UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

SCHEDULE 14A

Proxy Statement Pursuant to Section 14(a) of
The Securities Exchange Act of 1934

Filed by the Registrant þ
Filed by a Party other than the Registrant o
Check the appropriate box:
þ		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to § 240.14a-12

APRIA HEALTHCARE GROUP INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):
o		No fee required.
þ		Fee computed on table below per Exchange Act Rules 14(a)-6(i)(4) and 0-11.
o		Fee paid previously with preliminary materials.

			(1	)		Title of each class of securities to which transaction applies:
						Common stock, par value $0.001 per share, of Apria Healthcare Group Inc. (the “Apria Common Stock”)
			(2	)		Aggregate number of securities to which transaction applies:
						44,723,784 shares of Apria Common Stock (including 890,735 restricted stock awards and units) and 783,460 shares of Apria Common Stock issuable pursuant to in-the-money options.
			(3	)		Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0–11 (set forth the amount on which the filing fee is calculated and state how it was determined):
						$21.00 per share (the price per share negotiated in the transaction).
			(4	)		Proposed maximum aggregate value of transaction:
						$946,566,586.60 (equal to the sum of (A) 44,723,784 shares of Apria Common Stock (including 890,735 restricted stock awards and units) each multiplied by $21.00 and (B) the aggregate value of “in-the-money” options to purchase 783,460 shares of Apria Common Stock determined by taking the difference between $21.00 and the exercise price per share of each of the in-the-money options).
			(5	)		Total fee paid:
						$37,200.07

o

Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

	(1)		Amount Previously Paid:
	(2)		Form, Schedule or Registration Statement No.:
	(3)		Filing Party:
	(4)		Date Filed:

 

 

26220 Enterprise Court
Lake Forest, California 92630-8405
[ • ], 2008

 

Dear Stockholder:

 

You are cordially invited to attend a special meeting of stockholders of Apria Healthcare Group Inc., a Delaware corporation (“Apria”), to be held on [ • ], 2008, at [ • ] local time at [ • ].

 

At the special meeting, you will be asked to approve and adopt an Agreement and Plan of Merger dated as of June 18, 2008 (the “merger agreement”) by and among Apria, Sky Acquisition LLC, a Delaware limited liability company (“Buyer”) and Sky Merger Sub Corporation, a Delaware corporation (“Merger Sub”), pursuant to which Merger Sub will be merged with and into Apria, and Apria will continue as the surviving corporation and become a wholly-owned subsidiary of Buyer. Buyer was formed and is wholly-owned by Blackstone Capital Partners V L.P., a Delaware limited partnership and an affiliate of The Blackstone Group. Upon completion of the merger, you will be entitled to receive $21.00 in cash, without interest and less applicable withholding taxes, for each share of Apria common stock that you own.

 

Following the completion of the merger, Buyer will own all of Apria’s issued and outstanding capital stock and Apria will continue its operations as a wholly-owned subsidiary of Buyer. As a result, Apria will no longer have its stock listed on the New York Stock Exchange and will no longer be required to file periodic and other reports with the Securities and Exchange Commission. After the merger, you will no longer have an equity interest in Apria and will not participate in any potential future earnings of Apria.

 

Apria’s Board of Directors has approved and authorized the merger agreement, and recommends that you vote “FOR” adoption of the merger agreement and the merger. In arriving at its recommendation, Apria’s Board of Directors carefully considered a number of factors described in the accompanying proxy statement.

 

If your shares are held in “street name” by your broker, bank or other nominee, your broker, bank or other nominee will be unable to vote your shares without receiving instructions from you. You should instruct your broker, bank or other nominee to vote your shares, and you should do so following the procedures provided by your broker, bank or other nominee. Failure to instruct your broker, bank or other nominee to vote your shares will have the same effect as voting against approval and adoption of the merger agreement.

 

If you do not hold your shares in “street name” and you complete, sign and return your proxy card without indicating how you wish to vote, your proxy will be voted in favor of approval and adoption of the merger agreement. If you fail to return your proxy card and fail to vote at the special meeting, the effect will be the same as a vote against approval and adoption of the merger agreement. Returning the proxy card does not deprive you of your right to attend the special meeting and vote your shares in person.

 

Your proxy may be revoked at any time before it is voted by submitting a later-dated proxy to Apria in writing or by telephone or over the Internet, by submitting a written revocation to the Corporate Secretary of Apria prior to the vote at the special meeting, or by attending and voting in person at the special meeting. For shares held in “street name,” you may revoke or change your vote by submitting instructions to your bank, broker or other nominee.

 

Your vote is very important. The merger cannot be completed unless the holders of a majority of the outstanding shares of Apria common stock approve and adopt the merger agreement. Whether or not you plan to attend the special meeting, please complete, sign and return the enclosed proxy card or submit your proxy by telephone or over the Internet following the instructions on the proxy card.

 

Your prompt submission of a proxy card will be greatly appreciated.

 

Sincerely,

 

Lawrence M. Higby
Chief Executive Officer

 

The accompanying proxy statement is dated [ • ], 2008 and is first being mailed to Apria’s stockholders on or about [ • ], 2008.

 

 

APRIA HEALTHCARE GROUP INC.
26220 Enterprise Court
Lake Forest, California 92630-8405

 

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON [ • ], 2008

 

 

 

To the Stockholders of Apria Healthcare Group Inc.:

 

Notice is hereby given that a special meeting of stockholders of Apria Healthcare Group Inc., a Delaware corporation (“Apria”), will be held on [ • ], 2008 at [ • ] local time at [ • ] located at [ • ], for the following purposes:

 

1. To consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger dated as of June 18, 2008 (the “merger agreement”) by and among Apria, Sky Acquisition LLC, a Delaware limited liability company and Sky Merger Sub Corporation, a Delaware corporation (“Merger Sub”), pursuant to which Merger Sub will be merged with and into Apria, and Apria will continue as the surviving corporation and become a wholly-owned subsidiary of Buyer. As part of the merger, each issued and outstanding share of Apria common stock will be converted into the right to receive $21.00 in cash, without interest and less applicable withholding taxes.

 

2. To consider and vote upon a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to approve and adopt the merger agreement.

 

3. To consider and vote upon any other matters that properly come before the special meeting.

 

Only holders of record of Apria common stock at the close of business on [ • ], 2008, the record date of the special meeting, are entitled to notice of, and to vote at, the special meeting or any adjournments or postponements of the special meeting.

 

The merger agreement and the merger are described in the accompanying proxy statement, which Apria urges you to read carefully. A copy of the merger agreement is attached as Appendix A to the accompanying proxy statement.

 

Your vote is very important. The merger cannot be completed unless the holders of a majority of the outstanding shares of Apria common stock approve the merger agreement. Whether or not you plan to attend the special meeting, please complete, sign and return the enclosed proxy card or submit your proxy by telephone or over the Internet following the instructions on the proxy card.

 

Under Delaware law, Apria’s stockholders may exercise appraisal rights in connection with the merger. Stockholders who do not vote in favor of the merger proposal and comply with all of the other necessary procedural requirements will have the right to dissent from the merger and to seek appraisal of the fair value of their Apria shares, exclusive of any element of value arising from the expectation or accomplishment of the merger. For a description of appraisal rights and the procedures to be followed to assert them, stockholders should review the provisions of Section 262 of the Delaware General Corporation Law, a copy of which is included as Appendix B to the accompanying proxy statement.

 

By Order of Apria’s Board of Directors,

 

Robert S. Holcombe

Executive Vice President, General Counsel

and Secretary

 

[ • ], 2008

 

Please do not send your Apria common stock certificates to Apria at this time. If the merger is completed, you will be sent instructions regarding the surrender of your certificates.

 

Proxy Statement
Table of Contents

 

 

This following summary highlights selected information contained in this proxy statement and may not contain all of the information that is important to you. You are urged to read this entire proxy statement carefully, including the appendices. In addition, Apria Healthcare Group Inc. (“Apria” or the “Company”) incorporates by reference important business and financial information about the Company in this proxy statement. You may obtain the information incorporated by reference into this proxy statement without charge by following the instructions in the section entitled “Where Stockholders Can Find More Information.” In this proxy statement, Apria refers to Sky Acquisition LLC as “Buyer,” Sky Merger Sub Corporation as “Merger Sub” and Blackstone Capital Partners V L.P. as “Parent.” The Blackstone Group is referred to herein as “Blackstone.”

 

 

 

 

 

The following questions and answers are for your convenience only, and briefly address some commonly asked questions about the merger. You should still carefully read this entire proxy statement, including the attached appendices.

 

 

 

 

 

 

This proxy statement and the accompanying form of proxy are being furnished to the Company’s stockholders in connection with the solicitation of proxies by the Company’s Board of Directors for use at the special meeting to be held at [ • ], on [ • ], 2008 at [ • ] local time.

 

The Company is asking its stockholders to vote on the adoption of the merger agreement dated as of June 18, 2008 by and among Apria, Buyer and Merger Sub. Buyer is a limited liability company organized under the laws of Delaware and a wholly-owned subsidiary of Parent, a Delaware limited partnership. Parent has agreed to guarantee certain payment obligations of Buyer under the merger agreement. If the merger is completed, Apria will continue as the surviving corporation and become a wholly-owned subsidiary of Buyer, and the Company’s stockholders (other than those who perfect their appraisal rights under Delaware law) will have the right to receive $21.00 in cash, without interest and less any applicable withholding taxes, for each share of Apria common stock that they own.

 

Apria is a national provider of a broad range of quality home health care services through approximately 550 branch locations that serve patients in all 50 states. Apria has three major service lines: home respiratory therapy, home infusion therapy and home medical equipment. The Company serves patients of managed care organizations, Medicare, Medicaid and other payors. The following table provides examples of the services and products in each service line:

 

 

Additional information about Apria’s business is set forth in Apria’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007, which is incorporated in this proxy statement by reference. See “Where Stockholders Can Find More Information” on page [ • ].

 

Apria Healthcare Group Inc.
26220 Enterprise Court
Lake Forest, California 92630-8405
Telephone: (949) 639-2000

 

The Blackstone Group, a global investment and advisory firm, was founded in 1985. Through its different investment businesses, as of March 31, 2008, Blackstone had total assets under management of approximately $113.5 billion. Blackstone’s alternative asset management businesses include the management of corporate private equity funds, real estate funds, hedge funds, funds of funds, debt funds, collateralized loan obligation vehicles (CLOs), and closed-end mutual funds. Blackstone also provides various financial advisory services, including mergers and acquisition advisory, restructuring and reorganization advisory, and fund placement services. In June 2007, Blackstone conducted an initial public offering of common units representing limited partner interests in The Blackstone Group L.P., which are listed on the New York Stock Exchange under the symbol “BX.”

 

Blackstone Capital Partners V L.P.
c/o The Blackstone Group
345 Park Avenue
New York, New York 10154
Telephone: 212-583-5000

 

Sky Acquisition LLC, a Delaware limited liability company, was formed solely for the purpose of acquiring Apria. Buyer is wholly-owned by Parent and has not engaged in any business except in anticipation of the merger.

 

Sky Acquisition LLC
c/o The Blackstone Group
345 Park Avenue
New York, New York 10154
Telephone: 212-583-5000

 

Sky Merger Sub Corporation, a Delaware corporation, was formed solely for the purpose of acquiring Apria. Merger Sub is wholly-owned by Buyer and has not engaged in any business except in anticipation of the merger.

 

Sky Merger Sub Corporation
c/o The Blackstone Group
345 Park Avenue
New York, New York 10154
Telephone: 212-583-5000

 

This proxy statement includes and incorporates by reference forward-looking statements that are not historical facts. These forward-looking statements are based on Apria’s current estimates and assumptions and, as such, involve uncertainty and risk. Forward-looking statements include the information concerning Apria’s possible or assumed future results of operations and Apria’s plans, intentions and expectations to complete the merger and also include those preceded or followed by the words “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “should,” “plans,” “targets” and/or similar expressions. They include statements relating to future revenues and expenses, the expected growth of the Company’s business and trends and opportunities in the home health care services industry.

 

The forward-looking statements are not guarantees of future performance or that the merger will be completed as planned, and actual results may differ materially from those contemplated by these forward-looking statements. In addition to the factors discussed elsewhere in this proxy statement, other factors that could cause actual results to differ materially include industry performance, general business, economic, regulatory and market and financial conditions, all of which are difficult to predict. These forward-looking statements include, among other things, whether and when the proposed merger will close and whether conditions to the proposed merger will be satisfied.

 

These forward-looking statements also involve known and unknown risks, uncertainties and other factors that include, among others, the failure of the merger to be completed, the time at which the merger is completed, approval and adoption of the merger and the merger agreement by the Company’s stockholders, failure of the Buyer to obtain financing for the merger, and failure by the Company or by the Buyer or Merger Sub to satisfy other conditions to the merger, and are also discussed in the documents that are incorporated by reference into this proxy statement, including Apria’s Annual Report on Form 10-K for the fiscal year ended December 31, 2007. These factors may cause the Company’s actual results, performance and achievements, or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.

 

Except to the extent required by law, the Company undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the cautionary statements contained throughout this proxy statement.

All information contained in this proxy statement concerning Parent, Buyer and Merger Sub has been supplied by Buyer and Merger Sub and has not been independently verified by Apria.

 

The enclosed proxy is solicited on behalf of the Company’s Board of Directors for use at a special meeting of the Company’s stockholders to be held on [ • ], 2008, at [ • ] local time, or at any adjournments or postponements thereof, for the purposes set forth in this proxy statement and in the accompanying notice of special meeting. The special meeting will be held at [ • ] at [ • ].

 

At the special meeting, the Company’s stockholders are being asked to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger dated as of June 18, 2008 by and among Apria, Buyer and Merger Sub. The Company’s stockholders are also being asked to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt and approve the merger agreement.

 

Apria does not expect a vote to be taken on any other matters at the special meeting. If any other matters are properly presented at the special meeting for consideration, however, the holders of the proxies will have discretion to vote on these matters in accordance with their best judgment.

 

Only holders of record of Apria common stock at the close of business on [ • ], 2008 are entitled to notice of and to vote at the special meeting. At the close of business on [ • ], 2008, [ • ] shares of Apria common stock were outstanding and entitled to vote. A list of the Company’s stockholders will be available for review at the Company’s executive offices during regular business hours after the date of this proxy statement and through the date of the special meeting. Each holder of record of Apria common stock on the record date will be entitled to one vote for each share held by such holder. The presence, in person or by proxy, of the holders of a majority of the outstanding shares of Apria common stock entitled to vote at the special meeting is necessary to constitute a quorum for the transaction of business at the special meeting.

 

All votes will be tabulated by the inspector of election appointed for the special meeting, who will separately tabulate affirmative and negative votes, abstentions and broker non-votes. If a stockholder’s shares are held of record by a broker, bank or other nominee and the stockholder wishes to vote at the special meeting, the stockholder must obtain from the record holder a proxy issued in the stockholder’s name. Brokers who hold shares in “street name” for clients typically have the authority to vote on “routine” proposals when they have not received instructions from beneficial owners. Absent specific instructions from the beneficial owner of the shares, however, brokers are not allowed to exercise their voting discretion with respect to the approval of non-routine matters, such as the merger agreement. Proxies submitted without a vote by brokers on these matters are referred to as “broker non-votes.” Abstentions and broker non-votes are counted for purposes of determining whether a quorum exists at the special meeting.

 

Proxies received at any time before the special meeting and not revoked or superseded before being voted will be voted at the special meeting. If the proxy indicates a specification, it will be voted in accordance with the specification. If no specification is indicated, the proxy will be voted “FOR” adoption of the merger agreement and the merger, “FOR” the approval of the proposal to adjourn the special meeting if there are not sufficient votes to adopt the merger agreement and in the discretion of the persons named in the proxy with respect to any other business that may properly come before the special meeting or any postponement or adjournment of the special meeting. You may also vote in person by ballot at the special meeting.

 

The affirmative vote of holders of a majority of the outstanding shares of Apria common stock is required to approve and adopt the merger agreement. Because adoption of the merger agreement requires the approval of stockholders representing a majority of the outstanding shares of Apria common stock, failure to vote your shares of Apria common stock (including if you hold through a broker, bank or other nominee) will have exactly the same effect as a vote against the merger agreement.

 

The approval of the proposal to adjourn the special meeting if there are not sufficient votes to approve and adopt the merger agreement requires the affirmative vote of stockholders holding a majority of the shares present in person or by proxy at the special meeting. The persons named as proxies may propose and vote for one or more adjournments of the special meeting, including adjournments to permit further solicitations of proxies.

 

Please do not send in stock certificates at this time. If the merger is completed, you will be sent a letter of transmittal regarding the procedures for exchanging existing Apria stock certificates for the $21.00 in cash, without interest and less any applicable withholding taxes, per share payment.

 

Each share of Apria common stock outstanding on [ • ], 2008, the record date for stockholders entitled to vote at the special meeting, is entitled to a vote at the special meeting. The affirmative vote of holders of a majority of the outstanding shares of Apria common stock is required to approve the merger agreement. Because adoption of the merger agreement requires the approval of stockholders representing a majority of the outstanding shares of Apria common stock, failure to vote your shares of Apria common stock (including if you hold through a broker, bank or other nominee) will have exactly the same effect as a vote against the merger agreement.

 

You may vote your shares in any of the following ways:

 

Voting by Mail.  If you choose to vote by mail, simply mark your proxy, date and sign it and return it in the postage-paid envelope provided.

 

Voting by Telephone.  You can vote your proxy by telephone by calling the toll-free number on the proxy card. You will then be prompted to enter the control number printed on your proxy card and to follow the subsequent instructions. Voting by telephone is available 24 hours a day. If you vote by telephone, do not return your proxy card(s).

 

Voting by Internet.  You can also vote your proxy via the Internet. The website for Internet voting is www.[ • ], and voting is available 24 hours per day. If you vote via the Internet, you should not return your proxy card(s). Instructions on how to vote via the Internet are located on the proxy card enclosed with this proxy statement. Have your proxy card in hand when you access the web site and follow the instructions to obtain your records and create an electronic voting form.

 

Voting in Person.  You can also vote by appearing and voting in person at the special meeting.

 

If you vote your shares of Apria common stock by submitting a proxy, your shares will be voted at the special meeting as you indicate on your proxy card, or Internet or telephone proxy. If no instructions are indicated on your signed proxy card, all of your shares of Apria common stock will be voted “FOR” the adoption of the merger agreement and the merger and the approval of the proposal to adjourn the special meeting, if necessary, to solicit additional proxies in the event that there are not sufficient votes at the time of the special meeting to approve the proposal to adopt the merger agreement. You should return a proxy by mail, by telephone, or via the Internet even if you plan to attend the special meeting in person.

 

Any person giving a proxy pursuant to this solicitation has the power to revoke and change it any time before it is voted. It may be revoked and/or changed at any time before it is voted at the special meeting by:

 

 

If your Apria shares are held in the name of a bank, broker, trustee or other holder of record, including the trustee or other fiduciary of an employee benefit plan, you must obtain a proxy, executed in your favor from the holder of record, to be able to vote at the special meeting.

 

If you have instructed a broker, bank or other nominee to vote your shares, you must follow directions received from your broker, bank or other nominee to change those instructions.

 

Apria will pay the costs of soliciting proxies for the special meeting. Officers, directors and employees of Apria may solicit proxies by telephone, mail, the Internet or in person. However, they will not be paid for soliciting proxies. Apria will also request that individuals and entities holding shares in their names, or in the names of their nominees, that are beneficially owned by others, send proxy materials to and obtain proxies from, those beneficial owners, and will reimburse those holders for their reasonable expenses in performing those services. Innisfree M&A Incorporated has been retained by the Company to assist it in the solicitation of proxies, using the means referred to above, and will receive a fee of $25,000, plus $25,000 if the merger agreement is approved.

 

Although it is not expected, the special meeting may be adjourned for any reason by either the Chairman of the meeting or the holders of a majority in voting power of the stock represented at the meeting. When a meeting is adjourned to another time or place, notice need not be provided of the place, date and time if the time and place thereof is announced at the meeting. If, however, the date of the adjourned meeting is more than thirty days after the date for which the special meeting was originally called, or if a new record date is fixed, notice of place, date and time must be provided. Such notice will be mailed to you or transmitted electronically to you and will be provided not less than ten days nor more than sixty days before the date of the adjourned meeting and will set forth the purpose of the meeting.

 

The Company’s Board of Directors is not aware of any business to be brought before the special meeting other than that described in this proxy statement.

 

As part of their ongoing activities, Apria’s Board of Directors and senior management regularly evaluate Apria’s long-term strategic alternatives, including prospects for mergers and acquisitions, or continued operations as an independent company, each with a view towards maximizing stockholder value. Over the course of the past four years in particular, Apria’s Board of Directors and senior management have considered a variety of strategic options in light of business trends and regulatory conditions impacting Apria or expected to impact Apria and the industry in which Apria operates. These options have included meeting with potential strategic and financial partners, reviewing and analyzing solicited and unsolicited indications of interests, conducting broad and targeted auction processes and exploring strategic alternatives with individual potential buyers.

 

In early 2004, Morgan Stanley & Co. (“Morgan Stanley”) advised Apria’s Board of Directors in connection with exploring a potential transaction involving the sale of the Company. At that time, a member of Apria’s Board of Directors initiated calls to six financial sponsors, including Company A, to gauge market interest and explore a potential sale of the Company. Morgan Stanley then conducted a targeted auction which involved seven financial sponsors and four strategic buyers, including Blackstone. Although Apria received non-binding preliminary indications of interest, none of the parties contacted submitted a final, definitive offer to acquire Apria. The Board of Directors decided to temporarily suspend efforts to sell the Company via this

targeted auction process and reconsider the process at a later date. News of the potential sale became public in a New York Post article published on July 29, 2004 regarding the sale process.

 

In early 2005, based on market conditions and Company performance, the Board of Directors decided to renew and expand the auction process suspended the prior year. Apria’s advisors contacted thirty-eight parties, which included both financial sponsors (including Blackstone and Company A) and potential strategic buyers. As a result of this process, Apria received a non-binding preliminary indication of interest from a syndicate comprised of certain financial sponsors. After considering the transaction and conducting due diligence for some time, the syndicate declined to submit a final, definitive offer to acquire the Company. News of the possible sale became public again in a New York Post article published on June 7, 2005 regarding the sale process.

 

In the spring of 2006, Apria received an unsolicited indication of interest from a strategic buyer and engaged in preliminary discussions with such party. The potential strategic buyer conducted due diligence and began negotiating the terms of a definitive merger agreement with Apria. During the discussions the potential strategic buyer encountered severe difficulties in its own business and was unable to proceed with the possible transaction.

 

In the spring of 2007, Goldman Sachs gave a presentation to the Board that included a variety of potential strategic alternatives and financial alternatives, and potential options to refinance the Company’s 33/8% Convertible Senior Notes, sometimes referred to herein as the “convertible notes.” The convertible notes were issued by the Company pursuant to an Indenture dated August 20, 2003 between the Company and U.S. Bank National Association, as trustee, as supplemented by a First Supplemental Indenture dated December 14, 2004, and contain a put option exercisable by the holders of the convertible notes that, if exercised, would take effect on September 1, 2008. After considering this presentation, Apria engaged in preliminary discussions regarding a transaction with and entered into a confidentiality agreement with Company B, another potential strategic buyer. However, discussions with Company B did not progress beyond the high-level consideration of a potential transaction, primarily because of the uncertainty in Medicare reimbursement rates and the potential impact of this uncertainty on Company B’s business. Apria also worked with Goldman Sachs in connection with an offering of high yield debt for the Company’s convertible notes that was ultimately withdrawn by the Company.

 

In December 2007, Goldman Sachs arranged a number of introductory meetings in New York between Chris A. Karkenny, Chief Financial Officer of Apria, and a variety of investment banks and financial investment professionals, including a representative of Blackstone.

 

In January 2008, senior management, including Mr. Higby and Mr. Karkenny, attended an industry conference and met with a variety of investment banks and financial investment professionals, including representatives from Company A and Company C, a financial sponsor.

 

On January 29, 2008, in light of market, economic, competitive, regulatory and other conditions and developments, the Board of Directors formally engaged Goldman Sachs as the Company’s financial advisor to assist in the consideration of the possible sale of Apria.

 

In February 2008, Goldman Sachs arranged a meeting in Orange County, California between representatives of Blackstone and representatives from the Company, including Mr. Higby and Mr. Karkenny. The parties had a general discussion about the health care industry, discussed the current regulatory issues facing the industry and the Company and broadly discussed publicly available information regarding the Company’s business and its recent acquisition of Coram, Inc.

 

Between February and March of 2008, representatives from Blackstone placed two telephone calls to Goldman Sachs to discuss general high-level due diligence questions about Apria.

 

On April 10, 2008, Apria executed a new confidentiality agreement with Company A, who had been contacted by Goldman Sachs to gauge Company A’s interest in exploring a potential transaction with Apria.

 

On or about April 13, 2008, a representative of Blackstone made a telephone call to Mr. Higby to advise him that Blackstone would be submitting a formal expression of interest to acquire Apria.

On April 14, 2008, Blackstone submitted a non-binding preliminary initial indication of interest to acquire Apria, at a per share price of $22.00, based on publicly available information available to Blackstone at the time, and subject to numerous conditions including satisfactory completion of due diligence.

 

Apria’s Board of Directors met on April 18, 2008 and formed a Special Committee, comprised of Mr. David L. Goldsmith, Chairman of the Board, I.T. Corley, Dr. Payson and Philip R. Lochner, Jr. in order to explore strategic alternatives available to Apria, in light of both the written initial indication of interest to acquire Apria submitted by Blackstone on April 14, 2008, and the financial alternatives available to Apria with regard to the need to secure financing in time to satisfy the put option exercisable on September 1, 2008 by the holders of Apria’s convertible notes, either by means of a new convertible note offering, a bridge facility or a stand-alone credit facility as part of a potential sale of the Company.

 

On April 23, 2008, Mr. Goldsmith requested a call with Goldman Sachs, Gibson, Dunn & Crutcher LLP (“Gibson Dunn”), counsel to the Company, and Company management to update him on the financial alternatives available to Apria and whether Goldman Sachs would be able to provide the Company with bridge financing for the Company’s convertible notes if the Company decided to explore a strategic process. Goldman Sachs informed Mr. Goldsmith that it would be able to provide the financing but that the financing would have a short maturity. The Company did not pursue this financing.

 

On April 24, 2008, during a telephone conference with Goldman Sachs, Company A indicated that it might be interested in exploring a potential acquisition of Apria.

 

Apria’s Special Committee met again on April 25, 2008 with representatives from Goldman Sachs and Gibson Dunn, and discussed Apria’s financial and strategic alternatives, including key timing and process considerations and constraints in light of the put option under Apria’s convertible notes exercisable on September 1, 2008, Blackstone’s written initial indication of interest that had been submitted on April 14, 2008, and Company A’s potential interest in exploring an acquisition of Apria, as communicated to Goldman Sachs on April 24, 2008. Goldman Sachs also presented the Special Committee with a financial analysis of the potential alternative financings and a potential strategic transaction.

 

On April 28, 2008, the Special Committee met with a representative from Gibson Dunn and unanimously agreed to recommend to the Board that it was in the best interest of Apria’s stockholders to pursue a parallel track process and explore both a targeted auction process and financing alternatives available to Apria with regard to the put option exercisable by the holders of Apria’s convertible notes on September 1, 2008.

 

The recommendation of the Special Committee was communicated to the full Board of Directors on April 30, 2008, when the Board of Directors met with representatives from Goldman Sachs and Gibson Dunn to receive an update on the ongoing progress of Goldman Sachs’s contacts with potential acquirors and of the various financing alternatives available to Apria. Goldman Sachs reported to the Board of Directors that three financial sponsors, Blackstone, Company A and Company C had been in contact with Goldman Sachs regarding a potential acquisition of the Company. In addition, Goldman Sachs reported that Company D, a potential strategic buyer that Apria had contacted in connection with the May 2005 auction process, had expressed an interest to both Mr. Higby and to Goldman Sachs in discussing a potential strategic combination. Further, Goldman Sachs advised the Board that it had contacted Company B regarding a potential transaction, but that Company B indicated to Goldman Sachs that it was not interested in pursuing a transaction with Apria. After a lengthy discussion, the Board of Directors determined to move forward with a targeted auction process for the sale of Apria that initially included Blackstone, Company A, Company C and Company D and that such targeted auction should be conducted on a timeline that would provide the Company sufficient time to arrange alternative financing for the convertible notes in the event the auction proved unsuccessful or that the Board of Directors determined not to pursue a sale. The Board of Directors also instructed Goldman Sachs and Gibson Dunn to be prepared to move forward with a potential financing transaction in the event the auction process was terminated.

 

Following this meeting, representatives from Goldman Sachs contacted the Chief Executive Officer of Company D, who further expressed an interest in exploring a transaction with Apria. Also, on the same day, a representative from Goldman Sachs contacted Company C, and provided it with an update on the transaction process.

On May 1, 2008, Company C informed Goldman Sachs that it was no longer interested in pursuing a transaction with Apria.

 

Blackstone began its in-depth diligence review of Apria following the execution of an amended and restated confidentiality agreement with Apria on May 1, 2008. Between May 5, 2008 and the execution of the merger agreement, Apria’s management and representatives from Goldman Sachs held several due diligence sessions, provided information to Blackstone and responded to Blackstone’s diligence requests.

 

Apria’s Board of Directors met again on May 8, 2008 and May 9, 2008 for its regularly scheduled Board meeting. On May 8, 2008, the Board of Directors discussed in detail the parallel track process involving the potential sale of the Company and the exploration of financing alternatives for the Company’s convertible notes. Goldman Sachs provided an update to the Board of Directors regarding the process, including the timeline of the process and the status of discussions with potential bidders. Goldman Sachs also presented the Board of Directors with a financial analysis of the potential alternative financings and the potential strategic transaction. Gibson Dunn advised the Board of Directors of its fiduciary duties, and a lengthy discussion ensued concerning these fiduciary duties, particularly in the context of considering strategic alternatives under Delaware corporate law.

 

During the Board meeting, the Chief Executive Officer of Company D called Mr. Higby, and informed him that Company D was no longer interested in pursuing a transaction with Apria. Goldman Sachs indicated that because of the fact that Company D was no longer interested in acquiring Apria, it appeared that Blackstone and Company A would be the most likely bidders to continue in the process. Due to Company A’s role as one of the two most likely bidders remaining in the process, Dr. Payson advised the Board of Directors of certain professional and personal relationships that he had with Company A and one of its principals, including that he had previously served as Chief Executive Officer of a company in which Company A had owned a significant interest and that he had invested in various limited partnerships sponsored by Company A. The Board of Directors determined that while Dr. Payson’s relationships with Company A would likely not impact his independence, out of an abundance of caution, it would be advisable for Dr. Payson to recuse himself from any further decisions regarding the potential transaction. In addition, the Board of Directors determined that because Mr. Higby might become subject to potential conflicts of interest due to his status as Chief Executive Officer of Apria, he, too, should refrain from participating in the consideration of the sale process by the Board of Directors. At this point in time, the Board of Directors (other than Mr. Higby and Dr. Payson) determined that the parallel track process should be directly overseen by the members of Apria’s Board of Directors (other than Mr. Higby and Dr. Payson) rather than the three directors remaining on the Special Committee. After excusing Dr. Payson and management (including Mr. Higby), the members of Apria’s Board of Directors, with assistance from Goldman Sachs, examined whether any additional parties should be contacted in the targeted auction and determined that in light of timing constraints, no additional parties should be contacted at that point in time. Subsequently on May 8, 2008, the independent members of Apria’s Board engaged Munger, Tolles & Olson LLP (“Munger Tolles”) as its special counsel to advise it in connection with the sale process.

 

On May 9, 2008, Apria executed a confidentiality agreement with Company E, a financial sponsor who had contacted Goldman Sachs and expressed interest in acquiring Apria.

 

On May 13, 2008, Company A submitted a non-binding preliminary indication of interest for the acquisition of Apria at a price of $20.00-$22.00 per share, after having engaged in informational discussions with Goldman Sachs and management in April and early May of 2008. The indication of interest was subject to numerous conditions including satisfactory completion of due diligence. On the same day, representatives from the Company held a due diligence conference call with Company E.

 

From May 13, 2008 through late May 2008, Company A conducted due diligence about the Company, which included various in-person and telephonic financial due diligence meetings with representatives from the Company, Goldman Sachs and Gibson Dunn at the Irvine, California offices of Gibson Dunn.

 

Apria’s Board of Directors met again on May 19, 2008 with representatives from Goldman Sachs, Gibson Dunn, Munger Tolles, and Skadden, Arps, Slate, Meagher & Flom LLP (“Skadden Arps”), counsel to Goldman Sachs. The Board of Directors received an update from Goldman Sachs regarding progress in

soliciting interest from potential acquirors. In particular, Goldman Sachs advised the Board that Company E had indicated that it was considering a potential offer in the range of a twenty percent premium over Apria’s then current trading price of $15.00-$16.00 per share. The Board of Directors instructed Goldman Sachs to relay to Company E that a bid for the Company within that range would likely be unacceptable. The Board of Directors also discussed the terms of the draft merger agreement that Apria anticipated delivering to potential bidders and instructed Goldman Sachs to deliver a bid process letter and draft merger agreement to potential bidders upon finalization of the draft merger agreement.

 

Following the May 19, 2008 Board of Directors meeting, Goldman Sachs informed Company E that a potential offer in the range of a twenty percent premium over Apria’s then current trading price of $15.00-$16.00 would likely be unacceptable to the Company, and subsequently, Company E confirmed to Goldman Sachs that it was no longer interested in pursuing a transaction.

 

Apria’s Board of Directors met again on May 27, 2008 with representatives from Goldman Sachs, Gibson Dunn and Munger Tolles. The Board of Directors received an update from Goldman Sachs on the status of the process, including the timeline and the status of discussions with Blackstone, Company A and Company E. Goldman Sachs informed Apria’s Board of Directors that it had delivered a bid process letter and the draft merger agreement to both Blackstone and Company A, together with instructions to provide a response no later than June 9, 2008.

 

On May 29, 2008, Company A informed Goldman Sachs that it was highly unlikely that it could submit a bid to acquire Apria in the $22.00 per share range at the June 9, 2008 deadline, but would more likely submit a bid at a price of $20.00 per share or below. Company A also informed Goldman Sachs that it would require significant financial and personnel resources to meet the June 9, 2008 bid date set by the Company and was looking for guidance from Apria on whether it should expend those resources in light of the bid it would likely provide. After having discussions on this issue with Goldman Sachs, Mr. Goldsmith instructed Goldman Sachs to relay to Company A that it should remain involved in the sale process, but that it should be cautious about utilizing its resources if it was planning on submitting a bid at such price because it would likely be unacceptable to the Company. Goldman Sachs so informed Company A on that date.

 

The Board of Directors met again on June 4, 2008 with representatives from Goldman Sachs, Gibson Dunn and Munger Tolles. The Board of Directors received an update from Goldman Sachs and Gibson Dunn on the sale process, including the timeline and the status of discussions with Blackstone and Company A. The Board of Directors was advised that Blackstone was moving forward with its diligence process, was in the process of obtaining financing, and was planning on submitting a bid by the June 9, 2008 deadline. Goldman Sachs also confirmed to the Board of Directors that on May 29, 2008, it had delivered Mr. Goldsmith’s message to Company A regarding the response to the price range being proposed by Company A as well as its continued involvement in the sale process.

 

On the evening of June 9, 2008, Blackstone submitted its offer, together with a mark-up of the draft merger agreement and drafts of equity and debt financing commitment letters. Blackstone also submitted a commitment letter from Banc of America Bridge LLC, Barclays Capital and Wachovia Capital Markets, LLC with regards to a short-term liquidity facility that would permit Apria to refinance its convertible notes, referred to herein as the “short-term liquidity facility.” Blackstone offered $20.00 per share for Apria’s common stock. Blackstone indicated that the $2.00 per share decrease from its preliminary indication of interest on April 14, 2008, which valued Apria at a price of $22.00 per share, was due to certain results of Blackstone’s diligence review, including the Company’s recent sales results, the potential impact of managed care contracts on the Company, issues related to the Company’s current operating system and the Company’s outstanding credit balances. Company A did not submit a bid by the June 9, 2008 deadline.

 

On June 10, 2008, the Board of Directors held a meeting with representatives from Goldman Sachs, Gibson Dunn, Munger Tolles and Skadden Arps. The Board received an update from Goldman Sachs and Gibson Dunn regarding the recent developments in the sale process, including, among other items, the price per share offered by Blackstone and key open issues raised by the draft merger agreement that had been submitted by Blackstone on June 9, 2008, including the deletion of a proposed “go-shop” provision. The Board also discussed other key open issues included in the Blackstone bid, such as the size of and

circumstances in which the termination fees would be payable, the definition of a company material adverse effect, the allocation of regulatory risk, specific performance, and the proposed short-term liquidity facility. The Board of Directors instructed Goldman Sachs to advise Blackstone that the $20.00 per share price was insufficient for a sale of Apria and it would be important that the Board of Directors be permitted to conduct an active “go-shop” process if Apria were to execute a merger agreement with Blackstone.

 

Beginning on June 10, 2008, and continuing until the execution of the merger agreement with Blackstone on June 18, 2008, representatives from Goldman Sachs and Gibson Dunn held numerous conference calls with representatives from Blackstone and Simpson Thacher & Bartlett LLP, counsel to Blackstone, to discuss and negotiate the terms of the merger agreement. During that time period representatives of the Company and its advisors also held a number of conference calls with representatives from Blackstone and its advisors relating to a variety of diligence matters.

 

On June 10, 2008, Goldman Sachs informed Blackstone that the Board of Directors was not prepared to accept a price of $20.00 per share and that it required a “go-shop” provision. In response, Blackstone increased its offer to $20.50 per share and agreed to provide the Board of Directors with a “go-shop” period following the execution of a merger agreement.

 

On June 12, 2008, the Board of Directors reconvened with representatives from Goldman Sachs, Gibson Dunn, Munger Tolles and Skadden Arps to discuss the progress that had been made and the major issues outstanding in the formal bid submitted by Blackstone on June 9, 2008. The Board of Directors was informed that Blackstone had agreed to raise its price per share to $20.50 per share. Representatives from Goldman Sachs then reviewed with the Board of Directors certain financial analyses prepared for the Board of Directors, that assumed, pursuant to a request by the Board of Directors, that Congress would override the President’s veto regarding a bill concerning the Medicare Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (“DMEPOS”) competitive bidding program, which would, among other things, delay the implementation of Phase I of the competitive bidding program and potentially improve the Company’s prospects. Representatives from Gibson Dunn discussed with the Board of Directors the short-term liquidity facility for the Company’s convertible notes, certain changes that Blackstone had made to the draft merger agreement and the status of negotiations over certain key provisions of the merger agreement, including, among other items, the go-shop period, the size of and circumstances in which the termination fees would be payable, the definition of a company material adverse effect and the allocation of regulatory risk. The Board of Directors instructed Goldman Sachs to ask Blackstone to raise its offer to $21.50 per share and instructed Gibson Dunn to continue to negotiate certain key provisions in the merger agreement.

 

On June 12, 2008, representatives of Goldman Sachs contacted Blackstone and relayed the Board of Directors’ request that Blackstone raise its offer to $21.50 per share. In response, over that weekend, Blackstone advised Goldman Sachs that it would increase its offer to $21.00 per share, but that $21.00 was its “best and final offer.”

 

On June 16, 2008, the Board of Directors met with representatives from Goldman Sachs, Gibson Dunn, Munger Tolles and Skadden Arps. The Board of Directors received an update on the status of negotiations with Blackstone, and was informed that Blackstone had agreed to increase its offer of $20.50 per share to $21.00 per share. The Board of Directors also discussed the progress that had been made with regards to the key terms of the merger agreement, issues that remained open with regard to the merger agreement, and the status of the proposed short-term liquidity facility for the Company’s convertible notes, which at that time included a provision that would possibly preclude funding in the event the Company entered into a transaction that resulted in a change in control with any party other than Blackstone. The Company’s advisors subsequently negotiated this provision to require the lenders to fund even in the event the Company entered into an alternative transaction with a party other than Blackstone after signing a merger agreement with Blackstone. The Board also discussed the size of the reverse termination fee (in light of, among other things, the “option” on the Company, the cost of entering into the proposed transaction and the proposed short-term liquidity facility compared to the cost of remaining a stand-alone company and independently financing the convertible notes, and the standard for comparable transactions in the current market), the status of the go-shop formulation, and expense provisions.

On June 17, 2008, representatives from Blackstone met with Mr. Higby, Mr. Karkenny and a representative of Gibson Dunn at the Irvine, California offices of Gibson Dunn, to discuss issues relating to the timing of the announcement of a potential deal, diligence priorities, organizational issues and process.

 

On June 18, 2008, the Board of Directors met in an executive session with representatives from Munger Tolles. During this executive session, the Board of Directors discussed the terms and conditions of the proposed merger agreement with Blackstone as well as the terms of the bridge financing relating to Apria’s convertible notes. The Board of Directors considered the benefits and detriments of approving the transaction with Blackstone. Subsequent to the executive session, representatives of Goldman Sachs and Gibson Dunn joined the meeting to review the terms of the merger agreement and the stand-alone financing, and to discuss outstanding issues. Following further discussion, the Board of Directors requested that Goldman Sachs provide its view regarding the fairness from a financial point of view of the $21.00 per share in cash to be received by the holders of Apria’s common stock pursuant to the proposed merger agreement. Representatives of Goldman Sachs delivered its financial analyses to the Board of Directors. Goldman Sachs then rendered its oral opinion, subsequently confirmed by delivery of a written opinion dated June 18, 2008, that, as of that date, and based upon and subject to the factors and assumptions set forth in the opinion, the $21.00 per share in cash to be received by the holders of shares of Apria common stock pursuant to the merger agreement was fair from a financial point of view to such holders. The full text of the written opinion of Goldman Sachs, dated June 18, 2008, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with such opinion, is attached as Appendix C to this proxy statement. See “— Opinion of Apria’s Financial Advisor” beginning on page [ • ] for a description of the presentation of Goldman Sachs. Following these discussions, the Board of Directors discussed the transaction, the overview given by Gibson Dunn and the presentation by Goldman Sachs. After the discussion, the Company’s Board of Directors (other than Mr. Higby and Dr. Payson, who recused themselves from the vote at the request of the Board because of Mr. Higby’s potential role as an employee of the surviving corporation after the merger, and Dr. Payson’s relationship with a potential bidder other than Blackstone), unanimously adopted and approved the merger agreement and the transactions contemplated by the merger agreement, and determined that the merger agreement and the transactions contemplated by the merger agreement were fair to and in the best interests of Apria and its stockholders. Apria’s Board of Directors further directed management to include in this proxy statement its recommendation that Apria’s stockholders vote for the approval of the merger agreement and the consummation of the merger. Certain of the factors considered by the Company’s Board of Directors are described in greater detail under the heading “— Recommendation of the Company’s Board of Directors” beginning on page [ • ].

 

Following the execution of the merger agreement, at the direction of the Board of Directors, Goldman Sachs initiated contact with thirty-one potential financial bidders and twenty-two potential strategic bidders. In addition, Company F, a financial sponsor, contacted Goldman Sachs to express an interest in being included in the process. Company F executed a confidentiality agreement with Apria on July 2, 2008 and was provided access to due diligence on July 3, 2008. On July 8, 2008, Company F executed an amended confidentiality agreement and submitted a diligence request list to the Company. Representatives of Gibson Dunn and Goldman Sachs held various conference calls with Company F and its legal counsel, regarding the diligence request and Company F’s interest in the process.

 

At the time of the filing of this proxy statement, neither Company F nor any other potential bidder had submitted an indication of interest to acquire the Company.

 

At the time of the filing of this proxy statement, neither Blackstone nor the Company has entered into any employment agreements with members of Company’s management or engaged in discussions with management regarding employment arrangements in connection with the proposed transaction, nor has the Company materially amended or modified any existing employment agreements.

 

 

After careful consideration, Apria’s Board of Directors (other than Mr. Higby and Dr. Payson, who recused themselves from the vote at the request of the Board because of Mr. Higby’s potential role as an employee of the surviving corporation after the merger, and Dr. Payson’s relationship with a potential bidder other than Blackstone),

approved and authorized the merger agreement by unanimous vote on June 18, 2008, determined that the merger and the merger agreement are advisable and fair to, and in the best interests of, Apria and its stockholders, declared the merger agreement advisable, determined to submit the merger agreement to the Company’s stockholders to vote upon its adoption, and recommended to the Company’s stockholders that they vote in favor of the adoption of the merger agreement and the merger. In reaching its determination, the members of the Company’s Board of Directors consulted with its legal advisors, management, as well as the Company’s financial and legal advisors, considered the short-term and long-term interests and prospects of Apria and its stockholders, and considered a number of factors, including among others, the following:

 

 

 

 

The Company’s Board of Directors also considered the following adverse factors associated with the merger, among others:

 

 

In reaching the determination described above, the Company’s Board of Directors (other than Mr. Higby and Dr. Payson, who recused themselves from the vote at the request of the Board because of Mr. Higby’s potential role as an employee of the surviving corporation after the merger, and Dr. Payson’s relationship with a potential bidder other than Blackstone), passed the following resolutions, unanimously:

 

 

The foregoing discussion of the information and factors considered by the Company’s Board of Directors is not intended to be exhaustive but, the Company believes, includes all material factors considered by the Company’s Board of Directors. In view of the wide variety of factors considered in connection with their respective evaluations of the merger and the complexity of these matters, the Company’s Board of Directors found it impracticable to, and did not, quantify or otherwise attempt to assign relative weight to each of the specific factors considered in reaching its determination. Rather, the Company’s Board of Directors made its judgment based on the total mix of information available to it concerning the overall effect of the merger on the Company’s stockholders compared to any alternative transaction, or to remaining a stand-alone company, and the judgments of individual directors may have been influenced to a greater or lesser degree by their individual views with respect to different factors.

 

Apria’s Board of Directors (other than Mr. Higby and Dr. Payson, who recused themselves from the vote at the request of the Board because of Mr. Higby’s potential role as an employee of the surviving corporation after the merger, and Dr. Payson’s relationship with a potential bidder other than Blackstone), has approved and authorized the merger by unanimous vote, and recommends that you vote “FOR” adoption of the merger agreement and the merger.

 

The Company’s purpose for engaging in the merger is to enable its stockholders to receive $21.00 in cash, without interest and less any applicable withholding taxes, per share, representing a premium of 26.9% based on the Company’s June 16, 2008 closing market price. The Company also determined to undertake the merger at this time based on the conclusions, determinations and reasons of the Company’s Board of Directors described in detail above under “— Background of the Merger” beginning on page [ • ] and “— Recommendation of the Company’s Board of Directors” beginning on page [ • ].

 

Goldman Sachs rendered its opinion to the Company’s Board of Directors that, as of June 18, 2008 and based upon and subject to the factors and assumptions set forth therein, the $21.00 per share in cash to be received by the holders of shares of Company common stock pursuant to the merger agreement was fair from a financial point of view to such holders.

 

The full text of the written opinion of Goldman Sachs, dated June 18, 2008, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Appendix C. Goldman Sachs provided its opinion for the information and assistance of the Company’s Board of Directors in connection with its consideration of the merger. The Goldman Sachs opinion is not a recommendation as to how any holder of the Company’s common stock should vote with respect to the merger, or any other matter.

In connection with rendering the opinion described above and performing its related financial analyses, Goldman Sachs reviewed, among other things:

 

 

Goldman Sachs also held discussions with members of the senior management of the Company regarding their assessment of past and current business operations, financial condition and future prospects of the Company. In addition, Goldman Sachs reviewed the reported price and trading activity for the Company common stock, compared certain financial and stock market information for the Company with similar information for certain other companies the securities of which are publicly traded, reviewed the financial terms of certain recent business combinations and performed such other studies and analyses, and considered such other factors, as it considered appropriate.

 

For purposes of rendering the opinion described above, Goldman Sachs relied upon and assumed, without assuming any responsibility for independent verification, the accuracy and completeness of all of the financial, legal, regulatory, tax, accounting and other information provided to, discussed with or reviewed by it. In addition, Goldman Sachs did not make an independent evaluation or appraisal of the assets and liabilities (including any contingent, derivative or off-balance-sheet assets and liabilities) of the Company or any of its subsidiaries, nor was any evaluation or appraisal of the assets or liabilities of the Company or any of its subsidiaries furnished to Goldman Sachs. Goldman Sachs’ opinion does not address any legal, regulatory, tax or accounting matters nor does it address the underlying business decision of the Company to engage in the merger or the relative merits of the merger as compared to any strategic alternatives that may be available to the Company. Goldman Sachs’ opinion addresses only the fairness from a financial point of view, as of the date of the opinion, of the $21.00 per share in cash to be received by holders of Company common stock pursuant to the merger agreement. Goldman Sachs’ opinion does not express any view on, and does not address, any other term or aspect of the merger agreement or the merger, including, without limitation, the short-term liquidity facility (as defined in the merger agreement), the fairness of the merger to, or any consideration received in connection therewith by, the holders of any other class of securities, creditors, or other constituencies of the Company or Buyer; nor as to the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of the Company or Buyer, or class of such persons in connection with the merger, whether relative to the $21.00 in cash to be received by holders of Company common stock pursuant to the merger agreement or otherwise. Goldman Sachs did not express any opinion as to the impact of the merger on the solvency or viability of the Company or Buyer or the ability of the Company or Buyer to pay its obligations when they come due. Goldman Sachs’ opinion was necessarily based on economic, monetary, market and other conditions, as in effect on, and the information made available to it as of, the date of the opinion and Goldman Sachs assumed no responsibility for updating, revising or reaffirming its opinion based on circumstances, developments or events occurring after the date of its opinion. Goldman Sachs’ opinion was approved by a fairness committee of Goldman Sachs.

 

The following is a summary of the material financial analyses delivered by Goldman Sachs to the Board of Directors of the Company in connection with rendering the opinion described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by Goldman Sachs, nor does the order of analyses described represent relative importance or weight given to those analyses by Goldman Sachs. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone

not a complete description of Goldman Sachs’ financial analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before June 18, 2008 and is not necessarily indicative of current market conditions.

 

Historical Stock Trading Analysis.  Goldman Sachs reviewed the historical trading prices for the Company common stock for the twelve month period ended June 16, 2008. In addition, Goldman Sachs analyzed the consideration to be received by holders of the Company common stock pursuant to the merger agreement in relation to market prices of the Company common stock.

 

The following table presents the results of this analysis:

 

 

Selected Companies Analysis.  Goldman Sachs reviewed and compared certain financial information for the Company to corresponding financial information, ratios and public market multiples for the following publicly traded corporations in the home health care services industry:

 

 

Although none of the selected companies is directly comparable to the Company, the companies included were chosen because they are publicly traded companies with operations that for purposes of analysis may be considered similar to certain operations of the Company.

 

Goldman Sachs also calculated and compared various financial multiples and ratios based on financial data as of March 31, 2008, information it obtained from SEC filings and IBES estimates. The multiples and ratios of the Company were calculated using the Company closing price on June 16, 2008. The multiples and ratios of the Company were based on information provided by the Company’s management and IBES estimates. The multiples and ratios for each of the selected companies were based on the most recent publicly available information. With respect to the selected companies, Goldman Sachs calculated the following and compared them to the results for the Company:

 

 

The following table presents the results of this analysis:

 

 

Goldman Sachs also calculated the selected companies’ estimated calendar years 2008 and 2009 price to earnings ratios and compared them to the results for the Company. The following table presents the results of this analysis:

 

 

Goldman Sachs also considered latest twelve months EBITDA margins and EBIT margins, and five-year earnings per share compound annual growth rate provided by the Company’s management and IBES estimates.

 

The following table presents the results of this analysis:

 

 

Analysis at Various Prices.  Goldman Sachs performed certain analyses, based on historical information, projections provided by management of the Company and IBES estimates. Assuming a share price of $21.00 per share of the Company common stock, Goldman Sachs calculated for the Company the implied total equity consideration on a fully diluted basis (including outstanding stock options computed using the treasury method) and implied enterprise value, the ratio of implied enterprise value to latest twelve months revenues, the ratio of implied enterprise value to latest twelve months EBITDA, and the ratio of price to latest twelve months earnings.

The following table presents the results of this analysis:

 

 

Illustrative Discounted Cash Flow Analysis.  Goldman Sachs performed an illustrative discounted cash flow analysis to determine a range of implied present value per share of the Company common stock. Forecasted financial information used in this analysis was based on the Company’s projections provided by management. Goldman Sachs applied discount rates ranging from 9.0% to 11.0% and terminal 2012 EBITDA multiples ranging from 4.0x to 6.0x. This analysis resulted in a range of implied present values per share of the Company’s common stock of $16.90 to $30.96.

 

Using the same projections provided by the Company’s management, Goldman Sachs also performed a sensitivity analysis to analyze the effect of increases or decreases in percentage of revenue achieved and EBITDA margin. The analysis utilized a range of 95% — 105% of projected revenue achieved and a range of 11.4% — 15.4% EBITDA margin and a terminal 2012 EBITDA multiple of 5.0x. This analysis resulted in a range of implied present values per share of the Company’s common stock of $12.93 to $28.72.

 

Illustrative Present Value of Future Stock Price Analysis.  Goldman Sachs performed an illustrative analysis of the implied present value of the future price per share of Company common stock, which is designed to provide an indication of the present value of a theoretical future value of a company’s equity as a function of such company’s estimated future earnings and its assumed price to future earnings per share multiple. For this analysis, Goldman Sachs used the financial information for the Company prepared by the Company’s management for each of the fiscal years 2008 to 2010. Goldman Sachs first calculated the implied values per share of common stock for each of the fiscal years 2008 to 2010, by applying price to forward earnings per share multiples of 7.0x to 13.0x earnings per share of common stock estimates for each of the fiscal years 2008 to 2010, and then discounted 2009 and 2010 values back one year and two years, respectively, using discount rates of 10.0% and 12.5%, respectively. Using projections provided by the Company’s management, this analysis resulted in a range of implied present values of $12.42 to $28.32 per share of the Company’s common stock. Using IBES estimates, this analysis resulted in a range of implied present values of $9.46 to $25.81 per share of the Company’s common stock.

 

Illustrative Leveraged Buyout Analysis.  Goldman Sachs performed an illustrative analysis of the range of internal rates of return a financial buyer might earn if the Company was acquired in a leverage buyout transaction that closed as of September 30, 2008 at a price of $21.00 per share of the Company’s common stock. Forecasted financial information used in this analysis was based on the projections for the Company provided by the Company’s management. Based on a range of illustrative exit EBITDA multiples of 4.0x to 6.0x for the assumed exit at the end of 2010, 2011 and 2012, which reflect illustrative implied prices at which a hypothetical financial buyer might exit its investment through a sale transaction, this analysis resulted in illustrative internal rate of equity returns to a hypothetical financial buyer ranging from 4.2% to 34.7%.

Using the same projections provided by the Company’s management, Goldman Sachs also performed a sensitivity analysis to analyze the effect of increases or decreases in percentage of revenue and EBITDA margin achieved. The analysis utilized a range of 95% — 105% of projected revenue achieved and a range of 11.4% — 15.4% EBITDA margin and a terminal 2011 exit EBITDA multiple of 5.0x. This analysis resulted in illustrative internal rate of equity returns to a hypothetical financial buyer ranging from 4.0% to 24.3%.

 

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Goldman Sachs’ opinion. In arriving at its fairness determination, Goldman Sachs considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, Goldman Sachs made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the above analyses as a comparison is directly comparable to the Company or the contemplated transaction.

 

Goldman Sachs prepared these analyses for purposes of Goldman Sachs’ providing its opinion to the Company’s Board of Directors as to the fairness from a financial point of view of the $21.00 per share in cash to be received by the holders of shares of Company common pursuant to the merger agreement. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of the Company, Buyer, Merger Sub, Goldman Sachs or any other person assumes responsibility if future results are materially different from those forecast.

 

The merger consideration was determined through arm’s-length negotiations between the Company and Buyer and was approved by the Company’s Board of Directors (other than Mr. Higby and Dr. Payson, who recused themselves from the vote at the request of the Board because of Mr. Higby’s potential role as an employee of the surviving corporation after the merger, and Dr. Payson’s relationship with a potential bidder other than Blackstone). Goldman Sachs provided advice to the Company during these negotiations. Goldman Sachs did not, however, recommend any specific amount of consideration to the Company or its Board of Directors or that any specific amount of consideration constituted the only appropriate consideration for the merger.

 

As described above, Goldman Sachs’ opinion to the Company’s Board of Directors was one of many factors taken into consideration by the Company’s Board of Directors in making its determination to approve the merger agreement. The foregoing summary does not purport to be a complete description of the analyses performed by Goldman Sachs in connection with the fairness opinion and is qualified in its entirety by reference to the written opinion of Goldman Sachs attached as Appendix C.

 

Goldman, Sachs & Co. and its affiliates are engaged in investment banking and financial advisory services, securities trading, investment management, principal investment, financial planning, benefits counseling, risk management, hedging, financing, brokerage activities and other financial and non-financial activities and services for various persons and entities. In the ordinary course of these activities and services, Goldman, Sachs & Co. and its affiliates may at any time make or hold long or short positions and investments, as well as actively trade or effect transactions, in the equity, debt and other securities (or related derivative securities) and financial instruments (including bank loans and other obligations) of the Company, Buyer, Blackstone and any of their respective affiliates or portfolio companies or any currency or commodity that may be involved in the transaction for their own account and for the accounts of their customers. Goldman Sachs acted as financial advisor to the Company in connection with, and participated in certain of the negotiations leading to, the transaction contemplated by the merger agreement. In addition, Goldman Sachs has provided certain investment banking and other financial services to the Company and its affiliates from time to time. Goldman Sachs also has provided and is currently providing certain investment banking and other financial services to Blackstone and its affiliates and portfolio companies from time to time, including having acted as joint lead

managing underwriter with respect to the public offering of 13,684,100 shares of common stock of New Skies Satellites NV, a portfolio company of Blackstone (“New Skies”), in May 2005; as joint lead managing underwriter with respect to the public offering of 33,350,000 shares of common stock of Nalco Holding Company, a portfolio company of Blackstone, in August 2005; as financial advisor to New Skies in connection with its sale in December 2005; as financial advisor to Freescale Semiconductor, Inc., a portfolio company of Blackstone, in December 2006; as financial advisor to Houghton Mifflin Company, a portfolio company of Blackstone, in December 2006; as co-manager with respect to the initial public offering of common units representing limited partner interests of Blackstone in June 2007; as joint lead manager in the initial public offering of common stock of Orbitz LLC, a portfolio company of Blackstone, in July 2007; and as counterparty to certain interest rate and inflation swap transactions for TRW Automotive Inc., a portfolio company of Blackstone, in March 2008. Goldman Sachs also may provide investment banking and other financial services to the Company, Buyer, Blackstone and their respective affiliates and portfolio companies in the future. In connection with the above-described services Goldman Sachs has received, and may receive in the future, compensation. In addition, affiliates of Goldman, Sachs & Co. have co-invested with affiliates of Blackstone from time to time and may do so in the future. Affiliates of Goldman, Sachs & Co. also have invested in limited partnership units and managed private equity funds of affiliates of Blackstone and may do so in the future.

 

The Company’s Board of Directors selected Goldman Sachs as its financial advisor because it is an internationally recognized investment banking firm that has substantial experience in transactions similar to the merger. Pursuant to a letter agreement dated January 29, 2008, the Company engaged Goldman Sachs to act as its financial advisor in connection with the contemplated merger. Pursuant to the terms of this engagement letter, the Company has agreed to pay Goldman Sachs a transaction fee of 0.73% of the aggregate merger consideration (which would be approximately $11.8 million), $1.5 million of which is payable upon execution of the merger agreement and the remainder of which is payable upon consummation of the merger, plus reasonable expenses. In addition, the Company has agreed to reimburse Goldman Sachs for its expenses, including attorneys’ fees and disbursements, and to indemnify Goldman Sachs and related persons against various liabilities, including certain liabilities under the federal securities laws.

 

Apria’s senior management does not, as a matter of course, publicly disclose projections as to its future financial performance or earnings for periods beyond one year due to the unpredictability of the underlying assumptions and estimates. However, Apria’s senior management did provide certain financial forecasts of Apria’s operating performance to potential acquirors and their advisors and potential financing sources, as well as to Apria’s Board of Directors, in connection with Apria’s consideration of a possible sale transaction. See “— Background of the Merger” beginning on page [ • ]. The projections were also provided to Apria’s financial advisor, Goldman Sachs, and were utilized by Goldman Sachs, at the direction of Apria, for purposes of the financial analyses it rendered to the Board of Directors during the sales process and its analyses in connection with its opinion. See “— Opinion of Apria’s Financial Advisor” beginning on page [ • ], and “— Background of the Merger” beginning on page [ • ].

 

Apria has included in this proxy statement the projections that were deemed material by Apria for purposes of considering and evaluating the merger. The inclusion of these projections or any other projections provided in connection with the transaction should not be regarded as a representation by Apria, its Board of Directors, Buyer, Merger Sub, Goldman Sachs or any other recipient of this information that any of them considered, or now considers, the projections to be necessarily representative of actual future results.

 

Apria believes that the assumptions Apria’s management used as a basis for the projections were reasonable at the time the projections were prepared, given information Apria’s management had at the time. However, except to the extent required by applicable federal securities laws, Apria does not intend, and expressly disclaims any responsibility to, update or otherwise revise the projections to reflect circumstances existing after the date when prepared or to reflect the occurrence of future events even in the event that any of the assumptions underlying the projections are shown to be in error. The internal financial forecasts upon which these projections were based are subjective in many respects and are subject to various interpretation.

Although the projections are presented with numerical specificity, the projections reflect numerous assumptions with respect to industry performance, general business, economic, market, regulatory and financial conditions and other matters, all of which are difficult to predict and many of which are beyond Apria’s control. The projections are also subject to significant uncertainties in connection with changes to Apria’s business and its financial condition and results of operations, and include numerous estimates and assumptions related to Apria’s business that are inherently subject to significant economic, political and competitive uncertainties, including those factors described under “Cautionary Statements Concerning Forward-Looking Statements” beginning on page [ • ] and “Risk Factors” incorporated herein by reference from the Company’s Annual Report on Form 10-K, filed on February 29, 2008, all of which are difficult to predict and many of which are beyond Apria’s control. As a result, although the projections set forth below were prepared in good faith based upon assumptions believed to be reasonable at the time the projections were prepared, there can be no assurance that the projected results will be realized or that actual results will not be significantly higher or lower than projected. Since the projections below cover multiple years, such information by its nature becomes less reliable with each successive year. For the foregoing reasons, the inclusion of projections in this proxy statement should not be regarded as an indication that such projections will be necessarily predictive of actual future events, and they should not be relied on as such.

 

The following projections were not prepared with a view to public disclosure and are included in this proxy statement only because such information was made available, in whole or in part, to potential acquirors and their advisors and potential financing sources in connection with Apria’s consideration of a possible sale transaction in connection with their due diligence review of Apria, as well as to the Board of Directors of the Company, in connection with their consideration of a possible transaction. The projections were not prepared with a view to compliance with published guidelines of the SEC regarding projections, the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information, or United States generally accepted accounting principles, or GAAP. Furthermore, the Company’s auditor has not examined, compiled or otherwise applied procedures to the projections and, accordingly, assumes no responsibility for, and expresses no opinion on them.

 

A summary of the initial projections prepared by senior management in May 2008 that were deemed material by Apria are as follows:

 

 

 

 

Subsequently, in June 2008, senior management updated the foregoing projections in order to reflect the Company’s most recent performance. A summary of such projections that were deemed material by Apria are as follows:

 

 

 

 

Readers of this proxy statement are cautioned not to place undue reliance on the specific portions of the financial projections set forth above. No one has made or makes any representation to you regarding the information included in these projections or the future financial results of Apria.

 

If the merger is completed, all of the equity interests in Apria will be owned by Buyer. No current Apria stockholder will have any ownership interest in, or be a stockholder of, Apria. As a result, the Company’s stockholders will no longer benefit from any increases in Apria’s value, nor will they bear the risk of any decreases in Apria’s value. Following the merger, Buyer will benefit from any increases in the value of Apria and also will bear the risk of any decreases in the value of Apria.

 

As a part of the merger, each stockholder will be entitled to receive $21.00 in cash, without interest and less any applicable withholding taxes, per share for each share of Apria common stock held. Except as otherwise agreed by Buyer and the holder, each holder of options, stock appreciation rights, restricted stock, restricted stock units and restricted stock purchase rights outstanding at the effective time of the merger, whether or not vested, will be entitled to receive, upon the completion of the merger, a cash payment equal to the amount by which $21.00 exceeds the exercise price, purchase price or base amount per share previously subject to such award, multiplied by the number of shares of Apria common stock underlying the award. At the effective time of the merger, all awards that have not been exercised will be cancelled.

 

Apria’s common stock constitutes “margin securities” under the regulations of the Board of Governors of the Federal Reserve System, which has the effect, among other things, of allowing brokers to extend credit on collateral of the Apria common stock. As a result of the merger, the Apria common stock will no longer constitute “margin securities” for purposes of the margin regulations of such Board of Governors and, therefore, will no longer constitute eligible collateral for credit extended by brokers.

 

Apria’s common stock is registered as a class of equity security under the Securities Exchange Act of 1934 (the “Exchange Act”). Registration of the Apria common stock under the Exchange Act may be terminated upon application of Apria to the SEC if the Apria common stock is not listed on a national securities exchange and there are fewer than 300 record holders of the outstanding shares. Termination of registration of the Apria common stock under the Exchange Act would substantially reduce the information required to be furnished by Apria to its stockholders and the SEC, and would make certain provisions of the Exchange Act, such as the short-swing trading provisions of Section 16(b) of the Exchange Act and the requirement of furnishing a proxy statement in connection with stockholders meeting pursuant to Section 14(a) of the Exchange Act, no longer applicable to Apria. If Apria (as the entity surviving the merger) completed a registered exchange or public offering of debt securities, however, it would be required to file periodic reports with the SEC under the Exchange Act for a period of time following that transaction.

 

The HSR Act requires Apria, Buyer and Parent to file notification and report forms with respect to the merger and related transactions with the Antitrust Division of the U.S. Department of Justice (the “DOJ”) and the U.S. Federal Trade Commission (the “FTC”). The parties thereafter are required to observe a waiting period before completing the merger. The parties filed the necessary forms with the DOJ and the FTC on June 27, 2008. On July 8, 2008, the FTC granted early termination of the HSR Act waiting period for the merger.

 

Equity Financing

 

Buyer has received an equity commitment letter from Parent, pursuant to which Parent has committed to purchase or cause to be purchased the equity of Buyer for an aggregate cash purchase price of $700 million in connection with the proposed merger. Parent has the right to effect the purchase of the equity directly or indirectly through affiliated entities or other designated co-investors, provided that this will not affect the equity commitment obligations of Parent. The obligations of Parent to fund or cause the funding of the equity commitment are subject to the satisfaction or waiver by Buyer and Merger Sub (as determined by Parent) of each of the conditions precedent to Buyer and Merger Sub’s obligations to complete the merger, and the substantial concurrent completion of the merger in accordance with the terms of the merger agreement. In the event that Buyer does not require all of the equity commitment in order to consummate the merger and pay any related fees and expenses, the amount to be funded will be reduced in a manner determined by Parent.

 

Debt Financing

 

Buyer has received a fully executed debt commitment letter (the “debt commitment letter”) dated as of June 18, 2008, from Bank of America, N.A. (“Bank of America”). Banc of America Bridge LLC (“BofA Bridge”), Banc of America Securities LLC (“BAS”), Wachovia Bank, National Association (“Wachovia”), Wachovia Investment Holdings, LLC (“Wachovia Bridge”), Wachovia Capital Markets, LLC (“WCM”) and Barclays Capital (“Barclays” and, together with Bank of America, BofA Bridge, BAS, Wachovia, Wachovia Bridge and WCM, each, a “lender” and, collectively, the “lenders”) pursuant to which certain of the lenders have collectively committed to provide Buyer with financing in an aggregate amount of up to $1,150,000,000 (the “debt financing” and, collectively with the equity financing, the “financing”). Pursuant to the debt commitment letter and subject to the conditions set forth therein:

 

 

The debt commitments expire on the earlier of (i) February 15, 2009 (and, under certain circumstances, the commitments with respect to the ABL facility may expire prior to that date) and (ii) any termination of the merger agreement not arising out of action or inaction by any lender. The documentation governing the bank credit facilities, the senior secured notes and the senior secured bridge loan facility has not been finalized and, accordingly, the actual terms of such facilities may differ from those described in this proxy statement.

 

Pursuant to the merger agreement, Buyer and Merger Sub are obligated to use their reasonable best efforts to obtain the debt financing set forth in the debt commitment letter at or prior to the closing of the merger. In the event that any portion of the debt financing becomes unavailable on the terms contemplated in the debt commitment letter, Buyer must use its reasonable best efforts to arrange alternative financing from alternative sources on terms not materially less favorable to Buyer in the aggregate (as determined in the good faith judgment of Buyer).

The availability of the bank credit facilities and the senior secured bridge loan facility is subject to, among other things:

 

 

As an inducement for Apria to enter into the merger agreement, Parent entered into a Limited Guarantee dated as of June 18, 2008 in favor of and for the benefit of Apria. The Limited Guarantee is referred to herein as the “guarantee.” Under the guarantee, Parent agreed to irrevocably and unconditionally guarantee and perform the payment obligations of Buyer with respect to the reverse termination fee payable by Buyer to Apria, in an amount not to exceed $37,900,000.

 

In considering the recommendation of the Company’s Board of Directors, you should be aware that some executive officers and directors of Apria have various relationships with Apria or interests in the merger, including those described below, that are different from or in addition to your interests as a stockholder and that may present actual or potential conflicts of interest. The members of the Company’s Board of Directors were aware of such interests when deciding to approve the merger.

 

Indemnification of Directors and Officers; Directors’ and Officers’ Insurance.  Buyer has agreed to cause the surviving corporation in the merger and its subsidiaries to maintain for a period of six years from and after the completion of the merger, policies of directors and officers’ liability insurance covering each person who was a director or an officer of Apria or any of its subsidiaries at any time prior to completion of the merger, with respect to claims arising from facts or events that occurred on or prior to the completion of the merger, and providing at least the same coverage and amounts and containing terms that are not less advantageous to the insured parties than those contained in the policies of directors’ and officers’ liability insurance in effect on June 18, 2008; provided, that, in no event will Buyer be required to maintain such policies if it is required to pay aggregate annual premiums in excess of 275% of the amount of the annual premium being paid by Apria prior to completion of the merger. If the cost of such policy is in excess of such amount, it will only be obligated to provide a policy with the best coverage Buyer is reasonably able to obtain for such amount. In addition, for a period of six years after the completion of the merger, Buyer has agreed to comply with all obligations of Apria that were in existence or in effect as of June 18, 2008, under law, provisions in Apria’s certificate of incorporation, bylaws or contracts, and to indemnify and hold harmless (and also advance expenses as incurred to the fullest extent permitted under applicable law) each present and former director or officer of Apria or any of its subsidiaries against all losses, claims, damages, costs, expenses (including, without limitation attorneys’ fees and expenses), settlement payments or other liabilities arising out of or in connection with acts or omissions (other than illegal acts or fraud), by them in their capacities as such, whether asserted or claimed before, at, or after the consummation of the merger. See “The Merger Agreement — Covenants of Parent, Buyer and/or Merger Sub — Indemnification and Insurance.”

Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units and Restricted Stock Purchase Rights.  The merger agreement provides that except as otherwise agreed by Buyer and the holder, each option, stock appreciation right, share of restricted stock, restricted stock unit and restricted stock purchase right that is outstanding immediately prior to the completion of the merger, including all such awards held by the Company’s executive officers and directors, will be canceled, and the holder of each award will be entitled to receive upon completion of the merger a cash payment for each share of Apria common stock subject to the award equal to the excess, if any, of $21.00 over the exercise price, purchase price or base amount per share previously subject to such award, without interest and less any required withholding taxes.

 

The following table sets forth, as of July 17, 2008, for each of the Company’s directors and executive officers, the approximate cash proceeds that each of the Company’s directors and executive officers will receive at the completion of the merger (without accounting for any applicable withholding taxes), on the basis of the shares of Apria common stock, in-the-money options, restricted stock, restricted stock units and restricted stock purchase rights to purchase shares of Apria common stock that they hold at the effective time of the merger.

 

 

 

 

For additional information regarding the nature of each director’s and executive officer’s beneficial ownership of the Company’s common stock, please see “Security Ownership of Certain Beneficial Owners and Management” beginning on page [ • ].

 

Employment and Severance Agreements

 

Lawrence M. Higby.  The Company’s employment agreement with Mr. Higby provides for the following payments upon a termination of the executive’s employment with the Company either by the Company without “cause” or by the executive for “good reason” (each as defined below) equal to three times the sum of (i) the

executive’s base salary as in effect at the time of termination; (ii) the average of the executive’s annual bonuses with respect to the Company’s two most recently completed fiscal years; and (iii) the annual cost for the executive to obtain medical, dental and vision insurance under Consolidated Omnibus Budget Reconciliation Act, referred to herein as “COBRA,” which annual amount is estimated to be $19,583. In addition, Mr. Higby will be entitled to reimbursement of office and secretarial support expenses at a cost not to exceed $50,000 for a period of one year following termination. The employment agreement with Mr. Higby also provides that he will be entitled to indemnification on an after-tax basis in the event he incurs an excise tax under Section 4999 of the Internal Revenue Code.

 

Daniel E. Greenleaf.  The Company’s employment agreement with Mr. Greenleaf provides for the following payments upon a termination of the executive’s employment with the Company either by the Company without “cause” or by the executive for “good reason” (each as defined below) equal to two times the sum of (i) the executive’s base salary as in effect at the time of termination; (ii) the average of the executive’s annual bonuses with respect to the Company’s two most recently completed fiscal years; and (iii) the annual cost for the executive to obtain medical, dental and vision insurance under COBRA, which annual amount is estimated to be $23,382. The employment agreement with Mr. Greenleaf also provides that in the event payments to him would otherwise be subject to the excise tax under Section 4999 of the Internal Revenue Code, he will either be entitled to full payment of such amounts or payment of a lesser amount such that no payment to him is subject to the excise tax, whichever results in the greatest after-tax benefit to Mr. Greenleaf.

 

Chris A. Karkenny.  The Company’s employment agreement with Mr. Karkenny provides for the following payments upon a termination of the executive’s employment with the Company either by the Company without “cause” or by the executive for “good reason” (each as defined below) equal to two times the sum of (i) the executive’s base salary as in effect at the time of termination; (ii) the average of the executive’s annual bonuses with respect to the Company’s two most recently completed fiscal years (in the event of a termination in 2008 the average of the annual bonuses will be deemed to be equal to the average of the executive’s annual bonus for 2007 and the executive’s target bonus for the year of termination); and (iii) the annual cost for the executive to obtain medical, dental and vision insurance under COBRA, which annual amount is estimated to be $9,959. The employment agreement with Mr. Karkenny also provides that he will be entitled to indemnification on an after-tax basis in the event he incurs an excise tax under Section 4999 of the Internal Revenue Code.

 

Lawrence A. Mastrovich.  The Company’s employment agreement with Mr. Mastrovich provides for the following payments upon a termination of the executive’s employment with the Company either by the Company without “cause” or by the executive for “good reason” (each as defined below) equal to two times the sum of (i) the executive’s base salary as in effect at the time of termination; (ii) the average of the executive’s annual bonuses with respect to the Company’s two most recently completed fiscal years; and (iii) the annual cost for the executive to obtain medical, dental and vision insurance under COBRA, which annual amount is estimated to be $25,159. The employment agreement with Mr. Mastrovich also provides that he will be entitled to indemnification on an after-tax basis in the event he incurs an excise tax under Section 4999 of the Internal Revenue Code.

 

William Monast.  The Company’s severance agreement with Mr. Monast provides for the following payments upon a termination of the executive’s employment with the Company either by the Company without “cause” or by the executive for “good reason” (each as defined below) equal to one times the sum of (i) the executive’s base salary as in effect at the time of termination; (ii) the average of the executive’s annual bonuses with respect to the Company’s two most recently completed fiscal years; and (iii) the annual cost for the executive to obtain medical, dental and vision insurance under COBRA, which annual amount is estimated to be $20,127. The severance agreement with Mr. Monast also provides that in the event payments to him would otherwise be subject to the excise tax under Section 4999 of the Internal Revenue Code, such payments will be automatically reduced such that no payment to him is subject to such excise tax.

Noncompetition Agreements

 

The Company’s noncompetition agreements with Mr. Greenleaf, Mr. Karkenny and Mr. Monast each provide for a payment of $750,000 upon a termination of the executive’s employment with the Company either by the Company without cause or by the executive for good reason, in each case, during the period that begins with the first to occur of (i) the initial public announcement of a change of control, or (ii) the ninetieth (90th) day preceding a change of control and ends two years following such change of control. The payments under these noncompetition agreements are contingent upon the affected executive’s compliance with the post-termination noncompetition covenant contained therein.

 

Definition of “cause” and “good reason” in Employment Agreements, Severance Agreements and Noncompetition Agreements

 

For purposes of the employment and severance agreements, as well as the noncompetition agreements, during the period that begins with the first to occur of (i) the initial public announcement of a change of control, or (ii) the ninetieth day preceding a change of control, and ends two years following such change of control, “cause” shall mean only the occurrence of either or both of the following: (i) the executive’s conviction for committing an act of fraud, embezzlement, theft, or other act constituting a felony; or (ii) the willful engaging by the executive in misconduct that is significantly injurious to the Company.

 

For purposes of the employment and severance agreements, as well as the noncompetition agreements, during the period that begins with the first to occur of (i) the initial public announcement of a change of control, or (ii) the ninetieth day preceding a change of control, and ends two years following such change of control, “good reason” shall mean, without the executive’s written consent, the occurrence of any of the following: (i) a material reduction in the nature, status or scope of the executive’s authorities, duties, and/or responsibilities from their level in effect on the day immediately prior to the change of control; (ii) a reduction in the executive’s base salary from its highest level in effect at any point in the three months preceding the change of control or a significant reduction in the executive’s aggregate incentive opportunities under the Company’s short and/or long-term incentive programs, as such opportunities exist immediately prior to the change of control; (iii) the failure of the Company to maintain the executive’s relative level of coverage and accruals under the Company’s employee benefit and/or retirement plans, policies, practices or arrangements in which the executive participates immediately prior to the change of control; (iv) the executive is informed by the Company that his principal place of employment for the Company will be relocated to a location that will result in an increase of more than thirty miles in the executive’s one-way commute; and (v) for purposes of the employment agreements (but not Mr. Monast’s severance agreement or the noncompetition agreements), the Company’s not permitting the executive to continue to serve in a mutually acceptable senior executive position. In addition, (x) for purposes of Mr. Karkenny’s employment and noncompetition agreements, “good reason” also includes the executive ceasing to serve in his current position with a corporation with publicly traded securities; and (y) for purposes of Mr. Higby’s employment agreement, “good reason” also includes the occurrence of a change of control followed by Mr. Higby’s written notice of his resignation at any time concurrent with or during the six-month period following such change of control.

 

The merger, if consummated, will constitute a change of control pursuant to the above described employment and severance agreements, as well as the non-competition agreements.

 

Retention Bonuses

 

In connection with the merger, it is contemplated that the Apria will pay retention or “stay” bonuses to certain of its current employees, in an aggregate amount not to exceed $5 million. The individuals eligible to receive a stay bonus, the amount of each stay bonus and the payment schedule and terms of each stay bonus are subject to the approval of Buyer.

 

New Management Arrangements

 

As of the date of this proxy statement, neither the Company nor Buyer have entered into any employment agreements with our management or engaged in discussions with management regarding employment

arrangements in connection with the merger, nor has the Company materially amended or modified any existing employment agreements.

 

Grantor Trusts.

 

Prior to the effective time of the merger, the Company has agreed to take all actions as may be reasonably necessary to cause each employment agreement or severance agreement between the Company and any of its employees to be amended such that in no event will the Company and/or Buyer (or their respective affiliates) be required, as a result of the merger or any transaction or event contemplated by this merger agreement, to fund, through a grantor trust described in Section 671 of the Code or similar arrangement, the payment of any amounts that are or could become payable to the employee pursuant to such agreement and/or any other employee plan.

 

The discussion of the provisions set forth in this section is not a complete summary regarding your appraisal rights under Delaware law and is qualified in its entirety by reference to the text of Section 262 of the General Corporation Law of the State of Delaware (the “DGCL”), a copy of which is attached to this proxy statement as Appendix B. Stockholders intending to exercise appraisal rights should carefully review Appendix B. Failure to follow any of the statutory procedures precisely may result in a termination or waiver of these rights.

 

If the merger is consummated, dissenting holders of the Company’s common stock who follow the procedures specified in Section 262 of the DGCL within the appropriate time periods will be entitled to have their shares of the Company’s common stock appraised by the Delaware Court of Chancery (the “Court”) and to receive the “fair value” of such shares in cash as determined by the Court, together with a fair rate of interest, if any, to be paid on the amount determined to be the fair value, in lieu of the consideration that such stockholder would otherwise be entitled to receive pursuant to the merger agreement.

 

The following is a brief summary of Section 262, which sets forth the procedures for dissenting from the merger and demanding and perfecting appraisal rights. Failure to follow the procedures set forth in Section 262 precisely could result in the loss of appraisal rights. Under Section 262, where a merger is to be submitted for approval at a meeting of stockholders, such as the special meeting, not less than twenty days prior to the meeting a constituent corporation must notify each of its holders of its stock for whom appraisal rights are available that such appraisal rights are available and include in each such notice a copy of Section 262. This proxy statement constitutes such notice to holders of the Company’s common stock concerning the availability of appraisal rights under Section 262. A stockholder of record wishing to assert appraisal rights must hold the shares of stock on the date of making a demand for appraisal rights with respect to such shares and must continuously hold such shares through the effective time of the merger.

 

Stockholders who desire to exercise their appraisal rights must satisfy all of the conditions of Section 262. A written demand for appraisal of shares must be filed with the Company before the special meeting. This written demand for appraisal of shares must be in addition to and separate from a vote against the adoption of the merger agreement, or an abstention or failure to vote for the adoption of the merger agreement. Stockholders electing to exercise their appraisal rights must not vote “FOR” the adoption of the merger agreement. Any proxy or vote against the merger will not constitute a demand for appraisal within the meaning of Section 262.

 

A demand for appraisal must be executed by or for the stockholder of record, fully and correctly, as such stockholder’s name appears on the share certificate. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, the demand must be executed by or for the record owner. If the shares are owned by or for more than one person, as in a joint tenancy or tenancy in common, the demand must be executed by or for all joint owners. An authorized agent, including an agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in exercising the demand, he is acting as agent for the record owner or owners. A person having a beneficial interest in the Company’s common stock

held of record in the name of another person, such as a broker or nominee, must act promptly to cause the record holder to follow the steps summarized herein and in a timely manner to perfect whatever appraisal rights the beneficial owner may have. If common stock is held through a broker who in turn holds the common stock through a central securities depository nominee such as Cede & Co., a demand for appraisal of such common stock must be made by or on behalf of the depository nominee and must identify the depository nominee as record holder.

 

A stockholder who elects to exercise appraisal rights should mail or deliver the required written demand to Apria at Apria Healthcare Group Inc., 26220 Enterprise Court, Lake Forest, California 92630-8405, Attention: Corporate Secretary. The demand must reasonably inform the Company of the identity of the holder as well as the holder’s intention to demand an appraisal of the “fair value” of the shares held by the holder. A stockholder’s failure to make the written demand prior to the taking of the vote on the adoption of the merger agreement at the special meeting will constitute a waiver of appraisal rights. Within ten days after the effective time of the merger, the Company must provide notice of the effective time of the merger to all of the Company’s stockholders who have complied with Section 262 and have not voted for the adoption of the merger agreement.

 

Within 120 days after the effective time of the merger (but not thereafter), any stockholder who has satisfied the requirements of entitlement to perfection of appraisal rights will be entitled, upon written request, to receive from the Company a statement listing the aggregate number of shares not voted in favor of the merger and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. The statement must be mailed within ten days after a written request therefor has been received by the Company or within ten days after the expiration of the period for delivery of demands for appraisal, whichever is later. A person who is the beneficial owner of shares of common stock held either in a voting trust or by a nominee on behalf of such person may, in such person’s own name, request from the Company the statement described in this paragraph.

 

Within 120 days after the effective time of the merger (but not thereafter), either Apria or any stockholder who has complied with the required conditions of Section 262 and who is otherwise entitled to appraisal rights may commence an appraisal proceeding by filing a petition in the Court demanding a determination of the fair value of the shares of the Company’s common stock owned by stockholders entitled to appraisal rights. The Company has no obligation or present intention to file such a petition if demand for appraisal is made, and holders should not assume that the Company will file a petition. Accordingly, it is the obligation of the holders of common stock to initiate all necessary action to perfect their appraisal rights in respect of shares of common stock within the time prescribed in Section 262. A person who is the beneficial owner of shares of common stock held either in a voting trust or by a nominee on behalf of such person may, in such person’s own name, file such a petition.

 

Upon the filing of any petition by a stockholder in accordance with Section 262, service of a copy must be made upon Apria. Apria must, within twenty days after service, file in the office of the Register in Chancery in which the petition was filed, a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom the Company has not reached agreements as to the value of their shares. The Court may require the stockholders who have demanded an appraisal for their shares (and who hold stock represented by certificates) to submit their stock certificates to the Register in Chancery for notation of the pendency of the appraisal proceedings and the Court may dismiss the proceedings as to any stockholder that fails to comply with such direction.

 

After notice to the stockholders as required by the Court, the Court is empowered to conduct a hearing on the petition to determine those stockholders who have complied with Section 262 and who have become entitled to appraisal rights thereunder. After the Court determines the holders of common stock entitled to appraisal, the appraisal proceeding shall be conducted in accordance with the rules of the Court, including any rules specifically governing appraisal proceedings. Through such proceeding, the Court shall determine the “fair value” of the shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. Unless the Court in its discretion determines otherwise for good cause shown, interest from the closing date of the merger through the date of payment of the judgment shall be compounded quarterly and shall

accrue at five percent over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the merger and the date of payment of the judgment.

 

In determining fair value, the Court will take into account all relevant factors. In Weinberger v. UOP, Inc., the Supreme Court of Delaware discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that “proof of value by any techniques or methods that are generally considered acceptable in the financial community and otherwise admissible in court” should be considered, and that “fair price obviously requires consideration of all relevant factors involving the value of a company.” The Delaware Supreme Court stated that, in making this determination of fair value, the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts that could be ascertained as of the date of the merger that throw any light on future prospects of the merged corporation. Section 262 provides that fair value is to be “exclusive of any element of value arising from the accomplishment or expectation of the merger.” In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a “narrow exclusion [that] does not encompass known elements of value,” but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Supreme Court of Delaware also stated that “elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.” Stockholders considering seeking appraisal of their shares should note that the fair value of their shares determined under Section 262 could be more, or less than, or equal to, the consideration they would receive pursuant to the merger agreement if they did not seek appraisal of their shares. Although the Company believes that the merger consideration is fair, no representation is made as to the outcome of the appraisal of fair value as determined by the Court.

 

The costs of the appraisal proceeding (which do not include attorneys’ fees or the fees and expenses of experts) may be determined by the Court and taxed against the parties as the Court deems equitable under the circumstances. Upon application of a dissenting stockholder, the Court may order all or a portion of the expenses incurred by any dissenting stockholder in connection with the appraisal proceeding, including reasonable attorneys’ fees and the fees and expenses of experts, to be charged pro rata against the value of all shares entitled to appraisal. In the absence of a determination or assessment, each party bears his, her or its own expenses. The exchange of shares for cash pursuant to the exercise of appraisal rights generally will be a taxable transaction for United States federal income tax purposes and possibly state, local and foreign income tax purposes as well. See “— Material U.S. Federal Income Tax Consequences of the Merger” on page [ • ].

 

Any stockholder who has duly demanded appraisal in compliance with Section 262 will not, after the effective time of the merger, be entitled to vote for any purpose the shares subject to demand or to receive payment of dividends or other distributions on such shares, except for dividends or distributions payable to stockholders of record at a date prior to the effective time of the merger.

 

At any time within sixty days after the effective time of the merger, any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party will have the right to withdraw his, her or its demand for appraisal and to accept the terms offered in the merger agreement. After this period, a stockholder may withdraw his, her or its demand for appraisal and receive payment for his, her or its shares as provided in the merger agreement only with the Company’s consent. No appraisal proceeding in the Court will be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just; provided, however, that any stockholder who has not commenced an appraisal proceeding or joined that proceeding as a named party may withdraw his, her or its demand for appraisal and accept the merger consideration offered pursuant to the merger agreement within sixty days after the effective time of the merger. If the Company does not approve a request to withdraw a demand for appraisal when that approval is required, or, except with respect to any stockholder who withdraws such stockholder’s right to appraisal in accordance with the proviso in the immediately preceding sentence, if the Court does not approve the dismissal of an appraisal proceeding, the stockholder will be entitled to receive only the appraised value determined in any such appraisal proceeding, which value could be more or less than, or equal to, the consideration being offered pursuant to the merger agreement. If no petition for appraisal is filed with the court within 120 days after the effective time of the merger, stockholders’ rights to appraisal (if

available) will cease. Inasmuch as the Company has no obligation to file such a petition, any stockholder who desires a petition to be filed is advised to file it on a timely basis.

 

Failure by any stockholder to comply fully with the procedures of Section 262 of the DGCL (as reproduced in Appendix B to this proxy statement) may result in termination of such stockholder’s appraisal rights. In view of the complexity of Section 262, stockholders of the Company who may wish to dissent from the merger and pursue appraisal rights should consult their legal advisors.

 

The following is a summary of the material U.S. federal income tax consequences of the merger to the Company’s stockholders. This summary is based on the Internal Revenue Code of 1986, as amended, referred to as the “Code” in this proxy statement, regulations promulgated under the Code, administrative rulings by the Internal Revenue Service and court decisions now in effect. All of these authorities are subject to change, possibly with retroactive effect, so as to result in tax consequences different from those described below. For purposes of this summary, a “U.S. holder” is a beneficial owner of Company common stock that is (i) a citizen or an individual resident of the United States; (ii) a corporation (or an entity treated as a corporation for U.S. federal income tax purposes) created or organized, or treated as created or organized, in or under the laws of the United States, any state thereof or the District of Columbia; (iii) an estate the income of which is subject to U.S. federal income taxation regardless of its source; or (iv) a trust (a) if a court within the United States is able to exercise primary supervision over its administration and one or more United States persons have authority to control all substantial decisions of the trust or (b) that has a valid election in effect under applicable Treasury regulations to be treated as a United States person. A “non-U.S. holder” is a person (other than a partnership) that is not a U.S. holder.

 

This summary does not address all of the U.S. federal income tax consequences that may be applicable to a particular holder of Apria common stock. In addition, this summary does not address the U.S. federal income tax consequences of the merger to the Company’s stockholders who are subject to special treatment under U.S. federal income tax law, including, for example, banks and other financial institutions, insurance companies, tax-exempt investors, S corporations, holders that are properly classified as “partnerships” under the Code, dealers in securities, holders who hold their Apria common stock as part of a hedge, straddle or conversion transaction, holders who acquired Apria common stock through the exercise of employee stock options or other compensatory arrangements, holders who are subject to the alternative minimum tax provisions of the Code and holders who do not hold their shares of Apria common stock as “capital assets” within the meaning of Section 1221 of the Code. Furthermore, this summary does not address the tax consequences of the merger under state, local or foreign tax laws.

 

This summary is provided for general information purposes only and is not intended as a substitute for individual tax advice. Each holder of Apria common stock should consult the holder’s individual tax advisors as to the particular tax consequences of the merger to such holder, including the application and effect of any state, local, foreign or other tax laws and the possible effect of changes to such laws.

 

U.S. Holders

 

Exchange of Apria Common Stock for Cash

 

A U.S. holder of Apria common stock receiving cash in the merger generally will recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the amount of cash received and the holder’s adjusted tax basis in the Apria common stock surrendered. Any such gain or loss generally will be capital gain or loss if the Apria common stock is held as a capital asset at the effective time of the merger. Any capital gain or loss will be taxed as long-term capital gain or loss if the holder has held the Apria common stock for more than one year prior to the effective time of the merger. If the U.S. holder has held the Apria common stock for one year or less prior to the effective time of the merger, any capital gain or loss will be taxed as short-term capital gain or loss. The deductibility of capital losses is subject to certain limitations. If a U.S. holder acquired different blocks of Apria common stock at different times or different prices, such U.S. holder must determine its tax basis and holding period separately with respect to

each block of Apria common stock and the cash that such U.S. holder receives will be allocated pro rata to each such block of Apria common stock.

 

Backup Withholding

 

Under the U.S. federal backup withholding tax rules, unless an exemption applies, the paying agent will be required to withhold, and will withhold, twenty-eight percent of all cash payments to which a holder of Apria common stock is entitled pursuant to the merger agreement unless the holder provides a tax identification number (social security number in the case of an individual or employer identification number in the case of other holders), certifies that such number is correct, and certifies that no backup withholding is otherwise required, and otherwise complies with such backup withholding rules. Each holder of Apria common stock should complete and sign the Substitute Form W-9 included as part of the letter of transmittal to be returned to the paying agent in order to provide the information and certification necessary to avoid backup withholding, unless an exemption applies and is satisfied in a manner satisfactory to the paying agent. Any amounts withheld under the backup withholding rules may be refunded or credited against the holder’s U.S. federal income tax liability, provided that the required information is furnished to the Internal Revenue Service.

 

Non-U.S. Holders

 

Exchange of Apria Common Stock for Cash

 

Any gain realized on the receipt of cash in the merger by a non-U.S. holder generally will not be subject to United States federal income tax unless:

 

 

An individual non-U.S. holder described in the first bullet point immediately above will be subject to tax on the net gain derived from the merger under regular graduated United States federal income tax rates. An individual non-U.S. holder described in the second bullet point immediately above will be subject to a flat thirty percent tax on the gain derived from the merger, which may be offset by U.S. source capital losses, even though the individual is not considered a resident of the United States. If a non-U.S. holder that is a foreign corporation falls under the first bullet point immediately above, it will be subject to tax on its net gain in the same manner as if it were a United States person as defined under the Code and, in addition, may be subject to the branch profits tax equal to thirty percent of its effectively connected earnings and profits or at such lower rate as may be specified by an applicable income tax treaty. Apria believes it is not and has not been a “United States real property holding corporation” for U.S. federal income tax purposes.

 

Backup Withholding

 

Under the U.S. federal backup withholding tax rules, unless an exemption applies, the paying agent will be required to withhold, and will withhold, twenty-eight percent of all cash payments to which a non-U.S. holder of Apria common stock is entitled pursuant to the merger agreement unless the non-U.S. holder certifies under penalty of perjury that it is a non-U.S. holder (and the payor does not have actual knowledge or reason to know that the beneficial owner is a United States person as defined under the Code) or such owner otherwise establishes an exemption. Any amounts withheld under the backup withholding rules may be refunded or credited against a non-U.S. holder’s United States federal income tax liability, if any,

provided that such non-U.S. holder furnishes the required information to the Internal Revenue Service in a timely manner.

 

Apria has been served with two complaints seeking to enjoin the proposed transaction. The first complaint was filed on June 24, 2008 by Alaska Ironworkers Pension Trust, On Behalf of Itself and All Others Similarly Situated, in the Superior Court of the State of California, County of Orange, Case No. 30-2008-00078710. The complaint names Apria, David L. Goldsmith, Vicente Anido, Jr., Terry P. Bayer, I.T. Corley, Lawrence M. Higby, Richard H. Koppes, Philip R. Lochner, Jr., Dr. Norman C. Payson and Mahvash Yazdi as defendants, and asserts a single cause of action for breach of fiduciary duty and aiding and abetting against all defendants. The complaint seeks certification of a class of all common stockholders of Apria who are being and will be harmed by defendants’ alleged actions; a declaration that the proposed transaction is in breach of defendants’ fiduciary duties, and, therefore, unlawful and unenforceable; an order enjoining defendants and others from consummating the proposed transaction; an order directing the individual defendants to exercise their fiduciary duties to obtain a transaction in the best interests of Apria’s stockholders; rescission of the proposed transaction to the extent already implemented; recovery of costs of suit, including attorneys’ fees; and other relief.

 

The second complaint was filed on July 2, 2008 by Bruce Ellis, On Behalf of Himself and All Others Similarly Situated, in the Superior Court of the State of California, County of Orange, Case No. 30-2008-00081027. The complaint names Apria, David L. Goldsmith, Vicente Anido, Jr., Lawrence M. Higby, Mahvash Yazdi, Dr. Norman C. Payson, Philip R. Lochner, Jr., Richard H. Koppes, I.T. Corley, Terry P. Bayer and Blackstone Group LP as defendants, and asserts two causes of action: (1) breach of fiduciary duty against the individual defendants, and (2) aiding and abetting the individual defendants’ breach of fiduciary duty against Blackstone Group LP. The complaint seeks certification of a class of all common stockholders of Apria who are being and will be harmed by defendants’ alleged actions; a declaration that the proposed transaction is in breach of defendants’ fiduciary duties, and, therefore, unlawful and unenforceable; an order enjoining defendants and others from consummating the proposed transaction; an order enjoining the defendants from holding a shareholder vote on the proposed transaction until curative disclosures are made; an order directing the individual defendants to exercise their fiduciary duties to obtain a transaction which is in the best interests of Apria’s shareholders; rescission of the proposed transaction to the extent already implemented; imposition of a constructive trust, in favor of plaintiff, upon any benefits improperly received by defendants; recovery of costs of suit, including attorneys’ fees; and other relief.

 

On July 15, 2008, the Court issued an Order on Consolidation of Related Actions and Appointment of Lead Counsel, where the Court, among other things, consolidated the above actions, as well as other current or future actions arising out of the same set of facts that are filed in or transferred to the Court, into a single action, titled In re Apria Healthcare Group Inc. Shareholder Litigation, Lead Case No. 30-2008-00078710. Coughlin, Stoia, Geller, Rudman & Robbins LLP was appointed as lead counsel for plaintiffs in the consolidated action. The Court further ordered plaintiffs to file a consolidated complaint within 30 days after the date of filing of this Preliminary Proxy Statement on Schedule 14A with the SEC by Apria. Pursuant to the July 15, 2008 order, the consolidated complaint will supersede all complaints filed in any consolidated action, and defendants shall respond to the consolidated complaint pursuant to a briefing schedule to be agreed upon by the parties and approved by the Court. Also pursuant to the order, defendants are not required to, and have not, responded to the foregoing complaints.

 

On June 18, 2008, Apria entered into the short term liquidity facility, a $280 million credit facility pursuant to a credit agreement with BofA Bridge, Barclays Capital and WCM. Proceeds of the short-term liquidity facility will be used to fund potential repurchases of Apria’s convertible notes and, if applicable, to pay certain tax liabilities related thereto. The loans under the short-term liquidity facility bear interest at a rate of eleven percent per year with a maturity date of March 1, 2009. The Company paid usual and customary bank fees in connection with entering into the short-term liquidity facility.

The short-term liquidity facility includes restrictions on the Company regarding additional indebtedness, business operations, liens, transfers and sales of assets, and transactions with affiliates. The short-term liquidity facility also contains customary events of default which would permit the lenders to accelerate payments under the short-term liquidity facility if not cured within applicable grace periods, including the failure to make timely payments under the short-term liquidity facility and the failure to follow certain covenants. Events of default also include the entry by the Company into an agreement or arrangement (other than the merger agreement or any agreement or arrangement with respect to certain qualifying bids to effect a transaction constituting a change of control).

 

The Company has agreed to, with the proceeds of the financing from the Buyer, repay and discharge the indebtedness pursuant to the short-term liquidity facility (or other indebtedness incurred in lieu thereof) at the effective time of the merger.

 

Subject to prior redemption by the holders thereof, the $250 million of the Company’s convertible notes will by their terms remain outstanding upon the completion of the merger, provided that pursuant to the terms of the indenture governing the convertible notes, holders of the convertible notes will have the option, as a result of the change of control resulting from the merger, to cause the Company for a limited period of time following notice from the Company of the occurrence of the merger to repurchase the convertible notes at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest.

 

Pursuant to the merger agreement, the Company has agreed to redeem on September 1, 2008 all of the convertible notes the holders of which have elected to have Apria so redeem pursuant to the current terms thereof using only the proceeds of the short-term liquidity facility or, solely to the extent such proceeds are not available, pursuant to other indebtedness incurred in lieu thereof, provided that such other indebtedness shall be prepayable by Apria at any time and shall be on market terms as of the date such other indebtedness is incurred. Further, Apria has agreed that it shall use its reasonable best efforts to obtain the financing contemplated by the short-term liquidity facility.

 

The following subsections of this proxy statement describe material aspects of the proposed merger. Although the Company believes that the description covers the material terms of the merger, this summary may not contain all of the information that is important to you. This summary is qualified in its entirety by reference to the complete text of the merger agreement, which is attached as Appendix A to this proxy statement and incorporated into this proxy statement by reference. You should carefully read this entire proxy statement and the other documents the Company refers you to for a more complete understanding of the merger. In addition, the Company incorporates important business and financial information into this proxy statement by reference. You may obtain the information incorporated by reference into this proxy statement without charge by following the instructions in the section entitled “Where Stockholders Can Find More Information” that begins on page [ • ] of this proxy statement.

 

The merger will be completed and become effective at the time the certificate of merger is filed with the Secretary of State of the State of Delaware or any later time as the Company, Buyer and Merger Sub agree upon and specify in the certificate of merger. The parties intend to complete the merger as soon as practicable following the adoption of the merger agreement by the Company’s stockholders and satisfaction or waiver of the conditions to closing of the merger set forth in the merger agreement (taking into account the timing of the marketing period). The parties to the merger agreement expect to complete the merger in the second half of 2008. Because the merger is subject to a number of conditions and to the completion of the marketing period, the exact timing of the merger cannot be determined, if it is completed at all.

 

At the effective time of the merger, Buyer will be the sole stockholder of Apria, and you will be entitled to receive $21.00 in cash, without interest and less any applicable withholding taxes, for each share of Apria common stock that you own at the time the merger is completed unless you have elected to exercise your appraisal rights. Buyer has designated the paying agent to make the cash payments contemplated by the

merger agreement. At or prior to the effective time of the merger, Buyer or Merger Sub will deposit with the paying agent, for the benefit of the holders of Apria common stock, funds in an aggregate amount equal to the merger consideration for all stockholders entitled to receive a cash payment in respect of their shares of Apria common stock. The paying agent will deliver to you your merger consideration according to the procedure summarized below.

 

At the effective time of the merger, the Company will close its stock ledger. After that time, if you present Apria common stock certificates to the surviving corporation, the surviving corporation will exchange them for cash as described in this section.

 

Promptly (but not more than three business days) after the completion of the merger, the surviving corporation will send you, or cause to be sent to you, a letter of transmittal and instructions advising you how to surrender your certificates in exchange for the merger consideration.

 

The paying agent will promptly pay you your merger consideration after you have (i) surrendered your certificates to the paying agent and (ii) provided to the paying agent any other items specified by the letter of transmittal.

 

Interest will not be paid or accrue in respect of any cash payments of merger consideration. The surviving corporation will reduce the amount of any merger consideration paid to you by any applicable withholding taxes.

 

If the paying agent is to pay some or all of your merger consideration to a person other than you, you must have your certificates properly endorsed or otherwise in proper form for transfer, and you must pay any transfer or other taxes payable by reason of the transfer or establish to the surviving corporation’s satisfaction that the taxes have been paid or are not required to be paid.

 

You should not forward your stock certificates to the paying agent without a letter of transmittal, and you should not return your stock certificates with the enclosed proxy.

 

The transmittal instructions will tell you what to do if you have lost your certificate, or if it has been stolen or destroyed. You will have to provide an affidavit to that fact and, if required by the surviving corporation, post a bond in an amount that the surviving corporation reasonably directs as indemnity against any claim that may be made against it in respect of the certificate.

 

After the completion of the merger, unless you are one of the stockholders who perfect their appraisal rights, you will cease to have any rights as an Apria stockholder.

 

One year after the merger occurs, the paying agent will return to the surviving corporation all funds in its possession, upon demand, and the paying agent’s duties will terminate. After that time, if you have not received payment of the merger consideration, you may look only to the surviving corporation, but only as a general creditor thereof, for payment of the merger consideration, without interest, subject to applicable abandoned property, escheat and similar laws. If any certificate representing Apria common stock has not been surrendered prior to one year after the completion of the merger (or such earlier date as shall be immediately prior to the date that such unclaimed funds would otherwise become subject to any abandoned property, escheat or similar law), the payment with respect to such certificate will, to the extent permitted by applicable law, become the property of the surviving corporation, free and clear of all claims or interest of any person previously entitled to any claims or interest.

 

Except as otherwise described in “The Merger Agreement — Effect of Termination; Fees and Expenses,” all fees, expenses and costs incurred in connection with the merger agreement, the merger and the other transactions contemplated thereby, including legal, accounting, investment banking and other fees, expenses and costs, will be paid by the party incurring such fees, expenses and costs, whether or not the merger is consummated. The expenses incurred in connection with the filing, printing and mailing of this proxy statement and the solicitation of the approval of the Company’s stockholders, and all filing and other fees paid to the SEC will be borne by Apria. Fees and expenses incurred or to be incurred by the Company in connection with the merger are estimated at this time to be as follows:

 

 

This section of the proxy statement summarizes the material provisions of the merger agreement, but is not intended to be an exhaustive discussion of the merger agreement. The following summary is qualified in its entirety by reference to the complete text of the merger agreement, which is attached as Appendix A to this proxy statement and incorporated into this proxy statement by reference. The rights and obligations of the parties are governed by the express terms and conditions of the merger agreement and not the summary set forth in this section or any other information contained in this proxy statement. The Company urges you to read the merger agreement carefully and in its entirety.

 

The summary of the merger agreement in this proxy statement has been included to provide you with information regarding some of its material provisions. The merger agreement contains representations and warranties made by and to the parties thereto as of specific dates. The statements embodied in those representations and warranties were made for purposes of that contract between the parties and are subject to qualifications and limitations agreed by the parties in connection with negotiating the terms of that contract. In addition, certain representations and warranties made as of a specified date may be subject to a contractual standard of materiality different from those generally applicable to public disclosures to stockholders, or may have been used for the purpose of allocating risk between the parties rather than establishing matters as facts.

 

The merger agreement provides for the merger of Merger Sub with and into Apria upon the terms, and subject to the conditions, set forth in the merger agreement. After the completion of the merger, Apria will continue as the surviving corporation and become a wholly-owned subsidiary of Buyer. If the merger is completed, Apria common stock will be delisted from the New York Stock Exchange (“NYSE”), deregistered under the Exchange Act and will no longer be publicly traded, and the Company will not file periodic reports with the SEC. The Company will be a privately held corporation and the Company’s current stockholders will cease to have any ownership interest in the Company or rights as the Company’s stockholders. Therefore, the Company’s current stockholders will not participate in any of the Company’s future earnings or growth and will not benefit from any appreciation in the Company’s value, if any.

 

At the effective time of the merger, Apria’s certificate of incorporation shall be amended to read as set forth in Exhibit A to the merger agreement and, as so amended, shall be the certificate of incorporation of the surviving corporation to the merger thereafter. The bylaws of the Company as in effect immediately prior to the completion of the merger shall remain the bylaws of the surviving corporation following the effective time.

 

After the merger, the directors of Merger Sub immediately prior to the merger shall be the directors of the surviving corporation, and the officers of Apria immediately prior to the merger shall continue to be the officers of the surviving corporation.

 

At the effective time of the merger, each share of issued and outstanding Apria common stock existing immediately prior to the merger shall, without any action on the part of the stockholder thereof, automatically be retired and cease to exist, and be converted into the right to receive, $21.00 in cash, without interest and less any applicable withholding taxes, other than the shares described below:

 

 

After the merger is effective, each holder of a certificate representing any shares of Apria common stock (other than any holders of dissenting shares) will no longer have any rights with respect to such shares, except for the right to receive $21.00 in cash, without interest and less any applicable withholding taxes, per share.

 

On or prior to the effective time of the merger, Buyer shall deposit or cause to be deposited with paying agent cash sufficient to pay the merger consideration for each holder of shares of Apria common stock (other than shares listed in the three bullet points above). Promptly after the completion of the merger, the paying agent will mail a letter of transmittal and instructions to you. The letter of transmittal and instructions will tell you how to surrender Apria common stock certificates in exchange for merger consideration.

 

You should not return your stock certificates with the enclosed proxy card, and you should not forward your stock certificates to the paying agent without a letter of transmittal.

 

You will not be entitled to receive the merger consideration until you surrender your stock certificate or certificates to the paying agent, together with a duly completed and executed letter of transmittal and any other documents as may be required by the letter of transmittal. The merger consideration may be paid to a person other than the person in whose name the corresponding certificate is registered if the certificate is properly endorsed or is otherwise in the proper form for transfer. The person requesting such payment will pay any transfer or other taxes required by reason of payment to a person other than the registered holder or establish to the satisfaction of the surviving corporation that such tax has been paid or is not applicable.

 

No interest will be paid or will accrue on the cash payable upon surrender of the certificates. Buyer and the surviving corporation will be entitled to deduct and withhold from the merger consideration payable to you such amounts as it is required to deduct and withhold with respect to the payment of such consideration under applicable tax laws and pay such withholding amounts to the appropriate taxing authorities. To the extent such withheld amounts are withheld, such withheld amounts will be treated for all purposes under the merger agreement as having been paid to the holder of Apria common stock.

 

Any portion of the merger consideration which remains unclaimed by stockholders one year after the completion of the merger shall be repaid to the surviving corporation, and any former stockholders who have not surrendered their shares in exchange for merger consideration shall thereafter look only to the surviving corporation for payment, without any interest. If any certificate representing Apria common stock has not been surrendered immediately prior to the date that such unclaimed funds would otherwise escheat or become

property of any governmental entity, the payment with respect to such certificate will, to the extent permitted by applicable law, become the property of the surviving corporation, free and clear of all claims or interest of any person previously entitled to any claims or interest.

 

Except as otherwise agreed by Buyer and the holder, each option, stock appreciation right, share of restricted stock, restricted stock unit and restricted stock purchase right (whether vested or unvested) granted under Apria’s equity compensation plans that is outstanding as of the completion of the merger shall be canceled, and the holder of such awards shall receive, in consideration for such cancellation, for each share of Apria common stock subject to such cancellation, the excess, if any, of $21.00 over the exercise price, purchase price or base amount per share previously subject to such award, without interest and less any required withholding taxes. To the extent that amounts are so deducted and withheld, such amounts will be treated as having been paid to the holder of the award.

 

The merger agreement contains representations and warranties made by the Company to Buyer and Merger Sub and representations and warranties made by Buyer and Merger Sub to the Company. The statements embodied in those representations and warranties were made for purposes of that contract between the parties and are subject to qualifications and limitations agreed by the parties in connection with negotiating the terms of that contract. In addition, certain representations and warranties were made as of a specific date, and certain representations and warranties may be subject to contractual standards of materiality different from those generally applicable to stockholders, or may have been used for the purpose of allocating risk between the parties rather than establishing matters of fact. The representations and warranties (1) have been qualified by disclosures made to the other parties in connection with the merger agreement, (2) will not survive the completion of the merger and (3) at closing, must only be true and correct subject to the standards contained in the merger agreement, which may differ from what may be viewed as material by Apria’s stockholders. For the foregoing reasons, you should not rely on the representations and warranties contained in the merger agreement as statements of factual information.

 

The Company’s representations and warranties in the merger agreement relate to, among other things:

 

 

 

Many of Apria’s representations and warranties are qualified by the absence of a “Company material adverse effect” which means, for purposes of the merger agreement, any effect, change, occurrence, development, condition or event that, individually or in the aggregate, has had or would reasonably be expected to have a material adverse effect on (a) the ability of Apria to consummate the transactions contemplated in the merger agreement, or (b) the condition (financial or otherwise), assets, business, or results of operations of Apria and its subsidiaries, taken as a whole. However, a “Company material adverse effect” falling under clause (b) of the definition does not include any effect, change, occurrence, development, condition or event arising out of or attributable to any of the following:

 

 

The merger agreement also contains various representations and warranties made by Buyer and Merger Sub to Apria that are subject, in some cases, to specified exceptions and qualifications. The representations and warranties relate to, among other things:

 

 

Apria has various obligations and responsibilities under the merger agreement from the date thereof until the effective time of the merger, including, but not limited to, the following:

 

Conduct of Business Pending the Merger.  During the period between the date of the merger agreement and the effective time of the merger, Apria has agreed to conduct its business in the ordinary course consistent with past practice, and to use its reasonable best efforts to preserve intact its and its subsidiaries’ business organization.

 

The merger agreement also restricts Apria from taking any of the following actions during the period between the date of signing the agreement until the earlier of the effective time or the termination of the merger agreement, without the prior consent of Buyer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Prior to the effective time of the merger, Apria also agreed to:

 

 

 

Solicitation of Other Offers.  The merger agreement provides that for the period (the “solicitation period”) beginning on the date of the merger agreement and continuing until 11:59 p.m. on July 23, 2008 (the “solicitation period end-date”) Apria and its representatives had the right to:

 

 

Any person, group of persons or group that includes any person (so long as such person and the other members of such group, if any, who were members of such group immediately prior to the solicitation period end-date constitute at least fifty of the equity financing of such group at all times following the solicitation period end-date and prior to the termination of the merger agreement) from whom Apria or any of the representatives had received a written acquisition proposal during the solicitation period that the Company’s Board of Directors determines, in good faith, after consultation with its financial advisor and outside counsel is bona fide and is reasonably likely to result in a superior proposal shall be deemed an “excluded party.” There were no excluded parties as of the expiration of the solicitation period.

 

No Solicitation of Acquisition Proposals After the Solicitation Period; Fiduciary Out.  Except with respect to an excluded party, after the solicitation period, Apria must cease and cause its subsidiaries and representatives to cease any existing solicitation, encouragement, discussion or negotiation with any third parties with respect to any acquisition proposal. After the solicitation period, Apria may not, and must cause its representatives not to, directly or indirectly:

 

 

However, the Company is permitted to take the actions described above with respect to any excluded party (so long as, with respect to the actions described in the third bullet point above, to the extent permitted under the non-solicitation provisions of the merger agreement). The Company is also permitted, at any time after the solicitation period end-date and prior to obtaining the stockholder approval, to furnish information concerning the businesses, properties or assets of the Company or any of its subsidiaries to any person or group, and may engage in discussions and negotiations with such person or group concerning an acquisition proposal if:

 

 

 

An “acquisition proposal” is defined in the merger agreement to mean, other than the transactions contemplated by the merger agreement, any proposal or offer from a third party relating to:

 

 

A “superior proposal” is defined in the merger agreement to mean any acquisition proposal (with all percentages in the definition of acquisition proposal changed to fifty percent) made by a person other than Buyer, Merger Sub or their affiliates:

 

 

Except as set forth below, neither the Board of Directors nor any committee of the Board of Directors can make an adverse recommendation, change or cause or permit the Company to enter into any alternative acquisition agreement.

 

An “adverse recommendation change” means, in the merger agreement, the withdrawal or modification, or public proposal to withdraw or modify, in a manner adverse to Buyer or Merger Sub, the approval or recommendation by the Company’s Board of Directors or any such committee of the merger agreement or the transactions contemplated thereby, or the approval or recommendation, or public proposal to approve or recommend, any acquisition proposal by the Company’s Board of Directors.

 

An “alternative acquisition agreement” means any letter of intent, memorandum of understanding, agreement in principle, acquisition agreement, merger agreement or similar agreement with respect to an acquisition proposal.

 

Notwithstanding the restrictions on solicitation described above, prior to obtaining stockholder approval of the merger agreement the Company’s Board of Directors may:

 

 

Match Right

 

Apria has an obligation to promptly (within twenty-four hours) advise the Buyer of receipt by the Company of any acquisition proposal or any request for nonpublic information in connection with such acquisition proposal, the material terms and conditions of any such acquisition proposal or request, and advise the Buyer of any amendments to any such request, acquisition proposal or inquiry. The Company is not entitled to effect an adverse recommendation change or to terminate the merger agreement unless:

 

 

Any material amendment to a superior proposal shall require a new notice of superior proposal and the Company shall be required to comply with the requirements described above, except that the required negotiations period shall be for a period of two business days following Buyer’s receipt of such notice of superior proposal.

 

The non-solicitation provisions described above do not prohibit Apria’s Board of Directors from taking any of the following actions:

 

 

Stockholder Approval; Proxy Statement.

 

Apria agreed as soon as reasonably practicable following the solicitation period end-date, to promptly file with the SEC the proxy statement in preliminary form, promptly notify Buyer of the receipt of any comments from the SEC and of the request by the SEC for amendments or supplements to the proxy statement or for additional information and supply Buyer with copies of all material correspondence between the Company or any of its representatives, on the one hand, and the SEC, on the other hand, with respect to the proxy statement. Prior to filing or mailing this proxy statement or any other SEC filing required in connection with the transactions contemplated by the merger agreement (or, in each case, any amendment or supplement thereto) or responding to any comments of the SEC with respect thereto, the party responsible for filing or mailing such document agreed to provide the other party an opportunity to review and comment on such document or response and shall consider in good faith any comments reasonably proposed by the other party.

 

Apria agreed to take all action necessary in accordance with applicable law and the certificate of incorporation and bylaws of the Company to cause a meeting of its stockholders to be duly called and held as

soon as reasonably practicable following the clearance of this proxy statement by the SEC for the purpose of considering, approving and adopting the merger agreement and the merger. Subject to the adverse recommendation change and superior proposal provisions set forth in the merger agreement, the Company’s Board of Directors agreed to recommend approval and adoption of the merger agreement and the merger by the Company stockholders, to include such recommendation in the proxy statement and agreed not to withhold, withdraw or modify, or publicly propose or resolve to withhold, withdraw or modify in a manner adverse to the Buyer, the recommendation of the Board of Directors that the Company’s stockholders vote in favor of the merger agreement and the merger. Apria agreed to use its reasonable best efforts to solicit from its stockholders proxies in favor of the merger agreement and the merger and to take all other action reasonably necessary or advisable to secure the vote or consent of the stockholders of Apria required by the rules of NYSE or the DGCL to obtain such approvals. Apria is obligated to hold the shareholders meeting notwithstanding the receipt of a superior proposal or an adverse recommendation change.

 

Access to Information.  Subject to certain restrictions, Apria agreed to provide Buyer and its authorized representatives reasonable access during normal business hours to the facilities, properties, plants, offices, employees, auditors, authorized representatives, books and records of the Company and its subsidiaries and furnish to Buyer and its authorized representatives such financial, operating and other data and other information on the business and properties of the Company and its subsidiaries as Buyer may from time to time reasonably request. However, Apria is not required to disclose any information to Buyer if such disclosure (i) would be in violation of applicable laws or agreements or (ii) would, in the Company’s good faith opinion after consultation with legal counsel, result in the loss of attorney-client privilege with respect to such books, records and other information (it being agreed that the parties shall use their reasonable efforts to cause such information to be provided in a manner that does not cause such violation, including entering into customary joint defense agreements).

 

Indemnification and Insurance.  The merger agreement provides that for a period of six years following the effective time of the merger, the Buyer agrees to indemnify, defend and hold harmless (and also advance expenses for) each person who was on the date of the merger agreement or who becomes prior to the effective time of the merger an officer or director of the Company or any of its subsidiaries, without limitation to acts or omissions (other than illegal acts or acts of fraud), or alleged acts or omissions (other than illegal acts or acts of fraud), by the indemnified persons in their capacities as officers or directors, as the case may be. The Buyer guaranteed the payment and performance of the surviving corporation’s obligations in the financing provision of the merger agreement For a period of six years following the effective time of the merger, the Buyer agreed to cause the surviving corporation to maintain policies of directors’ and officers’ liability insurance covering each person who was a director or officer of the Company or any of its subsidiaries at any time prior to the effective time of the merger with respect to claims arising from facts or events that occurred on or prior to the effective time of the merger and providing at least the same coverage and amounts and containing terms that are not less advantageous to the insured parties than those contained in the policies of directors’ and officers’ liability insurance in effect as of the date of the merger agreement, provided, that, in no event will Buyer be required to maintain such policies (but rather shall only be obligated to provide a policy with the best coverage Buyer is reasonably able to obtain for such amount) if it is required to pay aggregate annual premiums in excess of 275% of the amount of the annual premium being paid by the Company prior to completion of the merger.

 

Employee Matters.  For one year after the merger, subject to certain exceptions, the surviving corporation will provide to Apria’s current employees compensation and benefits that are, in the aggregate, no less favorable than the compensation and benefits being provided to Apria’s employees immediately prior to the effective time of the merger under Apria’s employee plans (excluding equity-based compensation, and any retention or other change in control related compensation). Additionally, as of and after the effective time of the merger, the surviving corporation will recognize service with Apria prior to the effective time of the merger under any of our employee compensation, incentive, and benefit (including vacation) plans, programs, policies and arrangements maintained for the benefit of our employees as of and after the effective time of the

merger by the Buyer, its subsidiaries or the surviving corporation. Finally, with respect to each welfare plan maintained by the Buyer or the surviving corporation, the Buyer and its subsidiaries will waive any pre-existing condition or eligibility limitations to the extent waived, satisfied or inapplicable under our corresponding plan and give effect, in determining any deductible and maximum out-of-pocket limitations, to claims incurred and amounts paid by, and amounts reimbursed to, continuing employees under similar plans maintained by Apria immediately prior to the effective time of the merger.

 

Financing.  In connection with the merger, Buyer and Merger Sub agreed to use its reasonable best efforts to obtain the financing contemplated by the equity and debt financing commitment letters. The Company agreed to provide, and to cause its subsidiaries to provide, and to use its reasonable best efforts to cause its representatives to provide, all reasonable cooperation in connection with the arrangement of the financing as is customary and that may be reasonably requested by Buyer (provided that such requested cooperation does not unreasonably interfere with the ongoing operations of the Company and the Company subsidiaries), including (i) assisting in the preparation for, and participating in, a reasonable number of road shows, due diligence sessions, drafting sessions, meetings and marketing presentations, and similar presentations, to and with prospective lenders, investors and rating agencies, at times reasonably acceptable to the Company; (ii) assisting with the preparation of materials for rating agency presentations, offering memoranda, private placement memoranda, bank information memoranda (including the delivery of one or more customary representation letters as contemplated in the debt financing letter), prospectuses and similar documents required in connection with the financing; (iii) cooperating in the preparation of, and executing and delivering (for effectiveness at and after the effective time of the merger) any, pledge and security documents, other definitive financing documents, and other certificates, legal opinions or documents as may be reasonably requested by Buyer.

 

Marketing Period.  The merger agreement provides for a marketing period intended to provide Buyer a period of time to market and place the debt financing contemplated by the debt financing commitments for the purposes of financing the merger. If Buyer is unable to market and place the debt financing contemplated by the debt commitment letters during the marketing period, it is still contractually obligated to close the transaction no later than the last day of the marketing period if the conditions to its obligations to close the merger under the merger agreement are satisfied as of that date or pay the reverse termination fee.

 

For purposes of the merger agreement, “marketing period” means the first period of twenty consecutive business days after the date of the merger agreement throughout which (i) Buyer shall have received certain required information that the Company is required to provide under the terms of the merger agreement for the purposes of marketing the debt financing and (ii) the conditions precedent to the closing, as set forth below under “— Conditions to Completion of the Merger” have been satisfied (as if the first date of such twenty consecutive business day period were the closing date) and nothing shall have occurred and no condition shall exist that would cause any of the conditions precedent to fail to be satisfied assuming the closing were to be scheduled for any time during such twenty consecutive business day period; provided, however, that (A) if the marketing period has not been completed on or prior to August 15, 2008, the marketing period shall commence no earlier than September 2, 2008, (B) if the marketing period has not been completed on or prior to December 19, 2008, the marketing period shall commence no earlier than January 5, 2009, (C) the marketing period shall not be deemed to have commenced if, (x) prior to the completion of the marketing period, Deloitte & Touche LLP shall have withdrawn its audit opinion with respect to any year-end financial statements of the Company or (y) the financial statements included in the required information that is available to the Buyer on the first day of any such twenty consecutive business day period would not be sufficiently current on any day during such consecutive business day period to permit a registration statement using such financial statements to be declared effective by the SEC on the last day of the consecutive business day period and (D) the marketing period shall end on any earlier date on which the debt financing is consummated.

 

Filings and Authorizations.  The parties to the merger agreement agreed to make appropriate filings pursuant to the HSR Act and any applicable foreign antitrust, competition or merger control laws with respect

to the transactions contemplated thereby as promptly as practicable and to supply as promptly as practicable any additional information and documentary material that may be requested pursuant to the HSR Act and/or any such applicable foreign law, and to use their reasonable best efforts to take all other actions necessary to cause the expiration or termination of the applicable waiting periods or to obtain any consents under the HSR Act and/or such foreign law, as soon as practicable. The parties to the merger agreement agreed to cause to be done, and to assist and cooperate with other parties in doing, all other things necessary, proper or advisable to consummate and make effective the transactions contemplated by the merger agreement, including using its reasonable best efforts to resolve such objections, if any, as the FTC, the DOJ, state antitrust enforcement authorities or competition authorities of any other nation or other jurisdiction to enable the closing to occur as soon as reasonably possible (and in any event no later than February 15, 2009), to ensure that no governmental entity enters any order, decision, judgment, decree, ruling, injunction (preliminary or permanent), or establishes any law or other action preliminarily or permanently restraining, enjoining or prohibiting the consummation of the merger, or to ensure that no antitrust authority with the authority to clear, authorize or otherwise approve the consummation of the merger, fails to do so by February 15, 2009. In addition, Buyer and Merger Sub have agreed not to take any action, or cause any of their respective affiliates to take any action (including any acquisition of businesses or assets) which would reasonably be expected to prevent or delay the consummation of the transactions contemplated by the merger agreement due to the actions of any antitrust authority. The appropriate parties filed the necessary forms with the DOJ and the FTC on June 27, 2008. On July 8, 2008, the FTC granted early termination of the HSR Act waiting period for the merger.

 

Approvals and Consents.  The parties agreed to cooperate with each other and use their reasonable best efforts to obtain all necessary consents, including, without limitation, all consents of governmental entities and certain other consents.

 

Notification of Certain Matters.  Under the terms of the merger agreement, Apria agreed to give prompt notice to Buyer and Merger Sub, and Buyer and Merger Sub agreed to give prompt notice to Apria, of (a) the occurrence or non-occurrence of any event whose occurrence or non-occurrence, as the case may be, causes any representation or warranty of such party contained in the merger agreement to be untrue or inaccurate in any material respect or would reasonably be expected to cause any condition precedent to the merger not to be satisfied in any material respect as of the closing and (b) any material failure of Apria, Buyer or Merger Sub, as the case may be, or any officer, director, employee or agent thereof, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it thereunder.

 

Public Announcements.  The Company, Merger Sub and Buyer also agreed to consult with each other before issuing any press releases or otherwise making any public statements with respect to the merger agreement or the transactions contemplated thereby, and the parties agreed not to issue any press release or make any public statement prior to obtaining the other parties’ written consent, which consent shall not be unreasonably withheld or delayed, except that no such consent shall be necessary to the extent disclosure may be required by law, order or applicable stock exchange or Nasdaq rule or any listing agreement of any party thereto.

 

Conditions to the obligations of each of the parties to complete the merger include:

 

 

Conditions to Buyer’s obligations to complete the merger include the satisfaction or waiver of the following additional conditions:

 

 

Conditions to Apria’s obligations to complete the merger include the satisfaction or waiver of the following conditions:

 

 

The Agreement may be terminated at any time prior to the completion of the merger:

 

 

 

 

 

 

 

 

Fees Paid to Buyer:

 

 

 

 

If any of the events described in the preceding four bullet points occurs prior to the solicitation period end date or the Company enters into a definitive agreement with an excluded party within ten days following the solicitation period end date, Apria will be obligated to pay Buyer a termination fee of $18,900,000, which represents approximately 2% of the equity value of the transaction (instead of $28,400,000). In addition, if either party terminates because of the failure to receive stockholder approval (or the Company terminates pursuant to a different termination right at a time when the merger agreement was terminable because of a failure to receive stockholder approval), then:

 

 

For purposes of these provisions, all references to fifteen percent (15%) in the definition of acquisition proposal are raised to fifty percent (50%).

 

Fees Paid to Apria:

 

If Apria terminates the merger agreement because of the Buyer’s breach of any representation, warranty or covenant that is reasonably expected to cause a condition precedent to the merger not to be satisfied, then Buyer must pay to Apria the reverse termination fee of $37,900,000, which represents approximately 4% of the equity value of the transaction.

 

The parties agreed that, to the extent Buyer and Merger Sub have any liability pursuant to the merger agreement, then the maximum aggregate liability of Buyer and Merger Sub for all such Company damages is limited to $37,900,000, the Parent’s maximum liability is limited to the express obligations of it under the guarantee, and in no event will the Company or its representatives seek any equitable relief or equitable remedies of any kind whatsoever or money damages or any other recovery, judgment, or damages of any kind, including consequential, indirect or punitive damages other than damages in an amount not to exceed $37,900,000.

 

No Break-Up Fees or Expense Reimbursement:

 

 

The merger agreement may be amended by action taken by Apria, Buyer and Merger Sub at any time prior to the effective time, so long as after the merger agreement has been approved by Apria’s stockholders, no amendment may be made that would reduce the amount or change the kind of consideration to be received in exchange for the Apria common stock or stock options or effect any other change not permitted by the DGCL.

 

At any time prior to the effective time of the merger, any party to the merger agreement may extend the time for the performance of any of the obligations of the other parties, waive any inaccuracies in the representations and warranties of the other parties or, subject to certain conditions, waive compliance by the other parties with any of the agreements or conditions contained in the agreement.

 

In the event that the number of shares of Apria common stock present in person and represented by proxy at the special meeting and voting “FOR” the merger is insufficient to approve the merger proposal, Apria may move to adjourn the special meeting in order to enable the Apria Board of Directors to solicit additional proxies in favor of the approval of the merger proposal. In that event, Apria will ask its stockholders to vote only upon the adjournment proposal and not on the other proposals discussed in this proxy statement.

 

Approval of the adjournment proposal requires the affirmative vote of the holders of a majority of the votes cast on the merger proposal.

 

Apria’s Board of Directors (other than Mr. Higby and Dr. Payson, who recused themselves from the vote at the request of the Board because of Mr. Higby’s potential role as an employee of the surviving corporation after the merger, and Dr. Payson’s relationship with a potential bidder other than Blackstone), has approved and authorized the merger agreement by unanimous vote, and recommends that you vote “FOR” the merger agreement and the merger.

 

Markets and Market Price Shares of Apria common stock are listed and traded on the NYSE under the symbol “AHG.” The following table shows, for the periods indicated, the reported high and low sale prices per share on the NYSE for Apria common stock.

 

Prices listed below are the high and low prices within any given day for the period, as opposed to the high opening or closing prices during the period.

 

 

On July 23, 2008, the last trading day for which information was available prior to the date of the first filing of this proxy statement, the high and low sale prices for Apria common stock as reported on the NYSE

were $19.83 and $19.18 per share, respectively, and the closing sale price on that date was $19.21. The Company’s stockholders should obtain a current market quotation for Apria common stock before making any decision with respect to the merger. On July 23, 2008, there were approximately 352 holders of record of Apria common stock.

 

The Company does not pay and does not plan to pay any cash dividends on Apria common stock in the foreseeable future. Further, the Company has not paid dividends on its common stock for the last two fiscal years, and subsequent interim periods. Loan covenants contained in the Company’s bank facilities and subordinated notes indenture limit the Company’s ability to pay dividends on its common stock. In addition, under the merger agreement, the Company has agreed not to pay any dividends on Apria common stock before the closing of the merger.

 

The following table sets forth certain information, as of July 17, 2008, with respect to the beneficial ownership (as defined by Rule 13d-3 under the Exchange Act) of Apria common stock by:

 

 

Unless otherwise indicated, shares are owned directly or indirectly with sole voting and investment power.

 

 

 

 

If the merger is completed, there will be no public participation in any future meetings of Apria’s stockholders. If the merger is not completed, however, Apria’s stockholders will continue to be entitled to attend and participate in the Company’s stockholders’ meetings. If the merger is not completed, for stockholder proposals to be considered for inclusion in the proxy materials for Apria’s 2009 annual meeting of stockholders, they must be received by the Corporate Secretary of Apria no later than December 5, 2008; for a director nomination to be considered timely, it must be received by the Corporate Secretary of Apria no later than February 8, 2009 and no earlier than December 10, 2008. All other proposals will be deemed untimely unless submitted not less than 90 nor more than 150 days prior to the 2009 annual meeting. All proposals must comply with the rules and regulations of the SEC then in effect.

 

Stockholders who share a single address will receive only one proxy statement at that address unless the Company has received instructions to the contrary from any stockholder at that address. This practice, known as “householding,” is designed to reduce the Company’s printing and postage costs. However, if a stockholder of record residing at such an address wishes to receive a separate copy of this proxy statement or of future proxy statements (if applicable), he or she may contact Apria Healthcare Group Inc., 26220 Enterprise Court, Lake Forest, California 92630-8405, Attention: Corporate Secretary. The Company will deliver separate copies of this proxy statement promptly upon written or oral request. If you are a stockholder of record receiving multiple copies of this proxy statement, you can request householding by contacting the Company in the same manner. If you own your shares of Apria common stock through a bank, broker or other stockholder of record, you can request additional copies of this proxy statement or request householding by contacting the stockholder of record.

 

Apria is subject to the informational requirements of the Exchange Act. Apria files reports, proxy statements and other information with the SEC. You may read and copy these reports, proxy statements and other information at the SEC’s Public Reference Section at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website, located at www.sec.gov, that contains reports, proxy statements and other information regarding companies and individuals that file electronically with the SEC.

 

The information contained in this proxy statement speaks only as of the date indicated on the cover of this proxy statement unless the information specifically indicates that another date applies.

 

The SEC allows the Company to “incorporate by reference” information into this proxy statement. This means that the Company can disclose important information by referring to another document filed separately with the SEC. The information incorporated by reference is considered to be part of this proxy statement. This proxy statement and the information that the Company later files with the SEC may update and supersede the information incorporated by reference. Similarly, the information that the Company later files with the SEC may update and supersede the information in this proxy statement. Apria incorporates by reference each document it files under Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of the initial filing of this proxy statement and before the special meeting. Apria also incorporates by reference into this proxy statement the following documents filed by it with the SEC under the Exchange Act:

 

 

 

Apria undertakes to provide without charge to each person to whom a copy of this proxy statement has been delivered, upon request, by first class mail or other equally prompt means, within one business day of receipt of the request, a copy of any or all of the documents incorporated by reference into this proxy statement, other than the exhibits to these documents, unless the exhibits are specifically incorporated by reference into the information that this proxy statement incorporates.

 

Requests for copies of Apria’s filings should be directed to Apria Healthcare Group Inc., 26220 Enterprise Court, Lake Forest, California 92630-8405, Attention: Corporate Secretary.

 

Document requests from Apria should be made by [ • ], 2008 in order to receive them before the special meeting.

 

The proxy statement does not constitute an offer to sell, or a solicitation of an offer to buy, any securities, or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is not lawful to make any offer or solicitation in that jurisdiction. The delivery of this proxy statement should not create an implication that there has been no change in the affairs of Apria since the date of this proxy statement or that the information herein is correct as of any later date.

 

Stockholders should not rely on information other than that contained or incorporated by reference in this proxy statement. Apria has not authorized anyone to provide information that is different from that contained in this proxy statement. This proxy statement is dated [ • ], 2008. No assumption should be made that the information contained in this proxy statement is accurate as of any date other than that date, and the mailing of this proxy statement will not create any implication to the contrary.

 

No other matters are intended to be brought before the special meeting by Apria, and Apria does not know of any matters to be brought before the special meeting by others. If, however, any other matters properly come before the meeting, the persons named in the proxy will vote the shares represented thereby in accordance with the judgment of management on any such matter.

 

If you have questions about the special meeting or the merger after reading this proxy, or if you would like additional copies of this proxy statement or the proxy card, you should contact Apria Healthcare Group Inc., 26220 Enterprise Court, Lake Forest, California 92630-8405, Attention: Corporate Secretary. You may call the Company’s proxy solicitor Innisfree M&A Incorporated toll-free at (888) 750-5833 (bankers and brokers may call collect at (212) 750-5833).

APPENDIX A

 

CONFIDENTIAL
EXECUTION COPY

 

 

 

Agreement and Plan of Merger
among
Apria Healthcare Group Inc.,
Sky Acquisition LLC
and
Sky Merger Sub Corporation
Dated as of
June 18, 2008

 

 

 

TABLE OF CONTENTS