwill and Long-lived Assets. Goodwill arising from business combinations
represents the excess of the purchase price over the estimated fair value of the
net assets of the acquired business. Pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
goodwill is tested annually for impairment or more frequently if circumstances
indicate potential impairment. Also, management reviews for impairment of its
intangible assets and long-lived assets on an ongoing basis and whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Based on its tests and reviews, management does not believe
any impairment of its goodwill, intangible assets or other long-lived assets
existed at December 31, 2002. However, future events or changes in current
circumstances could affect the recoverability of the carrying value of goodwill
and long-lived assets. Should an asset be deemed impaired, an impairment loss
would be recognized, to the extent the carrying value of the asset exceeded its
estimated fair market value. Such an impairment charge could have an adverse
impact on Apria's consolidated financial statements.
SEGMENT REPORTING. Apria's branch locations are organized into geographic
regions. Each region consists of a number of branches and a regional office
which provides key support services such as billing, purchasing, 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 of SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information."
CHANGE IN ACCOUNTING PRINCIPLES. Effective January 1, 2002, Apria adopted
SFAS No. 142 which 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
the possibility of impairment. 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." This statement superseded SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and amended 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 are to 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 broadened the presentation of discontinued operations to
include a component of an entity when operations and cash flows can be clearly
distinguished, and established 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 consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS. In April 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statement Nos.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 updates and clarifies existing accounting pronouncements related to
gains and losses from the extinguishment of debt and requires that certain lease
modifications be accounted for in the same manner as sale-leaseback
transactions. Apria adopted the provisions of SFAS No. 145 for its fiscal year
beginning January 1, 2003. Adoption of this statement will not have a material
effect on the company's consolidated financial statements.
In July 2002, SFAS No. 146, "Accounting for Costs Associated With Exit or
Disposal Activities," was issued. This statement addresses the financial
accounting and reporting for costs associated with exit or disposal activities
and requires that a liability for such costs be recognized when the liability is
incurred rather than at the date of an entity's commitment to an exit plan. SFAS
No. 146 also establishes that the liability should be measured and recorded at
fair value. Apria will adopt the provisions of SFAS No. 146 for exit and
disposal activities that are initiated after December 31, 2002, as required.
In December 2002, SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123," was issued.
This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation,"
to provide alternative methods of transition and guidance for a voluntary change
to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The company has complied
with the expanded financial statement disclosure requirements in its
consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others," an interpretation of SFAS Nos.
5, 57 and 107 and rescission of FIN No. 34, "Disclosure of Indirect Guarantees
of Indebtedness of Others." FIN No. 45 elaborates on the disclosure requirements
for the interim and annual financial statements of the guarantor. It also
requires that a guarantor recognize a liability at the inception of the
guarantee for the fair value of the obligation undertaken. Apria was required to
adopt the recognition provisions of FIN No. 45 beginning January 1, 2003, while
the disclosure provisions became effective at December 31, 2002. Adoption of
this interpretation will not have a material effect on the company's
consolidated financial statements.
In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities,"
an interpretation of Accounting Research Bulletin No. 51, was issued. FIN No. 46
requires that a company consolidate variable interest entities if that company
is subject to a majority of the risk of loss from the entity's activities or the
company receives a majority of the entity's residual returns. FIN No. 46 also
requires certain disclosures about variable interest entities in which a company
has a significant interest, regardless of whether consolidation is required.
Apria will begin to adopt the consolidation provisions of FIN No. 46 beginning
January 1, 2003, while certain disclosure requirements will become effective for
all financial statements issued after January 31, 2003, regardless of when the
variable interest entities were established. The company currently has no
variable interest entities, therefore the adoption of this interpretation is not
expected to have a material effect on the company's consolidated financial
statements.
RESULTS OF OPERATIONS
NET REVENUES. Approximately 34% of Apria's 2002 revenues are reimbursed
under arrangements with Medicare and Medicaid. In 2002, no other third-party
payor represented 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 less than 10% of total net revenues for 2002. Because of continuing
changes in the healthcare industry and third-party reimbursement, there can be
no assurance that Apria's current revenue levels can be maintained, which could
have an impact on operations and cash flows.
Net revenues increased to $1,252 million in 2002 from $1,132 million in
2001 and $1,014 million in 2000. Growth rates were 10.6% and 11.6% in 2002 and
2001, respectively. The increases in both years are 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 provides for 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 in 2002 was derived from
acquisitions.
The following table sets forth a summary of net revenues by service line:
YEAR ENDED DECEMBER 31,
----------------------------------
(IN THOUSANDS) 2002 2001 2000
---------------------------------------------------------------------------
Home respiratory therapy............. $ 830,972 $ 742,805 $ 656,089
Home infusion therapy................ 229,190 216,436 194,508
Home medical equipment/other......... 192,034 172,674 163,604
---------- ---------- ----------
Total net revenues............. $1,252,196 $1,131,915 $1,014,201
========== ========== ==========
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 in 2002 by 11.9% when compared to
2001 and increased by 13.2% in 2001 when compared to 2000. Apria's strategy to
target acquisitions of respiratory therapy businesses contributed to the growth
in both years.
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 5.9% in 2002 versus 2001 and
11.3% in 2001 versus 2000. The growth in both years is largely due to volume
increases. Much of the increase in 2001 was concentrated in the enteral
nutrition line reflecting renewed focus from a program that centralized the
related intake, clinical oversight and distribution functions at the region
level.
Home Medical Equipment/Other. Home medical equipment/other revenues are
derived from the provision of patient safety items, ambulatory and in-home
equipment. Home medical equipment/other revenues increased by 11.2% in 2002 from
its level in 2001 and 5.5% in 2001 from 2000. Although the company's strategy is
to target acquisitions of respiratory therapy businesses, the growth in the home
medical equipment/other line also includes the effects of acquisitions completed
in late 2001 and in 2002.
Medicare and Medicaid Reimbursement. The Balanced Budget Act of 1997
contained several provisions that have affected Apria's Medicare reimbursement
levels. Subsequent legislation - the Medicare Balanced Budget Refinement Act of
1999 and the Medicare Medicaid and SCHIP Benefits Improvement and Protection Act
of 2000 - mitigated some of the effects of the original legislation. However,
there are some pending issues that may further impact Medicare reimbursement to
Apria in the future.
The Balanced Budget Act of 1997 granted streamlined authority to the
Secretary of the U.S. Department of Health and Human Services ("HHS") to
increase or reduce the reimbursement for home medical equipment, including
oxygen, by up to 15% each year under an inherent reasonableness authority. In
December 2002, the Centers for Medicare and Medicaid Services ("CMS") issued an
interim final rule that establishes a process by which such adjustments may be
made. The rule applies to all Medicare Part B services except those paid under a
physician fee schedule or a prospective payment system.
Further, the Balanced Budget Act of 1997 mandated that CMS conduct up to
five competitive bidding market demonstrations for Medicare Part B-covered items
and services. CMS conducted demonstration projects in Polk County, Florida and
San Antonio, Texas. These demonstration projects have been completed. The
demonstrations could provide CMS and Congress with a model for implementing
competitive pricing in all Medicare programs. Initial reports from government
agencies allege cost savings that vary by product line, but the reports do not
include costs incurred by the government to administer the program. If such a
competitive bidding system were implemented, it could result in lower
reimbursement rates, exclude certain items and services from coverage or impose
limits on increases in reimbursement rates. Although not included in the
President's budget, the administration may seek authority to implement
nationwide competitive bidding for all Medicare Part B products and services
other than physicians' services. There are members of Congress who support
legislation to create a national competitive bidding system for durable medical
equipment. The homecare industry is currently working with members of Congress
and the administration to ensure that the negative impact of competitive bidding
on patient choice, small businesses, the economy and other aspects are fully
understood. The industry is also working with the same groups to ensure that the
total costs for the government to establish an infrastructure to administer such
a complicated program as has been proposed are studied and quantified in detail.
It is not clear under what timeframe the government will conduct such analyses,
or whether such initiatives will move ahead.
During 2000, the Secretary of HHS wrote to the durable medical equipment
regional carriers and recommended, but did not mandate, that Medicare and
Medicaid claims processors base their payments for covered outpatient drugs and
biologicals on pricing schedules other than the normally calculated Average
Wholesale Prices, which historically has been the industry's basis for drug
reimbursement. The suggested alternative pricing methodology was offered in an
effort to reduce reimbursement levels for certain drugs to more closely
approximate a provider's acquisition cost, but it would not have covered the
costs that homecare pharmacies incur to prepare, deliver or administer the drugs
to patients. Clinical services, billing, collection and other overhead costs
also would not have been considered. Under current government reimbursement
schedules, these costs are not clearly defined but are implicitly covered within
the reimbursement for the drug. 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
to patients in their homes. Further, if providers choose to discontinue
providing these drugs due to inadequate reimbursement, patient access to
homecare may be jeopardized. The Medicare, Medicaid and SCHIP Benefits
Improvement and Protection Act of 2000 provided for a moratorium on decreasing
the payment rates in effect as of January 1, 2001, for drugs and biologicals
under the current Medicare payment methodology. This legislation also required
the General Accounting Office ("GAO") to conduct a thorough study, by September
2001, of the adequacy of current payments. The GAO was also directed to
recommend revised payment methodologies and report to Congress and the Secretary
of HHS. The study was completed but the authors acknowledged that 1) the limited
scope and deadline associated with the study did not allow for a thorough
analysis of the homecare pharmacy aspects of covered services, 2) legitimate
service components and related costs do exist, and 3) different methods of
determining drug delivery and administration payments may be necessary for
different types of drugs. Currently, the timing and impact of such pricing
methodology revisions are not known. There is interest in Congress in
legislation that would replace Average Wholesale Price as the basis for Medicare
drug reimbursement, but to date there has been no agreement within Congress as
to what the alternative should be.
Some states have already adopted, or are contemplating adopting, some form
of the proposed alternate pricing methodology for certain drugs and biologicals
under the Medicaid program. In at least 20 states, these changes have reduced
the level of reimbursement received by Apria to an unacceptable level without a
corresponding offset or increase to compensate for the service costs incurred.
In several of those states, Apria has elected to stop accepting new Medicaid
patient referrals for the affected drugs. The company is continuing to provide
services to patients already on service, and for those who receive other
Medicaid-covered respiratory, home medical equipment or infusion therapies. As a
percentage of total business, Medicaid represents a very small percentage of
Apria's home infusion and home-delivered respiratory medication revenues.
GROSS PROFIT. Gross margins were 72.8% in 2002 and 2001 and 72.5% in 2000.
Gross margins have remained consistent due to negligible reimbursement price
increases and consistent pricing for the products Apria purchases to serve its
patients. Also, the proportion of business among Apria's three major service
lines has remained fairly steady.
PROVISION FOR DOUBTFUL ACCOUNTS. As described in the "Critical Accounting
Policies" section above, accounts receivable estimated to be uncollectible are
provided for through the application of specified percentages to each
receivables aging category. For 2002, 2001 and 2000, the provision for doubtful
accounts as a percentage of net revenues was 3.6%, 3.3% and 3.2%, respectively.
The increase in the percentage in 2002 is largely attributable to the year's
acquisition activity. The time-consuming processes of converting the acquired
patient files onto Apria's systems and obtaining provider numbers from
government payors delay billing of the newly-acquired business. During this
time, a provision for doubtful accounts is recorded on the earned but unbilled
receivables as they pass through the aging categories. When the billings are
finally submitted and, subsequently, cash is received, the provision requirement
decreases. Because the majority of the acquired business in 2002 was effected in
the last half of the year, there was not sufficient time for completion of this
cycle on a number of the acquisitions. See "Critical Accounting Policies" and
"Accounts Receivable."
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. Some are also very sensitive to market-driven price
fluctuations such as facility lease and fuel costs. 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 54.7% in 2002, 55.8% in 2001 and 54.7% for
2000. The decrease in 2002 reflects the benefit of various standardization and
productivity initiatives that have been implemented. Delivery expenses as a
percentage of net revenues decreased by nearly 1%. Also, bonus expense was high
in 2001 as the bonus plans were extended to all employees and the payment
provisions of these plans were enriched, thereby resulting in the expense
increase. The 2002 plans did not include such provisions. Offsetting the
decreases in 2002 were $3.8 million in costs related to the departure of the
former chief executive officer and $1.7 million in professional fees associated
with the settlement of prior year tax examinations. See "Income Tax Expense."
AMORTIZATION OF GOODWILL AND INTANGIBLE ASSETS. Amortization of intangible
assets was $2.7 million in 2002. Amortization of goodwill and intangible assets
was $12.3 million and $10.2 million in 2001 and 2000, respectively. Upon
adoption of SFAS No. 142 on January 1, 2002, goodwill amortization ceased.
Amortization of goodwill was $9.8 million and $7.8 million in 2001 and 2000,
respectively. The effect of adding these amounts back as though the
nonamortization provisions of SFAS No. 142 were adopted at the beginning of 2000
would have resulted in net income and diluted income per share increases of $6.1
million and $0.11 in 2001 and $4.5 million and $0.08 in 2000. The increase in
amortization in 2001 when compared to 2000 was due to the acquisitions that were
consummated during 2001 and the latter part of 2000. See "Business
Combinations."
INTEREST EXPENSE AND INCOME. Interest expense was $15.0 million in 2002,
$27.6 million in 2001 and $42.3 million in 2000. Interest income was $4.2
million, $1.9 million and $2.2 million in 2002, 2001 and 2000, respectively.
Analyzed on a net basis, the decrease in 2002 when compared to 2001 can be
attributed to a number of factors. The dramatic decreases in market-driven
interest rates that took place over the course of 2001 are fully reflected in
2002. Interest expense in 2002 reflects a full year's benefit of the July 2001
refinancing that replaced the $200 million 9 1/2% senior subordinated notes with
debt at significantly more favorable interest rates and lowered the applicable
interest margin on the bank loans. The refinancing also resulted in the
write-off of debt issuance costs related to the notes and old bank debt that, in
turn, lowered the related amortization expense. In June 2002, Apria executed an
amendment to the credit agreement that, among other items, lowered the
applicable interest margin on the $175 million term loan. Also impacting net
interest expense is a $24.3 million reduction in long-term debt during 2002.
Finally, the settlement of prior year tax examinations during 2002 resulted in a
$4 million interest refund.
The decrease in net interest expense in 2001 when compared to 2000 also
reflects the market-driven interest rate decreases and the lower interest rates
and amortization resulting from the July 2001 refinancing. Also, long-term debt
decreased by $49.8 million during 2001. See "Long-term Debt."
INCOME TAX EXPENSE. Income taxes for 2002 are $52.4 million and were
provided at the effective tax rate expected to be applicable for the year as
reduced by a benefit of $11.1 million that resulted from prior year tax
examinations that were settled in the fourth quarter. Income taxes for 2001 and
2000 were $44.1 million and $41.1 million, respectively, and were provided at
the effective tax rate expected to be applicable for the respective year.
At December 31, 2002, Apria had federal net operating loss carryforwards of
approximately $15.3 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 $9.6 million.
As a result of settling the prior year tax examinations, Apria utilized
approximately $34.2 million of its previously limited $57 million net operating
loss carryforward during 2002 which reduced its effective tax rate to 31% for
the year ended December 31, 2002. Such net operating loss carryforward was
generated prior to 1992 and utilization had been limited to $5 million per year
in accordance with Internal Revenue Code Section 382. Prior to 2002, the $57
million net operating loss carryforward was not recognized for financial
statement reporting purposes as management believed it unlikely that they would
be used before expiration. The remaining net operating loss carryforward of
approximately $22.8 million is excluded from the related deferred tax assets and
will expire unused.
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, while
continuing to reduce long-term debt. 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 in 2002 was $262 million
compared to $241.4 million in 2001 and $188 million in 2000. The cash flow
increase in 2002 was primarily attributable to the increase in net income before
items not requiring cash. Also contributing to the increase was an income tax
refund, including interest, related to the settlement of prior year tax
examinations. The cash flow increase was offset by an increase in accounts
receivable and the timing of disbursements processed through accounts payable.
Also offsetting the net income increase in 2002 was a decrease in accrued
expenses. The cash flow increase in 2001 was primarily attributable to the
increase in net income before items not requiring cash and increases in accounts
payable and accrued expenses. Partially offsetting this was an increase in
accounts receivable due to the revenue increases.
Cash used in investing activities decreased in 2002 when compared to 2001
due to reduced levels of patient service equipment expenditures and a decrease
in acquisition activity. Cash used in 2001 increased from 2000 due to an
increase in acquisition activity and increases in patient service equipment
purchases.
Cash used in financing activities increased between 2002 and 2001 due to
the repurchase of Apria's common stock in the amount of $35 million, which was
partially offset by a decrease in payments against long-term debt due to the
voluntary prepayments effected in 2001. Cash used in 2001 decreased from 2000
primarily due to large voluntary prepayments made against long-term debt in the
latter part of 2000 and an increase in proceeds from the exercise of stock
options in 2001. See "Long-term Debt."
CONTRACTUAL CASH OBLIGATIONS. The following table summarizes Apria's
long-term cash payment obligations to which the company is contractually bound:
FOR THE YEAR ENDING DECEMBER 31,
-------------------------------------------
(IN MILLIONS) 2003 2004 2005 2006 2007 2008+ TOTAL
--------------------------------------------------------------------------------------------------
Term loans.............................. $ 19 $ 27 $ 29 $ 23 $ 42 $123 $263
Capitalized lease obligations........... 3 2 1 - - - 6
Operating leases........................ 56 48 43 32 20 25 224
Deferred acquisition payments........... 7 - - - - - 7
---- ---- ---- ---- ---- ---- ----
Total contractual cash obligations. $ 85 $ 77 $ 73 $ 55 $ 62 $148 $500
==== ==== ==== ==== ==== ==== ====
ACCOUNTS RECEIVABLE. Accounts receivable before allowance for doubtful
accounts increased by $23.3 million during 2002 which is directly attributable
to the revenue increase. Accounts aged in excess of 180 days decreased from
19.8% at December 31, 2001 to 18% at December 31, 2002. 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 51 at December 31, 2002 compared to 50 at December 31, 2001. See "Critical
Accounting Policies."
Unbilled Receivables. Included in accounts receivable are earned but
unbilled receivables of $29.2 million and $26.9 million at December 31, 2002 and
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 historical performance and collectibility. The increase in
2002 from the end of 2001 is largely due to acquisitions effected during 2002.
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 products 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.
The branch locations serve as the primary point from which inventories and
patient service equipment are delivered to the patient. The branches are
supplied with inventory and equipment from the regional warehouses, where the
purchasing responsibility lies. The regions are also responsible for repairs and
scheduled maintenance of patient service equipment, which adds to the frequent
movement of equipment between the region and branch locations. Further, at any
given time, approximately 80% of Apria's patient service equipment is located in
patients' homes. Inherent in this asset flow is the fact that losses will occur.
Management has successfully instituted a number of controls over the company's
inventories and patient service equipment to minimize such losses. However,
there can be no assurance that Apria will be able to maintain its current level
of control over inventories and patient service equipment.
Continued revenue growth is directly dependent on Apria's ability to fund
its inventory and patient service equipment requirements.
DEFERRED INCOME TAXES. The decrease in deferred tax assets (combined
current and non-current) from December 31, 2001 to December 31, 2002 is
primarily due to the utilization of the net operating loss carryforwards. At
December 31, 2002, Apria had a net non-current deferred tax liability of $13
million that resulted primarily from changes in goodwill amortization expense in
accordance with SFAS No. 142 and additional tax depreciation expense as a result
of a 2002 federal statute change. See "Income Tax Expense."
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 revolving credit facility, a $125 million term loan
and a $175 million term loan. Effective June 7, 2002 the credit agreement was
amended to extend the maturity date, reduce the applicable interest rate margins
and modify the repayment schedule for the $175 million term loan.
The final maturity date for the revolving credit facility is July 20, 2006.
The remaining payment schedule on the $125 million term loan requires 14
consecutive quarterly payments ranging from $6 million to $7 million with the
final payment of $7 million due on July 20, 2006. The remaining payment schedule
on the $175 million term loan requires 18 consecutive quarterly payments of
$437,500 followed by three consecutive quarterly payments of $41.1 million with
the final payment of $41.1 million due on July 20, 2008. These remaining payment
schedules reflect voluntary prepayments made in December 2002 of $6 million and
$437,500 on the $125 million and $175 million term loans, respectively.
The senior secured credit agreement permits Apria to select one of two
variable interest rates. One option is the base rate, which is expressed as the
higher of (a) the Federal Funds rate plus 0.50% or (b) the Prime Rate. The other
option is the Eurodollar rate, which is based on the London Interbank Offered
Rate ("LIBOR"). Interest on outstanding balances under the senior secured credit
agreement are determined by adding a margin to the Eurodollar rate or base rate
in effect at each interest calculation date. The applicable margins for the
revolving credit facility and the $125 million term loan are based on Apria's
leverage ratio, which is the ratio of its funded debt to its last four quarters
of earnings before interest, taxes, depreciation and amortization. The
applicable margin ranges from 1.50% to 2.25% for Eurodollar loans and from 0.50%
to 1.25% for base rate loans. For the $175 million term loan, the margins are
fixed at 2.00% for Eurodollar loans and at 1.00% for base rate loans. The
effective interest rate at December 31, 2002 was 4.21% on total borrowings of
$263.4 million. The senior credit agreement also requires payment of commitment
fees ranging from 0.25% to 0.50% (also based on Apria's leverage ratio) on the
unused portion of the revolving credit facility.
Borrowings under the senior secured credit facilities are collateralized by
substantially all of the assets of Apria. The credit agreement contains numerous
restrictions, including but not limited to, covenants requiring the maintenance
of certain financial ratios, limitations on additional borrowings, capital
expenditures, mergers, acquisitions and investments, and restrictions on cash
dividends, loans and other distributions. The agreement also permits Apria to
expend a maximum of $100 million per year on acquisitions. At December 31, 2002,
the company was in compliance with all of the financial covenants required by
the credit agreement.
On December 31, 2002 outstanding borrowings on the two term loans were
$263.4 million and there were no borrowings under the revolving credit facility.
Outstanding letters of credit totaled $5.2 million and credit available under
the revolving facility was $94.8 million.
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.
At December 31, 2002, Apria had six interest rate swap agreements in effect
to fix its LIBOR-based variable rate debt. Two of the interest rate swap
agreements with an aggregate notional amount of $100 million and a fixed rate of
2.58% terminate on March 31, 2003. In December 2002, Apria entered into four
additional swap agreements with terms as follows: two two-year agreements with
an aggregate notional amount of $50 million and a fixed rate of 2.43%; a
three-year agreement with a notional amount of $25 million and a fixed rate of
3.04%; and a four-year agreement with a notional amount of $25 million and a
fixed rate of 3.42%. All rates are stated before application of the interest
margins described above.
The swap agreements are being accounted for as cash flow hedges under SFAS
No. 133, "Accounting for Derivative and Hedging Activities." Accordingly, the
difference between the interest received and interest paid is reflected as an
adjustment to interest expense. For 2002, Apria paid a net settlement amount of
$780,000. Unrealized gains and losses on the fair value of the swap agreements
are reflected, net of taxes, in other comprehensive income. At December 31,
2002, the aggregate fair value of the swap agreements was a deficit of $2
million and, accordingly, is reflected in the accompanying balance sheet in
other accrued liabilities. Apria does not anticipate losses due to counterparty
nonperformance as its counterparties to the various swap agreements are
nationally-recognized financial institutions with strong credit ratings.
TREASURY STOCK. During 2002, Apria repurchased 1.6 million shares of its
common stock for $35 million in open market transactions. In 2000, Apria
repurchased 86,000 shares for $958,000. 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.
In March 2003, Apria announced that it would resume its stock repurchase
program, depending on market conditions and other considerations. Purchases may
be made through open market or privately negotiated transactions. Through March
24, 2003, Apria repurchased 50,700 shares for $1.1 million.
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. In accordance with 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 2002 was
$78.3 million. Allocation of this amount includes $55.4 million to goodwill and
$4 million to intangible assets. During 2001, the aggregate consideration for
acquisitions was $81.7 million. Cash paid for acquisitions, which includes
amounts deferred from prior year acquisitions, totaled $74 million, $80.3
million and $26.2 million in 2002, 2001 and 2000, 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 INVESTIGATION. As previously reported, since mid-1998 Apria has
been the subject of an investigation conducted by the U.S. Attorney's office in
Los Angeles and the U.S. Department of Health and Human Services. The
investigation concerns 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 and has responded to
various document requests and subpoenas.
Apria has been informed that the investigation 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.
Government representatives and counsel for the plaintiffs in the qui tam
actions asserted in July 2001 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, 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.
Apria has been exchanging information and having discussions with
government representatives in an attempt to explore whether it will be possible
to resolve this matter on a basis that would be considered fair and reasonable
by all parties. Apria cannot provide any assurances as to the outcome of these
discussions, however, or as to the outcome of the qui tam litigation in the
absence of a settlement. 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.
OFF-BALANCE SHEET ARRANGEMENTS
Apria is not a party to "off-balance sheet arrangements" as defined by the
Securities and Exchange Commission. However, from time to time the company
enters into certain types of contracts that contingently require the company to
indemnify parties against third party claims. The contracts primarily relate to:
(i) certain asset purchase agreements, under which the company may provide
customary indemnification to the seller of the business being acquired; (ii)
certain real estate leases, under which the company may be required to indemnify
property owners for environmental and other liabilities, and other claims
arising from the company's use of the applicable premises; and (iii) certain
agreements with the company's officers, directors and employees, under which the
company may be required to indemnify such persons for liabilities arising out of
their employment relationship.
The terms of such obligations vary by contract and in most instances a
specific or maximum dollar amount is not explicitly stated therein. Generally,
amounts under these contracts cannot be reasonably estimated until a specific
claim is asserted. Consequently, no liabilities have been recorded for these
obligations on the company's balance sheets for any of the periods presented.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Apria is exposed to interest rate fluctuations on its underlying variable
rate long-term debt. Apria is party to several interest rate swap agreements
that it utilizes to moderate such exposure. Apria does not use derivative
financial instruments for trading or other speculative purposes.
At December 31, 2002, Apria's term loan borrowings totaled $263.4 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 December 31, 2002, all of
Apria's outstanding term debt was tied to LIBOR.
In October 2001, Apria entered into two interest rate swap agreements with
a total notional amount of $100 million to pay a fixed rate of 2.58% (before
application of interest margin). These swap agreements expire March 31, 2003. In
December 2002, Apria entered into four additional interest rate swap agreements
with a total notional amount of $100 million to pay fixed rates ranging from
2.43% to 3.42% (before application of interest margin). The terms of the new
swap agreements range from two to four years.
Based on the term debt outstanding and the swap agreements in place at
December 31, 2002, a 100 basis point change in the applicable interest rates
would increase or decrease Apria's annual cash flow and pretax earnings by
approximately $630,000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Long-term Debt - Hedging Activities."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report and Consolidated Financial Statements
listed in the "Index to Consolidated Financial Statements and Financial
Statement Schedule" are filed as part of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS
Information regarding Apria's executive officers is set forth under the
caption "Executive Officers" in Item 1 hereof.
DIRECTORS
Set forth in the table below are the names, ages and past and present
positions of the persons serving as Apria's Directors as of March 14, 2003. The
term of each Director expires in 2003.
BUSINESS EXPERIENCE DURING LAST DIRECTOR
NAME AND AGE FIVE YEARS AND DIRECTORSHIPS SINCE
------------ ---------------------------- -----
Ralph V. Whitworth, 47 Chairman of the Board of Directors of Apria since 1998. Mr. 1998
Whitworth is a principal and Managing Member of Relational
Investors LLC, a private investment company. He is also a
principal in Relational Advisors LLC, a financial advisory
and investment-banking firm based in San Diego, California,
which is registered as a broker-dealer under Section 15(b)
of the Securities Exchange Act of 1934 and a member of the
National Association of Securities Dealers, Inc. Mr. Whitworth
is also a Director of Mattel, Inc. and Waste Management, Inc.
Vicente Anido, Jr., 50 President, Chief Executive Officer and a Director of ISTA 2002
Pharmaceuticals, Inc., an ophthalmic pharmaceutical company
located in Irvine, California, since December 2001. He
previously served as General Partner of Windamere Venture
Partners, a medical communications company, from 2000 to
2002. From 1996 to 1999 he served as President and Chief
Executive Officer of CombiChem, Inc., a drug discovery company.
I.T. Corley, 57 Chairman of the Board of Directors, President and Chief 2003
Executive Officer of Strategic Materials, Inc. since 1995.
Strategic Materials, Inc. is a large, privately-owned glass
recycler.
David L. Goldsmith, 54 Managing Director of RS Investment Management, an investment 1987*
management firm, since February 1999. He served as Managing
Director of Robertson, Stephens Investment Management, an
investment management firm, in 1998 and 1999.
Lawrence M. Higby, 57 President and Chief Executive Officer and a Director of 2002
Apria. From 1997 until his appointment as Chief Executive
Officer, Mr. Higby served as Apria's President and Chief
Operating Officer. Mr. Higby also served as Apria's Chief
Executive Officer on an interim basis from January through May
1998.
-----------------------------------
* Director of Homedco Group Inc., from 1987 until the June 1995 merger with Abbey Healthcare
Group Inc. which formed Apria. Director of Apria from the date of the merger until the present.
BUSINESS EXPERIENCE DURING LAST DIRECTOR
NAME AND AGE FIVE YEARS AND DIRECTORSHIPS SINCE
------------ ---------------------------- -----
Richard H. Koppes, 56 Of Counsel to Jones, Day, Reavis & Pogue, a law firm, and a 1998
Co-Director of Education Programs at Stanford University
School of Law. He is a member of the Board of Directors of
ICN Pharmaceuticals, Inc. He served as a principal of
American Partners Capital Group, a venture capital and
consulting firm, from 1996 to 1998.
Philip R. Lochner, Jr., 60 Senior Vice President - Chief Administrative Officer of Time 1998
Warner Inc. (now AOL Time Warner Inc.) from 1991 to 1998. He is
a member of the Advisory Council of Republic New York
Corporation and is also a Director of Clarcor, Inc., GTech
Holdings Corp. and Solutia Inc.
Jeri L. Lose, 45 Vice President, Information Technology and Chief Information 2002
Officer of St. Jude Medical, Inc., a manufacturer of cardiac
medical devices since 1999. Previously, she served as Vice
President, Systems Development at U.S. Bancorp in St. Paul,
Minnesota from 1993 to 1999.
Beverly Benedict Thomas, 60 Managing Partner of Thomas Consulting Group (formerly BBT 1998
Strategies), a consulting firm specializing in public affairs
and strategic planning.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT BY CERTAIN COMPANY AFFILIATES
Section 16(a) of the Exchange Act requires Apria's Directors and executive
officers, and persons who own more than 10% of a registered class of Apria's
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission and The New York Stock Exchange, Inc.
Directors, executive officers and greater than 10% stockholders are required by
the Securities and Exchange Commission to furnish the company with copies of the
reports they file.
Based solely on its review of the copies of such reports and written
representations from certain reporting persons that certain reports were not
required to be filed by such persons, the company believes that all of its
Directors, executive officers and greater than 10% beneficial owners complied
with all filing requirements applicable to them with respect to transactions
during the 2002 fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY OF EXECUTIVE COMPENSATION
The following table sets forth all compensation for the 2002, 2001, and
2000 fiscal years paid to or earned by Apria's Chief Executive Officer and the
three other executive officers of the company who were serving in such capacity
as of December 31, 2002, as well as George J. Suda, Michael J. Keenan and Philip
L. Carter.
SUMMARY COMPENSATION TABLE
-------------------------------------------------------------------------------------------------------------------
--------------------- -------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION(1)
--------------------- -------------------------
OPTIONS LTIP ALL OTHER
SALARY(2) BONUS GRANTED PAYOUTS(3) COMPENSATION
NAME YEAR ($) ($) (#) ($) ($)
----------------------------------- ---- --------- --------- ------------ ---------- --------------
Lawrence M. Higby................. 2002 593,716 600,000 100,000 -- 2,831,619 (6)
President and Chief Executive 2001 463,010 460,000 300,000(5) -- 3,313 (7)
Officer (4) 2000 443,553 285,224 40,000(5) 440,000 3,330 (7)
Lawrence A. Mastrovich............ 2002 250,686 375,000 200,000 -- 144,764(10)
Chief Operating Officer (8) 2001 184,003 -- 75,000(5)(9) -- 1,952,782(11)
2000 196,675 123,165 30,000(5) 190,000 115,685(12)
James E. Baker.................... 2002 228,340 225,000 15,000(5) -- 5,500 (7)
Chief Financial Officer 2001 164,191 111,563 50,000 -- 229,874(13)
2000 150,243 29,847 10,000(5) -- 452,391(14)
Anthony S. Domenico............... 2002 225,646 225,000 20,000(5) -- 11,158(16)
Executive Vice President, 2001 57,425 -- 75,000 -- --
Sales (15) 2000 -- -- -- -- --
Michael J. Keenan................. 2002 227,893 209,700 20,000(5) -- 751,226(18)
Executive Vice President, 2001 205,725 163,795 40,000(5) -- 3,313 (7)
Business Operations (17) 2000 184,880 -- 15,000(5) 178,880 442,892(19)
George J. Suda.................... 2002 252,504 250,000 20,000(5) -- 750,519(21)
Executive Vice President, 2001 233,024 230,000 75,000(5) -- 3,313 (7)
Information Services (20) 2000 218,186 136,130 20,000(5) 210,061 3,330 (7)
Philip L. Carter.................. 2002 253,170 -- -- -- 16,550,470(23)
Chief Executive Officer (22) 2001 691,916 680,000 500,000(5) -- 3,313 (7)
2000 661,538 421,354 75,000(5) 680,000 3,330 (7)
(1) Apria has not issued stock appreciation rights or restricted stock awards.
(2) These amounts include an automobile allowance which is paid as salary.
Salary is paid on the basis of bi-weekly pay periods, with payment for
each period being made during the week following its termination. Due to
the fact that some years contain payment dates for pay periods which begin
or end in other years, amounts reported as salary paid for a particular
year may vary slightly from the actual amounts of the salaries of the
executive officers listed above.
(3) Payments under a two-year incentive plan adopted by the Board of Directors
in December 1998. Includes payments made in 2001 but allocable to the
1999-2000 period covered by the plan.
(4) Mr. Higby was appointed Chief Executive Officer upon the resignation of
Philip L. Carter on February 12, 2002. Prior to that time he had served as
the company's Chief Operating Officer since 1997.
(5) Option grant for 2000 approved by the company's Board of Directors in
October 1999 but not effective and not fixed as to price until January 3,
2000. Option grant for 2001 approved by the company's Board of Directors
in October 2000 but not effective and not fixed as to price until January
2, 2001. Option grant for 2002 approved by the company's Board of
Directors in October 2001, but not effective and not fixed as to price
until January 2, 2002.
(6) $5,500 annual contribution by Apria to the company's 401(k) Savings Plan
in the name of the individual and $2,826,119 in net proceeds from the
exercise of employee stock options.
(7) Annual contribution by Apria to the company's 401(k) Savings Plan in the
name of the individual.
(8) Mr. Mastrovich served as an Executive Vice President for the company
during 2000 and 2001 until his resignation on August 8, 2001. Thereafter,
he was hired as the company's Chief Operating Officer effective April 4,
2002.
(9) Options cancelled prior to vesting when Mr. Mastrovich left Apria in
August 2001.
(10) $2,134 annual contribution by Apria to the company's 401(k) Savings Plan
in the name of the individual and $142,630 relocation assistance payment.
(11) $1,952,782 in value realized from the exercise of employee stock options.
(12) $4,285 annual contribution by Apria to the company's 401(k) Savings Plan
in the name of the individual and $111,400 in net proceeds from the
exercise of employee stock options.
(13) $4,182 annual contribution by Apria to the company's 401(k) Savings Plan
in the name of the individual and $225,692 in value realized from the
exercise of employee stock options.
(14) $3,330 annual contribution by Apria to the company's 401(k) Savings Plan
in the name of the individual and $449,061 in value realized from the
exercise of employee stock options.
(15) Mr. Domenico was hired as the company's Executive Vice President, Sales,
in August, 2001.
(16) $5,500 annual contribution by Apria to the company's 401(k) Savings Plan
the name of the individual and $5,658 relocation assistance payment.
(17) Effective July 18, 2002, Mr. Keenan's position was reclassified by the
Board of Directors so that he is no longer deemed to be an "executive
officer" for Securities and Exchange Commission reporting purposes.
(18) $5,500 annual contribution by Apria to the company's 401(k) Savings Plan
in the name of the individual and $745,726 in net proceeds from the
exercise of employee stock options.
(19) $3,330 annual contribution by Apria to the company's 401(k) Savings Plan
in the name of the individual and $439,562 in value realized from the
exercise of employee stock options.
(20) Effective July 18, 2002, Mr. Suda's position was reclassified by the Board
of Directors so that he is no longer deemed to be an "executive officer"
for Securities and Exchange Commission reporting purposes.
(21) $5,500 annual contribution by Apria to the company's 401(k) Savings Plan
in the name of the individual and $745,019 in net proceeds from the
exercise of employee stock options.
(22) Mr. Carter resigned from the company on February 12, 2002.
(23) $12,729,973 in net proceeds from the exercise of employee stock options
and $2,667,687 in payments under an Employment Agreement between Mr.
Carter and the company and $1,152,810 in payments under a Non-competition
Agreement between Mr. Carter and the company.
SUMMARY OF OPTION GRANTS
The following table provides information with respect to grants of options
in 2002 to Apria's Chief Executive Officer and the three other executive
officers of the company who were serving in such capacity as of December 31,
2002, as well as Michael J. Keenan, George J. Suda and Philip L. Carter. These
amounts and calculations include options approved in 2001 which did not become
effective until January 1, 2002, but do not include options approved in 2002
which did not become effective until 2003.
OPTION GRANTS TABLE
------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF VALUE AT ACCRUAL RATE
SECURITIES % OF TOTAL EXPIRATION OF STOCK APPRECIATION
UNDERLYING OPTIONS GRANTED DATE OF FOR OPTION TERM ($)
OPTIONS TO EMPLOYEES IN EXERCISE OPTIONS ------------------------
NAME GRANTED FISCAL YEAR PRICE ($) GRANTED 5% 10%
--------------------------- ----------- --------------- ----------- ----------- ----------- -----------
Lawrence M. Higby 100,000 7.1% 22.70 3/08/12 1,427,591 3,617,795
Lawrence A. Mastrovich 200,000 14.1% 24.18 4/03/12 3,041,334 7,707,339
James E. Baker 15,000 1.1% 24.01 1/02/12 226,496 573,986
Anthony S. Domenico 20,000 1.4% 24.01 1/02/12 301,995 765,315
Michael J. Keenan 20,000 1.4% 24.01 1/02/12 301,995 765,315
George J. Suda 20,000 1.4% 24.01 1/02/12 301,995 765,315
Philip L. Carter -- -- -- -- -- --
SUMMARY OF OPTIONS EXERCISED
The following table provides information with respect to the exercise of
stock options during the 2002 fiscal year by Apria's Chief Executive Officer and
the three other executive officers of the company who were serving in such
capacity as of December 31, 2002, as well as by Michael J. Keenan, George J.
Suda and Philip L. Carter, together with the fiscal year-end value of
unexercised options.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUE
-------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS AT THE-MONEY OPTIONS AT
SHARES FISCAL YEAR-END FISCAL YEAR-END(1)
ACQUIRED ON VALUE ------------------------- -------------------------
EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
----------- ----------- ------------------------- -------------------------
NAME (#) ($) (#) / (#) ($) / ($)
------------------------ ----------- ----------- ------------------------- -------------------------
Lawrence M. Higby 190,000 2,826,119 331,666/368,334 1,956,596/372,279
Lawrence A. Mastrovich -- -- -- /200,000 -- / --
James E. Baker -- -- 25,799/51,668 123,931/65,013
Anthony S. Domenico -- -- 25,000/70,000 -- / --
Michael J. Keenan 45,000 745,726 26,633/51,667 69,080/26,512
George J. Suda 53,333 745,019 25,000/76,667 -- /35,352
Philip L. Carter 800,000 12,729,973 -- / -- -- / --
------------------------
(1) Market value of the securities underlying the options at year-end, minus the
exercise or base price of "in-the-money" options. The market value of a
share of Apria's common stock at the close of trading on the last trading
day of 2002 (December 31) was $22.24.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 2002, no member of the Compensation Committee was either an officer
or an employee of the company.
DIRECTORS' FEES
All Directors of Apria are reimbursed for their out-of-pocket expenses
incurred in connection with attending Board and related Committee meetings.
During 2002, all non-employee Directors received: (i) $1,000 per Board or
Committee meeting attended in person ($2,000 per Committee meeting for the
Director who is the Committee's chairperson) and (ii) $500 per Board or
Committee meeting attended via telephone. In addition, for services rendered
during 2002, the non-employee Chairman of the Board was granted an option to
purchase 25,000 shares of the company's common stock, and each other
non-employee Director was granted an option to purchase 15,000 shares. The
options are granted at a purchase or exercise price equal to the fair market
value on the date of grant.
EMPLOYMENT AND SEVERANCE AGREEMENTS
Apria has employment agreements, nondisclosure/noncompetition agreements
and/or severance agreements with the following executive officers and other
persons listed in the Summary Compensation Table.
LAWRENCE M. HIGBY. Pursuant to an Amended and Restated Employment Agreement
which became effective February 12, 2002, Mr. Higby serves as Apria's President
and Chief Executive Officer. The Agreement provides that Mr. Higby is to receive
an annual salary of $600,000, subject to increases at the discretion of the
company's Board of Directors or its Compensation Committee. Mr. Higby's annual
salary is being increased to $700,000 as of April 1, 2003. Mr. Higby is also
entitled to participate in Apria's annual bonus, incentive, 401(k) and other
benefit programs generally available to executive officers of the company. The
agreement also provides for (i) reasonable access to accountants for personal
financial planning, (ii) an automobile allowance, (iii) reimbursement of certain
other expenses and (iv) an indemnification of Mr. Higby on an after-tax basis in
the event he incurs an excise tax under Section 4999 of the Internal Revenue
Code.
The company also has entered into a Nondisclosure and Noncompetition
Agreement with Mr. Higby pursuant to which, if the company terminates Mr.
Higby's employment without cause, or if he terminates his employment with good
reason (including upon a change in control), Mr. Higby shall be entitled to
receive cash payments in exchange for the performance of certain agreements
pertaining to nondisclosure and noncompetition following the termination.
Payments under the Nondisclosure and Noncompetition Agreement are required to be
made in 52 equal weekly installments following the termination, and shall equal,
in the aggregate, three times the sum of (i) his annual salary, (ii) the average
of his two most recent annual bonuses, (iii) his annual car allowance, and (iv)
an additional amount equal to the average annual cost for company employees of
obtaining certain post-employment medical insurance. The company shall be
required to provide an office and secretarial support at a cost not to exceed
$50,000 during the year following such a termination. In addition, the 150,000
share stock option grant issued to Mr. Higby in January 1998 will remain
exercisable for a period of three years following such termination.
LAWRENCE A. MASTROVICH. Pursuant to an Employment Agreement dated April 4,
2002, Mr. Mastrovich serves as the company's Chief Operating Officer. The
Agreement initially has a two-year term that is extended one day for each day of
Mr. Mastrovich's employment during its term. The Agreement may be terminated at
any time by the company or by Mr. Mastrovich. The Agreement provides that Mr.
Mastrovich's salary shall be at least $375,000. Mr. Mastrovich's annual salary
is being increased to $450,000 as of April 1, 2003. Mr. Mastrovich is entitled
to participate in Apria's annual bonus, incentive, 401(k) and other benefit
programs generally available to executive officers of the company. He is also
entitled to receive reimbursement of certain other expenses at the company's
discretion. If the company terminates Mr. Mastrovich's employment without cause,
or if he terminates his employment with good reason, Mr. Mastrovich shall
receive a lump sum payment equal to his annual salary and car allowance that
would have been payable through the remaining two-year term of the agreement,
plus two times the sum of (i) the average of his two most recent annual bonuses
and (ii) the average annual cost for company employees of obtaining certain
post-employment medical insurance. The Agreement also contains provisions
designed to indemnify Mr. Mastrovich on an after-tax basis in the event he
incurs an excise tax under Section 4999 of the Internal Revenue Code.
JAMES E. BAKER. In June 1997, Mr. Baker entered into an executive severance
agreement with the company. Pursuant to that agreement, Mr. Baker serves in a
position and undertakes duties at Apria's discretion. Currently, Mr. Baker
serves as Apria's Chief Financial Officer. The agreement provides that Mr.
Baker's salary shall be at the company's discretion. His annual salary is
currently $225,000 and will increase to $239,000 as of April 1, 2003. Mr. Baker
is entitled to participate in Apria's stock option plans and all other benefit
programs generally available to executive officers of the company at the
company's discretion. He is also entitled to bonuses in accordance with the
bonus plans from time to time in effect for Apria's executives and reimbursement
of certain expenses at the company's discretion. If the company terminates his
employment without cause, or if he terminates his employment with good reason,
Mr. Baker is entitled to receive severance pay equal to the sum of (i) his
annual salary, (ii) the average of his two most recent annual bonuses, (iii) his
annual car allowance and (iv) an additional amount equal to the average annual
cost for company employees of obtaining certain post-employment medical
insurance. However, in the event that such termination occurs during the
two-year period following a change in control, Mr. Baker is entitled to receive
severance pay equal to two times that amount. Such payments shall be payable in
periodic installments over one or two years, as applicable.
ANTHONY S. DOMENICO. In May 2002, Mr. Domenico entered into an executive
severance agreement with the company. A recent amendment to that agreement
became effective March 18, 2003. Pursuant to that agreement, Mr. Domenico serves
in a position and undertakes duties at Apria's discretion. Currently, Mr.
Domenico serves as Apria's Executive Vice President, Sales. The agreement
provides that Mr. Domenico's salary shall be at the company's discretion. His
annual salary is currently $225,000 and will increase to $250,000 as of April 1,
2003. Mr. Domenico is entitled to participate in Apria's stock option plans and
all other benefit programs generally available to executive officers of the
company at the company's discretion. He is also entitled to bonuses in
accordance with the bonus plans from time to time in effect for Apria's
executives and reimbursement of certain expenses at the company's discretion. If
the company terminates his employment without cause, or if he terminates his
employment with good reason, Mr. Domenico is entitled to receive severance pay
equal to two times the sum of (i) his annual salary, (ii) the average of his two
most recent annual bonuses, (iii) his annual car allowance and (iv) an
additional amount equal to the average annual cost for company employees of
obtaining certain post-employment medical insurance. Such payments shall be
payable in periodic installments over two years.
MICHAEL J. KEENAN. In June 1997, Mr. Keenan entered into an executive
severance agreement with the company. Pursuant to that agreement, Mr. Keenan
serves in a position and undertakes duties at Apria's discretion. Currently, Mr.
Keenan serves as Apria's Executive Vice President, Business Operations. The
agreement provides that Mr. Keenan's salary shall be at the company's
discretion. His annual salary is currently $225,000 and will increase to
$235,000 as of April 1, 2003. Mr. Keenan is entitled to participate in Apria's
stock option plans and all other benefit programs generally available to
executive officers of the company at the company's discretion. He is also
entitled to bonuses in accordance with the bonus plans from time to time in
effect for Apria's executives and reimbursement of certain expenses at the
company's discretion. If the company terminates his employment without cause, or
if he terminates his employment with good reason, Mr. Keenan is entitled to
receive severance pay equal to the sum of (i) his annual salary, (ii) the
average of his two most recent annual bonuses, (iii) his annual car allowance
and (iv) an additional amount equal to the average annual cost for company
employees of obtaining certain post-employment medical insurance. Such payments
shall be payable in periodic installments over one year.
GEORGE J. SUDA. In March 2000, Mr. Suda entered into an executive severance
agreement with the company. Pursuant to that agreement, Mr. Suda serves in a
position and undertakes duties at the company's discretion. Currently, Mr. Suda
serves as Apria's Executive Vice President, Information Services. The agreement
provides that Mr. Suda's salary shall be at the company's discretion. His annual
salary is currently $250,000 and will increase to $280,000 as of April 1, 2003.
Mr. Suda is entitled to participate in Apria's stock option plans and all other
benefit programs generally available to executive officers of the company at the
company's discretion. He is also entitled to receive bonuses in accordance with
the bonus plans from time to time in effect for Apria's executives and
reimbursement of certain expenses at the company's discretion. If Apria
terminates his employment without cause, or if he terminates his employment with
good reason (including upon a change in control), Mr. Suda is entitled to a lump
sum payment equal to two times the sum of (i) his annual salary, (ii) the
average of his two most recent annual bonuses, (iii) his annual car allowance
and (iv) an additional amount equal to the average annual cost for company
employees of obtaining certain post-employment medical insurance. The Agreement
also contains provisions designed to indemnify Mr. Suda on an after-tax basis in
the event he incurs an excise tax under Section 4999 of the Internal Revenue
Code.
PHILIP L. CARTER. Mr. Carter served as Apria's Chief Executive Officer
during 2001, but resigned on February 12, 2002. Pursuant to a Resignation and
General Release Agreement which became effective February 12, 2002, Mr. Carter
received two payments during February in the respective amounts of $61,333 and
$2,606,354. Mr. Carter has also received $1,303,177 under the terms of a
Nondisclosure and Noncompetition Agreement pursuant to which Mr. Carter was
entitled to receive cash payments in exchange for the performance of certain
agreements pertaining to nondisclosure and noncompetition following his
resignation. The relevant agreements also contain provisions designed to
indemnify Mr. Carter on an after-tax basis in the event he incurs an excise tax
under Section 4999 of the Internal Revenue Code.
REPORT OF THE COMPENSATION COMMITTEE
--------------------------------------------------------------------------------
TO: THE BOARD OF DIRECTORS
The Compensation Committee oversees Apria's overall compensation program
for its senior and mid-level management. In addition, the Compensation Committee
evaluates the performance and specifically establishes the compensation of the
Chief Executive Officer. The Compensation Committee is comprised entirely of
independent Directors who are not officers or employees of Apria.
COMPENSATION PHILOSOPHY AND PROGRAM FOR SENIOR MANAGEMENT
During 2002, Apria's compensation program for executive officers was
designed to:
- reward each member of senior management commensurately with the
company's overall growth and financial performance;
- attract and retain individuals who are capable of leading the company in
achieving its business objectives in an industry characterized by
competitiveness, growth and change; and
- encourage ownership of Apria's stock by executive officers.
The company believes a substantial portion of the annual compensation of
each member of senior management should relate to, and should be contingent
upon, the financial success of the company. As discussed below, the program
consists of, and is intended to strike a balance among, three elements:
- Salaries. Salary for the Chief Executive Officer is based principally on
the Committee's evaluation of individual job performance and an
assessment of the salaries and total compensation mix paid by other
similar companies to executive officers holding equivalent positions.
The salaries for all other executive officers are approved by the
Compensation Committee pursuant to recommendations made by the Chief
Executive Officer on the basis of similar criteria.
- Executive Bonuses. Executive bonuses are primarily based on an
evaluation of company performance against qualitative and quantitative
measures.
- Long-term Incentive Compensation. Long-term incentive awards such as
stock options or grants of restricted stock are also designed to insure
that incentive compensation is linked to the long-term performance of
Apria and its common stock.
In recent years, the Committee's overall compensation strategy has been
adjusted so that one-half of the total cash compensation earnable by executive
officers consists of bonuses based on the achievement of company financial and
operating objectives and individual performance objectives. Stock options or
restricted stock will also continue to represent a significant portion of
executive compensation if managerial efforts result in continued stock price
increases.
In 2003, the Compensation Committee and the Board of Directors established
new Stock Ownership Requirements for all members of senior management. Under the
Requirements, each senior officer must, within the next five years, acquire and
hold shares of Apria common stock with a total value at least equivalent to a
target level of ownership. The targets range from one-and-one-half to three
times base salary, depending on the officer's position. All stock options
granted in 2003 and the future will require a one-year holding period for the
"net" shares received upon exercise (after deduction of shares sold to pay taxes
and the option exercise price), even if the officer has achieved the applicable
target level of ownership. For officers not yet in compliance with their target,
only one-half of the net after-tax shares may be sold following the one-year
holding period. The remaining option shares, together with at least one-half of
all Apria shares presently held by such senior officers, must continue to be
held as an investment in the company.
FACTORS AFFECTING THE EVALUATION OF EXECUTIVE PERFORMANCE FOR 2002
During 2002, the company continued to pursue a plan for achieving
profitable operating results through the following principal elements:
- maintaining focus on existing service offerings and increasing emphasis
on home respiratory therapy;
- supplementing internal growth with selective acquisitions; and
- reducing costs and enhancing margins and cash flows.
As those objectives have been and continue to be achieved, management
continues to place emphasis on sales and operations as well as compliance
issues. Members of senior management have been asked to adapt their activities
so as to achieve the benefits sought by the foregoing strategies. Accordingly,
members of senior management were and continue to be evaluated in light of their
contributions toward achievement of the objectives established by the new Chief
Executive Officer and the Board. Future compensation for senior management will
continue to be based in large part on the company's ability to effectively
develop and implement strategies that enable Apria to achieve those objectives
and enhance stockholder value.
2002 TOTAL COMPENSATION FOR THE CHIEF EXECUTIVE OFFICER
Lawrence M. Higby. When Mr. Higby became the company's Chief Executive
Officer, the Committee designed a compensation plan which was consistent with
that provided to the company's other executive officers. However, although a
significant portion of Mr. Higby's 2002 compensation consisted of a bonus plan
based largely on company performance, the Committee did not rely entirely on
predetermined formulas or a limited set of criteria when it evaluated the
performance of the company's Chief Executive Officer. The Committee considered:
- management's overall accomplishments;
- Mr. Higby's individual accomplishments;
- the company's financial performance; and
- other criteria discussed below.
The Committee designed a compensation package for Mr. Higby which provided
a competitive salary with the potential of significant bonus plan compensation
in the event the company performed well under his leadership. For 2002, Mr.
Higby's annual salary level as Chief Executive Officer was $600,000 and his
total bonus compensation was $600,000. This bonus award was the maximum amount
payable under the bonus plan. Of the award, 80% was based on the company's
achievement of certain financial objectives related to earnings before interest,
taxes, depreciation and amortization ("EBITDA"), earnings per share and net
revenue, with a lesser element (20%) paid on recommendation of the Compensation
Committee based on the implementation of certain strategic initiatives. All
performance targets and goals concerning the implementation of initiatives were
met or exceeded. Mr. Higby's long-term compensation package was also designed to
couple his interests with those of Apria's stockholders, including options to
purchase up to 100,000 shares of Apria's common stock at an exercise price of
$22.70 per share granted to Mr. Higby upon his promotion to Chief Executive
Officer. As an executive officer, Mr. Higby is subject to the newly enacted
Stock Ownership Requirements with a target ownership level equal to three times
his base salary.
Philip L. Carter. Philip L. Carter was replaced by Lawrence M. Higby as
Apria's Chief Executive Officer on February 12, 2002. The bulk of Mr. Carter's
2002 compensation was paid to him pursuant to a Resignation and General Release
Agreement.
EXECUTIVE OFFICER SALARIES
In setting salaries, the first element of the executive compensation
program, the Committee did not use a predetermined formula. Instead, the 2002
salaries of the Chief Executive Officer and the other executive officers were
based on:
- the Committee's evaluation of individual job performance;
- an assessment of the company's performance; and
- a consideration of salaries paid by similar companies to executive
officers holding equivalent positions.
Lawrence M. Higby. During 2002 Mr. Higby's salary was increased to $600,000
upon his promotion to Chief Executive Officer.
Philip L. Carter. The amount received by Mr. Carter as salary in 2002 is
shown in the "Salary" column of the Summary Compensation Table. The Committee
felt the salary was justified due to the fact that the company's profitability
had continued to improve.
Other Executive Officers. The 2002 salaries of the other executive officers
are shown in the "Salary" column of the Summary Compensation Table.
EXECUTIVE OFFICER BONUSES
Bonuses for all executive officers were awarded under the 2002 Executive
Officer Incentive Compensation Plan, a plan adopted to provide certain members
of senior management with significant bonus compensation (up to the full amount
of each officer's 2002 salary) upon the achievement of improved financial and
operating performance levels for the 2002 fiscal year and the achievement of key
individual performance objectives by the executives.
The target levels of performance as well as the individual objectives
established in the 2002 Executive Officer Incentive Compensation Plan were
achieved, and the resulting 2002 bonus payments to Mr. Higby and the other most
highly compensated executive officers of the company are listed in the "Bonus"
column of the Summary Compensation Table. Because publication of sensitive and
proprietary quantifiable targets and other specific goals for the company and
its executive officers could place the company at a competitive disadvantage, it
has not been the company's practice to disclose the specific financial
performance target levels set forth in its incentive compensation plans.
However, the actual results for each of the quantifiable target factors are
publicly available and reflect an increase in 2002 net revenues of approximately
10.6% ($120,281,000) over the 2001 level. In addition, EBITDA (after adjustments
for unusual events and changes in accounting rules) increased by approximately
14.3% ($37,497,000) and similarly adjusted earnings per share increased by
approximately 30% ($0.43 per share) over 2001 levels.
EXECUTIVE OFFICER LONG-TERM INCENTIVE COMPENSATION
As noted above, the company provided long-term compensation to certain
members of senior and mid-level management under various stock incentive plans.
The stock incentive plans provide the company with the ability to periodically
reward key employees, including executive officers, with options to purchase
shares of the company's common stock.
The value of stock options is tied to the future performance of the
company's common stock and provides value to the recipient only when the price
of the company's common stock increases above the option grant price.
Mr. Higby and some of the other executive officers received stock option
grants as a part of their 2002 compensation, which grants are shown in the
"Options Granted" column of the Summary Compensation Table.
TAX TREATMENT OF STOCK OPTIONS
The Compensation Committee has considered the anticipated tax treatment to
the company regarding the compensation and benefits paid to the executive
officers of the company in light of the enactment of Section 162(m) of the
United States Internal Revenue Code. The basic philosophy of the Compensation
Committee is to strive to provide the executive officers of the company with a
compensation package which will preserve the deductibility of such payments for
the company to the greatest extent possible. However, certain types of
compensation payments and their deductibility (e.g., the spread on exercise of
non-qualified options) depend upon the timing of an executive officer's vesting
or exercise of previously granted rights. Moreover, interpretations of and
changes in the tax laws and other factors beyond the Compensation Committee's
control may affect the deductibility of certain compensation payments. In
addition, in order to attract and retain qualified management personnel, it has
sometimes proven necessary to grant certain long-term incentives that may not be
deductible under Section 162(m) of the Code.
Date: March 21, 2003
THE COMPENSATION COMMITTEE
OF THE BOARD OF DIRECTORS
Philip R. Lochner, Jr. (Chairman)
Vicente Anido, Jr.
Beverly Benedict Thomas
Ralph V. Whitworth
PERFORMANCE GRAPH
--------------------------------------------------------------------------------
The following graph shows the changes over the last five-year period in the
value of $100 invested in (i) the common stock of Apria, (ii) the S&P 500 Stock
Index, and (iii) the Peer Group Index (1). The value of each investment is based
on share price appreciation, with reinvestment of all dividends. The investments
are assumed to have occurred at the beginning of the period presented.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
AMONG APRIA HEALTHCARE GROUP INC.,
THE S&P 500 INDEX AND THE PEER GROUP INDEX
[OBJECT OMITTED, graphically depicts the data presented in the table below]
12/97 12/98 12/99 12/00 12/01 12/02
--------------------------- ----- ------ ------ ------ ------ ------
Apria Healthcare Group Inc. 100 66.51 133.49 221.40 185.97 165.51
S & P 500 100 128.58 155.64 141.46 124.65 97.10
Peer Group 100 113.36 95.72 154.71 164.19 171.71
(1) The Peer Group Index is based on the cumulative total returns of the
following companies: Coram Healthcare Corporation, Lincare Holdings,
Inc., Optioncare, Inc., and American Homepatient, Inc. In 1997, Rotech
Medical Corporation was also included in the Peer Group Index.
It should be noted that this graph represents historical stock price
performance and is not necessarily indicative of any future stock price
performance.
The foregoing report of the Compensation Committee of the Board of
Directors regarding compensation and the performance graph that appears
immediately after such report shall not be deemed to be soliciting material or
to be filed with the Securities and Exchange Commission under the Securities Act
of 1933, as amended, or the Exchange Act, or incorporated by reference in any
document so filed.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of March 14, 2003, with
respect to the beneficial ownership of Apria's common stock by each person who
is known by the company to beneficially own more than 5% of Apria's common
stock, each Director of the company, all past and present executive officers
listed in the summary compensation table and all Directors and executive
officers as a group. Except as otherwise indicated, beneficial ownership
includes both voting and investment power with respect to the shares shown.
SECURITY OWNERSHIP TABLE
-----------------------------------------------------------------------------------------------------------
AMOUNT AND NATURE OF PERCENT OF
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------------------------------------------------------------------------------------------------
Barclays Global Investors, LTD.(1) 2,777,011 5.05
Lawrence M. Higby(2) 494,333 *
David L. Goldsmith(3) 406,902 *
Ralph V. Whitworth(4) 121,666 *
James E. Baker(5) 88,027 *
Richard H. Koppes(6) 83,000 *
Philip R. Lochner, Jr.(6) 82,000 *
Lawrence A. Mastrovich(7) 66,666 *
George J. Suda(8) 65,933 *
Beverly Benedict Thomas(9) 58,000 *
Michael J. Keenan(10) 51,632 *
Anthony S. Domenico(11) 31,666 *
Vicente Anido, Jr.(12) 15,000 *
I. T. Corley(12) 15,000 *
Jeri L. Lose(12) 15,000 *
Philip L. Carter 0 *
All current directors and executive officers as a group 1,477,260 2.69
(12 persons)(13)
------------------
* Less than 1%
(1) According to a Schedule 13G, dated February 8, 2002, filed with the
Securities and Exchange Commission, Barclays Global Investors, Ltd.
("BGLTD"), a bank as defined in Section 3(a)(6) of the Securities Exchange
Act of 1934, has sole dispositive power as to 2,777,011 shares and sole
voting power as to 2,707,799 shares. BGLTD holds 4,230 of the shares
directly and has sole dispositive and voting power as to those shares. The
balance of the shares is held by two related banks: Barclays Global Fund
Advisors ("BGF"), which has sole voting and dispositive power as to 343,304
shares, and Barclays Global Investors, N.A. ("BGNA"), which has sole voting
power as to 2,360,265 shares and sole dispositive power as to 2,429,477.
The mailing address for BGLTD, BGF and BGNA is 45 Fremont Street, San
Francisco, California 94105.
(2) Includes 483,333 shares subject to options that are currently exercisable.
(3) Includes 300,236 shares held in a shared trust with Mr. Goldsmith's wife
and 106,666 shares subject to options that are currently exercisable.
(4) Includes 121,666 shares subject to options that are currently exercisable.
(5) Includes 34,133 shares subject to options that are currently exercisable.
(6) Includes 80,000 shares subject to options that are currently exercisable.
(7) Includes 66,666 shares subject to options which will become exercisable on
April 3, 2003.
(8) Includes 63,333 shares subject to options that are currently exercisable.
(9) Includes 55,000 shares subject to options that are currently exercisable.
(10) Includes 51,632 shares subject to options that are currently exercisable.
(11) Includes 31,666 shares subject to options that are currently exercisable.
(12) Includes 15,000 shares subject to options that are currently exercisable.
(13) Includes shares owned by certain trusts. Also includes 1,037,464 shares
subject to options that are currently exercisable and 66,666 shares subject
to options that will become exercisable on April 3, 2003.
EQUITY COMPENSATION PLANS
The following table sets forth information as of December 31, 2002 for
equity compensation plans:
NUMBER OF SECURITIES NUMBER OF
TO BE ISSUED UPON WEIGHTED AVERAGE SECURITIES REMAINING
EXERCISE OF EXERCISE PRICE OF AVAILABLE FOR
PLAN CATEGORY OUTSTANDING OPTIONS OUTSTANDING OPTIONS FUTURE ISSUANCE
------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by shareholders............. 3,883,333 $ 21.16 1,603,900
Equity compensation plans not
approved by shareholders............. 684,301 $ 20.28 1,509,981
--------- ---------
Totals............................. 4,567,634 $ 21.03 3,113,881
========= =========
Apria's 1998 Nonqualified Stock Incentive Plan is the only equity
compensation plan that has not been approved by shareholders. The plan was
approved by the Board of Directors on December 15, 1998 and became effective as
of that date. The 1998 Nonqualified Stock Incentive Plan authorizes the issuance
of 1,000,000 shares of common stock plus, in each year commencing in 2000, 1% of
the number of shares of common stock outstanding as of the preceding December
31. The 1998 Nonqualified Stock Incentive Plan also provides for the grant of
restricted stock awards, performance share awards, stock appreciation rights and
stock bonuses. The maximum number of shares subject to options and stock
appreciation rights that are granted during any calendar year to any individual
shall be limited to 200,000 shares and for non-employee directors shall be
limited to 30,000 shares. Persons eligible to receive awards under the 1998
Nonqualified Stock Incentive Plan include directors, key employees and others
who provide valuable bona fide services to the company or its subsidiaries. The
Compensation Committee administers the 1998 Nonqualified Stock Incentive Plan
and establishes the option exercise price with respect to options. Unless
previously terminated by the Board of Directors, the 1998 Nonqualified Stock
Incentive Plan will terminate on December 14, 2008.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN TRANSACTIONS
None.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Within the 90 days
prior to the date of this report, the company carried out an evaluation, under
the supervision and with the participation of the company's management,
including the company's Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the company's disclosure
controls and procedures. Based upon that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the company that is required to be included in the company's
periodic Securities and Exchange Commission filings.
(b) Changes in internal controls. No significant changes to the company's
internal controls, or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, have been made during the
periods covered by this report.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE, AND REPORTS ON FORM 8-K
(a) 1. The documents described in the "Index to Consolidated Financial
Statements and Financial Statement Schedule" are included in
this report starting at page F-1.
2. The financial statement schedule described in the "Index to
Consolidated Financial Statements and Financial Statement
Schedule" is included in this report starting on page S-1.
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and
Exchange Commission are not required under the related
instructions or are inapplicable, and therefore have been
omitted.
3. Exhibits included or incorporated herein:
See exhibit index.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of
the fiscal year covered by this report.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report...................................... F-1
Consolidated Balance Sheets - December 31, 2002 and 2001.......... F-2
Consolidated Statements of Income - Years ended
December 31, 2002, 2001 and 2000............................... F-3
Consolidated Statements of Stockholders' Equity and Comprehensive
Income - Years ended December 31, 2002, 2001 and 2000.......... F-4
Consolidated Statements of Cash Flows - Years ended
December 31, 2002, 2001 and 2000............................... F-5
Notes to Consolidated Financial Statements........................ F-6
FINANCIAL STATEMENT SCHEDULE
Schedule II - Valuation and Qualifying Accounts................... S-1
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of
Apria Healthcare Group Inc.:
We have audited the accompanying consolidated balance sheets of Apria Healthcare
Group Inc. and subsidiaries (the "Company") as of December 31, 2002 and 2001,
and the related consolidated statements of income, stockholders' equity and
comprehensive income, and cash flows for each of the three years in the period
ended December 31, 2002. Our audits also included the financial statement
schedule as of and for each of the three years in the period ended December 31,
2002, included in the Index at Item 15(a)(2). These consolidated financial
statements and this financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and this financial statement schedule based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Apria Healthcare Group Inc. and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the company
changed its method of accounting for goodwill and other intangible assets during
2002 as a result of adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets."
/s/ DELOITTE & TOUCHE LLP
Costa Mesa, California
February 18, 2003
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
----------------------
(IN THOUSANDS, EXCEPT SHARE DATA) 2002 2001
---------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents .................................................... $ 26,383 $ 9,359
Accounts receivable, less allowance for doubtful accounts of $32,206 and
$32,073 at December 31, 2002 and 2001, respectively ........................ 185,298 162,092
Inventories, net ............................................................. 27,067 25,084
Deferred income taxes ........................................................ 37,205 33,017
Prepaid expenses and other current assets .................................... 14,408 10,271
--------- ---------
TOTAL CURRENT ASSETS .................................................. 290,361 239,823
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of
$368,420 and $342,010 at December 31, 2002 and 2001, respectively ........... 186,210 165,471
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET ...................................... 54,134 47,312
DEFERRED INCOME TAXES .......................................................... 3,446 37,838
GOODWILL ....................................................................... 248,863 193,458
INTANGIBLE ASSETS, NET ......................................................... 6,142 4,863
OTHER ASSETS ................................................................... 6,500 7,017
--------- ---------
$ 795,656 $ 695,782
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ............................................................. $ 65,514 $ 71,198
Accrued payroll and related taxes and benefits ............................... 38,212 33,907
Accrued insurance ............................................................ 8,021 10,376
Income taxes payable ......................................................... 10,285 9,060
Other accrued liabilities .................................................... 39,968 34,754
Current portion of long-term debt ............................................ 21,713 15,455
--------- ---------
TOTAL CURRENT LIABILITIES ............................................. 183,713 174,750
LONG-TERM DEBT, net of current portion ......................................... 247,655 278,234
DEFERRED INCOME TAXES .......................................................... 12,979 -
COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value:
10,000,000 shares authorized; none issued .................................. - -
Common stock, $.001 par value:
150,000,000 shares authorized; 56,580,677 and 54,690,267 shares
issued at December 31, 2002 and 2001, respectively; 54,897,521 and
54,604,167 outstanding at December 31, 2002 and 2001, respectively ....... 56 55
Additional paid-in capital ................................................... 397,417 368,231
Treasury stock, at cost; 1,683,156 and 86,100 shares at
December 31, 2002 and 2001, respectively .............................. (35,961) (961)
Accumulated deficit .......................................................... (8,959) (124,554)
Accumulated other comprehensive (loss) income ................................ (1,244) 27
--------- ---------
351,309 242,798
--------- ---------
$ 795,656 $ 695,782
========= =========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
-----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000
---------------------------------------------------------------------------------------------------------------
Net revenues ...................................................... $ 1,252,196 $ 1,131,915 $ 1,014,201
Costs and expenses:
Cost of net revenues:
Product and supply costs .................................... 228,964 204,666 188,581
Patient service equipment depreciation ...................... 98,288 89,985 77,819
Nursing services ............................................ 958 1,223 1,642
Other ....................................................... 12,707 11,773 10,900
----------- ----------- -----------
TOTAL COST OF NET REVENUES .............................. 340,917 307,647 278,942
Provision for doubtful accounts ................................ 45,115 37,110 32,166
Selling, distribution and administrative ....................... 684,738 631,582 554,691
Amortization of goodwill and intangible assets ................. 2,681 12,349 10,205
----------- ----------- -----------
TOTAL COSTS AND EXPENSES ................................ 1,073,451 988,688 876,004
----------- ----------- -----------
OPERATING INCOME ........................................ 178,745 143,227 138,197
Interest expense .................................................. 15,028 27,612 42,271
Interest income ................................................... (4,235) (1,927) (2,215)
----------- ----------- -----------
INCOME BEFORE TAXES AND EXTRAORDINARY CHARGE ............ 167,952 117,542 98,141
Income tax expense ................................................ 52,357 44,097 41,135
----------- ----------- -----------
INCOME BEFORE EXTRAORDINARY CHARGE ...................... 115,595 73,445 57,006
Extraordinary charge on debt refinancing, net of taxes of $914 .... - 1,528 -
----------- ----------- -----------
NET INCOME .............................................. $ 115,595 $ 71,917 $ 57,006
=========== =========== ===========
Basic income per common share:
Income before extraordinary charge ............................. $ 2.12 $ 1.36 $ 1.09
Extraordinary charge on debt refinancing, net of taxes ......... - 0.03 -
----------- ----------- -----------
Net income .............................................. $ 2.12 $ 1.33 $ 1.09
=========== =========== ===========
Diluted income per common share:
Income before extraordinary charge ............................. $ 2.08 $ 1.32 $ 1.06
Extraordinary charge on debt refinancing, net of taxes ......... - 0.03 -
----------- ----------- -----------
Net income .............................................. $ 2.08 $ 1.29 $ 1.06
=========== =========== ===========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
ACCUMULATED
COMMON STOCK ADDITIONAL TREASURY STOCK OTHER TOTAL
----------------- PAID-IN ----------------- ACCUMULATED COMPREHENSIVE STOCKHOLDERS'
(IN THOUSANDS) SHARES PAR VALUE CAPITAL SHARES COST DEFICIT INCOME (LOSS) EQUITY
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999.......... 52,055 $ 52 $328,897 - $ (3) $(253,477) $ - $ 75,469
Exercise of stock options............. 1,099 1 10,735 10,736
Tax benefits related to stock options. 3,989 3,989
Repurchases of common stock........... (86) (958) (958)
Net income and total comprehensive
income............................ 57,006 57,006
------ ----- -------- ------ -------- --------- -------- --------
Balance at December 31, 2000.......... 53,154 $ 53 $343,621 (86) $ (961) $(196,471) $ - $146,242
Exercise of stock options............. 1,536 2 16,476 16,478
Tax benefits related to stock options. 8,134 8,134
Unrealized gain on interest rate
swap agreements, net of taxes....... 27 27
Net income............................ 71,917 71,917
--------- -------- --------
Total comprehensive income....... 71,917 27 71,944
------ ----- -------- ------ -------- --------- -------- --------
Balance at December 31, 2001.......... 54,690 $ 55 $368,231 (86) $ (961) $(124,554) $ 27 $242,798
Exercise of stock options............. 1,891 1 18,836 18,837
Tax benefits related to stock options. 10,350 10,350
Repurchases of common stock........... (1,597) (35,000) (35,000)
Unrealized loss on interest rate
swap agreements, net of taxes....... (1,271) (1,271)
Net income............................ 115,595 115,595
--------- -------- --------
Total comprehensive income....... 115,595 (1,271) 114,324
------ ----- -------- ------ -------- --------- -------- --------
Balance at December 31, 2002.......... 56,581 $ 56 $397,417 (1,683) $(35,961) $ (8,959) $ (1,244) $351,309
====== ===== ======== ====== ======== ========= ======== ========
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
(IN THOUSANDS) 2002 2001 2000
-----------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income ...................................................................... $ 115,595 $ 71,917 $ 57,006
Items included in net income not requiring (providing) cash:
Extraordinary charge on debt refinancing .................................... - 2,442 -
Provision for doubtful accounts ............................................. 45,115 37,110 32,166
Depreciation ................................................................ 116,043 106,106 95,074
Amortization of goodwill and intangible assets .............................. 2,681 12,349 10,205
Amortization of deferred debt issuance costs ................................ 1,282 1,880 2,618
Deferred income taxes ....................................................... 54,297 40,747 34,414
Loss (gain) on disposition of assets ........................................ 940 97 (921)
Changes in operating assets and liabilities, exclusive of effects of
acquisitions:
Accounts receivable ......................................................... (68,815) (53,822) (27,105)
Inventories, net ............................................................ (399) (2,516) (3,898)
Prepaid expenses and other assets ........................................... (4,461) (1,718) 1,427
Accounts payable, exclusive of outstanding checks ........................... (3,206) 11,979 (156)
Accrued payroll and related taxes and benefits .............................. 4,306 5,459 1,971
Income taxes payable ........................................................ 1,225 339 4,158
Accrued expenses ............................................................ (2,559) 9,060 (18,976)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES .............................. 262,044 241,429 187,983
INVESTING ACTIVITIES
Purchases of patient service equipment and property, equipment
and improvements, exclusive of effects of acquisitions .................... (121,727) (133,162) (96,414)
Proceeds from disposition of assets ......................................... 318 303 637
Cash paid for acquisitions, including payments of deferred consideration .... (73,960) (80,273) (26,220)
--------- --------- ---------
NET CASH USED IN INVESTING ACTIVITIES .................................. (195,369) (213,132) (121,997)
FINANCING ACTIVITIES
Proceeds from revolving credit facilities ................................... 150,500 94,900 -
Payments on revolving credit facilities ..................................... (158,300) (87,100) -
Proceeds from term loans .................................................... - 300,000 -
Payments on term loans ...................................................... (19,687) (156,938) (79,062)
Payment on redemption of senior subordinated notes .......................... - (200,000) -
Payments on other long-term debt ............................................ (2,858) (2,488) (3,608)
Outstanding checks included in accounts payable ............................. (2,477) 4,969 4,259
Capitalized debt issuance costs, net ........................................ (666) (5,623) (982)
Repurchases of common stock ................................................. (35,000) - (958)
Issuances of common stock ................................................... 18,837 16,478 10,736
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES .................................. (49,651) (35,802) (69,615)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............................ 17,024 (7,505) (3,629)
Cash and cash equivalents at beginning of year .................................. 9,359 16,864 20,493
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR ............................... $ 26,383 $ 9,359 $ 16,864
========= ========= =========
SUPPLEMENTAL DISCLOSURES - See Notes 5 and 7 for cash paid for interest and
income taxes, respectively.
NON-CASH TRANSACTIONS - See Statements of Stockholders' Equity and Comprehensive
Income, Note 3 and Note 9 for tax benefit from stock option exercises,
liabilities assumed in acquisitions and purchase of property and equipment under
capital leases, respectively.
See notes to consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation: The accompanying consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America. These statements include the accounts of Apria
Healthcare Group Inc. ("Apria" or "the company") and its subsidiaries.
Intercompany transactions and accounts have been eliminated.
Company Background and Segment Reporting: Apria operates in the home
healthcare segment of the healthcare industry, providing a variety of clinical
services and related products and supplies as prescribed by a physician or
authorized by a case manager as part of a care plan. All products and services
offered by the company are provided through the company's network of
approximately 410 branch facilities, which are located throughout the United
States and are organized into 16 geographic regions. Each region consists of a
number of branches and a regional office, which provides key support services
such as billing, purchasing, equipment maintenance, repair and warehousing. The
company's chief operating decision maker 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 of the company's operating segments are aggregated into
one reportable segment in accordance with the aggregation criteria of Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments
of an Enterprise and Related Information."
Respiratory therapy, infusion therapy and home medical equipment represent
approximately 67%, 18% and 15% of total 2002 revenues, respectively. The gross
margins for these services and related products were 80%, 57% and 62%,
respectively.
Use of Accounting Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
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 third-party payors, including private insurers, prepaid health
plans, Medicare and Medicaid. Approximately 34% of the company's revenues for
2002, 2001 and 2000 were reimbursed under arrangements with Medicare and
Medicaid. In 2002, no other third-party payor group represented 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 less than 10% of total net
revenues for 2002, 2001 and 2000.
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 periodic analyses to evaluate accounts receivable
balances to ensure that recorded amounts reflect estimated net realizable value.
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. Due to 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.
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.
Cash and Cash Equivalents: Apria maintains cash with various financial
institutions. These financial institutions are located throughout the United
States and the company's cash management practices limit exposure to any one
institution. Outstanding checks, which are reported as a component of accounts
payable, were $20,980,000 and $23,457,000 at December 31, 2002 and 2001,
respectively. Management considers all highly liquid instruments purchased with
a maturity of less than three months to be cash equivalents.
Accounts Receivable: Included in accounts receivable are earned but
unbilled receivables of $29,207,000 and $26,925,000 at December 31, 2002 and
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 historical performance and collectibility.
Inventories: Inventories are stated at the lower of cost (first-in,
first-out method) or market and consist primarily of disposables used in
conjunction with patient service equipment, and pharmaceuticals.
Patient Service Equipment: Patient service equipment consists of medical
equipment provided to in-home patients and is stated at cost. Depreciation is
provided using the straight-line method over the estimated useful lives of the
equipment, which range from one to ten years.
Property, Equipment and Improvements: Property, equipment and improvements
are stated at cost. Included in property and equipment are assets under
capitalized leases which consist solely of information systems. Depreciation is
provided using the straight-line method over the estimated useful lives of the
assets. Estimated useful lives for each of the categories presented in Note 2
are as follows: leasehold improvements -- the shorter of the remaining lease
term or seven years; equipment and furnishings -- three to fifteen years and
information systems -- three to four years.
Capitalized Software: Included in property, equipment and improvements are
costs related to internally-developed and purchased software that are
capitalized and amortized over periods not exceeding four years. Capitalized
costs include direct costs of materials and services incurred in developing or
obtaining internal-use software and payroll and payroll-related costs for
employees directly involved in the development of internal-use software.
The carrying value of capitalized software is reviewed if the facts and
circumstances suggest that it may be impaired. Indicators of impairment may
include a subsequent change in the extent or manner in which the software is
used or expected to be used, a significant change to the software is made or
expected to be made or the cost to develop or modify internal-use software
exceeds that expected amount. Management does not believe any impairment of its
capitalized software existed at December 31, 2002.
Goodwill: Goodwill arising from business combinations represents the excess
of the purchase price over the estimated fair value of the net assets of the
acquired businesses. Prior to 2002 and before the adoption of SFAS No. 142,
"Goodwill and Other Intangible Assets," goodwill attributable to business
combinations completed on or before June 30, 2001, was being amortized over the
period of expected benefit. The amortization period for substantially all of the
company's goodwill was 20 years. Previously, management reviewed for impairment
on an ongoing basis and whenever events or changes in circumstances indicated
the possibility of impairment. In accordance with the provisions of SFAS No.
142, goodwill arising from business combinations initiated after June 30, 2001,
is no longer amortized but tested annually for impairment or more frequently if
circumstances indicate impairment. Upon Apria's adoption of SFAS No. 142 in its
entirety on January 1, 2002, the amortization of goodwill, including goodwill
recorded in past transactions, ceased completely.
Intangible and Other Long-lived Assets: Intangible assets consist primarily
of covenants not to compete resulting from business combinations. The values
assigned to such intangible assets are amortized on a straight-line basis over
their contractual terms, which range from two to five years.
Management reviews for impairment of intangible assets and long-lived
assets on an ongoing basis and whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Management
does not believe any impairment of its intangible assets or long-lived assets
existed at December 31, 2002.
Fair Value of Financial Instruments: The fair value of long-term debt and
letters of credit is determined by reference to borrowing rates currently
available to Apria for loans with similar terms and average maturities. The
carrying amounts of cash and cash equivalents, accounts receivables, trade
payables and accrued expenses approximate fair value because of their short
maturity.
Advertising: Advertising costs amounting to $2,804,000, $3,044,000 and
$2,212,000 for 2002, 2001 and 2000, respectively, are expensed as incurred and
included in selling, distribution and administrative expenses.
Income Taxes: Apria provides for income taxes in accordance with provisions
specified in SFAS No. 109, "Accounting for Income Taxes." Accordingly, deferred
income tax assets and liabilities are computed for differences between the
financial statement and tax bases of assets and liabilities. These differences
will result in taxable or deductible amounts in the future, based on tax laws
and rates applicable to the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to
reduce deferred tax assets to amounts which are more likely than not to be
realized.
Derivative Instruments and Hedging Activities: From time to time Apria uses
derivative financial instruments to limit exposure to interest rate fluctuations
on the company's variable rate long-term debt. The company accounts for
derivative instruments pursuant to the provisions of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." The company's derivatives
are recorded on the balance sheet at their fair value and any unrealized gains
or losses on their fair value are included, net of tax, in other comprehensive
income.
Stock-based Compensation: The company accounts for its stock-based
compensation plans under the recognition and measurement principles of
Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. Apria has adopted the disclosure
provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure - an amendment of FASB Statement No. 123." No stock-based
employee compensation expense is recognized in net income for any of the years
presented. Had compensation expense for the company's stock-based compensation
awards been recognized based on the fair value recognition provisions of SFAS
No. 123, Apria's net income and per share amounts would have been adjusted to
the pro forma amounts indicated below. See "Note 6 - Stockholders' Equity."
YEAR ENDED DECEMBER 31,
-----------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000
----------------------------------------------------------------------------------------------------
Net income as reported ...................................... $ 115,595 $ 71,917 $ 57,006
Deduct: total stock-based compensation expense
determined for all awards under fair value-based
method, net of related tax effects .................. (9,852) (10,156) (9,194)
--------- --------- ---------
Pro forma net income ........................................ $ 105,743 $ 61,761 $ 47,812
========= ========= =========
Basic net income per share:
As reported ............................................. $ 2.12 $ 1.33 $ 1.09
Pro forma ............................................... $ 1.94 $ 1.14 $ 0.91
Diluted net income per share:
As reported ............................................. $ 2.08 $ 1.29 $ 1.06
Pro forma ............................................... $ 1.90 $ 1.11 $ 0.89
Comprehensive Income: For the years ended December 31, 2002 and 2001, the
difference between net income and comprehensive income is ($1,271,000) and
$27,000, respectively, net of taxes, which is attributable to unrealized
(losses)/gains on various interest rate swap agreements. For the year ended
December 31, 2000 there was no difference between comprehensive income and net
income.
Per Share Amounts: Basic net income per share is computed by dividing net
income available to common stockholders by the weighted-average number of common
shares outstanding. Diluted net income per share includes the effect of the
potential shares outstanding, including dilutive stock options and warrants,
using the treasury stock method.
Change in Accounting Principles: Effective January 1, 2002, Apria adopted
SFAS No. 142, which 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 the possibility of impairment. The effect of adoption of SFAS No. 142
on the consolidated financial statements is shown in "Note 4 - Goodwill and
Intangible Assets."
Effective January 1, 2002, Apria adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement superseded SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of," and amended 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 are to 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 broadened the presentation of discontinued operations to
include a component of an entity when operations and cash flows can be clearly
distinguished, and established 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 consolidated financial statements.
Recent Accounting Pronouncements: In April 2002, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 145, "Rescission of FASB Statement Nos.
4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS No. 145 updates and clarifies existing accounting pronouncements related to
gains and losses from the extinguishment of debt and requires that certain lease
modifications be accounted for in the same manner as sale-leaseback
transactions. Apria adopted the provisions of SFAS No. 145 for its fiscal year
beginning January 1, 2003. Adoption of this statement will not have a material
effect on the company's consolidated financial statements.
In July 2002, SFAS No. 146, "Accounting for Costs Associated With Exit or
Disposal Activities," was issued. This statement addresses the financial
accounting and reporting for costs associated with exit or disposal activities
and requires that a liability for such costs be recognized when the liability is
incurred rather than at the date of an entity's commitment to an exit plan. SFAS
No. 146 also establishes that the liability should be measured and recorded at
fair value. Apria will adopt the provisions of SFAS No. 146 for exit and
disposal activities that are initiated after December 31, 2002, as required.
In December 2002, SFAS No. 148 was issued. This statement amends SFAS No.
123 to provide alternative methods of transition and guidance for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No.
123 to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. The company has complied
with the expanded financial statement disclosure requirements herein.
In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees and Indebtedness of Others," an interpretation of SFAS Nos.
5, 57 and 107 and rescission of FIN No. 34, "Disclosure of Indirect Guarantees
of Indebtedness of Others." FIN No. 45 elaborates on the disclosure requirements
for the interim and annual financial statements of the guarantor. It also
requires that a guarantor recognize a liability at the inception of the
guarantee for the fair value of the obligation undertaken. Apria will be
required to adopt the recognition and measurement provisions of FIN No. 45
beginning January 1, 2003, while the disclosure provisions became effective at
December 31, 2002. Adoption of this interpretation will not have a material
effect on the company's consolidated financial statements.
In January 2003, FIN No. 46, "Consolidation of Variable Interest Entities,"
an interpretation of Accounting Research Bulletin No. 51, was issued. FIN No. 46
requires that a company consolidate variable interest entities if that company
is subject to a majority of the risk of loss from the entity's activities or the
company receives a majority of the entity's residual returns. FIN No. 46 also
requires certain disclosures about variable interest entities in which a company
has a significant interest, regardless of whether consolidation is required.
Apria will begin to adopt the consolidation provisions of FIN No. 46 beginning
January 1, 2003, while certain disclosure requirements will become effective for
all financial statements issued after January 31, 2003, regardless of when the
variable interest entities were established. The company currently has no
variable interest entities, therefore, the adoption of this interpretation is
not expected to have a material effect on the company's consolidated financial
statements.
Reclassifications: Certain amounts for prior periods have been reclassified
to conform to the current year presentation.
NOTE 2 -- PROPERTY, EQUIPMENT AND IMPROVEMENTS
Property, equipment and improvements consist of the following:
DECEMBER 31,
---------------------------
(IN THOUSANDS) 2002 2001
--------------------------------------------------------------------------
Leasehold improvements................... $ 19,289 $ 17,809
Equipment and furnishings................ 47,413 43,565
Information systems...................... 90,676 73,597
---------- ----------
157,378 134,971
Less accumulated depreciation............ (103,244) (87,659)
--------- ---------
$ 54,134 $ 47,312
========= =========
NOTE 3 -- BUSINESS COMBINATIONS
During 2002, 2001 and 2000, Apria acquired a number of complementary
businesses in specific geographic markets. During 2002, Apria acquired 17
companies comprised largely of home respiratory therapy businesses. For all
periods presented, these all-cash transactions were accounted for as purchases
and, accordingly, the results of operations of the acquired businesses are
included in the consolidated income statements from the dates of acquisition.
The purchase prices were allocated to the various underlying tangible and
intangible assets and liabilities on the basis of estimated fair value.
The following table summarizes the allocation of the purchase prices of
acquisitions made by the company, which include payments deferred from prior
years. In 2002, such payments totaled $2,752,000. At December 31, 2002,
outstanding deferred consideration totaled $6,592,000 and is included on the
balance sheet in other accrued liabilities.
Cash paid for acquisitions:
YEAR ENDED DECEMBER 31,
--------------------------------
(IN THOUSANDS) 2002 2001 2000
-------------------------------------------------------------------------------
Fair value of tangible assets acquired ..... $ 18,022 $ 9,067 $ 4,286
Intangible assets .......................... 3,960 1,316 1,322
Goodwill ................................... 55,405 71,426 21,170
-------- -------- --------
Total assets acquired ................. 77,387 81,809 26,778
Liabilities assumed and accrued ............ (3,427) (1,536) (558)
-------- -------- --------
Net assets acquired ................... $ 73,960 $ 80,273 $ 26,220
======== ======== ========
The following supplemental unaudited pro forma information presents the
combined operating results of Apria and the businesses that were acquired by
Apria during 2002, as if the acquisitions had occurred at the beginning of the
periods presented. The pro forma information is based on the historical
financial statements of Apria and those of the acquired businesses. Amounts are
not necessarily indicative of the results that may have been obtained had the
combinations been in effect at the beginning of the periods presented or that
may be achieved in the future.
YEAR ENDED DECEMBER 31,
--------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001
---------------------------------------------------------------------------------------------------------------
Net revenues.................................................... $1,291,389 $1,231,635
Income before extraordinary charge.............................. $ 117,076 $ 75,637
Net income...................................................... $ 117,076 $ 74,109
Diluted income per common share:
Income before extraordinary charge........................... $ 2.11 $ 1.36
Extraordinary charge on debt refinancing, net of taxes....... - 0.03
------- -------
Net income............................................ $ 2.11 $ 1.33
======= =======
NOTE 4 -- 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 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 is no longer amortized, but shall be tested for impairment annually, or
more frequently if circumstances indicate the possibility of 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 geographic regions are reporting units under SFAS No. 142.
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. Apria's transitional test indicated that no impairment existed and,
accordingly, no loss was recognized. The company recently completed its annual
impairment test, which yielded similar results with no goodwill impairment
indicated at any of Apria's reporting units.
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:
YEAR ENDED DECEMBER 31,
-----------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2001 2000
-------------------------------------------------------------------------------------------
Reported net income ......................................... $ 71,917 $ 57,006
Add: extraordinary charge, net of taxes ..................... 1,528 -
-------- --------
Net income before extraordinary charge .............. 73,445 57,006
Add: goodwill amortization, net of taxes .................... 6,129 4,545
-------- --------
Adjusted net income before extraordinary charge ..... 79,574 61,551
Extraordinary charge, net of taxes .......................... (1,528) -
-------- --------
Adjusted net income ................................. $ 78,046 $ 61,551
======== ========
Basic income per common share:
Reported net income ...................................... $ 1.33 $ 1.09
Add: extraordinary charge, net of taxes .................. 0.03 -
-------- --------
Net income before extraordinary charge .............. 1.36 1.09
Add: goodwill amortization, net of taxes ................. 0.11 0.09
-------- --------
Adjusted net income before extraordinary charge .... 1.47 1.18
Extraordinary charge, net of taxes ....................... (0.03) -
-------- --------
Adjusted net income ................................ $ 1.44 $ 1.18
======== ========
Diluted income per common share:
Reported net income ...................................... $ 1.29 $ 1.06
Add: extraordinary charge, net of taxes .................. 0.03 -
-------- --------
Net income before extraordinary charge .............. 1.32 1.06
Add: goodwill amortization, net of taxes ................. 0.11 0.08
-------- --------
Adjusted net income before extraordinary charge .... 1.43 1.14
Extraordinary charge, net of taxes ....................... (0.03) -
-------- --------
Adjusted net income ................................ $ 1.40 $ 1.14
======== ========
For the year ended December 31, 2002, the net change in the carrying amount
of goodwill of $55,405,000 is the result of business combinations. Goodwill
amortization expense for the years ended December 31, 2001 and 2000, was
$9,809,000 and $7,824,000, respectively. All of the goodwill recorded in
conjunction with business combinations completed after June 30, 2001 is expected
to be deductible for tax purposes.
Intangible assets, all of which are subject to amortization, consist of the
following:
(IN THOUSANDS) DECEMBER 31, 2002 DECEMBER 31, 2001
--------------------------------------------------------------------------------------------------------------------------------
AVERAGE GROSS GROSS
LIFE IN CARRYING ACCUMULATED NET BOOK CARRYING ACCUMULATED NET BOOK
YEARS AMOUNT AMORTIZATION VALUE AMOUNT AMORTIZATION VALUE
------- -------- ------------ -------- -------- ------------ --------
Covenants not to compete.... 4.7 $ 9,664 $(4,571) $5,093 $16,181 $(11,318) $4,863
Tradename................... 2.0 1,324 (275) 1,049 - - -
--- ------- ------- ------ ------- -------- ------
4.0 $10,988 $(4,846) $6,142 $16,181 $(11,318) $4,863
=== ======= ======= ====== ======= ======== ======
Amortization expense amounts to $2,681,000 for the year ended December 31,
2002. Estimated amortization expense for each of the fiscal years ending
December 31, is presented below:
(IN THOUSANDS)
----------------------------------------------------------------------
2003............................................ $ 2,573
2004............................................ 1,900
2005............................................ 837
2006............................................ 594
2007............................................ 238
NOTE 5 -- CREDIT FACILITY AND LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31,
----------------------
(IN THOUSANDS) 2002 2001
----------------------------------------------------------------------------
Term loans payable ............................... $ 263,375 $ 283,062
Notes payable relating to revolving
credit facilities .............................. - 7,800
Capital lease obligations (see Note 9) ........... 5,993 2,827
--------- ---------
269,368 293,689
Less: current maturities ......................... (21,713) (15,455)
--------- ---------
$ 247,655 $ 278,234
========= =========
Credit Agreement: Apria currently has a $400,000,000 senior secured credit
agreement with a syndicate of lenders led by Bank of America, N.A. The credit
agreement was amended effective June 7, 2002. Prior to the amendment, the credit
facilities consisted of a $100,000,000 five-year revolving credit facility, a
$125,000,000 five-year term loan and a $175,000,000 six-year term loan. The
$125,000,000 term loan, the terms of which remain unchanged, had a balance of
$91,000,000 at December 31, 2002 and is currently repayable in 14 consecutive
quarterly installments of $6,000,000 to $7,000,000 each, beginning June 30,
2003. The $175,000,000 term loan, which had a balance of $172,375,000 at
December 31, 2002, was amended in June 2002 to extend the maturity date to seven
years, to reduce the applicable interest rate margins and to modify the
repayment schedule. It is now repayable in 18 consecutive quarterly installments
of $437,500 each, followed by three consecutive quarterly installments of
$41,125,000 each, and a final payment of $41,125,000 due on July 20, 2008.
On December 31, 2002 the company made voluntary prepayments of $6,000,000
on the $125,000,000 term loan and $437,500 on the $175,000,000 term loan. The
voluntary prepayments were applied against future scheduled quarterly payments,
effectively eliminating any payment requirements for both term loans until June
2003.
On December 31, 2002, there were no borrowings under the revolving credit
facility, outstanding letters of credit totaled $5,155,000 and credit available
under the revolving facility was $94,845,000.
The senior secured credit agreement permits Apria to select one of two
variable interest rates. One option is the base rate, which is expressed as the
higher of (a) the Federal Funds rate plus 0.50% or (b) the Prime Rate. The other
option is the Eurodollar rate, which is based on the London Interbank Offered
Rate ("LIBOR"). Interest on outstanding balances under the senior secured credit
agreement are determined by adding a margin to the Eurodollar rate or base rate
in effect at each interest calculation date. The applicable margins for the
revolving credit facility and the $125,000,000 term loan are based on Apria's
leverage ratio, which is the ratio of its funded debt to its last four quarters
of earnings before interest, taxes, depreciation and amortization. The
applicable margin ranges from 1.50% to 2.25% for Eurodollar loans and from 0.50%
to 1.25% for base rate loans. For the $175,000,000 term loan, the margins were
amended in June 2002 and are currently fixed at 2.00% for Eurodollar loans and
1.00% for base rate loans. The effective interest rate at December 31, 2002 was
4.21% on total borrowings of $263,375,000. The senior credit agreement also
requires payment of commitment fees ranging from 0.25% to 0.50% (also based on
Apria's leverage ratio) on the unused portion of the revolving credit facility.
Borrowings under the senior secured credit facilities are collateralized by
substantially all of the assets of Apria. The credit agreement contains numerous
restrictions, including but not limited to, covenants requiring the maintenance
of certain financial ratios, limitations on additional borrowings, capital
expenditures, mergers, acquisitions and investments, and restrictions on cash
dividends, loans and other distributions. The agreement also permits Apria to
expend a maximum of $100,000,000 per year on acquisitions. At December 31, 2002,
the company was in compliance with all of the financial covenants required by
the credit agreement.
The carrying value of the term loans and the revolving credit facility
approximates fair value because the underlying instruments are variable notes
that reprice frequently.
Maturities of long-term debt, exclusive of capital lease obligations, are
as follows:
FOR THE YEAR ENDING
(IN THOUSANDS) DECEMBER 31,
----------------------------------------------------------------------
2003.......................................... $ 19,312
2004.......................................... 26,500
2005.......................................... 29,000
2006.......................................... 22,750
2007.......................................... 42,438
2008.......................................... 123,375
---------
$263,375
=========
Total interest paid in 2002, 2001 and 2000 amounted to $13,691,000,
$28,642,000 and $37,119,000, respectively.
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
derivatives for trading or other speculative purposes.
Since October 2001, Apria has been a party to two interest rate swap
agreements that fixed $100,000,000 of the company's LIBOR-based variable rate
debt at 2.58% (before the applicable margin). These agreements are scheduled to
expire on March 31, 2003. During the fourth quarter of 2002, Apria entered into
four new interest rate swap agreements with two different parties. The new swap
agreements became effective December 5, 2002, with two agreements of $25,000,000
each expiring in December 2004 and the remaining two agreements of $25,000,000
each expiring in December 2005 and 2006, respectively. Under these agreements,
with a total notional amount of $100,000,000, the interest rates on an
equivalent amount of the company's LIBOR-based variable rate debt are fixed at
rates ranging from 2.43% to 3.42% (before the applicable margin). 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 years ended December 31, 2002 and 2001,
Apria paid net settlement amounts of $780,000 and $39,000, respectively. At
December 31, 2002, the aggregate fair value of the swap agreements was a deficit
of $1,991,000 and, accordingly, is reflected in the accompanying balance sheet
in other accrued liabilities. Unrealized gains and losses on the fair value of
the swap agreements are reflected, net of taxes, in other comprehensive income.
NOTE 6 -- STOCKHOLDERS' EQUITY
Treasury Stock: In February 2002, Apria implemented a plan to repurchase up
to $35,000,000 of outstanding common stock. Depending on market conditions and
other considerations, repurchases were made throughout the year in open market
transactions. During 2002, Apria repurchased 1,597,000 shares for $35,000,000.
In 2000, Apria repurchased 86,000 shares of its common stock for $958,000. All
repurchased common shares are being held in treasury.
In March 2003, Apria announced that its Board of Directors had authorized
the company to repurchase up to $35,000,000 of its outstanding common stock
during fiscal year 2003. As of March 24, 2003, the company has repurchased
50,700 shares for $1,120,000.
Stock Compensation Plans: Apria has various stock-based compensation plans,
which are described below. Management accounts for these plans under the
recognition and measurement principles of APB No. 25 and related
interpretations. No stock-based employee compensation expense is reflected in
net income, as all options granted under those plans had an exercise price equal
to the market value of the underlying common stock on the date of grant.
For purposes of the pro forma disclosure presented in Note 1, the fair
value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2002, 2001 and 2000: risk-free interest rates
ranging from 2.80% to 4.71%, 3.83% to 5.03% and 5.99% to 6.72%, respectively;
dividend yield of 0% for all years; expected lives of 4.13 years in 2002, 4.25
years for 2001 and 4.89 years for 2000; and volatility of 59% for 2002, 62% for
2001 and 65% for 2000. See "Note 1 - Summary of Significant Accounting Policies
- Stock-based Compensation."
Fixed Stock Options: Apria has various fixed stock option plans that
provide for the granting of incentive or non-statutory options to its key
employees and non-employee members of the Board of Directors. In the case of
incentive stock options, the exercise price may not be less than the fair market
value of the company's stock on the date of the grant, and may not be less than
110% of the fair market value of the company's stock on the date of the grant
for any individual possessing 10% or more of the voting power of all classes of
stock of the company. The dates at which the options become exercisable range
from the date of grant to five years after the date of grant and expire not
later than 10 years after the date of grant. The weighted-average fair values of
fixed stock options granted during 2002, 2001 and 2000 were $11.79, $14.06 and
$9.85, respectively.
A summary of the status of Apria's fixed stock options as of December 31,
2002, 2001 and 2000, and the activity during the years ending on those dates is
presented below:
2002 2001 2000
-------------------------- ------------------------- ---------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year.......... 4,347,019 $20.41 3,268,096 $15.87 2,619,083 $15.73
Granted:
Exercise price equal to fair value...... 1,546,500 $23.59 2,246,000 $26.65 1,136,000 $16.47
Exercised................................. (703,858) $13.10 (548,185) $15.45 (322,432) $15.87
Forfeited................................. (831,685) $25.77 (618,892) $23.99 (164,555) $17.69
--------- --------- ---------
Outstanding at end of year................ 4,357,976 $21.69 4,347,019 $20.41 3,268,096 $15.87
========= ========= =========
Exercisable at end of year................ 2,057,595 $19.18 1,913,525 $16.02 1,868,339 $15.23
========= ========= =========
The following table summarizes information about fixed stock options
outstanding at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-----------------------------------------------------------------------------------------------------------------------------
$ 6.69 - $12.19 256,970 5.21 $ 9.47 226,970 $ 9.11
$12.25 - $16.63 376,698 6.00 $14.61 347,196 $14.57
$16.94 - $16.94 378,191 7.01 $16.94 199,157 $16.94
$17.05 - $20.00 482,011 5.97 $18.38 477,011 $18.37
$20.50 - $26.45 1,942,740 7.90 $23.84 514,569 $23.80
$27.13 - $29.00 921,366 7.91 $27.14 292,692 $27.18
--------- ---------
$ 6.69 - $29.00 4,357,976 7.29 $21.69 2,057,595 $19.18
========= =========
Performance-Based Stock Options: Included in Apria's stock-based
compensation plans are provisions for the granting of performance-based stock
options. No such options have been granted since 1999. All options awarded under
the performance-based plans have vested and expire 10 years from the date of
grant.
A summary of the status of Apria's performance-based stock options at
December 31, 2002, 2001 and 2000, and the activity during the years ending on
those dates is presented below:
2002 2001 2000
------------------------- ------------------------ --------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
-------------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year.......... 1,396,210 $ 7.91 2,384,402 $ 7.99 3,208,392 $ 7.77
Granted:
Exercise price equal to fair value...... - $ - - $ - - $ -
Exercised................................. (1,186,552) $ 8.01 (988,192) $ 8.09 (776,484) $ 7.20
Forfeited................................. - $ - - $ - (47,506) $ 6.50
---------- --------- ---------
Outstanding at end of year................ 209,658 $ 7.34 1,396,210 $ 7.91 2,384,402 $ 7.99
========== ========= =========
Exercisable at end of year................ 209,658 $ 7.34 1,396,210 $ 7.91 1,747,365 $ 8.36
========== ========= =========
The following table summarizes information about performance-based stock
options outstanding at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ----------------------------
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
NUMBER CONTRACTUAL AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (IN YEARS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-----------------------------------------------------------------------------------------------------------------------------
$ 6.50 - $10.75 186,408 5.57 $ 6.55 186,408 $ 6.55
$12.25 - $18.56 23,250 1.58 $13.61 23,250 $13.61
------- -------
$ 6.50 - $18.56 209,658 5.13 $ 7.34 209,658 $ 7.34
======= =======
Approximately 7,682,000 shares of common stock are reserved for future
issuance upon exercise of stock options under all of Apria's active plans.
NOTE 7 -- INCOME TAXES
Significant components of Apria's deferred tax assets and liabilities are
as follows:
DECEMBER 31,
--------------------
(IN THOUSANDS) 2002 2001
--------------------------------------------------------------------------
Deferred tax assets:
Allowance for doubtful accounts ................. $ 12,077 $ 12,028
Accruals ........................................ 9,266 9,309
Asset valuation reserves ........................ 2,076 2,181
Net operating loss carryforward, limited
by Section 382 ............................... 10,685 35,623
AMT credit carryovers ........................... 9,614 9,766
Intangible assets ............................... 3,102 4,823
Other, net ...................................... 3,592 2,429
-------- --------
Total deferred tax assets ................. 50,412 76,159
-------- --------
Deferred tax liabilities:
Tax over book depreciation ...................... (16,911) (4,122)
Tax over book goodwill amortization ............. (5,829) -
Other, net ...................................... - (1,182)
-------- --------
Total deferred tax liabilities ............ (22,740) (5,304)
-------- --------
Net deferred tax assets ................... $ 27,672 $ 70,855
======== ========
At December 31, 2002, Apria had federal net operating loss carryforwards of
$15,348,000, 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
$9,614,000.
As a result of settling prior year tax examinations, Apria utilized
approximately $34,200,000 of its previously limited $57,000,000 net operating
loss carryforward during 2002. Such net operating loss carryforward was
generated prior to 1992 and utilization had been limited to $5,000,000 per year
in accordance with Internal Revenue Code Section 382. Prior to 2002, the
$57,000,000 net operating loss carryforward was not recognized for financial
statement reporting purposes as management believed it unlikely that they would
be used before expiration. The remaining net operating loss carryforward of
approximately $22,800,000 is excluded from the related deferred tax assets and
will expire unused.
Income tax expense (benefit) consists of the following:
YEAR ENDED DECEMBER 31,
-------------------------------------
(IN THOUSANDS) 2002 2001 2000
------------------------------------------------------------------------
Current:
Federal ............... $ (8,348) $ 2,150 $ 1,622
State ................. 6,408 1,200 5,099
-------- -------- --------
(1,940) 3,350 6,721
Deferred:
Federal ............... 53,058 39,049 30,116
State ................. 1,239 1,698 4,298
-------- -------- --------
54,297 40,747 34,414
-------- -------- --------
$ 52,357 $ 44,097 $ 41,135
======== ======== ========
During 2002, the exercise of stock options granted under Apria's various
stock option plans gave rise to $27,601,000 in compensation that is includable
as taxable income to the employee and deductible by the company for federal and
state tax purposes but is not recognized as expense for financial reporting
purposes. Such tax benefits are included in additional paid-in capital.
Differences between Apria's income tax expense (benefit) and an amount
calculated utilizing the federal statutory rate are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
(IN THOUSANDS) 2002 2001 2000
------------------------------------------------------------------------------------
Income tax expense at statutory rate ............ $ 58,783 $ 41,140 $ 34,349
Non-deductible expenses ......................... 735 1,693 1,590
State and foreign taxes, net of federal
benefit and state loss carryforwards .......... 4,519 2,959 3,942
Examination settlements ......................... (11,073) - -
Other ........................................... (607) (1,695) 1,254
-------- -------- --------
$ 52,357 $ 44,097 $ 41,135
======== ======== ========
Net income taxes (received) paid in 2002, 2001 and 2000 amounted to
$(3,165,000), $2,096,000 and $2,575,000, respectively.
NOTE 8 -- PER SHARE AMOUNTS
The following table sets forth the computation of basic and diluted per
share amounts:
YEAR ENDED DECEMBER 31,
------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) 2002 2001 2000
-------------------------------------------------------------------------------------------------------
Numerator:
Net income ........................................................ $115,595 $ 71,917 $ 57,006
Numerator for basic and diluted per share amounts - net income
available to common stockholders ............................... $115,595 $ 71,917 $ 57,006
Denominator:
Denominator for basic per share
amounts - weighted-average shares .............................. 54,586 53,971 52,375
Effect of dilutive securities:
Employee stock options ......................................... 869 1,807 1,647
-------- -------- --------
Total dilutive potential common shares ......................... 869 1,807 1,647
-------- -------- --------
Denominator for diluted per share amounts - adjusted
weighted-average shares ....................................... 55,455 55,778 54,022
======== ======== ========
Basic net income per common share .................................... $ 2.12 $ 1.33 $ 1.09
======== ======== ========
Diluted net income per common share .................................. $ 2.08 $ 1.29 $ 1.06
======== ======== ========
Employee stock options excluded from the computation
of diluted per share amounts:
Shares for which exercise price exceeds
average market price of common stock ........................ 2,543 1,853 249
======== ======== ========
Average exercise price per share that exceeds
average market price of common stock .............................. $ 25.31 $ 26.86 $ 25.52
======== ======== ========
NOTE 9 -- LEASES
Apria leases substantially all of its facilities. In addition, delivery
vehicles and office equipment are leased under operating leases. Lease terms are
generally ten years or less with renewal options for additional periods. Many
leases provide that the company pay taxes, maintenance, insurance and other
expenses. Rentals are generally increased annually by the Consumer Price Index,
subject to certain maximum amounts defined within individual agreements.
Apria occasionally subleases unused facility space when a lease buyout is
not a viable option. Sublease income, in amounts not considered material, is
recognized monthly and is offset against facility lease expense. Net rent
expense in 2002, 2001 and 2000 amounted to $62,383,000, $60,618,000 and
$56,243,000, respectively.
In addition, during 2002, 2001 and 2000, Apria acquired information systems
totaling $5,937,000, $1,837,000 and $3,054,000, respectively, under capital
lease arrangements with lease terms ranging from 24 to 36 months. Amortization
of the leased information systems amounted to $1,686,000, $811,000 and $87,000
in 2002, 2001 and 2000, respectively.
The following amounts for assets under capital lease obligations are
included in property, equipment and improvements:
DECEMBER 31,
---------------------------
(IN THOUSANDS) 2002 2001
--------------------------------------------------------------------------
Information systems.......................... $ 7,773 $ 4,458
Less accumulated depreciation................ (1,686) (811)
--------- ---------
$ 6,087 $ 3,647
========= =========
Future minimum payments, by year and in the aggregate, required under
capital lease obligations and noncancelable operating leases consist of the
following at December 31, 2002:
CAPITAL OPERATING
(IN THOUSANDS) LEASES LEASES
-----------------------------------------------------------------------
2003........................................... $ 2,661 $ 56,244
2004........................................... 2,525 48,457
2005........................................... 1,224 42,724
2006........................................... - 32,159
2007........................................... - 19,881
Thereafter..................................... - 24,776
-------- --------
6,410 $224,241
========
Less interest included in minimum
lease payments............................... (417)
--------
Present value of minimum lease payments........ 5,993
Less current portion........................... (2,401)
--------
$ 3,592
========
NOTE 10 -- EMPLOYEE BENEFIT PLANS
Apria has a 401(k) defined contribution plan, whereby eligible employees
may contribute up to 35% of their annual base earnings. The company matches 50%
of the first 8% of employee contributions. Total expenses related to the defined
contribution plan were $4,569,000, $4,227,000 and $3,792,000 in 2002, 2001 and
2000, respectively.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
Regulatory Environment: The healthcare industry is subject to extensive
government regulation, including numerous laws directed at preventing fraud and
abuse and laws regulating reimbursement under various governmental programs.
Many of these laws are subject to governmental review, interpretation and
reform, all of which complicate compliance. If Apria is deemed to have violated
these laws and regulations, Apria could be subject to significant fines or
penalties, facility shutdowns and possible exclusion from participation in
federal healthcare programs such as Medicare and Medicaid.
Litigation: Apria and certain of its present and former officers and/or
directors were 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). The
complaint alleged, 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. Two similar class actions were filed
during July 1998 in the Superior Court for the State of California for the
County of Orange, which were consolidated by a court order dated October 22,
1998 (Master Case No. 797060). Following a series of settlement discussions, the
parties reached an agreement to settle both the federal and state class actions
for $42 million. Under the terms of the settlement, Apria paid $1 million and
its insurance carriers paid $41 million. Pursuant to the settlement: (1) the
State Court class actions were concluded on August 20, 2002 by entry of an Order
and Final Judgment; and (2) the District Court class action was dismissed on
August 21, 2002.
In August 2001, a purported class action lawsuit was filed against Apria
and its former Chief Executive Officer in the U.S. District Court for the
Central District of California, Southern Division (Case No. SACV01-5160 PA),
entitled J.E.B. Capital Partners, LP v. Apria Healthcare Group Inc. and Philip
L. Carter. The complaint alleged that Apria made false and/or misleading public
statements in its public disclosures concerning the qui tam litigation referred
to below. On October 10, 2002, the District Court entered a judgment in favor of
Apria and dismissed the complaint. On November 8, 2002, the plaintiff appealed
that dismissal. On January 22, 2003, the Court of Appeals, acting on a
stipulation by the parties, entered an order dismissing the appeal and finally
concluding this litigation in favor of Apria.
As previously reported, since mid-1998 Apria has been the subject of an
investigation conducted by the U.S. Attorney's office in Los Angeles and the
U.S. Department of Health and Human Services. The investigation concerns 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 and has responded to various document requests
and subpoenas.
Apria has been informed that the investigation 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.
Government representatives and counsel for the plaintiffs in the qui tam
actions asserted in July 2001 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, 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.
Apria has been exchanging information and having discussions with
government representatives in an attempt to explore whether it will be possible
to resolve this matter on a basis that would be considered fair and reasonable
by all parties. Apria cannot provide any assurances as to the outcome of these
discussions, however, or as to the outcome of the qui tam litigation in the
absence of a settlement. 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 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. Management is unable to estimate the range of possible loss
for all other claims and lawsuits.
Certain Concentrations: Approximately 67% of Apria's 2002 revenues are
derived from respiratory therapy services, a significant portion of which is
reimbursed under the federal Medicare program. The Balanced Budget Act of 1997
contained several provisions that have affected Apria's Medicare reimbursement
levels. Subsequent legislation - the Medicare Balanced Budget Refinement Act of
1999 and the Medicare, Medicaid and SCHIP Benefits Improvement and Protection
Act of 2000 - mitigated some of the effects of the original legislation.
However, there are some pending issues that may further impact Medicare
reimbursement to Apria in the future, such as potential reimbursement reductions
under an inherent reasonableness authority and competitive bidding. Also
currently at issue is the potential adoption of an alternative pricing
methodology for certain drugs and biologicals. The timing and magnitude of
reimbursement reductions that may result from any of these issues are not
currently known.
Apria currently purchases approximately 50% of its patient service
equipment and supplies from four suppliers. Although there are a limited number
of suppliers, management believes that other suppliers could provide similar
products on comparable terms. However, a change in suppliers could cause delays
in service delivery and possible losses in revenue, which could adversely affect
operating results.
Guarantees and Indemnities: From time to time Apria enters into certain
types of contracts that contingently require the company to indemnify parties
against third party claims. These contracts primarily relate to (i) certain
asset purchase agreements, under which the company may provide customary
indemnification to the Seller of the business being acquired; (ii) certain real
estate leases, under which the company may be required to indemnify property
owners for environmental or other liabilities and other claims arising from the
company's use of the applicable premises; and (iii) certain agreements with the
company's officers, directors and employees, under which the company may be
required to indemnify such persons for liabilities arising out of their
employment relationship.
The terms of such obligations vary by contract and in most instances a
specific or maximum dollar amount is not explicitly stated therein. Generally,
amounts under these contracts cannot be reasonably estimated until a specific
claim is asserted. Consequently, no liabilities have been recorded for these
obligations on the company's balance sheets for any of the periods presented.
NOTE 12 -- SERVICE/PRODUCT LINE DATA
The following table sets forth a summary of net revenues and gross profit
by service line:
YEAR ENDED DECEMBER 31,
---------------------------------------
(IN THOUSANDS) 2002 2001 2000
--------------------------------------------------------------------------------------------------------
Net revenues:
Respiratory therapy........................................ $ 830,972 $ 742,805 $ 656,089
Infusion therapy........................................... 229,190 216,436 194,508
Home medical equipment/other............................... 192,034 172,674 163,604
---------- ---------- ----------
Total net revenues................................. $1,252,196 $1,131,915 $1,014,201
========== ========== ==========
Gross profit:
Respiratory therapy........................................ $ 661,879 $ 588,868 $ 521,867
Infusion therapy........................................... 130,439 126,778 115,352
Home medical equipment/other............................... 118,961 108,622 98,040
---------- ---------- ----------
Total gross profit................................. $ 911,279 $ 824,268 $ 735,259
========== ========== ==========
NOTE 13 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER
------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) FIRST SECOND THIRD FOURTH
---------------------------------------------------------------------------------------------------
2002
Net revenues ................................... $301,345 $310,425 $312,046 $328,380
Gross profit ................................... $219,226 $225,942 $227,813 $238,298
Operating income ............................... $ 40,936 $ 45,817 $ 45,873 $ 46,119
Net income ..................................... $ 22,995 $ 26,158 $ 26,465 $ 39,977
Basic income per common share .................. $ 0.42 $ 0.48 $ 0.48 $ 0.73
Diluted income per common share ................ $ 0.41 $ 0.47 $ 0.48 $ 0.72
2001
Net revenues ................................... $271,354 $283,480 $284,025 $293,056
Gross profit ................................... $195,076 $207,905 $207,548 $213,739
Operating income ............................... $ 35,696 $ 35,613 $ 35,681 $ 36,237
Income before extraordinary charge ............. $ 17,076 $ 17,247 $ 19,133 $ 19,989
Net income ..................................... $ 17,076 $ 17,247 $ 17,605 $ 19,989
Basic income per common share:
Income before extraordinary charge ........... $ 0.32 $ 0.32 $ 0.35 $ 0.37
Extraordinary charge on debt refinancing,
net of taxes .............................. - - 0.03 -
-------- -------- -------- --------
Net income ........................... $ 0.32 $ 0.32 $ 0.32 $ 0.37
======== ======== ======== ========
Diluted income per common share:
Income before extraordinary charge ........... $ 0.31 $ 0.31 $ 0.34 $ 0.36
Extraordinary charge on debt refinancing,
net of taxes .............................. - - 0.03 -
-------- -------- -------- --------
Net income ........................... $ 0.31 $ 0.31 $ 0.31 $ 0.36
======== ======== ======== ========
Fourth Quarter - 2002: Net income for the fourth quarter of 2002 reflects
the positive impact of prior year income tax examinations that were settled in
the period. The components of this are as follows: income tax benefit of
$11,073,000, interest income of $4,045,000 and related professional fee expense
of $1,710,000.
Third Quarter - 2001: Net income for the third quarter of 2001 includes an
extraordinary charge of $1,528,000, net of tax, attributable to the write-off of
the unamortized balance of deferred financing fees related to the early
retirement of Apria's 9 1/2% senior subordinated notes and the previously
existing credit agreement. Both were scheduled to mature in late 2002, but were
repaid in full concurrently with the closing of the new senior credit agreement
in July 2001.
o o o o o o
APRIA HEALTHCARE GROUP INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER END OF
(IN THOUSANDS) OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
--------------------------------------------------------------------------------------------------------------------
Year ended December 31, 2002
----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts.............. $ 32,073 $ 45,115 $ - $ 44,982 $ 32,206
Reserve for inventory and patient
service equipment shortages............... 5,816 - - 499 5,317
-------- -------- -------- -------- --------
Totals........................ $ 37,889 $ 45,115 $ - $ 45,481 $ 37,523
======== ======== ======== ======== ========
Year ended December 31, 2001
----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts.............. $ 39,787 $ 37,110 $ - $ 44,824 $ 32,073
Reserve for inventory and patient
service equipment shortages............... 7,790 - - 1,974 5,816
-------- -------- -------- -------- --------
Totals........................ $ 47,577 $ 37,110 $ - $ 46,798 $ 37,889
======== ======== ======== ======== ========
Year ended December 31, 2000
----------------------------
Deducted from asset accounts:
Allowance for doubtful accounts.............. $ 44,652 $ 32,166 $ - $ 37,031 $ 39,787
Reserve for inventory and patient
service equipment shortages............... 10,359 - - 2,569 7,790
-------- --------- -------- -------- --------
Totals........................ $ 55,011 $ 32,166 $ - $ 39,600 $ 47,577
======== ========= ======== ======== ========
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: March 31, 2003
APRIA HEALTHCARE GROUP INC.
By: /s/ LAWRENCE M. HIGBY
--------------------------------------
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------------------------------------------------------------------------------
/s/ LAWRENCE M. HIGBY
--------------------------
Lawrence M. Higby President, Chief Executive March 31, 2003
Officer and Director
(Principal Executive Officer)
/s/ JAMES E. BAKER
--------------------------
James E. Baker Chief Financial Officer March 31, 2003
(Principal Financial and
Accounting Officer)
/s/ RALPH V. WHITWORTH
--------------------------
Ralph V. Whitworth Director, Chairman
of the Board March 31, 2003
/s/ VICENTE ANIDO, JR.
--------------------------
Vicente Anido, Jr. Director March 31, 2003
/s/ I. T. CORLEY
--------------------------
I. T. Corley Director March 31, 2003
/s/ DAVID L. GOLDSMITH
--------------------------
David L. Goldsmith Director March 31, 2003
/s/ RICHARD H. KOPPES
--------------------------
Richard H. Koppes Director March 31, 2003
/s/ PHILIP R. LOCHNER, JR.
--------------------------
Philip R. Lochner, Jr. Director March 31, 2003
/s/ JERI L. LOSE
--------------------------
Jeri L. Lose Director March 31, 2003
/s/ BEVERLY B. THOMAS
--------------------------
Beverly B. Thomas Director March 31, 2003
CERTIFICATION - CHIEF EXECUTIVE OFFICER
I, Lawrence M. Higby, certify that:
1. I have reviewed this annual report on Form 10-K of Apria Healthcare Group
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ LAWRENCE M. HIGBY
------------------------------------
Lawrence M. Higby
Chief Executive Officer
CERTIFICATION - CHIEF FINANCIAL OFFICER
I, James E. Baker, certify that:
1. I have reviewed this annual report on Form 10-K of Apria Healthcare Group
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 31, 2003
/s/ JAMES E. BAKER
------------------------------------
James E. Baker
Chief Financial Officer
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION REFERENCE
--------------------------------------------------------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of Registrant. (c)
3.2 Certificate of Ownership and Merger merging Apria Healthcare Group Inc. into Abbey and amending
Abbey's Restated Certificate of Incorporation to change Abbey's name to "Apria Healthcare Group Inc." (l)
3.3 Amended and Restated Bylaws of Registrant, as amended on May 5, 1998. (f)
3.4 Certificate of Amendment of Certificate of Incorporation of Apria Healthcare Group Inc. (h)
3.5 Amended and Restated Bylaws of Registrant, as amended on October 29, 1999. (i)
3.6 Amended and Restated Bylaws of Registrant, as amended on September 3, 2002. (o)
3.7 Amended and Restated Bylaws of Registrant, as amended on November 20, 2002.
4.1 Specimen Stock Certificate of the Registrant. (l)
4.2 Certificate of Designation of the Registrant. (c)
10.1 1991 Stock Option Plan. (a)
10.2 Schedule of Registration Procedures and Related Matters. (b)
10.3 401(k) Savings Plan, restated effective October 1, 1993, amended December 28, 1994. (e)
10.4 Amendment Number Two to the 401(k) Savings Plan, dated June 27, 1995.
10.5 Apria/Homedco Stock Incentive Plan, dated June 28, 1995. (d)
10.6 Amended and Restated 1992 Stock Incentive Plan. (e)
10.7 Amendment Number Three to the 401(k) Savings Plan, effective January 1, 1996.
10.8 Amendment 1996-1 to the 1991 Stock Option Plan, dated October 28, 1996. (g)
10.9 Amendment 1996-1 to the Amended and Restated 1992 Stock Incentive Plan, dated October 28, 1996. (g)
10.10 Amended and Restated 1997 Stock Incentive Plan, dated February 27, 1997, as amended through June 30,
1998. (g)
10.11 Executive Severance Agreement effective June 28, 1997, between Registrant and James E. Baker. (g)
10.12 1998 Nonqualified Stock Incentive Plan, dated December 15, 1998. (g)
10.13 Building Lease, dated December 6, 2000 and commencing on December 1, 2001, between MSGW California I,
LLC and Apria Healthcare, Inc. for two buildings within the MSGW/Pacific Commercentre Business Park,
Lake Forest, California. (k)
10.14 Amendment No. 1 to the 1998 Nonqualified Stock Incentive Plan, dated January 31, 2001. (j)
10.15 Credit Agreement dated July 20, 2001, among Registrant and certain of its subsidiaries, Bank of
America National Association and other financial institutions party to the Credit Agreement. (k)
10.16 Underwriting Agreement dated August 9, 2001, between Registrant and Relational Investors, LLC. (k)
10.17 Resignation and General Release Agreement effective February 12, 2002, between Registrant and Philip
L. Carter. (l)
10.18 Amended and Restated Employment Agreement effective February 12, 2002, between Registrant and Lawrence
M. Higby. (o)
10.19 Employment Agreement effective April 4, 2002, between Registrant and Lawrence A. Mastrovich. (m)
10.20 Executive Severance Agreement effective May 8, 2002, between Registrant and Anthony S. Domenico. (n)
10.21 Third Amended and Restated Credit Agreement dated June 7, 2002, among Registrant and certain of its
subsidiaries, Bank of America National Association and other financial institutions party to the
Credit Agreement. (n)
10.22 International Swaps and Derivatives Association, Inc. Master Agreement dated December 3, 2002, between
Registrant and Credit Lyonnais New York Branch.
10.23 Schedule to the Master Agreement dated December 3, 2002, between Registrant and Credit Lyonnais New
York Branch.
10.24 International Swaps and Derivatives Association, Inc. Master Agreement dated December 3, 2002, between
Registrant and Bank of Nova Scotia.
10.25 Schedule to the Master Agreement dated December 3, 2002, between Registrant and Bank of Nova Scotia.
10.26 Amendment to Executive Severance Agreement dated March 18, 2003, between Registrant and Anthony S.
Domenico.
21.1 List of Subsidiaries.
23.1 Consent of Deloitte & Touche LLP, Independent Auditors.
99.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
99.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
REFERENCES - DOCUMENTS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
(a) Incorporated by reference to Registration Statement on Form S-1 (Registration No. 33-44690), as filed on
December 23, 1991.
(b) Incorporated by reference to Registration Statement on Form S-4 (Registration No. 33-69094), as filed on
September 17, 1993.
(c) Incorporated by reference to Registration Statement on Form S-4
(Registration No. 33-90658), and its appendices, as filed on March
27, 1995.
(d) Incorporated by reference to Registration Statement on Form S-8 (Registration No. 33-94026), as filed on
June 28, 1995.
(e) Incorporated by reference to Registration Statement on Form S-8 (Registration No. 33-80581), as filed on
December 19, 1995.
(f) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30, 1998, as filed on August 14, 1998.
(g) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 1998.
(h) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30, 1999, as filed on August 12, 1999.
(i) Incorporated by reference to Quarterly Report on Form 10-Q dated September 30, 1999, as filed on November
12, 1999.
(j) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2000.
(k) Incorporated by reference to Quarterly Report on Form 10-Q dated September 30, 2001, as filed on November
14, 2001.
(l) Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2001.
(m) Incorporated by reference to Quarterly Report on Form 10-Q dated March 31, 2002, as filed on May 15, 2002.
(n) Incorporated by reference to Quarterly Report on Form 10-Q dated June 30, 2002, as filed on August 14, 2002.
(o) Incorporated by reference to Quarterly Report on Form 10-Q dated September 30, 2002, as filed on November
14, 2002.