UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 1-14316
APRIA HEALTHCARE GROUP INC.
(Exact name of registrant as specified in its charter)
DELAWARE 33-0488566
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3560 HYLAND AVENUE, COSTA MESA, CA 92626
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714) 427-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- ------
There were 53,766,008 shares of common stock, $.001 par value, outstanding at
May 8, 2001.
APRIA HEALTHCARE GROUP INC.
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2001
PART I. FINANCIAL INFORMATION
-------------------------------
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheets
Condensed Consolidated Income Statements
Condensed Consolidated Statements of Cash Flows
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
PART II. OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
----------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(dollars in thousands) 2001 2000
--------------------------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ............................................ $ 11,377 $ 16,864
Accounts receivable, less allowance for doubtful accounts of $36,716
and $39,787 at March 31, 2001 and December 31, 2000, respectively... 155,216 145,518
Inventories .......................................................... 21,855 22,404
Deferred income taxes ................................................ 33,400 33,067
Prepaid expenses and other current assets ............................ 8,332 8,617
--------- ---------
TOTAL CURRENT ASSETS ......................................... 230,180 226,470
PATIENT SERVICE EQUIPMENT, less accumulated depreciation of $318,606
and $310,741 at March 31, 2001 and December 31, 2000, respectively ... 140,035 134,812
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET .............................. 43,101 40,630
DEFERRED INCOME TAXES .................................................. 65,311 75,076
INTANGIBLE ASSETS, NET ................................................. 161,356 137,928
OTHER ASSETS ........................................................... 1,643 1,687
--------- ---------
$ 641,626 $ 616,603
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable ..................................................... $ 49,392 $ 54,250
Accrued payroll and related taxes and benefits ....................... 31,093 28,449
Accrued insurance .................................................... 9,511 9,980
Income taxes payable ................................................. 13,837 13,378
Other accrued liabilities ............................................ 27,892 24,555
Current portion of long-term debt .................................... 8,956 1,999
--------- ---------
TOTAL CURRENT LIABILITIES .................................... 140,681 132,611
LONG-TERM DEBT, net of current portion ................................. 332,794 337,750
COMMITMENTS AND CONTINGENCIES (Note H)
STOCKHOLDERS' EQUITY
Preferred stock, $.001 par value: 10,000,000 shares authorized;
none issued ........................................................ - -
Common stock, $.001 par value: 150,000,000 shares authorized;
53,602,825 and 53,153,890 shares issued at March 31, 2001 and
December 31, 2000, respectively; 53,516,725 and 53,067,790
outstanding at March 31, 2001 and December 31, 2000, respectively... 54 53
Additional paid-in capital ........................................... 348,453 343,621
Accumulated deficit .................................................. (179,395) (196,471)
Treasury stock, at cost; 86,100 shares at March 31, 2001
and December 31, 2000, respectively ................................ (961) (961)
--------- ---------
168,151 146,242
--------- ---------
$ 641,626 $ 616,603
========= =========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED INCOME STATEMENTS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
-------------------
(dollars in thousands, except per share data) 2001 2000
--------------------------------------------------------------------------------
Net revenues ............................................. $271,354 $250,722
Costs and expenses:
Cost of net revenues:
Product and supply costs ........................... 51,927 49,446
Patient service equipment depreciation ............. 20,964 18,853
Nursing services ................................... 354 453
Other .............................................. 3,033 2,749
-------- --------
76,278 71,501
Selling, distribution and administrative .............. 148,394 133,525
Provision for doubtful accounts ....................... 8,150 10,619
Amortization of intangible assets ..................... 2,836 2,440
-------- --------
235,658 218,085
-------- --------
OPERATING INCOME ............................... 35,696 32,637
Interest expense, net .................................... 8,408 10,601
-------- --------
INCOME BEFORE TAXES ............................ 27,288 22,036
Income tax expense ....................................... 10,212 9,255
-------- --------
NET INCOME ..................................... $ 17,076 $ 12,781
======== ========
Basic net income per common share ........................ $ 0.32 $ 0.24
======== ========
Diluted net income per common share ...................... $ 0.31 $ 0.24
======== ========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THREE MONTHS ENDED
MARCH 31,
--------------------
(dollars in thousands) 2001 2000
--------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income ................................................................... $ 17,076 $ 12,781
Items included in net income not requiring cash:
Provision for doubtful accounts ........................................... 8,150 10,619
Depreciation and amortization ............................................. 27,487 25,760
Amortization of deferred debt costs ....................................... 617 689
Deferred income taxes and other ........................................... 9,412 8,418
Changes in operating assets and liabilities, net of effects of acquisitions:
Accounts receivable ....................................................... (17,848) (12,997)
Inventories ............................................................... 661 (3,697)
Prepaid expenses and other assets ......................................... 373 (306)
Accounts payable .......................................................... (4,857) 473
Accrued payroll and related taxes and benefits ............................ 2,644 1,493
Accrued expenses .......................................................... 1,466 (3,069)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............................ 45,181 40,164
INVESTING ACTIVITIES
Purchases of patient service equipment and property,
equipment and improvements, net of effects of acquisitions ................ (30,029) (20,628)
Proceeds from disposition of assets .......................................... 41 74
Acquisitions and payments of contingent consideration ........................ (25,299) (4,860)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES ................................ (55,287) (25,414)
FINANCING ACTIVITIES
Proceeds from revolving credit facility ...................................... 17,200 -
Payments on revolving credit facility ........................................ (17,200) -
Payments on term loan ........................................................ - (5,000)
Payments on other long-term debt ............................................. (214) (2,691)
Issuances of common stock .................................................... 4,833 1,513
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .................. 4,619 (6,178)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS ........................... (5,487) 8,572
Cash and cash equivalents at beginning of period ............................... 16,864 20,493
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ..................................... $ 11,377 $ 29,065
======== ========
See notes to condensed consolidated financial statements.
APRIA HEALTHCARE GROUP INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Apria Healthcare Group Inc. ("Apria" or "the company") and its
subsidiaries. Intercompany transactions and accounts have been eliminated.
In the opinion of management, all adjustments, consisting of normal recurring
accruals necessary for a fair presentation of the results of operations for the
interim periods presented, have been reflected herein. The unaudited results of
operations for interim periods are not necessarily indicative of the results to
be expected for the entire year. For further information, refer to the
consolidated financial statements and footnotes thereto for the year ended
December 31, 2000, included in the company's 2000 Form 10-K.
NOTE B - RECLASSIFICATIONS, ACCOUNTING ESTIMATES AND RECENT ACCOUNTING
PRONOUNCEMENTS
Reclassifications: Certain amounts from prior periods have been reclassified to
conform to the current year presentation.
Use of Accounting Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Recent Accounting Pronouncements: During the first quarter of 2001, Apria
adopted Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities", which was
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133" and further amended
by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities". SFAS No. 133, as amended, establishes accounting and
reporting standards for hedging activities and for derivative instruments,
including certain derivative instruments embedded in other contracts. It
requires that an entity recognize all derivatives as either assets or
liabilities in the statements of financial position and measure those
instruments at fair value. Changes in the fair value of derivatives must be
recorded each period. SFAS No. 133 also requires formal documentation,
designation at the time the hedge transaction is initiated and assessment of the
effectiveness of the transactions that receive hedge accounting. At March 31,
2001, Apria had no derivative securities that require fair value measurement
under SFAS No. 133. Accordingly, adoption of SFAS No. 133 did not have a
material effect on the financial statements.
NOTE C - REVENUE RECOGNITION AND CONCENTRATION OF CREDIT RISK
Revenues are recognized on the date services and related products are provided
to patients and are recorded at amounts estimated to be received under
reimbursement arrangements with third-party payors, including private insurers,
managed care organizations, Medicare and Medicaid.
Due to the nature of the industry and the reimbursement environment in which
Apria operates, certain estimates are required to record net revenues and
accounts receivable at their net realizable values. Inherent in these estimates
is the risk that they will have to be revised or updated as additional
information becomes available. Specifically, the complexity of many third-party
billing arrangements and the uncertainty of reimbursement amounts for certain
services from certain payors may result in adjustments to amounts originally
recorded. Such adjustments are typically identified and recorded at the point of
cash application, claim denial or account review.
Accounts receivable are reduced by an allowance for doubtful accounts which
provides for those accounts from which payment is not expected to be received,
although services were provided and revenue was earned.
Management performs various analyses to evaluate the net realizable value of
accounts receivable. Specifically, management considers historical realization
data, accounts receivable aging trends, operating statistics and relevant
business conditions. Also, focused reviews of certain large and/or problematic
payors are performed. Because of continuing changes in the healthcare industry
and third-party reimbursement, it is possible that management's estimates could
change in the near term, which could have an impact on operations and cash
flows.
NOTE D - BUSINESS COMBINATIONS
Apria periodically makes acquisitions of complementary businesses in specific
geographic markets. The transactions are accounted for as purchases and the
results of operations of the acquired companies are included in the accompanying
income statements from the date of acquisition. During the three-month period
ended March 31, 2001, cash paid for acquisitions was $25,299,000. For the
acquisitions that closed during that same period, $25,751,000 was allocated to
intangible assets, which includes amounts not yet paid. Goodwill is being
amortized over 20 years and covenants not to compete are being amortized over
the life of the respective agreements.
NOTE E - LONG-TERM DEBT
At March 31, 2001, total borrowings under the credit agreement were
$140,000,000, outstanding letters of credit totaled $1,000,000 and credit
available under the revolving facility was $49,000,000. At March 31, 2001, Apria
was in compliance with all of the financial covenants required by the credit
agreement.
NOTE F - EQUITY
The change in stockholders' equity, other than from net income, is attributable
to the exercise of stock options. For the three months ended March 31, 2001,
proceeds from the exercise of stock options amounted to $4,833,000.
NOTE G - INCOME TAXES
Income taxes for the three months ended March 31, 2001 and 2000 have been
provided at the effective tax rate expected to be applicable for the year.
At December 31, 2000, Apria's federal net operating loss carryforwards ("NOLs")
approximated $173,000,000, which will begin expiring in varying amounts in the
years 2003 through 2013. Additionally, the company has various state NOLs which
began expiring in 1997 and an alternative minimum tax credit carryforward of
approximately $8,000,000. As a result of an ownership change in 1992, which met
specified criteria of Section 382 of the Internal Revenue Code, future use of a
portion of the federal and state NOLs generated prior to 1992 are each limited
to approximately $5,000,000 per year. Because of the annual limitation,
approximately $57,000,000 of each of Apria's federal and state NOLs may expire
unused. The company excludes the $57,000,000 of potentially expiring NOLs from
its deferred tax assets. In 2001, for federal tax purposes, NOLs are being
utilized to the extent of the company's federal taxable income.
NOTE H - COMMITMENTS AND CONTINGENCIES
Apria and certain of its present and former officers and/or directors are
defendants in a class action lawsuit, In Re Apria Healthcare Group Securities
Litigation, filed in the U.S. District Court for the Central District of
California, Southern Division (Case No. SACV98-217 GLT). This case is a
consolidation of three similar class actions filed in March and April, 1998.
Pursuant to a court order dated May 27, 1998, the plaintiffs in the original
three class actions filed a Consolidated Amended Class Action Complaint on
August 6, 1998. The amended complaint purports to establish a class of plaintiff
shareholders who purchased Apria's common stock between May 22, 1995 and January
20, 1998. No class has been certified at this time. The amended complaint
alleges, among other things, that the defendants made false and/or misleading
public statements regarding Apria and its financial condition in violation of
federal securities laws. The amended complaint seeks compensatory and punitive
damages as well as other relief.
Two similar class actions were filed during July, 1998 in Superior Court of
California for the County of Orange: Schall v. Apria Healthcare Group Inc., et
al. (Case No. 797060) and Thompson v. Apria Healthcare Group Inc., et al. (Case
No. 797580). These two actions were consolidated by a court order dated October
22, 1998 (Master Case No. 797060). On June 14, 1999, the plaintiffs filed a
Consolidated Amended Class Action Complaint asserting claims founded on state
law and on Sections 11 and 12(2) of the 1933 Securities Act.
Apria believes that it has meritorious defenses to the plaintiffs' claims and it
intends to vigorously defend itself in both the federal and state cases. In the
opinion of Apria's management, the ultimate disposition of these class actions
will not have a material adverse effect on the company's financial condition or
results of operations.
Since mid-1998 Apria has received a number of subpoenas and document requests
from U.S. Attorneys' offices and from the U.S. Department of Health and Human
Services. The subpoenas and requests generally ask for documents, such as
patient files, billing records and other documents relating to billing
practices, related to the company's patients whose healthcare costs are paid by
Medicare and other federal programs. Apria is cooperating with the government in
connection with these investigations and is responding to the document requests
and subpoenas. In July 1999 the company received notification that the U.S.
Attorney's office in Sacramento closed its criminal investigation file relating
to eight subpoenas that had been issued by that office.
In February 2001 the company was informed by the U.S. Attorney's office in Los
Angeles that the billing investigation being conducted by that office is the
result of qui tam litigation filed on behalf of the government against the
company, and that the government is investigating certain allegations for the
purpose of determining whether it will intervene in that litigation. The
complaints in the litigation are under seal, however, and the government has not
informed the company of either the identity of the court or courts where the
proceedings are pending, the date or dates instituted, the identity of the
plaintiffs, the factual bases alleged to underlie the proceedings, or the relief
sought.
Apria has acknowledged that there may be errors and omissions in supporting
documentation affecting a portion of its billings. If a judge, jury or
administrative agency were to determine that such errors and omissions resulted
in the submission of false claims to federal healthcare programs or significant
overpayments by the government, Apria could face civil and administrative claims
for refunds, sanctions and penalties for amounts that would be highly material
to its business, results of operations and financial condition, including
exclusion of Apria from participation in federal healthcare programs. Apria
believes that the company would be in a position to assert numerous meritorious
defenses in the event that the qui tam litigation proceeds or any other claims
are asserted. However, no assurance can be provided as to the outcome of this
litigation or whether any other claims will be asserted or as to the outcome of
any other possible proceedings that may result from any such other claims.
Management cannot estimate the range of possible loss of this litigation and
therefore has not recorded any related accruals.
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 financial condition or results of operations.
NOTE I - PER SHARE AMOUNTS
The following table sets forth the computation of basic and diluted per share
amounts:
THREE MONTHS ENDED
MARCH 31,
------------------
(in thousands, except per share data) 2001 2000
-------------------------------------------------------------------------------------------------------------
NUMERATOR:
Net income ............................................................................ $17,076 $12,781
Numerator for basic per share amounts - income available to common stockholders ....... 17,076 12,781
Numerator for diluted per share amounts - income available to common stockholders ..... 17,076 12,781
DENOMINATOR:
Denominator for basic per share amounts - weighted average shares ..................... $53,392 $52,191
Effect of dilutive securities:
Employee stock options ............................................................ 2,092 1,756
------- -------
Dilutive potential common shares .................................................. 2,092 1,756
------- -------
Denominator for diluted per share amounts - adjusted weighted average shares .......... 55,484 53,947
======= =======
Basic net income per common share ....................................................... $ 0.32 $ 0.24
======= =======
Diluted net income per common share ..................................................... $ 0.31 $ 0.24
======= =======
Employee stock options excluded from the computation of diluted per share
amounts:
Exercise price exceeds average market price of common stock ......................... 2,160 2,391
Average exercise price per share that exceeds average market price of common stock ...... $ 26.93 $ 18.67
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995: Apria's business is subject to a
number of risks, some of which are beyond the company's control. The company has
described certain of those risks in its Form 10-K for the fiscal year ended
December 31, 2000, as filed with the Securities and Exchange Commission on March
22, 2001. This report may be used for purposes of the Private Securities
Litigation Reform Act of 1995 as a readily available document containing
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those projected in any forward-looking
statements the company may make from time to time. Those risks include: whether
the company will be able to resolve issues pertaining to the collectibility of
its accounts receivable, healthcare reform and the effect of federal and state
healthcare regulations, the ongoing government investigations regarding patients
covered by Medicare and other federal programs, pricing pressures from large
payors and changes in governmental reimbursement levels, the effectiveness of
the company's operating systems and controls, and the successful implementation
of the company's acquisition strategy.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
---------------------
NET REVENUES. Net revenues were $271.4 million in the first quarter of
2001, compared to $250.7 million for the first quarter of 2000. The increase in
net revenues is due to internal growth, new contracts with regional and national
payors, the acquisition of complementary businesses and price increases in
certain managed care contracts.
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
2001 2000
------------------ ------------------
(dollars in thousands) $ % $ %
------------------------------------------------------------------------------
Respiratory therapy ............ $178,330 65.7% $163,263 65.1%
Infusion therapy ............... 52,385 19.3% 46,751 18.6%
HME/other ...................... 40,639 15.0% 40,708 16.3%
-------- ----- -------- -----
Total net revenues ........ $271,354 100.0% $250,722 100.0%
======== ===== ======== =====
Use of Estimates in Recording Net Revenues. Substantially all of Apria's
revenues are reimbursed by third party payors, including Medicare, Medicaid and
managed care organizations. Due to the nature of the industry and the
reimbursement environment in which Apria operates, certain estimates are
required in recording net revenues. Inherent in these estimates is the risk that
they will have to be revised or updated as additional information becomes
available.
Medicare Reimbursement Update. The Medicare, Medicaid and SCHIP Benefits
Improvement and Protection Act of 2000 provides reinstatement of the Consumer
Price Index-based reimbursement increase in 2001 for certain durable medical
equipment products and services. The increase will be in effect July 1, 2001
through December 31, 2001 and will include a transitional allowance that will
effectively compress a full year's Consumer Price Index update into six months.
GROSS MARGIN. Gross margins for the first quarter of 2001 were 71.9%
compared to 71.5% for the same period last year. The improvement can be
partially attributed to better utilization of inventory and patient service
equipment and the increase in the share of higher-margin respiratory revenues to
total net revenues.
SELLING, DISTRIBUTION AND ADMINISTRATIVE. Selling, distribution and
administrative expense, as a percentage of net revenue, was 54.7% for the first
quarter of 2001 versus 53.3% for the corresponding period in 2000. Expenses for
the first quarter of 2001 reflect staffing and compensation increases effected
during 2000, most notably in the functional areas of reimbursement and delivery.
The investments made in the reimbursement area have contributed to improvements
in cash collections and reductions in the provision for doubtful accounts. The
additions in the delivery area were in support of business growth.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts was
3.0% of net revenues for the first three months of 2001 compared to 4.2% for the
corresponding period in 2000. The decrease is due to a reduction in the
percentage of older accounts to total accounts receivable and a reduction in
collection periods. See "Liquidity and Capital Resources - Accounts Receivable".
AMORTIZATION OF INTANGIBLE ASSETS. Amortization expense was $2.8 million
for the first quarter of 2001 compared to $2.4 million in the corresponding
period of 2000. The increase is directly attributable to intangible assets that
were recorded in conjunction with acquisitions consummated after the first
quarter of 2000.
INTEREST EXPENSE. Interest expense was $8.4 million for the first quarter
of 2001, down from $10.6 million for the first quarter of 2000. The decrease is
due to the reduction in long-term debt and a decrease in interest rates between
the periods.
INCOME TAXES. Income taxes for the three months ended March 31, 2001 and
2000 have been provided at the effective tax rate expected to be applicable for
the year.
At December 31, 2000, Apria's federal net operating loss carryforwards
("NOLs") approximated $173 million, which will begin expiring in varying amounts
in the years 2003 through 2013. Additionally, the company has various state NOLs
which began expiring in 1997 and an alternative minimum tax credit carryforward
of approximately $8 million. As a result of an ownership change in 1992, which
met specified criteria of Section 382 of the Internal Revenue Code, future use
of a portion of the federal and state NOLs generated prior to 1992 are each
limited to approximately $5 million per year. Because of the annual limitation,
approximately $57 million of each of Apria's federal and state NOLs may expire
unused. Apria excludes the $57 million of potentially expiring NOLs from its
deferred tax assets. In 2001, for federal tax purposes, NOLs are being utilized
to the extent of the company's federal taxable income.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
CASH FLOW. Operating cash flow was $45.2 million in the first quarter of
2001 compared with $40.2 million for the corresponding period in 2000. The
primary reason for the improvement is the increase in net income. The larger
increase in accounts receivable in the first quarter of 2001 versus the same
period in 2000 was offset by changes in other operating assets and liabilities.
Cash used in investing activities was $55.3 million and $25.4 million in the
first quarters of 2001 and 2000, respectively. The variance is due to an
increase in business acquisitions and increases in patient service equipment
purchases to support revenue growth.
ACCOUNTS RECEIVABLE. Accounts receivable before allowance for doubtful
accounts was $191.9 million at March 31, 2001 and $185.3 million at December 31,
2000. The increase is due to continued quarter-over-quarter net revenue
increases. 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 days at both March 31, 2001 and December 31,
2000. Accounts aged in excess of 180 days as a percentage of total accounts
receivable decreased to 21.6% at March 31, 2001 from 23.8% at December 31, 2000.
Evaluation of Net Realizable Value. Management performs various analyses to
evaluate the net realizable value of accounts receivable. Specifically,
management considers historical realization data, accounts receivable aging
trends, operating statistics and relevant business conditions. Also, focused
reviews of certain large and/or problematic payors are performed. Because of
continuing changes in the healthcare industry and third-party reimbursement, it
is possible that management's estimates could change in the near term, which
could have an impact on operations and cash flows.
Unbilled Receivables. Included in accounts receivable are earned but
unbilled receivables of $23.2 million and $17.9 million at March 31, 2001 and
December 31, 2000, respectively. Delays 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.
LONG-TERM DEBT. At March 31, 2001, total borrowings under the credit
agreement were $140.0 million (none of which was advanced from the revolving
credit facility), outstanding letters of credit totaled $1.0 million and credit
available under the revolving facility was $49.0 million. At March 31, 2001,
Apria had $120.4 million of its acquisition allotment (as defined by the credit
agreement) remaining.
BUSINESS COMBINATIONS. Apria periodically makes acquisitions of
complementary businesses in specific geographic markets. The transactions are
accounted for as purchases and the results of operations of the acquired
companies are included in the accompanying income statements from the date of
acquisition. During the three-month period ended March 31, 2001, cash paid for
acquisitions was $25.3 million. For acquisitions that closed during the period,
approximately $25.8 million was allocated to intangible assets, which includes
amounts not yet paid. Goodwill is being amortized over 20 years and covenants
not to compete are being amortized over the life of the respective agreements.
OTHER. Apria's management believes that cash provided by operations
together with cash invested in its money market account and amounts available
under its existing credit facility will be sufficient to finance its current
operations for at least the next year.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Apria does not currently utilize derivative financial instruments that
expose the company to significant market risk. However, Apria is subject to
interest rate changes on its variable rate term loan under the company's bank
credit agreement that may affect the fair value of that debt and cash flow and
earnings. Based on the term debt outstanding at March 31, 2001 and the current
market perception, a 100 basis point change in the applicable interest rates
would increase or decrease Apria's annual cash flow and pretax earnings by
approximately $1.4 million.
PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
Apria and certain of its present and former officers and/or directors
are defendants in a class action lawsuit, In Re Apria Healthcare
Group Securities Litigation, filed in the U.S. District Court for the
Central District of California, Southern Division (Case No.
SACV98-217 GLT). This case is a consolidation of three similar class
actions filed in March and April, 1998. Pursuant to a court order
dated May 27, 1998, the plaintiffs in the original three class
actions filed a Consolidated Amended Class Action Complaint on August
6, 1998. The amended complaint purports to establish a class of
plaintiff shareholders who purchased Apria's common stock between May
22, 1995 and January 20, 1998. No class has been certified at this
time. The amended complaint alleges, among other things, that the
defendants made false and/or misleading public statements regarding
Apria and its financial condition in violation of federal securities
laws. The amended complaint seeks compensatory and punitive damages
as well as other relief.
Two similar class actions were filed during July, 1998 in Superior
Court of California for the County of Orange: Schall v. Apria
Healthcare Group Inc., et al. (Case No. 797060) and Thompson v. Apria
Healthcare Group Inc., et al. (Case No. 797580). These two actions
were consolidated by a court order dated October 22, 1998 (Master
Case No. 797060). On June 14, 1999, the plaintiffs filed a
Consolidated Amended Class Action Complaint asserting claims founded
on state law and on Sections 11 and 12(2) of the 1933 Securities Act.
Apria believes that it has meritorious defenses to the plaintiffs'
claims and it intends to vigorously defend itself in both the federal
and state cases. In the opinion of Apria's management, the ultimate
disposition of these class actions will not have a material adverse
effect on the company's financial condition or results of operations.
Since mid-1998 Apria has received a number of subpoenas and document
requests from U.S. Attorneys' offices and from the U.S. Department of
Health and Human Services. The subpoenas and requests generally ask
for documents, such as patient files, billing records and other
documents relating to billing practices, related to the company's
patients whose healthcare costs are paid by Medicare and other
federal programs. Apria is cooperating with the government in
connection with these investigations and is responding to the
document requests and subpoenas. In July 1999 the company received
notification that the U.S. Attorney's office in Sacramento closed its
criminal investigation file relating to eight subpoenas that had been
issued by that office.
In February 2001 the company was informed by the U.S. Attorney's
office in Los Angeles that the billing investigation being conducted
by that office is the result of qui tam litigation filed on behalf of
the government against the company, and that the government is
investigating certain allegations for the purpose of determining
whether it will intervene in that litigation. The complaints in the
litigation are under seal, however, and the government has not
informed the company of either the identity of the court or courts
where the proceedings are pending, the date or dates instituted, the
identity of the plaintiffs, the factual bases alleged to underlie the
proceedings, or the relief sought.
Apria has acknowledged that there may be errors and omissions in
supporting documentation affecting a portion of its billings. If a
judge, jury or administrative agency were to determine that such
errors and omissions resulted in the submission of false claims to
federal healthcare programs or significant overpayments by the
government, Apria could face civil and administrative claims for
refunds, sanctions and penalties for amounts that would be highly
material to its business, results of operations and financial
condition, including exclusion of Apria from participation in federal
healthcare programs. Apria believes that the company would be in a
position to assert numerous meritorious defenses in the event that
the qui tam litigation proceeds or any other claims are asserted.
However, no assurance can be provided as to the outcome of this
litigation or whether any other claims will be asserted or as to the
outcome of any other possible proceedings that may result from any
such other claims.
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 financial condition or results of operations.
ITEMS 2-5. NOT APPLICABLE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Reference
------ ---------
10.1 Amendment No. 1 to the 1998 Nonqualified Stock
Incentive Plan, dated January 31, 2001. Incorporated
by reference to Annual Report on Form 10-K for the
year ended December 31, 2000.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter for which
this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
APRIA HEALTHCARE GROUP INC.
---------------------------
Registrant
May 15, 2001 /s/ JOHN C. MANEY
----------------------------------------------------
John C. Maney
Executive Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)