##### Table of Contents



UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2006
 OR
 o
    
    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.
  Delaware
(State of Incorporation)
    
    33-0488566
(I.R.S. Employer Identification Number)
 26220 Enterprise Court, Lake Forest, CA
(Address of Principal Executive Offices)
    
    92630-8405
(Zip Code)
   Common Stock, $0.001 par value per share
(Title of each class)
    
    New York Stock Exchange
(Name of each exchange on which registered)
  þ o
 o þ
 þ o
 þ
  þ o o
 o þ
  Documents Incorporated by Reference:




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APRIA HEALTHCARE GROUP INC.
 TABLE OF CONTENTS
 PagePART IItem 1
    
     Business
    
    
    1Strategy
    
    
    1Service Lines
    
    
    2Organization and Operations
    
    
    3Marketing
    
    
    4Sales
    
    
    5Competition
    
    
    5Government Regulation
    
    
    6Employees
    
    
    13Website Access to Reports
    
    
    13Executive Officers of the Registrant
    
    
    14Item 1A
    
     Risk Factors
    
    
    15Item 1B
    
     Unresolved Staff Comments
    
    
    16Item 2
    
     Properties
    
    
    16Item 3
    
     Legal Proceedings
    
    
    17Item 4
    
     Submission of Matters to a Vote of Security Holders
    
    
    17PART IIItem 5
    
     Market for Registrants Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
    
    
    18Item 6
    
     Selected Financial Data
    
    
    19Item 7
    
     Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 7A
    
     Quantitative and Qualitative Disclosures about Market Risk
    
    
    31Item 8
    
     Financial Statements and Supplementary Data
    
    
    31Item 9
    
     Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
    
    
    31Item 9A
    
     Controls and Procedures
    
    
    31Managements Report on Internal Control over Financial Reporting
    
    
    32Report of Independent Registered Public Accounting Firm
    
    
    33Item 9B
    
     Other Information
    
    
    34PART III *Item 10
    
     Directors, Executive Officers and Corporate Governance
    
    
    34Item 11
    
     Executive Compensation
    
    
    34Item 12
    
     Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
    
    
    34Item 13
    
     Certain Relationships and Related Transactions, and Director Independence
    
    
    34Item 14
    
     Principal Accounting Fees and Services
    
    
    34PART IVItem 15
    
     Exhibits, Financial Statement Schedule
    
    
    34Report of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Financial Statements
    
    
    F-2Consolidated Financial Statement Schedule
    
    
    S-1SIGNATURESEXHIBIT INDEXEXHIBIT 21.1EXHIBIT 23.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  
 *
    
    All information required to be disclosed in Part III is incorporated by
reference from Part I and the companys definitive Proxy Statement to be filed
with the Commission within 120 days after the end of the companys fiscal year.




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Forward Looking Statements
 This report contains forward-looking statements that are not based on historical facts. All
such forward-looking statements are uncertain. Apria has based those forward-looking statements
on, among other things, projections and estimates regarding the economy in general, the healthcare
industry and other factors that impact Aprias results of operations. These statements involve
known and unknown risks, uncertainties and other factors that may cause Aprias actual results,
levels of activity, performance or achievements to be materially different from any results, levels
of activity, performance or achievements expressed or implied by any forward-looking statements.
In some cases, forward-looking statements that involve risks and uncertainties contain terminology
such as may, will, should, could, expects, intends, plans, anticipates, believes,
estimates, predicts, potential, or continue or variations of these terms or other
comparable terminology. See Certain of these risks, uncertainties and other factors are discussed
in Item 1A  Risk Factors.
 
 PART I
 
 Item 1. BUSINESS
  Service Line
    
    Examples of Services and ProductsHome respiratory therapy
    
    Provision of oxygen systems, stationary and
portable ventilators, obstructive sleep apnea
equipment, nebulizers, respiratory medications
and related clinical/administrative support
servicesHome infusion therapy
    
    Intravenous administration of anti-infectives,
pain management, chemotherapy, nutrients (also
administered through a feeding tube), immune
globulin, other medications and related
clinical/administrative support servicesHome medical equipment
    
    Provision of patient safety items, ambulatory
aids and in-home equipment, such as wheelchairs
and hospital beds
 
 Strategy
  
    
    achieve strong organic sales growth and increase market share;
    
    leverage its nationwide infrastructure to reduce costs and expand profits;
    
    deliver superior customer service; and
    
    attract, develop and advance leaders within the company.
 1




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##### Table of Contents



Service Lines
  
    
    providing in-home clinical respiratory care, infusion and respiratory pharmacy
management and high-tech infusion nursing;
    
    educating patients and their caregivers about illnesses and providing them with
written instructions about home safety, self-care and the proper use of their
equipment;
    
    monitoring patients individualized treatment plans;
    
    reporting patient progress and status to the physician and/or managed care organization;
    
    providing in-home delivery and set-up of equipment and/or supplies;
    
    maintaining and repairing equipment; and
    
    processing claims to third-party payors, billing and collecting patient co-pays and deductibles.
  Year Ended December 31,2006
    
    2005
    
    2004Home respiratory therapy
    
    
    68
    %
    
    
    69
    %
    
    
    68
    %Home infusion therapy
    
    
    18
    %
    
    
    17
    %
    
    
    17
    %Home medical equipment/other
    
    
    14
    %
    
    
    14
    %
    
    
    15
    %Total net revenues
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
 Home Respiratory Therapy .
 
    
    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.
   Home Infusion Therapy .
 
    
    total parenteral (intravenous) nutrition;
    
    anti-infective and anti-fungal medications;
    
    chemotherapy; and
    
    pain management.
   2




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Home Medical Equipment/Other .
  
 Organization and Operations
 Organization.
 Corporate Compliance.
 Internal Audit.
 Operating Systems and Controls.
  3




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Payors.
 Receivables Management.
  
 Marketing
  Automated Call Routing Through a Single Toll-Free Number.
 Accreditation by the Joint Commission on Accreditation of Healthcare Organizations or JCAHO.
 Essential Care Model.
 Patient Satisfaction and Complaint Resolution Process.
 Apria Great Escapes ® Travel Program.
 4




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Sales
   
 Competition
  
    
    reputation with referral sources, including local physicians and hospital-based professionals;
    
    accessibility and responsiveness;
    
    price of services;
    
    overall ease of doing business;
    
    quality of patient care and associated services; and
    
    range of home healthcare services and products.
  
    
    ability to service a wide geographic area;
    
    ability to develop and maintain contractual relationships with managed care organizations;
    
    access to capital;
    
    information systems capabilities; and
    
    accreditation by the JCAHO or a similar accrediting body.
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Government Regulation
  Medicare and Medicaid Reimbursement.
 Medicare Reimbursement
    
    
    A freeze on annual payment increases for durable medical equipment  The freeze
commenced in 2004 and will continue through 2008.
    
    Reimbursement reductions for five durable medical equipment categories 
Reimbursement for most of these categories is now based on the median price paid for
such items on behalf of beneficiaries of federal employee health benefit plans, or
FEHBP. The new fee schedules for most products went into effect January 1, 2005. The
revised pricing for oxygen and oxygen equipment was implemented on April 8, 2005.
Subsequent legislation has further modified some of these reimbursement methodologies.
    
    Reimbursement reductions for inhalation drugs  The previous reimbursement rate of
95% of the average wholesale price was reduced to 80% of the average wholesale price,
effective January 1, 2004. Beginning in January 2005, reimbursement for these drugs was
further reduced through a shift to the manufacturer-reported average sales price, or
ASP (subject to adjustment each quarter), plus 6%, plus a separate dispensing fee per
patient episode. Medicare publishes the ASP plus 6% payment levels several weeks
before the first day of each quarter, and the company has no way of knowing if the
quarterly ASPs for
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inhalation drugs will increase or decrease since manufacturers report
applicable sales price information directly to CMS. Since 2006, dispensing fees have
been $57.00 for a 30-day supply for a new patient, $33.00 for each 30-day supply
thereafter, and $66.00 for each 90-day supply.
 
    
    Establishment of a competitive bidding program for Medicare Part B  Such a program
would require that suppliers wishing to provide certain durable medical equipment to
beneficiaries submit bids to Medicare. Although the specific durable medical equipment
items and services subject to this rule and the exact timeline for implementation
remain unspecified, the MMA states that the program is to be phased in as follows: (i)
10 of the largest metropolitan statistical areas, or MSAs, in 2007; (ii) 80 of the
largest MSAs in 2009; and (iii) additional areas after 2009. The legislation contains
special provisions exempting rural areas.On April 24, 2006, CMS issued a proposed rule for the competitive bidding program. The
proposal outlined CMS general intent and proposed procedures and requirements for a
program beginning some time in 2007. However, CMS did not specify: (i) which DMEPOS
products will be included in the 10 initial competitive acquisition program areas; (ii)
which MSAs will be included in the initial phase of competitive bidding, although it
does explicitly exclude New York City, Chicago and Los Angeles from the first phase;
(iii) target cost savings; (iv) specific quality standards; or (v) specific provider
guidelines for preparing, completing and implementing the bids in each area. The
proposed rule also introduced certain concepts not previously addressed. CMS accepted
comments on all aspects of the proposed rule as of June 30, 2006, and Apria submitted
extensive comments.On August 1, 2006, CMS issued a final rule limited to only selective aspects of the
competitive bidding program. The August 1 final rule finalized CMS plan to work with
Competitive Bidding Implementation Contractors, or CBICs, to administer the competitive
bidding program in conjunction with CMS and the DME Medicare Administrator Contractors,
or DME MACs. It also clarified CMS plan to administer certain aspects of the process
for accrediting providers in order for them to qualify to participate in competitive
bidding. CMS also issued final quality standards for competitive bidding participants on
August 14, 2006. Apria already complies with the final quality standards and has been
accredited by the Joint Commission on Accreditation of Healthcare Organizations, or
JCAHO, for almost two decades.Throughout the fourth quarter of 2006 and the early portion of 2007, CMS informed the
supplier community that the final rule outlining the additional components of
competitive bidding would be released in the near future. To date, a final rule has not
been published. Given the limited information available regarding CMS final plan for
the competitive bidding program, such as the list of products and services and the MSAs
to be included, Apria cannot estimate at this time the impact of the competitive bidding
program on the companys operations or financial condition.
    
    Incentives for expansion of Medicare Part C 3⁄4 The Medicare Modernization Act
includes financial incentives for managed care plans to expand their provision of
Medicare Advantage plans in 2006 in an effort to attract more Medicare beneficiaries to
managed care models. The company maintains contracts to provide respiratory therapy,
infusion and medical equipment and related services to a significant number of managed
care plans nationwide, and believes that the Medicare Advantage expansion represents a
growth opportunity.
    
    Reimbursement for home infusion therapy under Medicare Part D 3⁄4 Currently, a
limited number of infusion therapies, supplies and equipment are covered by Medicare
Part B. The Medicare Modernization Act provides expanded coverage for the drugs only,
but excludes coverage for the supplies and clinical services needed to safely and
effectively provide home infusion therapy services to patients in the home. The company
has contracted with a limited number of Medicare Part D prescription drug plans in
order to provide continuity of care for certain patients. Due to nationwide Part D
implementation issues experienced by home infusion providers, the industry is
continuing to work with CMS and Congress to rectify the coverage and payment
limitations that are causing implementation challenges for providers, patients and
referral sources. In addition, a bill was introduced in Congress in the summer of 2006
to consolidate home infusion therapy coverage under Part B. The bill, which garnered 40
sponsors in 2006, is expected to be reintroduced in the new Congress and would provide
for infusion benefit coverage in a more comprehensive manner that is analogous to how
the therapy is covered by the managed care sector.
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
    
    In 2007, durable medical equipment currently categorized in the capped rental
category by CMS, such as hospital beds, wheelchairs, nebulizers, patient lifts and
continuous positive airway pressure devices, will be considered purchased outright at
the end of a maximum rental period and the ownership of such devices will transfer
directly to the patients. The maximum rental period, which had been 15 months with an
option for the patients to purchase the equipment in the tenth month, is reduced to 13
months. The new 13-month rental period policy took effect on January 1, 2006, and
therefore the first month in which the new policy had an impact on the companys
revenue was February 2007. In addition, the service and maintenance fee, which had
been paid to suppliers twice yearly after the rental period ended in order to cover
various non-equipment service costs, was eliminated for those patients who commenced
service on or after January 1, 2006. In November 2006, CMS issued a final rule
outlining various aspects of implementing the DRA. For example, supplier replacement of
equipment during the rental period is limited, and suppliers must replace
beneficiary-owned equipment that does not last the useful lifetime of the equipment,
which CMS has generally defined as being five years. Management estimates that the reduction in rental revenues for impacted DME products and the loss
of the service and maintenance fees in 2007 will be approximately $4.0 million and $0.5 million,
respectively. The 2007 estimate assumes the loss of the service and maintenance fee component for
one quarter as the effect of the loss is expected to impact the latter part of the year only. This
estimate is subject to assumptions and uncertainties and the actual negative impact on revenue and
fees may be greater or less.
    
    Under the DRA, reimbursement for oxygen equipment will also convert from an ongoing
rental method to a rent-to-purchase method. The law mandates that oxygen equipment
reimbursement will be limited to 36 months, after which time the ownership of the
equipment will transfer to the patient, who will assume primary responsibility for
identifying when repairs or preventive maintenance are needed. Such repairs and
preventive maintenance have historically been provided by home oxygen providers and
included in the bundled monthly rental payment from Medicare for oxygen therapy. The
final rule that CMS issued in November 2006 regarding the implementation of the DRA
establishes new payment classes for oxygen equipment, including transfilling and
portable equipment, new monthly rental payment rates, and new payment rates for the
delivery of oxygen contents for patient-owned equipment after title to the equipment
transfers. According to this final rule, beginning in 2008, Medicare will review the
utilization patterns and fee schedule rates and consider whether an adjustment to the
payment rates is needed in order to satisfy the statutory mandate of budget neutrality.
The new DRA payment amounts went into effect January 1, 2007, but the 36-month rental
period will be retroactively applied to January 1, 2006 for all beneficiaries requiring
oxygen as of December 31, 2005. Accordingly, January 2009 is the first month in which
the transfer of ownership for oxygen equipment and the new repair and maintenance
policy will impact the company.Regarding repair and maintenance, the final rule permits payment to suppliers for
general maintenance and servicing of certain patient-owned oxygen equipment every six
months, beginning after the first six months the patient owns the equipment. The final
rule limits payment for general maintenance and servicing visits to 30 minutes of labor
based on rates the Medicare contractors establish. CMS declined to offer general
maintenance and servicing payments for beneficiary-owned liquid and gas equipment with
the exception of a single payment for pick-up and storage or disposal of such equipment
that a beneficiary no longer needs. Once title to the oxygen equipment transfers, CMS
will also pay for certain other reasonable and necessary but non-routine repairs which
remain as yet unspecified by the agency, but CMS will not make separate payment for
certain patient support services, which are currently covered by and included in the
monthly bundled payment rate for oxygen therapy. Apria may or may not continue to
provide repair and maintenance service on patient-owned equipment and is in the process
of evaluating the impact of these changes.The final rule also limits supplier replacement of oxygen equipment during the rental
period, and requires suppliers to replace beneficiary-owned equipment that does not last
the useful lifetime of the equipment, which CMS has generally defined as being five
years.
    
    The Presidents current healthcare proposals seek to further reduce the maximum
rental period for oxygen equipment from the now-mandated 36 months to 13 months. The
Presidents fiscal year 2008 budget includes such a recommendation, but the line item
lacks clarity as to whether the
recommendation applies to all home oxygen technologies or only certain ones. There are
other initiatives to reduce the rental period to 13 months, but it is uncertain whether
any of these initiatives
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will ultimately be approved by Congress. For example, in
September 2006, the OIG published a report entitled Medicare Home Oxygen: Equipment
Cost and Servicing. The report was the result of an audit survey conducted by the OIG
beginning in the Fall of 2005. The surveys stated objective was to study the average
acquisition cost of oxygen concentrators. The final report included a recommendation
that Congress consider further reductions to oxygen payment levels, including the
possibility of limiting the maximum rental period for oxygen equipment from the
DRA-mandated 36 months to 13 months. The industry has analyzed the report and shared
concerns about the narrow scope of the report and its findings with the OIG, CMS,
members of Congress and other government agencies. There are also legislative provisions
that have been introduced in Congress that would repeal the current oxygen reimbursement
cap and equipment ownership mandate included in the DRA, but it is uncertain whether and
when any of the OIGs recommendations or the repeal legislation ultimately would be
adopted and passed by Congress.
  §
    
    In late December 2005, CMS issued the 2006 Health Care Procedure Coding System, or
HCPCS, fee schedule for Medicare Part B medications and the new two-tiered dispensing
fee for inhalation therapies. The fee schedule took effect on January 1, 2006, and
included two HCPCS codes for commercially manufactured budesonide
(Pulmicort®)1 and DuoNeb®2. The fee schedule also included a
revised definition for the HCPCS codes for commercially manufactured budesonide and
budesonide compounded from a powder, and separated these products into two unique
codes.§
    
    In October 2006, CMS issued the 2007 HCPCS list for Medicare Part B medications.
The 2007 list includes new codes for certain compounded medications, but does not
include the proposed Medicare allowable rates for the new codes. CMS has not released
any detailed allowable information for these compounded codes and has ascribed a
payment level of To Be Determined to them. However, management does not expect such
coding or reimbursement changes to have a material impact on the company due to the
extremely low volume of custom, patient-specific, physician-prescribed compounding
performed by its inhalation pharmacies. Additionally, according to the state licensing
agencies associated with the states in which the inhalation pharmacies operate, the
Companys inhalation pharmacies conform to current quality and sterility standards.§
    
    In January 2006, CMS published a final regulation that would shift payment for
certain respiratory assist devices from the current frequent and substantial payment
category to the capped rental category. Under frequent and substantial payment,
Medicare payment continues for the duration of time the beneficiary requires the
device, while capped rental payment continues for 13 months (a reduction from 15
months, mandated by the recently enacted DRA.) The change in the payment category
became effective April 1, 2006. The policy applies to those respiratory assist devices
(known as BiPAP STs) that have a backup rate feature that delivers pressure whenever
the users spontaneous breathing efforts are insufficient. The first claims received
for each Medicare beneficiary with a date of service on or after April 1, 2006,
including beneficiaries with existing rental equipment, are counted as the first rental
month in the capped rental period. Thus, the first month in which the new
categorization will impact the companys revenue will be May 2007. The companys
estimate for this change in payment categories is a reduction in 2007 revenues of approximately $3 million.§
    
    In January 2006, CMS announced the designation of four specialty contractors, DME
MACs, which will be responsible for handling the administration of all Medicare claims
from suppliers of durable medical equipment. CIGNA Government Services, LLC (CGS)
protested the contract awards made in Regions C and D. The Government Accountability
Office denied CGS protest for Region D but CMS ultimately authorized CGS for Region C
on January 16, 2007. The following DME MACs are currently processing
claims: National Heritage Insurance Company (NHIC) for Region A (effective July 1,
2006), AdminaStar Federal for Region B (effective July 1, 2006), CGS for Region C
(effective January 16, 2007), and Noridian Administrative Services for Region D
(effective September 30, 2006). It is difficult at this time to
 
 1
    
    Pulmicort® is a registered trademark of
Astra Zeneca AB Corporation2
    
    DuoNeb® is a registered trademark of
Dey L.P. 9




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predict precisely how
this change in claims administration will affect DME suppliers, nor can the company
predict or estimate the potential impact of this change on collections of its accounts
receivable.
 §
    
    On March 24, 2006, the three Program Safeguard Contractors, or PSCs, overseeing
durable medical equipment issued a proposed Local Coverage Determination, or LCD, for
nebulizer medications covered by Medicare Part B. In their respective geographic
regions, the PSC medical directors are responsible for implementing medical policies
that conform to Medicare rules, regulations, coverage guidelines and payment policies
for Part B as mandated by law or other regulations. The LCD for nebulizer medications
proposed to change the payment and coverage policies for certain inhalation therapies
that are provided in conjunction with the durable medical equipment known as a
nebulizer. Specifically, four provisions were proposed: (i) payment for levalbuterol
(commercially manufactured as brand-name Xopenex®)3 would be based on the
allowable for generic albuterol sulfate; (ii) payment for commercially-manufactured,
brand-name DuoNeb® would be based on the allowance for separate unit dose vials of
albuterol sulfate and ipratropium bromide; (iii) coverage for a variety of other
nebulizer drugs would be eliminated because the PSCs assert that there is inadequate
support in the medical literature for administration using a DME nebulizer; and (iv)
maximum monthly utilization limits for budesonide would be defined.Apria, along with numerous other industry representatives, manufacturers, providers,
physician and patient advocacy groups, participated in the public hearings and has also
submitted formal written comments to the PSCs and CMS. The company believes that the MMA
is clear in its intent to prescribe the Part B average sales price reimbursement formula
for single-source drugs which applies to both DuoNeb® and Xopenex®. The company further
believes that the PSCs do not have the legal authority to circumvent the average sales
price methodology through the issuance of an LCD that invokes their authority to use the
Least Costly Alternative as the basis for reducing the reimbursement for these drugs.
Apria is continuing to work with industry representatives to further demonstrate to CMS
and the PSCs that such a decision would have a negative impact on access to prescription
medications used in the front-line treatment of chronic obstructive pulmonary disease.
The company has determined that if the four provisions of the LCD are implemented as
proposed in the March 24, 2006 document, it will generally not provide DuoNeb® and
Xopenex® to existing or future patients covered by Medicare, as the cost would far
exceed the reimbursement rate. The company would undertake an effort to inform existing
patients and physicians of the option to use the generic drugs that the PSCs have deemed
to be therapeutically equivalent to these brand-name drugs. Such an effort would be
intended to mitigate but likely would not eliminate the full effect of the change in
reimbursement. Managements current estimate of providing the replacement medications in lieu of the brand name
drugs is a quarterly gross profit reduction of approximately $3 million. (Given that the impact
for 2007 will only be for a partial year, a quarterly estimate is provided.) However, this
estimate is subject to assumptions and uncertainties and the actual negative impact on gross profit
may be greater or less.The manufacturer of Xopenex® has announced that it is attempting to negotiate a solution
to this issue directly with CMS that would reduce the reimbursement rate while
maintaining patient access to the drug within the Medicare Part B program. Apria does
not have the particulars of such a proposal but believes that such a solution could also
have an adverse affect on its revenues and results of operations.Subsequent to the actions taken by the PSCs in the spring of 2006, CMS initiated a
National Coverage Analysis on December 20, 2006, and sought public comments regarding
the same issues of coverage and payment for certain inhalation drugs. The company
provided comments by the January 24, 2007 deadline set by CMS. CMS has indicated that
it will consider public comments and then issue a final decision, new policy and/or
change to existing policy some time in the third quarter of 2007, for implementation
some time in the fourth quarter of 2007 at the earliest. Depending on the final outcome
of such a decision by CMS, the company may or may not continue to provide DuoNeb® and
Xopenex® to Medicare beneficiaries after a revised policy is implemented by CMS.§
    
    In late 2006, CMS announced that it has revised the LCD for power mobility
devices resulting in reductions to the power mobility devices fee schedule. The
revised fee schedule imposes reductions for certain power mobility
devices of about 15%. The changes took effect November 15, 2006. Managements
estimate of the reduction in Aprias revenues for 2007 resulting from these fee
schedule changes is $1 million. However, this estimate is subject to assumptions and
uncertainties and the actual negative impact on revenue may be greater or less. The
industry is continuing work with CMS
to obtain clarification and modification of the LCD. The industry also believes that
Medicare beneficiary
 
 3
    
    Xopenex® is a registered trademark of
Sepracor, Inc. 10




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access to power mobility will be restricted by this LCD and
therefore has requested revisions to the fee schedule.
  Medicaid Reimbursement
 HIPAA .
  Anti-Kickback Statute.
  Physician Self-Referrals.
 11




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False Claims.
 qui tam qui tam
 qui tam qui tam
 Other Fraud and Abuse Laws.
  Healthcare Reform Legislation.
  12




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Employees
  
 Website Access to Reports
 www.apria.com
 13




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Executive Officers of the Registrant
  Name and Age
    
    Office and ExperienceLawrence M. Higby, 61
    
    Chief Executive Officer and
Director. Mr.
Higby was appointed Chief Executive Officer
and Director in February 2002. Mr. Higby
also served as Aprias Chief Executive
Officer on an interim basis from January
through May 1998. He joined Apria in
November 1997 as President and Chief
Operating Officer. Prior to joining Apria,
Mr. Higby served as President and Chief
Operating Officer of Unocals 76 Products
Company and Group Vice President of Unocal
Corporation from 1994 to 1997. From 1986 to
1994, Mr. Higby held various positions with
the Times Mirror Company, including
Executive Vice President, Marketing of the
Los Angeles Times and Chairman of the Orange
County Edition. In 1986, Mr. Higby served
as President and Chief Operating Officer of
Americas Pharmacy, Inc., a division of
Caremark, Inc.Lawrence A. Mastrovich, 45
    
    President and Chief Operating
Officer. Mr.
Mastrovich joined Apria as Chief Operating
Officer in April 2002 and was promoted to
President in August 2004. 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 Aprias Executive Vice
President, Revenue Management. From
December 1997 to October 1998, Mr.
Mastrovich served as Division Vice
President, Operations for Aprias Northeast
Division. Prior to that time, Mr.
Mastrovich had served as a Regional Vice
President for Apria and its predecessor,
Homedco, since 1994 and in various other
capacities from 1987 to 1994.Chris A. Karkenny, 38
    
    Executive Vice President and Chief Financial
Officer. Mr. Karkenny joined Apria as
Executive Vice President and Chief Financial
Officer in November 2006. From January 2003
to February 2006, Mr. Karkenny served as
Senior Vice President of Corporate
Development and Treasury Operations of
PacifiCare Health Systems, Inc., a Fortune
500 company. From August 1999 to December
2002, Mr. Karkenny served as Chief Executive
Officer of NetCatalyst, a California
investment banking firm. From July 1998 to
August 1999, Mr. Karkenny served as a
partner in Technologz, a California-based
business incubator, and was a founder, board
member and initial Chief Financial Officer
of CardioNow, a healthcare application
service provider. Prior thereto, he served
as Treasurer of Quarterdeck Corporation from
1995 to March 1998.W. Jeffrey Ingram, 39
    
    Executive Vice President, Sales. Mr. Ingram was promoted to
Executive Vice President, Sales in December of 2005. From January 2005 to November 2005, Mr.
Ingram served as Senior Vice President, National Accounts. From March 2003 to January 2005,
Mr. Ingram served as Division Vice President, Sales for Aprias Southeast Division. From May
2001 to February 2003, Mr. Ingram served as Region Vice President, Sales for Aprias Midsouth
Region. Prior to that time, Mr. Ingram had served in various other sales positions with Apria
since January 1994.
 14




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##### Table of Contents



Item 1A. RISK FACTORS
  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 have a
significant negative impact on its results of operations and financial condition.
  Operating Systems and ControlsAprias failure to successfully implement computer and other system
modifications designed to maximize productivity could ultimately have a significant negative impact
on its results of operations and financial condition.
  Medicare/Medicaid Reimbursement RatesContinued reductions in Medicare and Medicaid reimbursement
rates could have a material adverse effect on Aprias results of operations and financial
condition.
 Medicare Reimbursement Reductions .
  Medicaid Reimbursement Reductions.
  15




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##### Table of Contents



Government Regulation; Healthcare ReformNon-compliance with laws and regulations applicable to
Aprias business and future changes in those laws and regulations could have a material adverse
effect on Apria.
  Economic and Political Events, International Conflicts and Natural DisastersSignificant global or
regional developments that are out of the companys control could have a material adverse effect on
Apria.
  Pricing PressuresApria believes that continued pressure to reduce healthcare costs could have a
material adverse effect on the company.
   
 Acquisitions  Aprias strategic plan may include the acquisition of other companies, which involves a
number of risks.
   
    
    difficulties related to integrating a previously separate businesses into the company;
    
    diversion of managements attention from day-to-day operations;
    
    assumption of liabilities of an acquired business, including unforeseen or contingent
liabilities, or liabilities in excess of the amounts the company estimates;
    
    failure to realize anticipated benefits, such as cost savings and revenue
enhancements;
    
    dilution of existing stockholders due to the issuance of equity securities,
utilization of cash reserves, or incurrence of debt in order to fund the acquisitions;
    
    potentially substantial transaction costs associated with acquisitions;
    
    difficulties related to assimilating the products, personnel and systems of an
acquired business, including distribution and other operational capabilities; and
    
    difficulties in applying Aprias internal controls to an acquired business.
   Item 1B. UNRESOLVED STAFF COMMENTS
  
 Item 2. PROPERTIES
   16




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##### Table of Contents



Item 3. LEGAL PROCEEDINGS
 Venegas vs. Apria
Healthcare, Inc. et al
  
 Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  17




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##### Table of Contents



PART II
 
 Item 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
 Market for the Registrants Common Equity
  High
    
    LowYear ended December 31, 2006First quarter
    
    $
    24.76
    
    
    $
    21.69Second quarter
    
    
    22.92
    
    
    
    17.37Third quarter
    
    
    22.95
    
    
    
    17.38Fourth quarter
    
    
    27.70
    
    
    
    19.25Year ended December 31, 2005First quarter
    
    $
    33.56
    
    
    $
    29.78Second quarter
    
    
    36.75
    
    
    
    29.05Third quarter
    
    
    35.55
    
    
    
    31.56Fourth quarter
    
    
    32.84
    
    
    
    20.51
  Equity Compensation Plans
  Number of Securities
    
    
    
    
    
    Number ofto be Issued Upon
    
    Weighted Average
    
    Securities RemainingExercise of
    
    Exercise Price of
    
    Available for FutureOutstanding Options,
    
    Outstanding Options,
    
    Issuance Under EquityPlan Category
    
    Warrants and Rights
    
    Warrants and Rights
    
    Compensation PlansEquity compensation plans
approved by stockholders
    
    
    4,511,460
    
    
    $
    21.14
    
    
    
    3,582,017Equity compensation plans not
approved by stockholders
    
    
    297,776
    
    
    $
    21.51
    
    
    
    Totals
    
    
    4,809,236
    
    
    $
    21.16
    
    
    
    3,582,017
  18




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##### Table of Contents



Item 6. SELECTED FINANCIAL DATA
  Year Ended December 31,(in thousands, except per share data)
    
    2006(1)
    
    
    2005(2)
    
    
    2004(3)
    
    
    2003(4)
    
    
    2002(5)Statements of Income Data:Net revenues
    
    $
    1,517,307
    
    
    $
    1,474,101
    
    
    $
    1,451,449
    
    
    $
    1,380,945
    
    
    $
    1,252,196Net income
    
    
    74,980
    
    
    
    66,941
    
    
    
    114,008
    
    
    
    115,992
    
    
    
    115,595Basic net income per common share
    
    $
    1.77
    
    
    $
    1.39
    
    
    $
    2.31
    
    
    $
    2.17
    
    
    $
    2.12Diluted net income per common share
    
    $
    1.75
    
    
    $
    1.37
    
    
    $
    2.27
    
    
    $
    2.15
    
    
    $
    2.08Balance Sheet Data:Total assets
    
    $
    1,168,496
    
    
    $
    1,185,898
    
    
    $
    1,107,664
    
    
    $
    1,043,435
    
    
    $
    795,656Long-term obligations, including
current maturities
    
    
    487,145
    
    
    
    645,320
    
    
    
    480,858
    
    
    
    500,763
    
    
    
    269,368Stockholders equity
    
    
    410,431
    
    
    
    327,164
    
    
    
    406,185
    
    
    
    365,948
    
    
    
    351,309
 
 (1)
    
    Net revenue for 2006 reflects $15.0 million in incremental Medicare reimbursement reductions
for respiratory drugs, oxygen and oxygen equipment.(2)
    
    Net income for 2005 reflects $16.3 million in settlement costs and legal fees associated with
the disposition of the previously-reported federal investigation and qui tamlawsuits, net of
taxes. Net revenues for 2005 were reduced by an incremental $27.4 million in Medicare
reimbursement reductions on respiratory medications, certain durable medical equipment items
and oxygen-related equipment. The balance sheet data at December 31, 2005 reflects the
repurchase of common stock with $175.0 million in debt borrowed from Aprias revolving line of
credit. Net income per share for 2005 reflects the effect of the share repurchase on weighted
average shares.(3)
    
    Net income for 2004 reflects the write-off of deferred debt issuance costs of $2.7 million
associated with the November 2004 refinancing of the companys bank loans. Net revenues for
2004 were reduced by $15.2 million in Medicare reimbursement reductions on respiratory
medications.(4)
    
    The balance sheet data at December 31, 2003 reflects the issuance of convertible senior notes
in the aggregate principal amount of $250 million and the concurrent repurchase of common
stock with $100.0 million of the proceeds. Net income per share for 2003 reflects the effect
of the share repurchase.(5)
    
    Net income for 2002 reflects the impact of the favorable outcome of an income tax dispute
that was settled in the fourth quarter of 2002. The components of this impact include: income
tax benefit of $11.1 million, interest income of $4.0 million and related professional fee
expense of $1.7 million. Effective January 1, 2002, Apria adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets, and accordingly ceased
amortizing goodwill.  19




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##### Table of Contents



Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
 Overview.
  Strategy.
 
    
    achieve strong organic sales growth and increase market share;
    
    leverage its nationwide infrastructure to reduce costs and expand profits;
    
    deliver superior customer service; and
    
    attract, develop and advance leaders within the company.
 Critical Accounting Policies.
 Revenue and Accounts Receivable .
  Goodwill and Long-lived Assets .
 20




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##### Table of Contents



Share-Based Compensation.
     Expected option term (1)
    
    4.8 yearsExpected volatility (2)
    
    
    27.3
    %Risk-free interest rate (3)
    
    
    4.6
    %Expected annual dividend yield
    
    
    0
    %
 
 (1)
    
    The expected option term is based on historical exercise and post-vesting termination patterns.(2)
    
    Expected volatility represents a combination of historical stock price volatility and implied
volatility from publicly-traded options on Aprias common stock.(3)
    
    The risk-free interest rate is based on the implied yield on a U.S. Treasury zero coupon issue
with a remaining term equal to the expected term of the option.  Income Taxes .
 Clinical Expense Reclassification.
  Medicare Reimbursement.
   
    
    A freeze on annual payment increases for durable medical equipment  The freeze
commenced in 2004 and will continue through 2008.
    
    Reimbursement reductions for five durable medical equipment categories  Under the
MMA, reimbursement is based on the median price paid for such items on behalf of
beneficiaries of federal employee health benefit plans. The new fee schedules for these
products went into effect January 1, 2005, with the exception of oxygen and oxygen
equipment which was implemented on April 8, 2005. Subsequent legislation has modified
some of these reimbursement methodologies.
    
    Reimbursement reductions for inhalation drugs  The previous reimbursement rate of
95% of the average wholesale price was reduced to 80% of the average wholesale price,
effective January 1, 2004. Beginning in January 2005, reimbursement for these drugs was
further reduced to the quarterly manufacturer-reported average sales price, or ASP,
plus 6%, plus a separate dispensing fee per patient episode. The company has no way of
knowing if the quarterly ASPs for inhalation drugs will increase or decrease. Since
2006, dispensing fees have been $57.00 for a 30-day supply for a new patient, $33.00
for each 30-day supply thereafter, and $66.00 for each 90-day supply. Additionally, in
late December 2005, the 2006 fee schedule for Medicare Part B medications that took
effect on January 1, 2006 included commercially manufactured budesonide
(Pulmicort®)1 and DuoNeb®2.
    
    Establishment of a competitive bidding program for Medicare Part B  The program
requires that suppliers wishing to provide certain durable medical equipment to
beneficiaries submit bids to Medicare. Although the specific durable medical equipment
items and services subject to this rule and the exact timeline for implementation
remain unspecified, the MMA states that the program is to be phased in as follows: (i)
10 of the largest metropolitan statistical areas, or MSAs, in 2007; (ii) 80 of the
largest MSAs in 2009; and (iii) additional urban areas after 2009.On August 1, 2006, CMS issued a final rule limited to only selective operational aspects
of the competitive bidding program. To date, a final rule for the remaining components
of the competitive bidding program has not been published. Given the limited information
available regarding CMS final plan for the competitive bidding program, such as the list
of products and services and the MSAs to be included, Apria cannot estimate at this time
the impact of the competitive bidding program on the companys operations or financial
condition.
    
    Reimbursement for home infusion therapy under Medicare Part D  Currently, a
limited number of infusion therapies, supplies and equipment are covered by Medicare
Part B. A bill was introduced in Congress in the summer of 2006 to consolidate home
infusion therapy coverage under Part B and to provide for infusion benefit coverage in
a comprehensive manner.
  
    
    Effective on January 1, 2006, most items of durable medical equipment currently
categorized in the capped rental category by CMS, will be considered purchased outright
at the end of a 13 month maximum rental period (reduced from 15 months) and the
ownership of such devices will transfer directly to the patients. The first month in
which the new policy had an impact on the companys revenue was February 2007. In
addition, the service and maintenance fee, which had been paid to suppliers twice
yearly after the rental period ended in order to cover various non-equipment service
costs, was eliminated for those patients who commenced service on or after January 1,
2006. Management estimates that the reduction in rental revenues for
impacted DME
products and the loss of the service and maintenance fees in 2007 will be approximately
$4 million and $0.5 million, respectively. The 2007 estimate assumes the loss of
service and maintenance fees for one quarter as the effect of the loss is expected to
impact the latter part of the year only. However, this estimate is subject to
assumptions and uncertainties and the actual negative impact on revenue and fees may be
greater or less.
 
    
    Under the DRA, reimbursement for oxygen equipment will also convert from an ongoing
rental method to a
 
 1
    
    Pulmicort® is a registered trademark of
Astra Zeneca AB Corporation2
    
    DuoNeb® is a registered trademark of
Dey L.P. 21




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##### Table of Contents



rent-to-purchase method. The law mandates that oxygen equipment reimbursement will be
limited to 36 months, after which time the ownership of the equipment will transfer to
the patient. The final rule that CMS issued in November 2006 regarding the
implementation of the DRA establishes new payment classes with varying reimbursement
amounts for oxygen equipment and contents. Beginning in 2008, Medicare will review the
utilization patterns and make adjustments to the payment rates if needed in order to
satisfy the statutory mandate of budget neutrality. The new DRA payment amounts went into
effect January 1, 2007, but the 36-month rental period will be retroactively applied to
January 1, 2006 for all beneficiaries requiring oxygen as of December 31, 2005.
Accordingly, January 2009 is the first month in which the transfer of ownership for
oxygen equipment and the new repair and maintenance policy will
impact the company.The final rule also limits supplier replacement of oxygen equipment during the rental
period, and requires suppliers to replace beneficiary-owned equipment that does not last
the useful lifetime of the equipment, which CMS has generally defined as being five
years.Regarding repair and maintenance, the final rule permits payment to suppliers for general
maintenance and servicing of certain patient-owned oxygen equipment every six months,
beginning after the first six months the patient owns the equipment. The final rule
limits payment for general maintenance and servicing visits to 30 minutes of labor based
on rates the Medicare contractors establish. CMS declined to offer general maintenance
and servicing payments for beneficiary-owned liquid and gas equipment with the exception
of a single payment for pick-up and storage or disposal of such equipment that a
beneficiary no longer needs. Once title to the oxygen equipment transfers, CMS will also
pay for certain other reasonable and necessary but non-routine repairs which remain as
yet unspecified by the agency, but CMS will not make separate payment for certain patient
support services, which are currently covered by and included in the monthly bundled
payment rate for oxygen therapy. Apria may or may not continue to provide repair and
maintenance service on patient-owned equipment and is in the process of evaluating the
impact of these changes.
 
    
    The Presidents current healthcare proposals seek to further reduce the maximum
rental period for oxygen equipment from the now-mandated 36 months to 13 months. There
are other initiatives to reduce the rental period to 13 months, but it is uncertain
whether any of these initiatives will ultimately be approved by Congress. There are
also legislative provisions that have been introduced in Congress that would repeal the
current oxygen reimbursement cap and equipment ownership mandate included in the DRA,
but it is uncertain whether and when any of the OIGs recommendations or the repeal
legislation ultimately would be adopted and passed by Congress.
  
    
    In late December 2005, CMS issued the 2006 Health Care Procedure Coding System, or
HCPCS, fee schedule for Medicare Part B medications and the new two-tiered dispensing
fee for inhalation therapies. The fee schedule took effect on January 1, 2006, and
included two HCPCS codes for commercially manufactured budesonide
(Pulmicort®)3 and DuoNeb®4. The fee schedule also included a
revised definition for the HCPCS codes for commercially manufactured budesonide and
budesonide compounded from a powder, and separated these products into two unique
codes.
 
    
    In January 2006, CMS published a final regulation that would shift payment for
certain respiratory assist devices from ongoing rental method to a rent-to-purchase
method The change in the payment method became effective April 1, 2006. The policy
applies to those respiratory assist devices (known as BiPAP STs) that have a backup
rate feature that delivers pressure whenever the users spontaneous breathing efforts
are insufficient. The first month in which the new categorization will impact the
companys revenue will be May 2007. The companys estimate for this change in payment
categories is a reduction in 2007 revenues of $3 million.
 
    
    In January 2006, CMS announced and later modified the designation of four specialty
contractors, DME MACs, which will be responsible for handling the administration of all
Medicare claims from suppliers of durable
 
 3
    
    Pulmicort® is a registered trademark of
Astra Zeneca AB Corporation4
    
    DuoNeb® is a registered trademark of
Dey L.P. 22




---



##### Table of Contents




    
    On March 24, 2006, the three Program Safeguard Contractors, or PSCs, overseeing
durable medical equipment issued a proposed Local Coverage Determination, or LCD, for
nebulizer medications covered by Medicare Part B. Specifically, four provisions were
proposed: (i) payment for levalbuterol (commercially manufactured as brand-name
Xopenex®)5 would be based on the allowable for generic albuterol sulfate;
(ii) payment for commercially-manufactured, brand-name DuoNeb® would be based on the
allowance for separate unit dose vials of albuterol sulfate and ipratropium bromide;
(iii) coverage for a variety of other nebulizer drugs would be eliminated because the
PSCs assert that there is inadequate support in the medical literature for
administration using a DME nebulizer; and (iv) maximum monthly utilization limits for
budesonide would be defined.The company believes that the MMA is clear in its intent to prescribe the Part B average
sales price reimbursement formula for single-source drugs which applies to both DuoNeb®
and Xopenex®. The company further believes that the PSCs do not have the legal authority
to circumvent the average sales price methodology through the issuance of an LCD that
invokes their authority to use the Least Costly Alternative as the basis for reducing
the reimbursement for these drugs. The company has determined that if the four provisions
of the LCD are implemented as proposed in the March 24, 2006 document, it will generally
not provide DuoNeb® and Xopenex® to existing or future patients covered by Medicare.
Managements current estimate of providing the replacement medications in lieu of the
brand name drugs is a quarterly gross profit reduction of approximately $3 million.
(Given that the impact for 2007 will only be for a partial year, a quarterly estimate is
provided.) However, this estimate is subject to assumptions and uncertainties and the
actual negative impact on gross profit may be greater or less.Subsequent to the actions taken by the PSCs in the spring of 2006, CMS initiated a
National Coverage Analysis on December 20, 2006 regarding the same issues of coverage and
payment for certain inhalation drugs. CMS has indicated that it will issue a final
decision in the third quarter of 2007, for implementation in the fourth quarter of 2007
at the earliest. Depending on the final outcome of such a decision by CMS, the company
may or may not continue to provide DuoNeb® and Xopenex® to Medicare beneficiaries after a
revised policy is implemented by CMS.
    
    In late 2006, CMS announced that it has revised the LCD for power mobility devices
resulting in reductions to the power mobility devices fee schedule. The revised fee
schedule imposes reductions for certain power mobility devices of about 15%. The
changes took effect on November 15, 2006. Managements estimate of the annualized
reduction in Aprias revenues resulting from these fee schedule changes is
approximately $1 million. However, this estimate is subject to assumptions and
uncertainties and the actual negative impact on revenue may be greater or less.
  
 5
    
    Xopenex® is a registered trademark of
Sepracor, Inc. 23




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##### Table of Contents



Results of Operations
 Net Revenues
 See
Medicare Reimbursement.
  Year Ended December 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2004Home respiratory therapy
    
    $
    1,033,267
    
    
    $
    1,009,752
    
    
    $
    990,857Home infusion therapy
    
    
    274,723
    
    
    
    256,225
    
    
    
    246,662Home medical equipment/other
    
    
    209,317
    
    
    
    208,124
    
    
    
    213,930Total net revenues
    
    $
    1,517,307
    
    
    $
    1,474,101
    
    
    $
    1,451,449
 Respiratory Therapy .
 Infusion Therapy .
 Home Medical Equipment/Other .
 Gross Profit.
 24




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##### Table of Contents



Clinical Expense Reclassification
 Provision for Doubtful Accounts.
 Selling, Distribution and Administrative. Clinical Expense Reclassification
   Qui Tam Settlement and Related Costs. qui tam
 Amortization of Intangible Assets. See Liquidity and Capital Resources 
Business Combinations.
 Interest Expense, Interest Income and Write-off of Deferred Debt Issuance Costs.
 25




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##### Table of Contents



Income Tax Expense.
   Inflation.
 Liquidity and Capital Resources
   Cash Flow. qui
tam
  26




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##### Table of Contents



Contractual Cash Obligations.
 For the Year Ending December 31,(in millions)
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012+
    
    
    TotalRevolving loan
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    235
    
    
    $
    
    
    
    $
    235Convertible senior notes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    250Other debt
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Operating leases
    
    
    56
    
    
    
    47
    
    
    
    36
    
    
    
    26
    
    
    
    18
    
    
    
    22
    
    
    
    205Software licenses and related maintenance
    
    
    1
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Total contractual cash obligations
    
    $
    59
    
    
    $
    48
    
    
    $
    36
    
    
    $
    26
    
    
    $
    253
    
    
    $
    272
    
    
    $
    694
 (1)
    
    Interest on the outstanding borrowings is payable quarterly.(2)
    
    The holders of the convertible senior notes will first have the option to require Apria
to repurchase all or a portion of their notes in September 2008. Interest on these notes
is paid bi-annually in March and September.
 Accounts Receivable.
  December 31,
    
    December 31,2006
    
    2005Total
    
    
    19.8
    %
    
    
    21.1
    %Medicare
    
    
    19.2
    %
    
    
    22.8
    %Medicaid
    
    
    28.6
    %
    
    
    28.7
    %Self pay
    
    
    36.5
    %
    
    
    35.9
    %Managed care/other
    
    
    19.1
    %
    
    
    19.4
    %
 Unbilled Receivables .
 Inventories and Patient Service Equipment.
  27




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##### Table of Contents



Long-term Debt.
  Convertible Senior Notes .
 3 8
 Hedging Activities .
 28




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##### Table of Contents



Treasury Stock.
    Business Combinations.
  29




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##### Table of Contents



Off-Balance Sheet Arrangements
   30




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##### Table of Contents



Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  Long Term Debt.
 Operations  Liquidity Long Term Debt  Hedging Activities.
 Long-term Debt Hedging Activities
 
 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  
 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 Item 9A. CONTROLS AND PROCEDURES
 Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  31




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##### Table of Contents



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
  Internal Control -
Integrated Framework
   32




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 Internal ControlIntegrated Framework
    Internal ControlIntegrated Framework Internal ControlIntegrated Framework
 Share-Based Payment, Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements.
  
 33




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##### Table of Contents



Item 9B. OTHER INFORMATION
  
 PART III
 
 Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
  
 Item 11. EXECUTIVE COMPENSATION
  
 Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
  
 Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
  
 Item 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
  
 PART IV
 
 Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
 (a)
    1.
    
    The financial statements described in the Index to Consolidated
Financial Statements and Financial Statement Schedule are included in
this Annual Report on Form 10-K starting at page F-1.2.
    
    The financial statement schedule is included 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 by reference herein:See exhibit index.
 34




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
 PageCONSOLIDATED FINANCIAL STATEMENTSReport of Independent Registered Public Accounting Firm
    
    
    F-1Consolidated Balance Sheets  December 31, 2006 and 2005
    
    
    F-2Consolidated Statements of Income  Years ended December 31, 2006, 2005 and 2004
    
    
    F-3Consolidated Statements of Stockholders Equity  Years ended December 31, 2006, 2005 and 2004
    
    
    F-4Consolidated Statements of Cash Flows  Years ended December 31, 2006, 2005 and 2004
    
    
    F-5Notes to Consolidated Financial Statements
    
    
    F-6FINANCIAL STATEMENT SCHEDULESchedule II  Valuation and Qualifying Accounts
    
    
    S-1
 35




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    Internal ControlIntegrated Framework
 Share-Based Payment . Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.
  
 F-1




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##### Table of Contents



APRIA HEALTHCARE GROUP INC.
 
 CONSOLIDATED BALANCE SHEETS
 December 31,(in thousands, except share data )
    
    2006
    
    
    2005ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    14,657
    
    
    $
    23,304Accounts receivable, less allowance for doubtful accounts of $27,324 and
$41,527 at December 31, 2006 and 2005, respectively
    
    
    211,097
    
    
    
    226,478Inventories, net
    
    
    40,681
    
    
    
    42,571Deferred income taxes
    
    
    36,648
    
    
    
    30,916Deferred expenses
    
    
    22,712
    
    
    
    Prepaid expenses and other current assets
    
    
    19,142
    
    
    
    20,732TOTAL CURRENT ASSETS
    
    
    344,937
    
    
    
    344,001PATIENT SERVICE EQUIPMENT, less accumulated depreciation of
$445,608 and $446,728 at December 31, 2006 and 2005, respectively
    
    
    212,068
    
    
    
    225,575PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET
    
    
    52,975
    
    
    
    46,087DEFERRED INCOME TAXES
    
    
    
    
    
    
    4,059GOODWILL
    
    
    539,187
    
    
    
    540,985INTANGIBLE ASSETS, NET
    
    
    6,551
    
    
    
    10,580DEFERRED DEBT ISSUANCE COSTS, NET
    
    
    4,612
    
    
    
    5,248OTHER ASSETS
    
    
    8,166
    
    
    
    9,363$
    1,168,496
    
    
    $
    1,185,898LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESAccounts payable
    
    $
    66,969
    
    
    $
    63,984Accrued payroll and related taxes and benefits
    
    
    46,532
    
    
    
    51,167Income taxes payable
    
    
    10,793
    
    
    
    8,664Other accrued liabilities
    
    
    44,804
    
    
    
    42,511Deferred revenue
    
    
    32,280
    
    
    
    Current portion of long-term debt
    
    
    2,145
    
    
    
    4,465TOTAL CURRENT LIABILITIES
    
    
    203,523
    
    
    
    170,791LONG-TERM DEBT, net of current portion
    
    
    485,000
    
    
    
    640,855DEFERRED INCOME TAXES
    
    
    60,815
    
    
    
    38,079OTHER NON-CURRENT LIABILITIES
    
    
    8,727
    
    
    
    9,009TOTAL LIABILITIES
    
    
    758,065
    
    
    
    858,734COMMITMENTS AND CONTINGENCIES (Notes 10 and 12)STOCKHOLDERS EQUITYPreferred stock, $.001 par value:10,000,000 shares authorized; none issued
    
    
    
    
    
    
    Common stock, $.001 par value:150,000,000 shares authorized; 59,762,307 and 59,215,749 shares issued
at December 31, 2006 and 2005, respectively; 42,789,450 and 42,250,564
outstanding at December 31, 2006 and 2005, respectively
    
    
    60
    
    
    
    59Additional paid-in capital
    
    
    482,123
    
    
    
    468,099Treasury stock, at cost; 16,972,857 and 16,965,185 shares at
December 31, 2006 and 2005, respectively
    
    
    (429,573
    )
    
    
    (429,432
    )Retained earnings
    
    
    357,470
    
    
    
    287,982Accumulated other comprehensive income
    
    
    351
    
    
    
    456TOTAL STOCKHOLDERS EQUITY
    
    
    410,431
    
    
    
    327,164$
    1,168,496
    
    
    $
    1,185,898
 See notes to consolidated financial statements.
 F-2




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##### Table of Contents



APRIA HEALTHCARE GROUP INC.
 
 CONSOLIDATED STATEMENTS OF INCOME
 Year Ended December 31,(in thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2004Net revenues:Fee for service arrangements
    
    $
    1,355,818
    
    
    $
    1,327,777
    
    
    $
    1,312,269Capitation arrangements
    
    
    161,489
    
    
    
    146,324
    
    
    
    139,180TOTAL NET REVENUES
    
    
    1,517,307
    
    
    
    1,474,101
    
    
    
    1,451,449Costs and expenses:Cost of net revenues:Product and supply costs
    
    
    345,552
    
    
    
    309,413
    
    
    
    271,723Patient service equipment depreciation
    
    
    113,177
    
    
    
    111,759
    
    
    
    119,391Respiratory therapy services
    
    
    38,501
    
    
    
    34,669
    
    
    
    Nursing services
    
    
    8,825
    
    
    
    9,078
    
    
    
    10,644Other
    
    
    15,384
    
    
    
    14,369
    
    
    
    15,686TOTAL COST OF NET REVENUES
    
    
    521,439
    
    
    
    479,288
    
    
    
    417,444Provision for doubtful accounts
    
    
    38,723
    
    
    
    46,948
    
    
    
    48,567Selling, distribution and administrative
    
    
    804,365
    
    
    
    792,177
    
    
    
    777,671Qui tamsettlement and related costs (Note 12)
    
    
    
    
    
    
    19,258
    
    
    
    Amortization of intangible assets
    
    
    5,080
    
    
    
    6,941
    
    
    
    6,712TOTAL COSTS AND EXPENSES
    
    
    1,369,607
    
    
    
    1,344,612
    
    
    
    1,250,394OPERATING INCOME
    
    
    147,700
    
    
    
    129,489
    
    
    
    201,055Interest expense
    
    
    31,205
    
    
    
    22,972
    
    
    
    20,799Interest income
    
    
    (1,742
    )
    
    
    (853
    )
    
    
    (779
    )Write-off of deferred debt issuance costs
    
    
    
    
    
    
    
    
    
    
    2,730INCOME BEFORE TAXES
    
    
    118,237
    
    
    
    107,370
    
    
    
    178,305Income tax expense
    
    
    43,257
    
    
    
    40,429
    
    
    
    64,297NET INCOME
    
    $
    74,980
    
    
    $
    66,941
    
    
    $
    114,008Basic net income per common share
    
    $
    1.77
    
    
    $
    1.39
    
    
    $
    2.31Diluted net income per common share
    
    $
    1.75
    
    
    $
    1.37
    
    
    $
    2.27
 See notes to consolidated financial statements.
 F-3




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##### Table of Contents



APRIA HEALTHCARE GROUP INC.
 
 CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
 (Accumulated
    
    
    AccumulatedAdditional
    
    
    
    
    
    
    
    
    
    
    Deficit)
    
    
    Other
    
    
    TotalCommon Stock
    
    
    Paid-In
    
    
    Treasury Stock
    
    
    Retained
    
    
    Comprehensive
    
    
    Stockholders(in thousands)
    
    Shares
    
    
    Par Value
    
    
    Capital
    
    
    Shares
    
    
    Cost
    
    
    Earnings
    
    
    (Loss) Income
    
    
    EquityBalance at December 31, 2003
    
    
    57,317
    
    
    $
    57
    
    
    $
    414,220
    
    
    
    6,210
    
    
    $
    (154,432
    )
    
    $
    107,033
    
    
    $
    (930
    )
    
    $
    365,948Exercise of stock options
    
    
    893
    
    
    
    1
    
    
    
    18,314
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,315Tax benefits related to stock options
    
    
    
    
    
    
    
    
    
    
    2,587
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,587Compensatory stock options and
awards
    
    
    26
    
    
    
    
    
    
    
    4,423
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,423Repurchases of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,418
    
    
    
    (100,000
    )
    
    
    
    
    
    
    
    
    
    
    (100,000
    )Unrealized gain on interest rate
swap agreements, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    904
    
    
    
    904Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114,008
    
    
    
    
    
    
    
    114,008Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    114,008
    
    
    
    904
    
    
    
    114,912Balance at December 31, 2004
    
    
    58,236
    
    
    $
    58
    
    
    $
    439,544
    
    
    
    9,628
    
    
    $
    (254,432
    )
    
    $
    221,041
    
    
    $
    (26
    )
    
    $
    406,185Exercise of stock options
    
    
    937
    
    
    
    1
    
    
    
    21,179
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    21,180Tax benefits related to stock options
    
    
    
    
    
    
    
    
    
    
    4,117
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,117Compensatory stock options and
awards
    
    
    43
    
    
    
    
    
    
    
    3,259
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,259Repurchases of common stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,337
    
    
    
    (175,000
    )
    
    
    
    
    
    
    
    
    
    
    (175,000
    )Unrealized gain on interest rate
swap agreements, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    482
    
    
    
    482Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,941
    
    
    
    
    
    
    
    66,941Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66,941
    
    
    
    482
    
    
    
    67,423Balance at December 31, 2005
    
    
    59,216
    
    
    $
    59
    
    
    $
    468,099
    
    
    
    16,965
    
    
    $
    (429,432
    )
    
    $
    287,982
    
    
    $
    456
    
    
    $
    327,164Cumulative effect adjustment pursuant
to adoption of SAB No. 108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,492
    )
    
    
    
    
    
    
    (5,492
    )Exercise of stock options
    
    
    508
    
    
    
    1
    
    
    
    8,244
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,245Tax benefits related to stock options
    
    
    
    
    
    
    
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17Compensatory stock options and
awards
    
    
    38
    
    
    
    
    
    
    
    5,763
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,763Restricted
stock retained in treasury upon vesting
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    (141
    )
    
    
    
    
    
    
    
    
    
    
    (141
    )Unrealized loss on interest rate
swap agreements, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (105
    )
    
    
    (105
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,980
    
    
    
    
    
    
    
    74,980Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74,980
    
    
    
    (105
    )
    
    
    74,875Balance at December 31, 2006
    
    
    59,762
    
    
    $
    60
    
    
    $
    482,123
    
    
    
    16,973
    
    
    $
    (429,573
    )
    
    $
    357,470
    
    
    $
    351
    
    
    $
    410,431
 See notes to consolidated financial statements.
 F-4




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##### Table of Contents



APRIA HEALTHCARE GROUP INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended December 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2004OPERATING ACTIVITIESNet income
    
    $
    74,980
    
    
    $
    66,941
    
    
    $
    114,008Items included in net income not requiring cash:Provision for doubtful accounts
    
    
    38,723
    
    
    
    46,948
    
    
    
    48,567Depreciation
    
    
    133,563
    
    
    
    133,677
    
    
    
    140,762Amortization of intangible assets
    
    
    5,080
    
    
    
    6,941
    
    
    
    6,712Amortization of deferred debt issuance costs
    
    
    1,755
    
    
    
    1,729
    
    
    
    5,153Deferred income taxes
    
    
    24,673
    
    
    
    (5,210
    )
    
    
    20,798Share-based compensation
    
    
    5,762
    
    
    
    3,259
    
    
    
    4,423Loss on disposition of assets and other
    
    
    (81
    )
    
    
    
    
    
    
    (682
    )Changes in operating assets and liabilities, exclusive of effects of acquisitions:Accounts receivable
    
    
    (23,342
    )
    
    
    (54,198
    )
    
    
    (70,302
    )Inventories, net
    
    
    2,025
    
    
    
    (561
    )
    
    
    (9,372
    )Prepaid expenses and other assets
    
    
    7,094
    
    
    
    3,451
    
    
    
    832Accounts payable, exclusive of book cash overdraft
    
    
    7,717
    
    
    
    2,907
    
    
    
    1,050Accrued payroll and related taxes and benefits
    
    
    (4,775
    )
    
    
    3,547
    
    
    
    4,308Income taxes payable
    
    
    2,145
    
    
    
    (6,427
    )
    
    
    7,935Excess tax
benefits from shared-based compensation
    
    
    (403
    )
    
    
    
    
    
    
    Deferred revenue, net of related expenses
    
    
    560
    
    
    
    
    
    
    
    Accrued expenses
    
    
    5,438
    
    
    
    3,295
    
    
    
    (2,577
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    280,914
    
    
    
    206,299
    
    
    
    271,615INVESTING ACTIVITIESPurchases of patient service equipment and property, equipment
and improvements, exclusive of effects of acquisitions
    
    
    (125,628
    )
    
    
    (118,867
    )
    
    
    (137,358
    )Proceeds from disposition of assets
    
    
    778
    
    
    
    767
    
    
    
    211Cash paid for acquisitions, including payments of deferred consideration
    
    
    (8,082
    )
    
    
    (105,471
    )
    
    
    (144,235
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (132,932
    )
    
    
    (223,571
    )
    
    
    (281,382
    )FINANCING ACTIVITIESProceeds from revolving credit facilities
    
    
    29,800
    
    
    
    216,250
    
    
    
    250,850Payments on revolving credit facilities
    
    
    (184,800
    )
    
    
    (51,000
    )
    
    
    (26,100
    )Payments on term loans
    
    
    
    
    
    
    
    
    
    
    (244,063
    )Payments on other long-term debt
    
    
    (7,030
    )
    
    
    (7,854
    )
    
    
    (9,033
    )Change in book cash overdraft included in accounts payable
    
    
    (2,128
    )
    
    
    (2,384
    )
    
    
    1,419Capitalized debt issuance costs
    
    
    (1,119
    )
    
    
    (15
    )
    
    
    (2,775
    )Repurchases of common stock
    
    
    
    
    
    
    (175,000
    )
    
    
    (100,000
    )Excess tax
benefits from shared-based compensation
    
    
    403
    
    
    
    
    
    
    
    Issuances of common stock
    
    
    8,245
    
    
    
    21,180
    
    
    
    18,315NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
    
    
    (156,629
    )
    
    
    1,177
    
    
    
    (111,387
    )NET DECREASE IN CASH AND CASH EQUIVALENTS
    
    
    (8,647
    )
    
    
    (16,095
    )
    
    
    (121,154
    )Cash and cash equivalents at beginning of year
    
    
    23,304
    
    
    
    39,399
    
    
    
    160,553CASH AND CASH EQUIVALENTS AT END OF YEAR
    
    $
    14,657
    
    
    $
    23,304
    
    
    $
    39,399
    See notes to consolidated financial statements.
 F-5




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##### Table of Contents



APRIA HEALTHCARE GROUP INC.
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 Basis of Presentation:
 Company Background and Segment Reporting:
 Use of Accounting Estimates:
 Revenue Recognition and Concentration of Credit Risk:
 Cash and Cash Equivalents:
 Accounts Receivable:
   F-6




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Inventories:
 Patient Service Equipment:
 Property, Equipment and Improvements:
 Capitalized Software:
 Long-Lived Assets:
 
    
    significant underperformance relative to historical or projected future operating results;
    
    significant changes in the manner of use of the assets or the strategy for our overall business;
    
    significant decrease in the market value of the assets; and
    
    significant negative industry or economic trends.
  Goodwill: .
 F-7




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Intangible Assets:
 Deferred Debt Issuance Costs
 Fair Value of Financial Instruments:
 Respiratory Therapy Expenses:
  Nursing Expenses:
  Distribution Expenses:
 Self-Insurance
 Advertising:
 Income Taxes:
 Derivative Instruments and Hedging Activities:
 F-8




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Share-Based Compensation:
  Comprehensive Income:
 Per Share Amounts:
 NOTE 2
 RECENT ACCOUNTING PRONOUNCEMENTS
     F-9




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
         F-10




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 AdjustmentRecorded as of(in thousands)
    
    December 31, 2006Balance SheetDeferred expenses
    
    $
    22,712Deferred income tax liability
    
    
    (8,867
    )Deferred revenue
    
    
    (32,280
    )Deferred income tax asset
    
    
    12,602Retained earnings, beginning
    
    
    5,492Statement of IncomeNet revenues
    
    $
    466Cost of net revenues
    
    
    (22
    )Selling, distribution and administrative expenses
    
    
    (72
    )Income before taxes
    
    
    560Income taxes
    
    
    219Net income
    
    $
    341
 NOTE 3  PROPERTY, EQUIPMENT AND IMPROVEMENTS
  December 31,(in thousands)
    
    2006
    
    
    2005Leasehold improvements
    
    $
    36,770
    
    
    $
    33,942Equipment and furnishings
    
    
    56,696
    
    
    
    55,540Information systems  hardware
    
    
    88,396
    
    
    
    77,559Information systems  software
    
    
    51,753
    
    
    
    41,544233,615
    
    
    
    208,585Less accumulated depreciation
    
    
    (180,640
    )
    
    
    (162,498
    )$
    52,975
    
    
    $
    46,087
  NOTE 4  BUSINESS COMBINATIONS
    Year Ended December 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2004Fair value of patient service equipment acquired
    
    $
    1,923
    
    
    $
    7,453
    
    
    $
    9,880Fair value of property and equipment acquired
    
    
    4
    
    
    
    985
    
    
    
    1,995Fair value of other assets acquired
    
    
    641
    
    
    
    1,577
    
    
    
    2,712Intangible assets
    
    
    1,100
    
    
    
    7,613
    
    
    
    9,263Goodwill
    
    
    (1,112
    )
    
    
    85,362
    
    
    
    125,091Total assets acquired
    
    
    2,556
    
    
    
    102,990
    
    
    
    148,941Liabilities assumed and accrued, net of payments
deferred from prior years
    
    
    5,526
    
    
    
    2,481
    
    
    
    (4,706
    )Net assets acquired
    
    $
    8,082
    
    
    $
    105,471
    
    
    $
    144,235
 F-11




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
   Year Ended December 31,(in thousands, except per share data )
    
    2006
    
    
    2005
    
    
    2004Net revenues
    
    $
    1,523,656
    
    
    $
    1,551,002
    
    
    $
    1,646,988Net income
    
    
    76,012
    
    
    
    70,865
    
    
    
    127,217Basic net income per common share
    
    $
    1.79
    
    
    $
    1.47
    
    
    $
    2.58Diluted net income per common share
    
    $
    1.77
    
    
    $
    1.45
    
    
    $
    2.54
 NOTE 5  GOODWILL AND INTANGIBLE ASSETS
     December 31, 2006
    
    
    December 31, 2005Average
    
    
    Gross
    
    
    
    
    
    
    
    
    
    
    GrossLife in
    
    
    Carrying
    
    
    Accumulated
    
    
    Net Book
    
    
    Carrying
    
    
    Accumulated
    
    
    Net Book(dollars in thousands )
    
    Years
    
    
    Amount
    
    
    Amortization
    
    
    Value
    
    
    Amount
    
    
    Amortization
    
    
    ValueCovenants not to compete
    
    
    5.0
    
    
    $
    13,506
    
    
    $
    (7,313
    )
    
    $
    6,193
    
    
    $
    16,352
    
    
    $
    (6,316
    )
    
    $
    10,036Tradenames
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    628
    
    
    
    (440
    )
    
    
    188Customer lists
    
    
    1.0
    
    
    
    1,283
    
    
    
    (925
    )
    
    
    358
    
    
    
    1,588
    
    
    
    (1,232
    )
    
    
    3563.6
    
    
    $
    14,789
    
    
    $
    (8,238
    )
    
    $
    6,551
    
    
    $
    18,568
    
    
    $
    (7,988
    )
    
    $
    10,580
 F-12




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Year Ending December 31,
    
    (in thousands)2007
    
    $
    2,9162008
    
    
    2,0662009
    
    
    1,2542010
    
    
    315
 NOTE 6  LONG-TERM DEBT
  December 31,(in thousands )
    
    2006
    
    
    2005Notes payable relating to revolving credit facilities
    
    $
    235,000
    
    
    $
    390,000Convertible senior notes
    
    
    250,000
    
    
    
    250,000Capital lease obligations (see Note 10)
    
    
    
    
    
    
    1,111Other
    
    
    2,145
    
    
    
    4,209487,145
    
    
    
    645,320Less: current maturities
    
    
    (2,145
    )
    
    
    (4,465
    )$
    485,000
    
    
    $
    640,855
 Revolving Credit Facility:
    Convertible Senior Notes:
 F-13




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 3 8
   Year Ending December 31,
    
    (in thousands)2007
    
    $
    2,1452008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    235,000Thereafter
    
    
    250,000$
    487,145
  Hedging Activities:
    F-14




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 NOTE 7
 SHARE-BASED COMPENSATION AND STOCKHOLDERS EQUITY
       Expected option term (1)
    
    4.8 yearsExpected volatility (2)
    
    27.3
    %Risk-free interest rate (3)
    
    4.6
    %Expected annual dividend yield
    
    0
    %
 
 (1)
    
    The expected option term is based on historical exercise and post-vesting termination patterns.(2)
    
    Expected volatility represents a combination of historical stock price volatility and implied
volatility from publicly-traded options on Aprias common stock.(3)
    
    The risk-free interest rate is based on the implied yield on a U.S. Treasury zero coupon issue
with a remaining term equal to the expected term of the option. 2003 Performance Incentive Plan:
  F-15




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  
    
    grants of incentive stock options up to 2,000,000 shares,
    
    grants of options and SARs during any calendar year to any individual up to 500,000 shares,
    
    shares subject to all awards granted to an individual during any calendar year up to 1,000,000 shares,
    
    awards granted to non-employee directors up to 700,000 shares,
    
    awards granted, other than for stock options and SARs, up to 2,275,000 shares,
    
    performance-based awards, other than stock options and SARs, granted to an individual up to 500,000
shares in a calendar year, and
    
    performance-based awards, payable in cash, granted to an individual up to $10,000,000 in a calendar year.
   Stock Options:
  Weighted-AverageRemaining
    
    
    AggregateWeighted-Average
    
    
    Contractual Term
    
    
    IntrinsicOptions
    
    
    Exercise Price
    
    
    (in Years)
    
    
    ValueOutstanding at January 1, 2004
    
    
    4,553,926
    
    
    $
    21.73Granted
    
    
    1,647,000
    
    
    
    31.45Exercised
    
    
    (893,270
    )
    
    
    20.90Forfeited
    
    
    (193,511
    )
    
    
    26.19Outstanding at December 31, 2004
    
    
    5,114,145
    
    
    $
    24.84
    
    
    
    7.37
    
    
    $
    41,774,469Granted
    
    
    49,000
    
    
    
    32.45Exercised
    
    
    (920,385
    )
    
    
    22.49Forfeited
    
    
    (166,055
    )
    
    
    29.20Outstanding at December 31, 2005
    
    
    4,076,705
    
    
    $
    25.28
    
    
    
    6.60
    
    
    $
    7,881,252Granted
    
    
    1,056,000
    
    
    
    23.23Exercised
    
    
    (349,596
    )
    
    
    20.64Forfeited
    
    
    (726,795
    )
    
    
    29.48Outstanding at December 31, 2006
    
    
    4,056,314
    
    
    $
    24.59
    
    
    
    6.38
    
    
    $
    13,750,742Vested or expected to vest as of December 31, 2006
    
    
    3,933,107
    
    
    $
    24.63
    
    
    
    6.25
    
    
    $
    13,346,073Exercisable at December 31, 2006
    
    
    3,201,314
    
    
    $
    24.95
    
    
    
    5.56
    
    
    $
    10,819,092
   Restricted Stock Purchase Rights:
 F-16




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Restricted
    
    
    
    
    
    
    Weighted-AverageStock
    
    
    
    
    
    
    Remaining
    
    
    AggregatePurchase
    
    
    Weighted-Average
    
    
    Contractual Term
    
    
    IntrinsicRights
    
    
    Exercise Price
    
    
    (in Years)
    
    
    ValueOutstanding at January 1, 2004
    
    
    476,000
    
    
    $
    6.49Granted
    
    
    110,000
    
    
    
    7.60Exercised
    
    
    
    
    
    
    Forfeited
    
    
    
    
    
    
    Outstanding at December 31, 2004
    
    
    586,000
    
    
    $
    6.70
    
    
    
    8.71
    
    
    $
    15,385,350Granted
    
    
    
    
    
    
    Exercised
    
    
    (16,000
    )
    
    
    6.46Forfeited
    
    
    (24,000
    )
    
    
    6.46Outstanding at December 31, 2005
    
    
    546,000
    
    
    $
    6.71
    
    
    
    7.72
    
    
    $
    9,499,110Granted
    
    
    
    
    
    
    Exercised
    
    
    (158,500
    )
    
    
    6.49Forfeited
    
    
    (87,500
    )
    
    
    6.85Outstanding at December 31, 2006
    
    
    300,000
    
    
    $
    6.79
    
    
    
    6.76
    
    
    $
    5,957,820Vested or expected to vest as of December 31, 2006
    
    
    218,371
    
    
    $
    6.75
    
    
    
    6.74
    
    
    $
    4,345,307Exercisable at December 31, 2006
    
    
    16,000
    
    
    $
    6.46
    
    
    
    6.61
    
    
    $
    323,040
   Restricted Stock Awards and Units:
  Shares
    
    
    Weighted-Averageor
    
    
    Grant-DateShare Units
    
    
    Fair ValueNonvested restricted stock awards and units at January 1, 2004
    
    
    26,000
    
    
    $
    25.73Granted
    
    
    226,000
    
    
    
    32.80Vested and released
    
    
    (26,000
    )
    
    
    25.73Forfeited
    
    
    
    
    
    
    Nonvested restricted stock awards and units at December 31, 2004
    
    
    226,000
    
    
    
    32.80Granted
    
    
    81,384
    
    
    
    34.98Vested and released
    
    
    (26,000
    )
    
    
    28.21Forfeited
    
    
    
    
    
    
    Nonvested restricted stock awards and units at December 31, 2005
    
    
    281,384
    
    
    
    33.86Granted
    
    
    339,000
    
    
    
    22.71Vested and released
    
    
    (38,462
    )
    
    
    33.95Forfeited
    
    
    (95,000
    )
    
    
    28.35Nonvested restricted stock awards and units at December 31, 2006
    
    
    486,922
    
    
    $
    27.16
   Prior Period Pro Forma Presentation:
 F-17




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 Year Ended December 31,(in thousand, except per share datas )
    
    2005
    
    
    2004Net income as reported
    
    $
    66,941
    
    
    $
    114,008Add: stock-based compensation expense included
in reported net income, net of related tax effects
    
    
    2,032
    
    
    
    2,828Deduct: total stock-based compensation expense
determined for all awards under fair value-based
method, net of related tax effects
    
    
    (13,070
    )
    
    
    (12,869
    )Pro forma net income
    
    $
    55,903
    
    
    $
    103,967Basic net income per share:As reported
    
    $
    1.39
    
    
    $
    2.31Pro forma
    
    $
    1.16
    
    
    $
    2.11Diluted net income per share:As reported
    
    $
    1.37
    
    
    $
    2.27Pro forma
    
    $
    1.14
    
    
    $
    2.07
  Stock Option Acceleration:
  Treasury Stock:
   F-18




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  NOTE 8  INCOME TAXES
  December 31,(in thousands )
    
    2006
    
    
    2005Deferred tax assets:Allowance for doubtful accounts
    
    $
    13,007
    
    
    $
    15,989Accruals
    
    
    14,021
    
    
    
    12,955Asset valuation reserves
    
    
    14,301
    
    
    
    8,622Net operating loss carryforward
    
    
    8,448
    
    
    
    8,827Intangible assets
    
    
    8,994
    
    
    
    8,423Deferred revenue and expenses
    
    
    3,735
    
    
    
    Other, net
    
    
    8,882
    
    
    
    5,21871,388
    
    
    
    60,034Less: valuation allowance
    
    
    (904
    )
    
    
    (957
    )Total deferred tax assets
    
    
    70,484
    
    
    
    59,077Deferred tax liabilities:Tax over book depreciation
    
    
    (28,213
    )
    
    
    (29,491
    )Tax over book goodwill amortization
    
    
    (43,737
    )
    
    
    (28,658
    )Contingent debt interest
    
    
    (19,353
    )
    
    
    Other, net
    
    
    (3,348
    )
    
    
    (4,032
    )Total deferred tax liabilities
    
    
    (94,651
    )
    
    
    (62,181
    )Net deferred tax liabilities
    
    $
    (24,167
    )
    
    $
    (3,104
    )
   F-19




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
  Year Ended December 31,(in thousands )
    
    2006
    
    
    2005
    
    
    2004Current:Federal
    
    $
    16,458
    
    
    $
    46,030
    
    
    $
    35,245State
    
    
    2,490
    
    
    
    (719
    )
    
    
    8,25418,948
    
    
    
    45,311
    
    
    
    43,499Deferred:Federal
    
    
    21,298
    
    
    
    (5,605
    )
    
    
    25,088State
    
    
    3,011
    
    
    
    723
    
    
    
    (4,290
    )24,309
    
    
    
    (4,882
    )
    
    
    20,798$
    43,257
    
    
    $
    40,429
    
    
    $
    64,297
  Year Ended December 31,(in thousands )
    
    2006
    
    
    2005
    
    
    2004Income tax expense at statutory rate
    
    $
    41,382
    
    
    $
    37,580
    
    
    $
    62,407Non-deductible expenses
    
    
    711
    
    
    
    2,958
    
    
    
    465State taxes, net of federal benefit
and state loss carryforwards
    
    
    5,134
    
    
    
    4,592
    
    
    
    7,071Change in valuation allowance
    
    
    (53
    )
    
    
    (2,218
    )
    
    
    (6,803
    )Change in contingency reserve
    
    
    (4,063
    )
    
    
    (2,483
    )
    
    
    959Other
    
    
    146
    
    
    
    
    
    
    
    198$
    43,257
    
    
    $
    40,429
    
    
    $
    64,297
   F-20




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 NOTE 9  PER SHARE AMOUNTS
  Year Ended December 31,(in thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2004Numerator:Net income
    
    $
    74,980
    
    
    $
    66,941
    
    
    $
    114,008Numerator for basic and diluted per share amounts 
income available to common stockholders
    
    $
    74,980
    
    
    $
    66,941
    
    
    $
    114,008Denominator:Denominator for basic per share
amounts  weighted-average shares
    
    
    42,462
    
    
    
    48,154
    
    
    
    49,368Effect of dilutive securities:Employee stock options 
dilutive potential common shares
    
    
    473
    
    
    
    831
    
    
    
    812Denominator for diluted per share amounts 
adjusted weighted-average shares
    
    
    42,935
    
    
    
    48,985
    
    
    
    50,180Basic net income per common share
    
    $
    1.77
    
    
    $
    1.39
    
    
    $
    2.31Diluted net income per common share
    
    $
    1.75
    
    
    $
    1.37
    
    
    $
    2.27Employee stock options excluded from the computation
of diluted per share amounts:Shares for which exercise price exceeds
average market price of common stock
    
    
    3,145
    
    
    
    2,073
    
    
    
    1,505Average exercise price per share that exceeds
average market price of common stock
    
    $
    26.71
    
    
    $
    30.21
    
    
    $
    31.66
 F-21




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 NOTE 10  LEASES
    December 31,(in thousands )
    
    2006
    
    
    2005Information systems  hardware and software
    
    $
    3,156
    
    
    $
    3,156Less accumulated depreciation
    
    
    (1,734
    )
    
    
    (938
    )$
    1,422
    
    
    $
    2,218
  (in thousands )2007
    
    $
    56,8192008
    
    
    46,8412009
    
    
    35,8862010
    
    
    26,1452011
    
    
    18,056Thereafter
    
    
    21,684$
    205,431
 NOTE 11  EMPLOYEE BENEFIT PLANS
 401(k) Savings Plan:
 Pension Plan:
 Deferred Compensation Plan:
 F-22




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 NOTE 12  COMMITMENTS AND CONTINGENCIES
 Litigation Venegas vs. Apria Healthcare, Inc. et al
  Qui Tam Settlement and Related Costs: qui tam
 Medicare Reimbursement
 Supplier Concentration:
 Guarantees and Indemnities
  F-23




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 NOTE 13  SERVICE/PRODUCT LINE DATA
  Year Ended December 31,(in thousands)
    
    2006
    
    
    2005
    
    
    2004Net revenues:Respiratory therapy
    
    $
    1,033,267
    
    
    $
    1,009,752
    
    
    $
    990,857Infusion therapy
    
    
    274,723
    
    
    
    256,225
    
    
    
    246,662Home medical equipment/other
    
    
    209,317
    
    
    
    208,124
    
    
    
    213,930Total net revenues
    
    $
    1,517,307
    
    
    $
    1,474,101
    
    
    $
    1,451,449Gross profit:Respiratory therapy
    
    $
    737,476
    
    
    $
    746,486
    
    
    $
    774,149Infusion therapy
    
    
    146,121
    
    
    
    131,128
    
    
    
    129,482Home medical equipment/other
    
    
    112,271
    
    
    
    117,199
    
    
    
    130,374Total gross profit
    
    $
    995,868
    
    
    $
    994,813
    
    
    $
    1,034,005
   F-24




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##### Table of Contents



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
 NOTE 14  SELECTED QUARTERLY FINANCIAL DATA (unaudited)
 Quarter(in thousands, except per share data )
    
    First
    
    
    Second
    
    
    Third
    
    
    Fourth2006Net revenues
    
    $
    368,056
    
    
    $
    376,079
    
    
    $
    382,214
    
    
    $
    390,958Gross profit
    
    
    241,082
    
    
    
    247,109
    
    
    
    251,120
    
    
    
    256,557Operating income
    
    
    31,944
    
    
    
    37,355
    
    
    
    38,209
    
    
    
    40,192Net income
    
    
    16,123
    
    
    
    18,458
    
    
    
    19,306
    
    
    
    21,093Basic net income per common share
    
    $
    0.38
    
    
    $
    0.44
    
    
    $
    0.45
    
    
    $
    0.50Diluted net income per common share
    
    $
    0.38
    
    
    $
    0.43
    
    
    $
    0.45
    
    
    $
    0.492005Net revenues
    
    $
    371,863
    
    
    $
    374,931
    
    
    $
    367,615
    
    
    $
    359,692Gross profit
    
    
    252,092
    
    
    
    255,348
    
    
    
    248,922
    
    
    
    238,451Operating income
    
    
    40,768
    
    
    
    21,589
    
    
    
    33,360
    
    
    
    33,772Net income
    
    
    25,170
    
    
    
    3,016
    
    
    
    19,255
    
    
    
    19,500Basic net income per common share
    
    $
    0.52
    
    
    $
    0.06
    
    
    $
    0.39
    
    
    $
    0.42Diluted net income per common share
    
    $
    0.51
    
    
    $
    0.06
    
    
    $
    0.38
    
    
    $
    0.42
 qui tam
      
 F-25




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##### Table of Contents



APRIA HEALTHCARE GROUP INC.
 
 SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS
 Balance at
    
    Charged to
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    
    
    
    
    End of(in thousands)
    
    of Period
    
    Expenses
    
    Deductions
    
    PeriodYear ended December 31, 2006Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    41,527
    
    
    $
    38,723
    
    
    $
    52,926
    
    
    $
    27,324Reserve for inventory and patient
service equipment shortages
    
    $
    3,753
    
    
    $
    3,623
    
    
    $
    2,956
    
    
    $
    4,420Year ended December 31, 2005Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    45,064
    
    
    $
    46,948
    
    
    $
    50,485
    
    
    $
    41,527Reserve for inventory and patient
service equipment shortages
    
    $
    3,230
    
    
    $
    2,309
    
    
    $
    1,786
    
    
    $
    3,753Year ended December 31, 2004Deducted from asset accounts:Allowance for doubtful accounts
    
    $
    38,531
    
    
    $
    48,567
    
    
    $
    42,034
    
    
    $
    45,064Reserve for inventory and patient
service equipment shortages
    
    $
    1,377
    
    
    $
    3,909
    
    
    $
    2,056
    
    
    $
    3,230
 S-1




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##### Table of Contents



SIGNATURES
   APRIA HEALTHCARE GROUP INC.By:
    /s/ LAWRENCE M. HIGBYChief Executive Officer  Signature
    
    Title
    
    Date/s/ LAWRENCE M. HIGBYLawrence M. Higby
    
    Chief Executive Officer and Director
(Principal Executive Officer)
    
    March 1, 2007/s/ CHRIS A. KARKENNYChris A. Karkenny
    
    Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
    
    March 1, 2007/s/ ALICIA PRICEAlicia Price
    
    Vice President and Controller
(Principal Accounting Officer)
    
    March 1, 2007/s/ DAVID L. GOLDSMITHDavid L. Goldsmith
    
    Director and Chairman of the Board
    
    March 1, 2007/s/ VICENTE ANIDO, JR.Vicente Anido, Jr.
    
    Director
    
    March 1, 2007/s/ TERRY BAYERTerry Bayer
    
    Director
    
    March 1, 2007/s/ I. T. CORLEYI. T. Corley
    
    Director
    
    March 1, 2007/s/ RICHARD H. KOPPESRichard H. Koppes
    
    Director
    
    March 1, 2007/s/ PHILIP R. LOCHNER, JR.Philip R. Lochner, Jr.
    
    Director
    
    March 1, 2007/s/ NORMAN C. PAYSONNorman C. Payson
    
    Director
    
    March 1, 2007/s/ MAHVASH YAZDIMahvash Yazdi
    
    Director
    
    March 1, 2007




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##### Table of Contents



EXHIBIT INDEX
 Exhibit No.
    
    Description
    
    Reference3.1
    
    Restated Certificate of Incorporation of Registrant.
    
    (c)3.2
    
    Certificate of Ownership and Merger merging Registrant into Abbey and amending
Abbeys Restated Certificate of Incorporation to change Abbeys name to Apria
Healthcare Group Inc.
    
    (f)3.3
    
    Certificate of Amendment of Certificate of Incorporation of Registrant.
    
    (m)3.4
    
    Amended and Restated Bylaws of Registrant, as amended on March 1, 2006.
    
    (q)4.1
    
    Specimen Stock Certificate of the Registrant.
    
    (f)4.2
    
    Certificate of Designation of the Registrant.
    
    (c)4.3
    
    Indenture dated August 20, 2003, between Registrant and U.S. Bank National
Association, as trustee, describing the Registrants issuance of 33/8% Convertible
Senior Notes due 2033.
    
    (i)4.4
    
    First Supplemental Indenture dated December 14, 2004, supplementing and amending the
indenture dated August 20, 2003.
    
    (m)10.1 #
    
    1991 Stock Option Plan.
    
    (a)10.2 #
    
    401(k) Savings Plan, restated effective October 1, 1993, amended December 28, 1994.
    
    (d)10.3 #
    
    Amended and Restated 1992 Stock Incentive Plan.
    
    (d)10.4 #
    
    Amendment 1996-1 to the 1991 Stock Option Plan, dated October 28, 1996.
    
    (m)10.5 #
    
    Amendment 1996-1 to the Amended and Restated 1992 Stock Incentive Plan, dated October
28, 1996.
    
    (m)10.6 #
    
    Amended and Restated 1997 Stock Incentive Plan, dated February 27, 1997, as amended
through June 30, 1998.
    
    (m)10.7 #
    
    1998 Nonqualified Stock Incentive Plan, dated December 15, 1998.
    
    (m)10.8 #
    
    Amendment No. 1 to the 1998 Nonqualified Stock Incentive Plan, dated January 31, 2001.
    
    (e)10.9
    
    International Swaps and Derivatives Association, Inc. Master Agreement dated December
3, 2002, between Registrant and Bank of Nova Scotia.
    
    (g)10.10 #
    
    Apria Healthcare Group Inc. 2003 Performance Incentive Plan, dated July 17, 2003.
    
    (h)10.11 #
    
    Form of Director Stock Option Agreement as granted under the Registrants 2003
Performance Incentive Plan.
    
    (p)10.12 #
    
    Form of Director Restricted Stock Award Agreement as granted under the Registrants
2003 Performance Incentive Plan.
    
    (p)




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##### Table of Contents



Exhibit No.
    
    Description
    
    Reference10.13 #
    
    Form of Employee Stock Option Agreement as granted under the Registrants 2003 Performance Incentive Plan.
    
    (p)10.14 #
    
    Form of Employee Restricted Stock Purchase Rights Award Agreement as granted under the Registrants 2003
Performance Incentive Plan.
    
    (p)10.15 #
    
    Form of Employee Time-Based Restricted Stock Award Agreement as granted under the Registrants 2003 Performance
Incentive Plan.
    
    (p)10.16 #
    
    Form of Employee Performance-Based Restricted Stock Award Agreement as granted under the Registrants 2003
Performance Incentive Plan.
    
    (p)10.17
    
    Fourth Amended and Restated Credit Agreement dated November 23, 2004, among Registrant and certain of its
subsidiaries, Bank of America, N.A., The Bank of Nova Scotia and certain other lending institutions.
    
    (l)10.18
    
    Confirmation dated April 22, 2005, executed relative to the Master Agreement dated December 3, 2002, between
Registrant and Bank of Nova Scotia.
    
    (n)10.19 #
    
    Executive Severance Agreement dated June 13, 2005, between Registrant and Jeri L. Lose.
    
    (n)10.20 #
    
    Amended and Restated Employment Agreement dated October 20, 2005, between Registrant and Lawrence A. Mastrovich.
    
    (o)10.21
    
    Letter Agreement with respect to the Accelerated Share Repurchase transaction dated November 7, 2005, between
Registrant and Citibank, N.A., acting through Citigroup Global Markets, Inc., as agent.
    
    (o)10.22
    
    Form of Indemnity Agreement for Non-Employee Directors.
    
    (r)10.23 #
    
    Executive Severance Agreement dated March 14, 2006, between Registrant and W. Jeffrey Ingram.
    
    (p)10.24
    
    First Amendment to Fourth Amended and Restated Credit Agreement, dated June 23, 2006.
    
    (s)10.25 #
    
    Employment Agreement and Non-Competition Agreement between registrant and Chris A. Karkenny, as Executive Vice
President and Chief Financial Officer effective November 13, 2006.
    
    (t)14.1
    
    Registrants Code of Ethical Business Conduct.
    
    (j)21.1
    
    List of Subsidiaries.23.1
    
    Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm.31.1
    
    Certification of Chief Executive Officer pursuant to Securities Exchange Act Rule 13a-14(a).31.2
    
    Certification of Chief Financial Officer pursuant to Securities Exchange Act Rule 13a-14(a).32.1
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350.32.2
    
    Certification of the Chief Financial Officer pursuant to 18 U.S.C Section 1350.# Management contract or compensatory plan or arrangement.




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##### Table of Contents



Exhibit No.
    
    Description
    
    ReferenceReferences  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. 33-80581), as filed on December 19,
1995.(e)
    
    Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2000, as filed on March 22, 2001.(f)
    
    Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2001, as filed on April 1, 2002.(g)
    
    Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2002, as filed on March 31, 2003.(h)
    
    Incorporated by reference to Quarterly Report on Form 10-Q dated June 30, 2003, as filed on August 12, 2003.(i)
    
    Incorporated by reference to Quarterly Report on Form 10-Q dated September 30, 2003, as filed on November 14, 2003.(j)
    
    Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2003.(k)
    
    Incorporated by reference to Quarterly Report on Form 10-Q dated June 30, 2004, as filed on August 6, 2004.(l)
    
    Incorporated by reference to Current Report on Form 8-K dated November 23, 2004, as filed on November 30, 2004.(m)
    
    Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2004, as filed on March 15, 2004.(n)
    
    Incorporated by reference to Quarterly Report on Form 10-Q dated June 30, 2005, as filed on August 15, 2005.(o)
    
    Incorporated by reference to Quarterly Report on Form 10-Q dated September 30, 2005, as filed on November 9, 2005.(p)
    
    Incorporated by reference to Annual Report on Form 10-K for the year ended December 31, 2005, as filed on March 16, 2006.(q)
    
    Incorporated by reference to Current Report on Form 8-K dated March 1, 2006, as filed on March 7, 2006.(r)
    
    Incorporated by reference to Current Report on Form 8-K dated March 8, 2006, as filed on March 14, 2006.(s)
    
    Incorporated by reference to Quarterly Report on Form 10-Q dated June 30, 2006, as filed on August 9, 2006.(t)
    
    Incorporated by reference to Current Report on Form 8-K dated November 2, 2006, as filed on November 6, 2006