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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended July 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ________________
Commission File Number 0-14003
ROTECH MEDICAL CORPORATION
(Exact name of Registrant as specified in its charter)
Florida 59-2115892
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4506 L.B. McLeod Road, Suite F
Orlando, Florida 32811
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(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (407) 841-2115
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, par value $.0002 per share
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
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The aggregate market value of the Registrant's voting stock held by
nonaffiliates of the Registrant, computed by reference to the last sale price
per share, as of October 19, 1995, was $278,785,612.
On October 19, 1995, RoTech Medical Corporation had 11,990,779 shares of its
$.0002 par value Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement to security holders, in connection with the
annual meeting of shareholders to be held on December 8, 1995, are incorporated
into Part III.
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ROTECH MEDICAL CORPORATION
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED JULY 31, 1995
PART I: PAGE
Item 1 Business............................................................ 3
Item 2 Properties.......................................................... 11
Item 3 Legal Proceedings................................................... 12
Item 4 Submission of Matters to a Vote of Security Holders................. 12
PART II:
Item 5 Market for Registrant's Common Equity and Related Stockholder
Matters............................................................. 12
Item 6 Selected Financial Data............................................. 12
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 12
Item 8 Financial Statements and Supplementary Data......................... 16
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................ 16
PART III:
Item 10 Directors and Executive Officers of the Registrant.................. 16
Item 11 Executive Compensation.............................................. 16
Item 12 Security Ownership of Certain Beneficial Owners and Management...... 17
Item 13 Certain Relationships and Related Transactions...................... 17
PART IV:
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 17
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PART 1
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ITEM 1. BUSINESS
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GENERAL
RoTech Medical Corporation ("RoTech" or the "Company") provides
comprehensive home health care and primary care physician services to patients
in non-urban areas. RoTech operated 205 home health care locations and 20
primary care physician practices, employing 26 physicians as of July 31, 1995,
and has subsequently acquired an additional 50 home health care locations. The
Company's home health care business provides a diversified range of products and
services, with emphasis on respiratory and home infusion therapies. RoTech has
pursued an aggressive acquisition strategy since 1988 which included in fiscal
1995 acquisitions of 56 locations of smaller home health care companies and the
opening of 15 new locations. Current industry estimates indicate that
approximately half of the nation's home health care industry remains fragmented
and is run by either single operators or small, local chains. These smaller
providers are RoTech's main competition and main acquisition opportunities. The
Company plans to continue to enter new home health care markets through
acquisition or start-up as competitive and pricing pressures encourage
consolidation and economies of scale. In January 1994, the Company expanded this
strategy to include the acquisition of primary care physician practices in
certain markets to enable the ultimate development of an integrated primary
health care delivery system capable of providing a broad range of non-
institutional care to patients in these markets. The Company believes this
system will facilitate managed care concepts and pricing in these markets, where
managed care currently has little penetration, and should prevent the
outmigration of the non-urban population to urban health care facilities and
service providers. The Company's revenues have grown from $18 million for the
fiscal year ended July 31, 1990 to $134 million for the fiscal year ended July
31, 1995.
Recent data suggests that there is a shortage of health care services in non-
urban markets. According to the United States Census Bureau, in 1990 non-urban
areas of the United States accounted for roughly 25% of the national population,
or approximately 62 million people. However, according to the American Medical
Association, just 11% of physicians, or approximately 75,000 physicians,
practice in non-metropolitan markets. This data indicates that rural markets are
underserved, and suggests that there may be opportunities for improvement in
access to primary care physicians, as well as specialty services. The Company
believes that these needs result in significant opportunities for companies such
as RoTech, which can attract, retain and network physicians in non-urban
settings while offering ancillary services such as home health care, to become a
full-service, non-institutional based primary health care provider.
OPERATING AND EXPANSION STRATEGY
RoTech was founded in 1981 to provide home respiratory and home medical
equipment products and services to patients in Florida. With its founders' roots
in pharmacy and pharmaceutical sales, the Company's marketing directive has
always been to consult with primary care physicians in utilizing home health
care techniques, products and services for their patient base. Counseling these
physicians as to disease management leads to earlier identification and
treatment of patients, enhancing the patient's quality of life and longevity.
The Company has not targeted specialists, as their patients are more acute and
since specialists have historically been tied to the hospital systems which
results in higher hospitalizations. RoTech's philosophy and practice is to
assist in identifying patients of primary care physicians prior to
hospitalization and prior to an acuity level that would require utilizing a
specialist.
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The Company's strategy is to develop integrated health care delivery systems
through the acquisition of smaller local home health care companies and primary
care physician practices in non-urban areas. The Company targets non-urban
markets of smaller cities and rural areas, due to the dominance of primary care
physicians in these markets, reduced competition and a tendency to care for
patients in the home setting. The Company believes that acquisitions of home
health care companies will continue to expand the base of relationships with
primary care physicians in these markets. Primary care physicians in these
markets typically have long-standing relationships with loyal patient bases.
These physicians are usually solo practitioners and are the key decision makers
in the treatment of their patients. The Company believes that making home health
care products and services available to these physicians will result in better,
less expensive health care that provides an improved quality of life for the
patients and their caregivers in these communities.
RoTech expanded its strategy in 1994 to acquire primary care physician
practices in two specific markets, northern Mississippi and central Florida,
where it has strong market presence in its home health care business. The
Company believes that networking these acquired primary care physicians, who are
predominantly solo practitioners, will allow economies of scale, justification
for advanced equipment to be shared among physicians, and standardization of
protocols. The Company believes that assertive patient management at the primary
care level, which would include the use of home health care techniques, should
result in patient retention and higher quality of care. Aggregation of patient
lives under the treatment of these physicians who can comprehensively manage
patients is currently attractive to managed care entities and could eventually
enable the Company to provide a managed care product in non-urban America.
SALES AND MARKETING
RoTech believes that the sales and marketing skills of its employees have been
instrumental in its growth to date and are critical to its future success.
RoTech emphasizes to its employees the importance of patient base growth and
retention by providing quality service to physicians and their patients.
Approximately 28% of RoTech's employees are actively involved in sales and
marketing. The sales representatives employed by the Company include registered
or certified respiratory therapists, registered pharmacists and registered
nurses who market all of the Company's services and products and are responsible
for maintaining and expanding the Company's relationships with physicians,
targeting primary care physicians in non-urban areas.
RoTech provides formal marketing, training, product and service information
to all of its technical and sales personnel so they can communicate effectively
with physicians about the Company's services and products. These personnel are
instructed on methods of serving the physicians by counseling them on new
procedures and medical technologies. Each technical and sales person must attend
periodic seminars conducted on a Company-wide basis. The Company emphasizes the
cross-marketing of all its products to physicians with which its salespeople
have already developed professional relationships. The Company believes its
marketing approach allows the primary care physician to identify acute and
chronic patients earlier in the disease process. Treatment is done at the
primary care level and accordingly at less cost than the advanced treatment of
the disease by specialists or in a hospital setting.
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REIMBURSEMENT FOR SERVICES
A substantial percentage of RoTech's revenue is attributable to third-party
payors, including private insurers, Medicare and, to a lesser extent, Medicaid.
The Company has substantial expertise at processing claims and continues to
create and improve systems to manage third-party reimbursements, to produce
clean claims and obtain timely reimbursements by third-party payors. The Company
has developed distinct billing and collection departments for Medicare and
Medicaid reimbursements and for private insurance company claims which are
supported by customized computer systems. These departments work closely with
reimbursement officers at branch locations and third-party payors and are
responsible for the review of patient coverage, the adequacy and timeliness of
documentation and the follow-up with third-party payors to expedite
reimbursement payments. Reimbursement from the Medicare program as a percentage
of RoTech's total operating revenue approximated 36% for fiscal 1992, 39% for
fiscal 1993, 35% for fiscal 1994 and 49% for fiscal 1995.
RoTech has achieved increased operating revenue in home respiratory and other
medical equipment operations despite increased regulation and certain
reimbursement reductions. While the increased regulation tends to reduce the
amount of reimbursement from government sources for individual cases, the
Company believes the continued increased regulation also benefits the Company by
reducing the competition from joint ventures and fee revenue sharing
arrangements, which the Company has historically avoided.
The Company's levels of operating revenue and profitability, like
of other health care companies, are affected by the continuing efforts of third-
party payors to contain or reduce the health care costs by lowering
reimbursement rates, increasing case management review of services and
negotiating reduced contract pricing. Home health care, which is generally less
costly to third-party payors than hospital-based care, has benefited from those
cost containment objectives. However, as expenditures in the home health care
market continue to grow, initiatives aimed at reducing the health care delivery
costs at non-hospital sites are increasing. Changes in reimbursement policies by
third-party payors, or the reduction in or elimination of such reimbursement
programs, could have a material adverse impact on the Company's revenues.
Various state and federal health reform initiatives may lead to additional
changes in reimbursement programs.
PRODUCTS AND SERVICES
HOME HEALTH CARE PRODUCTS AND SERVICES
HOME RESPIRATORY CARE AND OTHER HOME MEDICAL EQUIPMENT PRODUCTS AND SERVICES
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RoTech provides a variety of home respiratory therapy products and
services on a monthly rental or sale basis. Home respiratory care and other home
medical equipment represented 66% of the Company's revenues for fiscal 1995.
RoTech focuses on serving patients of primary care physicians with chronic
pulmonary diseases in their pre-acute stages. Early identification and retention
of these patients at the primary care level reduces health care costs and should
improve the patient's quality of life. RoTech also enjoys patient retention
post-hospitalization at the patient's or physician's request and does not rely
on referrals of patients by hospital discharge planners or case managers.
Industry-wide home respiratory market revenues were approximately $1.6 billion
in 1993.
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The Company's home respiratory care product line includes oxygen
concentrators, portable liquid oxygen systems, nebulizers, and ventilator care.
Oxygen concentrators extract oxygen from room air and generally provide the
least expensive supply of oxygen for patients who require a continuous supply of
oxygen, are not ambulatory and who do not require excessive flow rates. Liquid
oxygen systems store oxygen under pressure in a liquid form. The liquid oxygen
is stored in a stationary unit that can be refilled at the patient's home and
can be used to fill a portable device that permits greatly enhanced patient
mobility. Nebulizers are devices which aerosolize medications, allowing them to
be inhaled directly into the patient's lungs. Ventilator therapy is used for the
individual that suffers from respiratory failure by mechanically assisting the
individual to breathe. The Company provides technicians who deliver and/or
install the respiratory care equipment, instruct the patient in its use, refill
the high pressure and liquid oxygen systems as necessary and provide continuing
maintenance of the equipment.
RoTech provides a full line of equipment and supplies of home medical
equipment and supplies for convalescents, including custom pieces required for
rehabilitation patients. Provision of home medical equipment enables the Company
to provide a "one-stop shopping" presence in its non-urban markets, which is
required for full patient service satisfaction. These products are provided on a
monthly rental or sale basis and include wheelchairs, hospital beds, walkers,
patient lifts, orthopedic supplies, catheters, syringes and bathroom aids.
HOME INFUSION THERAPY
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Home infusion therapy involves the administration of antibiotics, nutrients or
other medications intravenously, intramuscularly, subcutaneously or through a
feeding tube. The Company focuses on providing home infusion therapy to patients
prior to or in lieu of hospitalization, which generally offers significant cost
savings and preferable logistics for patients, their families and caregivers
over hospital-based treatments. RoTech believes that its marketing methods of
consulting with primary care physicians on home infusion therapies and the
continuing evolution of related technological advances should enable further
growth of this portion of the business. Focus on the referring primary care
physician facilitates the identification of patients requiring sub-acute
antibiotic treatments, which constitute 39% of the home infusion therapy market.
Home infusion therapies accounted for 25% of RoTech's revenues for fiscal 1995,
which includes the following types and approximate percentage mix of therapies
for the same period:
Antibiotic Therapy, 72% of home infusion therapy revenues. Antibiotic therapy
------------------
requires the infusion of antibiotic drugs into the patient's bloodstream to
treat infections and diseases, such as osteomyelitis (bone infections),
bacterial endocarditis (infection of the lining around the heart), wound
infections, infections associated with HIV/AIDS, and infections of the kidneys
and urinary tract. Antibiotics are generally believed to be more effective when
infused directly into the bloodstream than when taken orally. These treatments
can be prescribed by primary care physicians, are short-term in nature and recur
occasionally.
Enteral Nutrition Therapy, 12% of home infusion therapy revenues. Enteral
-------------------------
nutrition therapy is administered to patients who cannot eat as a result of an
obstruction to the upper gastrointestinal tract or because they are otherwise
unable to be fed orally. As with total parenteral nutrition therapy, enteral
nutrition therapy is often administered over a long period.
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Pain Management and Chemotherapy, 6% of home infusion therapy revenues. Pain
--------------------------------
management therapy is the administration of pain controlling drugs to terminally
or chronically ill patients and is often administered in conjunction with
intravenous chemotherapy. Chemotherapy is the continuous or intermittent
intravenous administration of anti-cancer drugs. Chemotherapy generally is
administered periodically for several weeks or months.
Total Parenteral Nutrition Therapy, 5% of home infusion therapy revenues.
----------------------------------
Total parenteral nutrition (TPN) therapy involves the intravenous feeding of
nutrients to patients with impaired digestive tracts due to gastrointestinal
illnesses or conditions, due to underlying conditions including cancer or
HIV/AIDS. TPN is usually longer in duration than other forms of infusion
therapy, and can be lifelong.
Other Therapies. Other therapies and services include therapies such as
---------------
congestive heart failure therapy, hydration therapy and related nursing
services.
The Company's home infusion therapy business is dependent in large measure
upon physicians continuing to prescribe the administration of drugs and
nutrients through intravenous and other infusion methods. Orally administered
drugs and alternative drug delivery systems may have an effect upon the demand
for certain infusion therapies. The Company can predict neither the ultimate
impact of these treatments on the Company's business nor the nature of future
medical advances or their eventual impact on the Company's business.
PRIMARY CARE PHYSICIANS PRACTICES
RoTech believes that acquisitions of primary care physician practices in its
service areas present substantial opportunities. The Company believes that it
will be able to increase the profitability of the individual practices through
economies of scale and greater efficiencies, and that its centralized billing
and reimbursement functions will typically result in lower costs per claim and
quicker reimbursement. Based upon its many years of marketing to primary care
physicians, RoTech believes that the additional training and responsibility of
certain key personnel in a practice, typically a nurse, result in more
efficiency and allow physicians to spend more time practicing medicine. Not only
does this increased efficiency boost profitability, it also usually results in
greater physician satisfaction. In a medical practice owned by RoTech, RoTech
has the opportunity to instill the philosophy of patient retention whereby
primary care physicians can help patients maintain control over their health
care expenditures. The Company believes this increases the profitability of the
primary care physician practice and reduces the total amount of money spent to
treat a patient with no reduction in the overall level of care. RoTech currently
provides home health care products and services to the patients of more than
2,000 primary care physicians. The Company believes that many of these
physicians could ultimately become part of RoTech through its acquisitions of
such practices. Physician practices currently represent approximately 9% of the
Company's revenues.
RoTech has been a proponent of physician independence and autonomy through its
long-standing marketing to primary care physicians. This position is counter to
the role of the hospitals and managed care organizations who have historically
served to limit access and reimbursement of these physicians. By partnering with
RoTech, primary care physicians are able to obtain purchasing power,
administrative services, management, information systems and capital for
expanded staffing needed to service a larger patient base and improve the
medical practice and quality of life of the physician. As RoTech creates
networks of primary care physicians in these non-urban markets, additional
services
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can be justified and facilitated such as introduction of specialists
(pulmonologist, cardiologist, oncologist, or obstetrician) or mobile diagnostic
equipment. The Company expects that these specialists will serve to educate,
support and consult with the primary care physician; will be salaried,
contracted or possibly capitated; and will provide hands-on treatment of more
complex cases. The expected economies of scale and information systems strength
will result in a better, more cost effective system for disease management,
including early detection and treatment, preventive care and wellness programs.
GOVERNMENT REGULATION
The home care industry is subject to extensive government regulation at the
federal level through the Medicare program and at the state level through the
Medicaid program. Medicare is a federally funded health insurance program which
provides health insurance coverage for persons age 65 and older and certain
disabled persons, and generally provides reimbursement at specified rates for
sales and rentals of specified medical equipment and supplies, provided such
equipment and supplies are determined to be medically necessary by the treating
physician. Medicaid is a health insurance program administered by state
governments which provides reimbursements for health care for certain
financially or medically needy persons regardless of age.
The Company is subject to government audits of its Medicare and Medicaid
reimbursement claims and has not, to date, experienced any material loss as a
result of any such government audits. Under existing federal law, the knowing
and willful offer or payment of any remuneration (including any kickback, bribe
or rebate) of any kind to another person to induce the referral of Medicare or
Medicaid beneficiaries for whom medical supplies and services may be reimbursed
by the Medicare or Medicaid programs is prohibited and could subject the parties
to such an arrangement to substantial criminal and civil penalties, including
exclusion from participation in these programs, for Medicare or Medicaid fraud.
The Office of Inspector General of the Department of Health and Human Services
("OIG") has promulgated regulatory "safe harbors" that describe certain
practices and business arrangements that comply with Medicare and Medicaid
regulations. The OIG and law enforcement authorities have recently increased
their investigatory efforts to determine whether various business practices
constitute remuneration for, or to induce, referrals. Certain states have also
passed statutes and regulations that prohibit payments for referral of patients.
These laws vary significantly from state to state. The result of legislative
and regulatory efforts is a challenging compliance situation. The Company has
been made aware that the OIG has made certain informal inquiries related to
payments received by the Company in the late 1980's. The OIG submitted its
findings to the United States Attorney for the Middle District of Florida, which
has elected to file a civil suit, Case No. 95-558-CIV-ORL-18, in which it is
contended that Medicare made some unspecified amount of payments to the Company
by mistake in part of 1987, 1988, and 1989. The civil suit seeks repayment of
the monies allegedly paid by mistake. While the Company is confident that it
was at all times in compliance with all material Medicare requirements, and
believes that all payments it received were made correctly and not by mistake,
the Company seeks an amicable resolution of the issues involved in the civil
suit in order to save time and potential litigation expenses. However, if the
matter is not amicably resolved, the Company intends to mount a vigorous
defense. The potential financial exposure of the Company in the civil suit is
unknown.
The types of services and products delivered by the Company, the required
quality of such services and products and the manner in which such services and
products are delivered and billed are each subject to significant and complex
regulations promulgated, interpreted and administered by the appropriate federal
or state governmental agency. Although the Company believes that its products,
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services and procedures comply in all respects with such regulations applicable
to reimbursement eligibility, the unavailability of advance formal
administrative rulings in most regulated areas subjects the Company to possible
subsequent adverse interpretations and rulings which may affect the eligibility
of some or all of the Company's services and products for reimbursement. Such an
adverse interpretation or ruling could have a substantial adverse impact on the
Company's business.
In addition, the Company is required to obtain federal and state licenses and
permits relating to the distribution of pharmaceutical products, including a
federal Controlled Dangerous Substance Registration Certificate and Florida
State Wholesaler License. The Company is required to obtain similar licenses
from each state in which it does business.
The Company's acquisitions of primary care physician practices are structured
to attempt to comply with federal and state law restrictions on business
relationships between the Company and persons who may be in a position to refer
patients to the Company for the provision of health care related items or
services. Accordingly, the Company endeavors to undertake such acquisitions in a
manner where the consideration offered and paid is consistent with fair market
value in arms-length transactions and is not determined in a manner that takes
into account the volume or value of any referrals or business that might
otherwise be generated between the Company and the physician whose practice to
be acquired and for which payment may be made under Medicare or Medicaid. While
the Company believes that its acquisitions do not entail any form of unlawful
remuneration, there can be no assurances that enforcement authorities will not
attempt to construe the consideration exchanged in certain acquisition
transactions as entailing unlawful remuneration and to challenge such
transactions on such basis.
In many states, the "corporate practice of medicine doctrine" prohibits
business corporations from providing, or holding themselves out as providers of,
medical care through the employment of physicians. Although the two states in
which the Company has acquired practices of primary care physicians, Florida and
Mississippi, have not adopted this prohibition, there can be no assurance that
either state will not adopt this doctrine in the future or that the Company will
not acquire a primary care medical practice in a state that has enacted or
adopted through case law the corporate practice of medicine doctrine. While the
Company intends to structure future acquisitions to comply with the corporate
practice of medicine doctrine where it exists, there can be no assurance that,
given varying and uncertain interpretations of such laws, the Company would be
found to be in compliance with restrictions on the corporate practice of
medicine in all states. Enforcement of such doctrine could require divestiture
of acquired practices or restructuring of physician relationships.
Health care is an area of extensive and dynamic regulatory change. Changes in
the law or new interpretations of existing laws can have a dramatic effect on
permissible activities, the relative costs associated with doing business, and
the amount of reimbursement by government and third-party payors. The Omnibus
Budget Reconciliation Act of 1987 ("OBRA 1987") created six categories of
durable medical equipment for purposes of reimbursement under the Medicare Part
B program. There is a separate fee schedule for each category. OBRA 1987 also
controls whether durable medical equipment products will be paid for on a rental
or sale basis and established fixed payment rates for oxygen service as well as
a 15-month rental ceiling on certain medical equipment. An interim final rule
implementing the payment methodology under the fee schedules was published in
the Federal Register. Payment based on the fee schedules is effective with
covered items furnished on or after January 1, 1989. Generally, Medicare pays
80% of the lower of the supplier's actual charge for the item or the fee
schedule amount, after adjustment for the annual deductible amount. OBRA 1990
made changes to Medicare Part B reimbursement that were implemented in 1991. The
substantive change
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was the standardization of Medicare rates for certain equipment categories. Laws
and regulations often are adopted to regulate new products, services and
industries. There can be no assurances that either the states or the federal
government will not impose additional regulations upon the Company's activities
which might adversely affect the Company's business.
Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. Although Congress has
failed to pass comprehensive health care reform legislation thus far, the
Company anticipates that Congress and state legislatures will continue to review
and assess alternative health care delivery and payment systems and may in the
future propose and adopt legislation effecting fundamental changes in the health
care delivery system and in the amount and circumstance under which federally
funded payments such as Medicare and Medicaid are made. Legislative debate is
expected to continue in the future, and the Company cannot predict what impact
the adoption of any federal or state health care reform measures or future
private sector reform may have on its industry or business.
Pursuant to federal legislation commonly known as "Stark II" enacted as
part of The Omnibus Budget Reconciliation Act of 1993, and effective January 1,
1995, physicians are prohibited from making referrals to entities in which they
(or immediate family members) have an investment interest or compensation
arrangement, where such referral is for any "designated health service"
covered by Medicare/Medicaid, including parenteral and enteral nutrients,
equipment and supplies, and home health services. Ownership by a physician of
investment securities in a publicly-held corporation with stockholders' equity
exceeding $75 million at the end of the corporation's most recent fiscal year or
on average during the previous three fiscal years is exempt from the investment
prohibition if the securities are traded on the New York, American or a regional
stock exchange, or The Nasdaq National Market. Exemptions from the compensation
arrangement prohibition include (i) amounts paid by an employer to a physician
pursuant to a bona fide employment relationship meeting specified requirements,
including payments being unrelated to referrals and consistent with the fair
market value of the services provided and (ii) other personal service
arrangements if certain requirements are met, including that compensation be
paid over the term of a written agreement with a term of one year or more, be
set in advance, not exceed fair market value, and be unrelated to referrals.
While RoTech intends to structure its acquisitions and operations to comply with
Stark II, there can be no assurance that future interpretations of that law will
not require structural and organizational modifications of the Company's
existing relationships with physicians, nor can assurance be given that present
or future relationships between the Company and physicians will be found to be
in compliance with such law.
INSURANCE
In recent years, participants in the health care market have become subject to
an increasing number of malpractice and product liability lawsuits, many of
which involve large claims and significant defense costs. As a result of the
liability risks inherent in the Company's lines of business, including the risk
of liability due to the negligence of physicians or other health care
professionals employed by or otherwise under contract to the Company, the
Company maintains liability insurance intended to cover such claims. There can
be no assurance that the coverage limits of the Company's insurance policies
will be adequate, or that the Company can obtain liability insurance in the
future on acceptable terms or at all.
The Company currently has in force general liability and products liability
insurance policies, with coverage limits of $2.0 million per occurrence and in
the aggregate annually (with a deductible of
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$25,000 per occurrence, and a deductible aggregate of $125,000). The Company
also has in force a professional liability insurance policy, with a coverage
limit of $1.0 million per occurrence and $3.0 million in the aggregate annually.
The Company has in force, with respect to physicians employed by the Company,
individual professional liability insurance policies, with coverage limits
ranging from $250,000 per occurrence to $1 million per occurrence, and ranges
from $750,000 in the aggregate annually to $3 million in the aggregate annually.
The Company's insurance policies are subject to annual renewal.
ITEM 2. PROPERTIES
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The Company leases all of its offices and facilities. The Company's
corporate headquarters is currently located in a 25,300 square foot
warehouse/office building located at 4506 L.B. McLeod Road, Suite F, Orlando,
Florida, 32811, leased by the Company for a 5 year period ending September 30,
2000 at a current rate of $3.40 per square foot with utilities, taxes and
insurance being the financial responsibility of the Company.
In addition to its corporate headquarters, the Company leases office
facilities in its 225 locations. These facilities are primarily used for general
office work and the dispatching of registered respiratory therapists, registered
nurses, registered pharmacists and delivery personnel. From the above locations,
the Company operates 34 pharmacies. The Company will consider opening additional
pharmacies as business in each area dictates.
The Company's office facilities vary in size from approximately 200 to
6,000 square feet. The total space leased for these offices is approximately
750,000 square feet at an average price of $6 per square foot. All of such
office space is leased pursuant to cancelable operating leases.
Management believes that its office and warehouse facilities are suitable
and adequate for its planned needs.
ITEM 3. LEGAL PROCEEDINGS
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No material legal proceedings are pending to which the Company or any of its
subsidiaries is a party, or of which any of their property is subject, nor
to the Company's knowledge, are any such legal proceedings threatened,
except as discussed under the heading "Government Regulation" contained herein.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report.
PART II
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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MATTERS
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The information required by this item is set forth under the heading "Prices of
Common Stock" on page 29 of the Company's Annual Report to Shareholders for the
fiscal year ended July 31, 1995, and is hereby incorporated by reference.
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ITEM 6. SELECTED FINANCIAL DATA
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The information required by this item is set forth under the heading "Selected
Consolidated Financial Data" on page 24 of the Company's Annual Report to
Shareholders for the fiscal year ended July 31, 1995, and is hereby incorporated
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATION
- ------------
RESULTS OF OPERATIONS
The following table presents certain statement of income data as a percentage of
certain items relative to total operating revenue:
<TABLE>
<CAPTION>
Year Ended July 31
-----------------------------
1995 1994 1993
------- ------- -----------
<S> <C> <C> <C>
OPERATING REVENUE:
Home respiratory and other medical equipment 66.3% 58.1% 49.3%
Home infusion therapy 25.0 35.7 44.9
Physician practices 8.7 6.2 5.8
------ ------ ---------
Total Operating Revenue 100.00% 100.00% 100.00%
COST AND EXPENSES:
Cost of revenue 27.1 24.4 25.5
Selling, general and administrative 49.6 50.2 51.8
Depreciation and amortization 7.1 7.5 5.8
Interest 0.6 0.1 0.2
------ ------ ---------
Total Cost and Expenses 84.4 82.2 83.3
------ ------ ---------
Income before income taxes 15.6 17.8 16.7
Income tax expense 5.8 6.5 6.1
------ ------ ---------
Net Income 9.8% 11.3% 10.6%
====== ====== =========
</TABLE>
FOR THE FISCAL YEARS ENDED JULY 31, 1995 AND 1994
- -------------------------------------------------
Operating revenue increased 87.6% to $134.1 million for the fiscal year ended
July 31, 1995 ("fiscal 1995") from $71.5 million for the fiscal year ended July
31, 1994 ("fiscal 1994"). The increase in operating revenue is attributable to
acquisitions and expanded product and service lines in existing areas of
operation. The Company continues to employ a single sales force to maintain and
develop both the home respiratory and other medical equipment and home infusion
therapy and other pharmacy related lines of business.
Operating revenue from home respiratory and other medical equipment increased
113.7% to $88.8 million for fiscal 1995 from $41.6 million for fiscal 1994. The
increase was due mainly to increases in patient bases throughout the Company's
locations and increased marketing efforts in certain locations acquired during
fiscal year 1994 and 1995.
Operating revenue from home infusion therapy and pharmacy related services
increased 31.6% to $33.6 million for fiscal 1995 from $25.5 million for fiscal
1994. Growth in this line of business should continue as the Company expands
both its service areas and available products and services.
12
<PAGE>
Operating revenue from physician practices represented 8.7% of total operating
revenue for fiscal 1995, compared to less than 5% for fiscal 1994. The Company
currently owns 20 physician practices and employs 26 primary care physicians.
These practices are clustered in two rural marketplaces. Growth in this line of
business should continue yet decline as a percentage of operating revenue as the
Company continues to acquire mostly home health care operations.
Cost of revenue as a percentage of operating revenue increased to 27.1% for
fiscal 1995 from 24.4% for fiscal 1994 due to changes in the product mix in the
last year resulting from mid-year fiscal 1994 and fiscal 1995 acquisitions.
Selling, general and administrative expenses as a percentage of operating
revenue remained relatively stable at 49.6% for fiscal 1995, down from 50.2% for
fiscal 1994 as the revenue base has grown faster than the Company's costs.
Selling, general and administrative expenses included a net gain from the sale
of an other asset. The gain resulted from years of operational expenses flowing
through the income statements rather than being capitalized. The net gain was
offset by increased bad debt expense, resulting in no net impact on selling,
general and administrative expenses and no impact on earnings from the gain.
Management took the opportunity provided by the gain to improve its overall
long-term financial position. Changes in the Company's mix of business also
affect these categories. For example, physician practices have no cost of
revenue, and all expenses are of a selling, general and administrative nature.
Depreciation and amortization expense increased 79.2% to $9.6 million for
fiscal 1995 from $5.3 million for fiscal 1994. Depreciation and amortization
expense as a percentage of operating revenue was 7.1% for fiscal 1995 and 7.5%
for fiscal 1994. The dollar increase was attributable to the Company's purchase
of fixed and intangible assets resulting from various acquisitions and the fixed
assets needed for the increased rentals of equipment. All acquisitions in
fiscal 1995 were accounted for by the purchase method of accounting for
acquisitions.
Interest expense, net of interest income, increased to $835,000 for fiscal
1995 from $67,000 for fiscal 1994. This increase resulted from the Company
borrowing monies to fund certain acquisitions. The proceeds from the Company's
May 1995 stock offering were utilized to repay all bank indebtedness, yet due to
the acquisition pace, the company became a borrower again in early July 1995.
Income tax expense was provided at a 37.2% effective rate, compared to 36.5%
the prior fiscal year. The increase was due to the increase in non-deductible
amortization expense in fiscal 1995 and the entry into a higher tax bracket.
Net income for fiscal 1995 was $13.1 million, a 62.0% increase over the $8.1
million for fiscal 1994. Net income per share increased 28.3% to $1.27 for
fiscal 1995 compared to $0.99 for fiscal 1994. The weighted average number of
shares increased 26.9% to 10.3 million at July 31, 1995 from 8.1 million at July
31, 1994, primarily as a result of the March 1994 and May 1995 public stock
offerings and shares issued in conjunction with certain acquisitions.
FOR THE FISCAL YEARS ENDED JULY 31, 1994 AND 1993
- -------------------------------------------------
Operating revenue for fiscal 1994 increased to $71.5 million from $48.4
million for the fiscal year ended July 31, 1993 ("fiscal 1993"). The 48%
increase in operating revenue is attributable primarily to the increase from 71
locations to 134 locations in fiscal 1994 with approximately one-third of the
increase resulting from the acquired home respiratory and other medical
equipment companies. The balance of the growth in operating revenue was from
existing locations, inclusion of fiscal 1993 acquisitions for a full year and
locations internally developed in fiscal 1994.
Operating revenue from home respiratory and other medical equipment grew 74%
to $41.6 million for fiscal 1994 from $23.9 million for fiscal 1993. This 74%
increase was due mainly to a continued focus of the Company's sales force toward
home respiratory products and services and acquisitions of companies
predominantly in this line of business.
13
<PAGE>
Operating revenue from home infusion therapy increased 17% to $25.5 million
for fiscal 1994 from $21.7 million for fiscal 1993. The slower growth is due to
the fiscal 1994 direction of the Company's single sales force toward home
respiratory products and services, and unit growth in home infusion therapy
products and services in spite of some pricing pressures experienced during the
year.
Cost of revenue as a percentage of operating revenue decreased to 24.4% for
fiscal 1994 from 25.5% for fiscal 1993. The Company continued to obtain better
volume pricing with the addition of new entities and refocused its acquisition
efforts on the home respiratory and other medical equipment line of business,
which has a lower cost of revenue as a percentage of operating revenue. Selling,
general and administrative expenses as a percentage of operating revenue
decreased to 50.2% from 51.8% for the same two periods.
Depreciation and amortization expense increased 91% to $5.3 million for fiscal
1994 from $2.8 million for fiscal 1993, and increased as a percentage of
operating revenue during the same periods. This dollar increase is attributable
to the Company's purchases of fixed and intangible assets resulting from various
acquisitions and the fixed assets needed for the increased rentals of equipment.
Net interest expense decreased to $67,000 for fiscal 1994 from $76,000 for
fiscal 1993. This decrease resulted from the payment of outstanding debt
balances in March 1994 with proceeds from the public offering and lower interest
rates charged on borrowings from banks prior to March 1994. The decrease was
also due to the interest income earned on short-term investments.
The effective tax rate was 36.5% for fiscal 1994, compared to 36.6% for fiscal
1993.
As a result of the foregoing, net income increased 58% to $8.1 million from
$5.1 million and net income as a percentage of operating revenue increased to
11.3% for fiscal 1994 from 10.6% for fiscal 1993.
The Company was required to adopt Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," in the first quarter of fiscal 1994 as
more fully described in Note 1 of the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At July 31, 1995, total current assets were $56.7 million and total current
liabilities were $18.8 million, resulting in working capital of $37.9 million.
The Company's current ratio was 3.01 to 1 at July 31, 1995 compared to 3.68 to 1
at July 31, 1994. Net trade accounts receivable increased $12.7 million in
fiscal 1995, or 42.8%. This increase is attributable to acquisitions of the net
assets of many home health care companies during the year and the 87.6% increase
in operating revenue over the prior year. As a result, the Company's days
revenue outstanding on net accounts receivable decreased to 98 days at July 31,
1995 from 116 days at July 31, 1994. Acquired receivables remaining outstanding
account for approximately 10 days revenue outstanding at July 31, 1995 and 21
days revenue outstanding at July 31, 1994.
Current liabilities increased $8.5 million in fiscal 1995, or 81.8%, as $10.0
million was borrowed on the working capital line of credit. The balance of the
change was due to the timing of payments to vendors.
14
<PAGE>
During fiscal 1995, the Company generated cash of $17.1 million from operating
activities primarily as a result of net income of $13.1 million along with non-
cash expenses of $11.7 million. Advances on the working capital line of credit
were utilized to fund acquisitions and internal expansion. During fiscal 1995,
the Company spent $55.6 million to acquire various home health care companies
and $17.3 million to purchase property and equipment, primarily rental
equipment, for operational needs. The Company has been financing its revenue
growth and increased working capital requirements with positive net cash
provided by operating activities and short-term borrowings.
As of July 31, 1995, the Company had a working capital line of credit of $75.0
million, with approximately $65.0 million available for future borrowing. The
working capital and acquisition line of credit carries a negative pledge on all
Company assets, is payable on demand and provides for interest rates, at the
Company's election, of LIBOR plus .70% or prime rate minus 1% for the first
$20.0 million advanced to the Company and LIBOR plus .825% or prime rate minus
1% for any advances in excess of the first $20.0 million. The line of credit
requires compliance by the Company with certain financial and negative
covenants, including a restriction on dividends. Management believes that its
credit capacity and cash flow from operations, will be sufficient for the
Company's projected growth in the near future.
The Company completed a public offering in May of 1995 in which it issued an
additional 1.7 million shares for cash of $49.9 million, compared with its March
1994 public offering of 2.0 million shares which provided cash of $36.7
million.
For fiscal 1994, the Company's operating activities provided $4.8 million in
cash, compared to $1.6 million in fiscal 1993. The primary component of this
change was an increase in net income to $8.1 million for fiscal 1994, compared
to $5.1 million for fiscal 1993, offset by increased accounts receivable and
decreased amounts payable on operating liabilities. The Company has generated
positive net cash flow from operating activities in each of its last six fiscal
years despite increases in accounts receivable in each period resulting from the
similar growth in operating revenue.
During fiscal 1994, investing activities used $47.1 million in cash, compared
to $6.4 million during fiscal 1993. During fiscal 1994, the Company spent $9.4
million to purchase property and equipment, primarily rental equipment, for
operations and general equipment needs, compared to $4.0 million in fiscal 1993.
Purchases of property and equipment typically represent the major component of
the Company's investing activities. The Company paid $38.6 million to acquire
various home health care companies in fiscal 1994. Aside from increased
purchases of home respiratory and other medical equipment to support its sales
growth in its home respiratory and other medical equipment operations, the
Company does not require significant fixed capital investment.
Financing activities provided $40.0 million in cash during fiscal 1994,
compared to $7.2 million during fiscal 1993. The Company's strategy has been to
use net cash flow from operations and borrowings to finance expansion of its
business. The Company was able to complete an equity offering and repay all
borrowings with a portion of the proceeds to enable the same strategy to
continue for fiscal 1994.
15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Financial Statements
- --------------------
The information required by this item is set forth on pages 4 through 22 in the
Company's Annual Report to Shareholders for the fiscal year ended July 31, 1995,
and is hereby incorporated by reference.
Selected Quarterly Consolidated Financial Data
- ----------------------------------------------
The supplementary financial information is set forth on page 29 of the Company's
Annual Report to Shareholders for the fiscal year ended July 31, 1995, and is
hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
On June 7, 1994, the Company dismissed Ernst & Young LLP as its independent
accountants and engaged Deloitte & Touche LLP as its new independent
accountants. The change was reported in a Current Report on Form 8-K dated June
10, 1994.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
Information concerning Directors and Executive Officers of the Registrant is
incorporated herein by reference to the Company's definitive proxy statement
dated November 8, 1995 for the annual meeting of shareholders to be held on
December 8, 1995, pages 3 and 4, "ELECTION OF DIRECTORS". Such definitive proxy
statement will be filed with the Securities and Exchange Commission no later
than October 28, 1995.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information concerning executive compensation is incorporated herein by
reference to the Company's definitive proxy statement dated November 8, 1995 for
the annual meeting of shareholders to be held on December 8, 1995, page 4,
"Executive Compensation," and page 5, "Key Man Life Insurance." Such definitive
proxy statement will be filed with the Securities and Exchange Commission no
later than October 28, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
Information concerning security ownership of certain beneficial owners and
management is incorporated herein by reference to the Company's definitive proxy
statement dated November 8, 1995 for the annual meeting of shareholders to be
held on December 8, 1995, pages 1 and 2, "PRINCIPAL HOLDERS OF VOTING
SECURITIES". Such definitive proxy statement will be filed with the Securities
and Exchange Commission no later than October 28, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
Information concerning certain relationships and related transactions is
incorporated herein by reference to the Company's definitive proxy statement
dated November 8, 1995 for the annual meeting of shareholders to be held on
December 8, 1995, page 5, "Certain Related Transactions". Such definitive proxy
statement will be filed with the Securities and Exchange Commission no later
than October 28, 1995.
16
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
(a) Documents filed as part of this report:
1. Financial Statements. The audited consolidated balance sheets of the
--------------------
Registrant and subsidiaries as of July 31, 1995 and July 31, 1994,
and the related consolidated statements of income, changes in
stockholders' equity and cash flows of the Registrant and
subsidiaries for the three fiscal years ended July 31, 1995, are set
forth on pages 4 through 21 of the Registrant's Annual Report to
Shareholders for the fiscal year ended July 31, 1995, which
statements are incorporated in this report by reference.
2. Financial Statement Schedules. The following Financial Statement
-----------------------------
Scheule for years ended July 31, 1995, 1994 and 1993 is set forth
under the heading "Financial Statement Schedule" on page 21 of the
Company's Annual Report to Shareholders for the fiscal year ended
July 31, 1995 and is hereby incorporated by reference.
Schedule II Valuation and
Qualifying Accounts
for the fiscal years
ended July 31, 1995,
1994 and 1993
All other schedules are omitted because they are not required, are not
applicable, or the required information is included in the
Consolidated Financial Statements or notes thereto.
(a) 3. Exhibits. The exhibits filed as a part of this Report are listed in
--------
the attached Index to Exhibits.
(b) Reports on Form 8-K filed in the fourth quarter of fiscal 1995.
--------------------------------------------------------------
The Company filed a Current Report on Form 8-K dated June 20, 1995.
The Current Report discussed that the Registrant, through its wholly-owned
subsidiary, Distinct Home Health Care, Inc., acquired substantially all of the
assets of Marshall Bell, Ltd., a Texas-based partnership referred to as
"Marshall Bell, Ltd.," or "Seller") for $11.3 million cash and the issuance of
146,000 shares of restricted common stock valued at $2 million; that Marshall
Bell, Ltd., provides home health care products and services through its
locations in Texas, Louisiana, Mississippi and Arkansas; that the Registrant
intends to continue the business as acquired; that the Sellers had no material
relationship with the Registrant prior to the acquisition; that the purchase
price was paid from available cash on hand resulting from the May 1995 secondary
public offering in which the Registrant raised approximately $49.9 million; that
the price was based on comparable purchases in the home health care industry,
type and timing of consideration to be paid and arms-length negotiations between
the two parties.
17
<PAGE>
Index to Exhibits
Except as otherwise indicated, the following Exhibits are incorporated by
reference as a part of this Report on Form 10-K:
<TABLE>
<CAPTION>
Exhibit Sequentially Numbered
Number Description Page
- ------- ----------- --------------------------
<C> <S> <C>
3.1 Articles of Incorporation of RoTech Medical Corporation (F/K/A Southern Oxygen Systems,
Inc.) filed with the Florida Department of State on September 1, 1981. (Incorporated
by reference to Exhibit 3.1 to the Company's Registration Statement No. 33-8711 on Form
S-1).
3.2 Amendment to Articles of Incorporation of Southern Oxygen Systems, Inc., changing its
name to RoTech Medical Corporation and restating its Articles of Incorporation, filed
with the Florida Department of Sate on March 29, 1984. (Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement No. 33-8711 on Form S-1.)
3.3 Amendment to Articles of Incorporation of RoTech Medical Corporation, changing the
authorized capital stock to 1,500,000 shares of Common Stock having a par value of
$1.00 per share, filed with the Florida Department of State on June 13, 1984.
(Incorporated by reference to Exhibit 3.3 to the Company's Registration Statement No.
33-8711 of Form S-1.)
3.4 Amendment to Articles of Incorporation of RoTech Medical Corporation, changing the
authorized capital stock to 50,000,000 shares of Common Stock having a par value of
$.0002 per share, filed with the Florida Department of State on June 15, 1984.
(Incorporated by reference to Exhibit 3.4 to the Company's Registration Statement No.
33-8711 of Form S-1.)
3.5 By-Laws of RoTech Medical Corporation (F/K/A Southern Oxygen Systems, Inc.)
(Incorporated by reference to Exhibit 3.5 to the Company's Registration Statement No.
33-8711 of Form S-1.)
3.6 Amended and Restated By-Laws of RoTech Medical Corporation, as amended. (Incorporated
by reference to Exhibit 3.6 to the Company's Registration Statement No. 33-8711 of Form
S-1.)
4.1 Form of Stock Certificate. (Incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement No. 33-8711 of Form S-1.)
10.1 Form of Registrant's 1986 Incentive Stock Option Plan. (Incorporated by reference to
Exhibit 10.5 to the Company's Registration Statement No. 33-8711 of Form S-1.)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
10.2 First Amendment to Third Amendment and Restated Loan Agreement, dated June 1, 1995, by and
between RoTech Medical Corporation, its subsidiaries and SunBank, National Association,
reflecting one credit facility not to exceed $75,000,000, filed herewith.
10.3 Form of Registrant's Incentive Compensation Plan (Incorporated by reference to Exhibit 10.3
to the Company's Registration Statement No. 33-41097 of Form S-2.)
10.4 Form of Registrant's Restricted Stock Plan for Non-Employee Directors (Incorporated by
reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1992.)
10.5 Form of Registrant's July 9, 1993 Stock Option Plan, (Incorporated by reference to Exhibit
10.5 to the Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1994.)
10.6 Form of Registrant's Amended Restricted Stock Plan for Non-Employee Directors, filed herewith.
13.1 Annual report to security holder.
22.1 Subsidiaries of Registrant, filed herewith.
27 Financial Data Schedule
99 Notice & Proxy Statement
</TABLE>
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, RoTech Medical Corporation has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ROTECH MEDICAL CORPORATION,
a Florida corporation
By: /s/ Stephen P. Griggs
-----------------------
Stephen P. Griggs,
President
Date: October 28, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ William P. Kennedy Chief Executive Officer; and Director October 28, 1995
- ---------------------------
WILLIAM P. KENNEDY
/s/ Stephen P. Griggs President, Assistant Secretary, October 28, 1995
- --------------------------- Chief Operating Officer; and Director
STEPHEN P. GRIGGS
/s/ William A. Walker II Secretary, and Director October 28, 1995
- ---------------------------
WILLIAM A. WALKER
Director
- --------------------------
JACK T. WEAVER
Director
- --------------------------
LEONARD E.WILLIAMS
/s/ Rebecca R. Irish Treasurer; Assistant Secretary, October 28, 1995
- -------------------------- Principal Financial and Accounting
REBECCA R. IRISH Officer; and Chief Financial Officer
</TABLE>
20
<PAGE>
FIRST AMENDMENT TO THIRD AMENDED AND RESTATED LOAN AGREEMENT
AND FIRST AMENDMENT TO PLEDGE AGREEMENT
THIS FIRST AMENDMENT TO THIRD AMENDED AND RESTATED LOAN AGREEMENT AND FIRST
AMENDMENT TO PLEDGE AGREEMENT (the "First Amendment") dated as of the 1st day of
June, 1995, is entered into by and between ROTECH MEDICAL CORPORATION, a Florida
corporation, 4506 L.B. McLeod Road, Orlando, Florida 32811 (the "Borrower") and
SUN BANK, NATIONAL ASSOCIATION, a national banking association, 200 South Orange
Avenue, Orlando, Florida 32801 (the "Bank").
W I T N E S S E T H:
-------------------
WHEREAS, the Borrower and the Bank heretofore entered into that certain Third
Amended and Restated Loan Agreement dated as of August 10, 1994 (the "Loan
Agreement"), pursuant to which the Bank agreed, among other things, to extend to
the Borrower a revolving line of credit loan in the maximum principal amount of
$50,000,000.00 (the "Loan") for the purposes set forth in the Loan Agreement;
and
WHEREAS, the Borrow has requested the Bank to increase the Loan by
$25,000,000.00 to a maximum principal amount of $75,000,000.00, to modify
certain financial covenants and ratios contained in the Loan Agreement and to
modify certain other provisions set forth in the Loan Agreement and the Bank has
agreed to do so subject to the additional conditions, limitations and
requirements hereinafter set forth in this First Amendment; and
WHEREAS, in connection with securing the obligations of the Borrower provided
for in the Loan Agreement, the Borrower and the Bank heretofore entered into
that certain Pledge Agreement dated August 10, 1994 (the "Pledge Agreement");
and
WHEREAS, the Borrower and the Bank desire and have agreed to modify the
provisions of the Pledge Agreement in order to modify certain definitions
contained in the Pledge Agreement and to confirm and reaffirm their respective
obligations under the Pledge Agreement.
NOW, THEREFORE, for and in consideration of the mutual premises contained
herein and for other good and valuable consideration, the receipt and
sufficiency whereof is hereby acknowledged, the parties hereto do hereby agree
as follows:
1. Amendments to Loan Agreement. The Loan Agreement is hereby amended as
----------------------------
follows:
<PAGE>
(a) The definition of the term "Agent Fee" is hereby added to Section
1.1 of the Loan Agreement in the proper alphabetical order, as follows:
"`Agent Fee' shall mean the annual fee
payable by the Borrower to the Bank to compensate
the Bank for services performed by it in connection
with the Bank's effort to obtain participants for
the Loan. The amount of such Agent Fee shall be .05%
(five basis points) of the average principal balance
of the Loan which has been outstanding during (i) the
period beginning June 1, 1995, and ending on July 31,
1995, in the case of the payment due on August 1, 1995
and (ii) the Company's most recently concluded fiscal
year in the case of subsequent payments. The Agent Fee
shall be due and payable annually, commencing August 1,
1995 and on each August 1 thereafter during the term
of the Loan."
(b) The definition of the term "Funded Debt to EBITDA" is hereby
added to Section 1.1 of the Loan Agreement in the proper alphabetical order, as
follows:
"`Funded Debt to EBITDA' shall mean the ratio
of the Borrower's Funded Debt to its EBITDA."
(c) The definition of the term "Funded Debt to Tangible Net Worth
Ratio" contained in Section 1.1 of the Loan Agreement is hereby deleted in its
entirety and the following is substituted in lieu thereof:
"`Funded Debt to Total Capital Ratio' shall
mean the ratio of the Borrower's Funded Debt to
its Total Capital."
(d) The definition of the term "EBITDA" is hereby added to Section
1.1 of the Loan Agreement, in the proper alphabetical order, as follows:
"`EBITDA' shall mean, for any period, Net
Income, increased by the sum of (i) Interest
Expense for such period, (ii) Income Tax Expense
for such period, (iii) depreciation for such
period and (iv) amortization for such period."
(e) The definition of the term "Increase Commitment Fee" is hereby
added to Section 1.1 of the Loan Agreement in the proper alphabetical order, as
follows:
2
<PAGE>
"`Supplemented Facility Fee' shall mean a one-time fee in the
-------------------------
amount of $20,812.00 for the increase of the maximum amount available
for borrowing in respect of the Loan from $50,000,000.00 to
$75,000,000.00, and shall be payable and is deemed to have been earned
as of the date that the Borrower executes and delivers to the Bank the
promissory note or notes evidencing such increase."
(f) The definition of the term "Net Worth" is hereby added to Section
1.1 of the Loan Agreement in the proper alphabetical order, as follows:
"`Net Worth' shall mean, for any period, the net worth of the
---------
Borrower, determined in accordance with GAAP."
(g) The definition of the term "Revolving Period" contained in
Section 1.1 of the Loan Agreement is hereby deleted in its entirety and the
following is substituted in lieu thereof:
"`Revolving Period' shall mean the period of time commencing on
----------------
the date of the Original Loan Agreement and ending on (i) the
occurrence of an Event of Default, or (ii) January 1, 1997, or (iii)
such later date as the Bank may in its absolute discretion agree to in
writing, whichever first occurs."
(h) The definition of the term "Total Capital" is hereby added to
Section 1.1 of the Loan Agreement in the proper alphabetical order, as follows:
"`Total Capital' shall mean the sum of Borrower's Funded Debt and
-------------
its consolidated Net Worth."
(i) The definition of the term "Working Capital Loan" contained in
Section 1.1 of the Loan Agreement is hereby deleted in its entirety and the
following is substituted in lieu thereof:
"`Working Capital Loan' shall mean the Working Capital Loan or
--------------------
Loans up to but not exceeding the principal amount of $75,000,000.00
made to the Borrower by the Bank pursuant to and in accordance with
the terms of this Agreement."
(j) The first sentence of Section 2.1 of the Loan Agreement is hereby
deleted in its entirety and the following is substituted in lieu thereof:
3
<PAGE>
"The Bank agrees from time to time during the Revolving Period to lend
to the Borrower, upon the Borrower's request, up to the aggregate
principal amount of $75,000,000.00 on the terms and conditions set
forth herein."
(k) Paragraph (b) of Section 2.2 of the Loan Agreement is hereby
deleted in its entirety and the following is substituted in lieu thereof:
"(b) if the LIBOR Rate Option is selected, then at a rate of
interest of per annum equal to:
(i) LIBOR plus 70 basis points (0.70%) for the first
$20,000,000 advanced to the Borrower hereunder; and
(ii) LIBOR plus 82.5 basis points (0.825%) for any Advances
hereunder after the first $20,000,000.
(l) Paragraph (b) of Section 2.8 of the Loan Agreement is hereby
deleted in its entirety and the following is substituted in lieu thereof:
"(b) The entire unpaid principal balance together with accrued
interest shall be due and payable in full on the earlier of (i) the
termination of the Revolving Period, or (ii) such later date as the
Bank, in its sole discretion, may agree to in writing."
(m) Paragraph (q) of Section 4.1 of the Loan Agreement is hereby
deleted in its entirety and the following is substituted in lieu thereof:
"(q) Funded Debt to Total Capital Ratio. At all times during the
----------------------------------
term of this Agreement, the Borrower's Funded Debt to Total Capital
Ratio shall not exceed 0.50:1, tested quarterly."
(n) Paragraph (r) of Section 4.1 of the Loan Agreement is hereby
deleted in its entirety and the following is substituted in lieu thereof:
"(r) Current Ratio. At all times during the term of this
-------------
Agreement, the ratio of the Borrower's Current Assets to its Current
4
<PAGE>
Liabilities shall be equal to or greater than
1.1:1, tested quarterly."
(o) Paragraph (t) of Section 4.1 of the Loan Agreement is hereby
deleted in its entirety and the following is substituted in lieu thereof:
"(t) Minimum Net Worth. At all times during the
-----------------
term of this Agreement, the Borrower's Net Worth shall
be equal to or greater than $85,000,000.00, plus (i)
fifty percent (50%) of its Net Income for each fiscal
year of the Borrower, commencing with the fiscal year
ending July 31, 1995, plus (ii) one hundred percent
(100%) of the net proceeds of any equity offering or
subordinated debt issue, tested quarterly."
(p) Paragraph (z) is hereby added to Section 4.1 of the Loan
Agreement as follows:
"(t) Funded Debt to EBITDA Ratio. At all
---------------------------
times during the term of this Agreement, the
Borrower's Funded Debt to EBITDA Ratio shall not
exceed 3.0:1, tested quarterly, computed on a
rolling four-quarter basis, based on information
contained in the Borrower's current financial
statement and financial statements for the
Borrower's preceding three quarters."
(q) Paragraph (aa) is hereby added to Section 4.1 of the Loan
Agreement as follows:
"(aa) Malpractice Suits. The Borrower
-----------------
shall promptly advise the Bank in writing of
the threatened or actual filing of malpractice
litigation against the Borrower or any of its
Subsidiaries. Such notice shall be given to the
Bank no later than thirty (30) Days after the
Borrower or the applicable Subsidiary becomes
aware of the threat of filing or actual filing
of any such malpractice litigation. The Borrower
shall provide the Bank with all information and
documentation requested by the Bank relating to
any such threatened or actual malpractice suits."
(r) Section 5.11 of the Loan Agreement is hereby deleted in its
entirety and the following is substituted in lieu thereof:
5
<PAGE>
"SECTION 5.11 Payment of Loan Fees. The Bank shall have
--------------------
received the Facility Fee, the Supplemental Facility Fee and
each installment of the Agent Fee, as and when due."
(s) All references in the Loan Agreement to the term "Funded
Liabilities" are hereby deleted and replaced with a reference to the term
"Funded Debt".
2. Amendments to Pledge Agreement. The Pledge Agreement shall be amended
------------------------------
as follows:
(a) The definition of the term "Promissory Note" contained in
paragraph 1 of the Pledge Agreement is hereby deleted in its entirety and, in
lieu thereof, the following is substituted:
"`Promissory Note' shall mean the Working Capital Note, as defined in
---------------
the Loan Agreement, and all amendments, supplements, renewals or
replacements thereof."
3. Conditions Precedent. As conditions precedent to the Bank increasing
--------------------
and modifying the Loan, the Borrower shall:
(a) pay to the Bank the Supplemental Facility Fee;
(b) provide the Bank with a written opinion of its counsel in form
and content acceptable to the Bank; and
(c) execute and deliver any other loan documents requested or
required by the Bank in connection herewith.
4. Representations and Warranties. The Borrower hereby reaffirms all of
------------------------------
the representations and warranties contained in the Loan Agreement and the
Pledge Agreement as though made and given in connection with the execution and
delivery of this First Amendment and further certifies that all such
representations and warranties are true and correct on and as of the date
hereof.
5. Ratification. Except for any modification of and/or amendment to the
------------
Loan Agreement and the Pledge Agreement as herein provided, no other term,
condition or provision of the Loan Agreement or the Pledge Agreement shall be
considered to be altered or amended, and this First Amendment shall not be
considered a novation. The Borrower and the Guarantors agree that the amounts
extended by the Bank to the Borrower hereunder are absolutely and
unconditionally due and owing to the Bank, and
6
<PAGE>
are not subject to any claims, counterclaims, defenses or other rights of offset
whatsoever.
6. Complete Agreement. This First Amendment constitutes the complete
------------------
agreement between the parties hereto and incorporates all prior discussions,
agreements and representations made in regard to the matters set forth herein.
7. Joinder. Each of the Subsidiaries hereby joins in this First
-------
Amendment, as a Subsidiary and a Guarantor, by executing the Joinder and Consent
of Subsidiaries and Guarantors attached hereto.
8. Capitalized Terms. Capitalized terms used in this First Amendment
-----------------
shall have the meanings assigned to them in the Loan Agreement unless the
context hereof clearly dictates otherwise.
IN WITNESS WHEREOF, the Bank and the Borrower have caused this First
Amendment to be executed by their respective duly authorized officers as of the
date first above written.
ATTEST ROTECH MEDICAL CORPORATION
/s/ Stephen P. Griggs By: /s/ Rebecca R. Irish
- ----------------------------- -------------------------------
Stephen P. Griggs Rebecca R. Irish
Title: President Treasurer
(CORPORATE SEAL)
SUN BANK, NATIONAL ASSOCIATION
By: /s/ Randy P. Chesak,
------------------------------
Randy P. Chesak,
Vice President
7
<PAGE>
EXHIBIT 10.6
ROTECH MEDICAL CORPORATION
BOARD OF DIRECTORS ACTION BY CONSENT
THE UNDERSIGNED, being all of the members of the Board of Directors of
ROTECH MEDICAL CORPORATION, a Florida corporation, hereby consent to the
following action by the Board of Directors of Corporation and instruct the
Secretary of Corporation to enter this certificate into the minutes of the
proceedings of the Board:
"WHEREAS, the shareholders of the Corporation adopted the Restricted
Stock Plan for Non-Employee Directors on December 4, 1992 (the "Plan"); and
WHEREAS, the Board, pursuant to Section 4(c) of the Plan, desires to
amend the Plan in the manner hereinafter set forth;
NOW THEREFORE, BE IT RESOLVED that the dollar value specified in Section
2(a) of the Plan to be used to calculate that number of stock units to be
credited to each director, be increased from $2,500 to $5,000 effective
immediately, and that Section 2(a) reflect such amendment by being restated as
follows:
(a) As of the date of each Annual Meeting of Shareholders of
RoTech at which an Eligible Director is elected to serve as a director
until the following Annual Meeting of Shareholders, there shall be
credited to such Eligible Director's Account that number of stock units
(including fractional units) determined by dividing $5,000 by the
average of the last reported sale prices per share of RoTech Stock as
quoted on the NASDAQ National Market System for the five business days
following the date of such Annual Meeting of Shareholders."
<PAGE>
EXECUTION of this certificate by the undersigned, being all of the
members of the Board of Directors, pursuant to Section 607.0704 of the Florida
Statutes, waives any requirement of a formal meeting of the Board to conduct the
business referred to herein.
DATED as of the 9th day of December, 1994.
/s/ William P. Kennedy
--------------------------------
WILLIAM P. KENNEDY, Director
/s/ William A. Walker II
--------------------------------
WILLIAM P. WALKER II, Director
/s/ Leonard E. Williams
--------------------------------
LEONARD E. WILLIAMS, Director
/s/ Jack T. Weaver
--------------------------------
JACK T. WEAVER, Director
/s/ Stephen P. Griggs
--------------------------------
STEPHEN P. GRIGGS, Director
2
<PAGE>
APPENDIX A
ROTECH MEDICAL CORPORATION
RESTRICTED STOCK PLAN
FOR NON-EMPLOYEE DIRECTORS
SECTION 1. Introduction.
-------------
The RoTech Medical Corporation Restricted Stock Plan for Non-Employee
Directors ("Plan") provides deferred compensation for those Directors of RoTech
Medical Corporation ("RoTech") not employed by RoTech or any of its subsidiaries
or affiliates ("Eligible Directors") as a supplement to any future cash
retainers and attendance fees, and is expected to encourage qualified
individuals to accept nominations as RoTech Directors and to strengthen the
mutuality of interest between RoTech's non-employee Directors and RoTech's other
shareholders. Benefits under the Plan are payable in the form of shares of
RoTech Common Stock ("RoTech Stock"). The Plan shall be unfunded and benefits
distributed under the Plan ("Plan Benefits") shall be paid only from the general
assets of RoTech. All shares of RoTech stock held under the Plan shall, prior to
their distribution to an Eligible Director, remain subject to the claims of
RoTech's creditors. The Plan is effective immediately upon approval by the
shareholders of RoTech.
SECTION 2. Stock Unit Accounts.
--------------------
The Secretary of RoTech shall maintain a stock Unit Account ("Account")
for each Eligible Director. Stock units will be credited to each such Account as
follows:
(a) As of the date of each Annual Meeting of Shareholders of
RoTech at which an Eligible Director is elected to serve as a director until the
following Annual Meeting of Shareholders, there shall be credited to such
Eligible Director's Account that number of stock units (including fractional
units) determined by dividing $2,500 by the average of the last reported sale
prices per share of RoTech Stock as quoted on the NASDAQ National Market System
for the five business days following the date of such Annual Meeting of
Shareholders.
(b) As of each date on which any cash dividend is paid on RoTech
Stock, there shall be credited to each Account that number of stock units
(including fractional units) determined by (i) multiplying the amount of such
dividend (per share) by the number of stock units in such Account; and (ii)
dividing the total so determined by the average of the last reported sale prices
per share of RoTech Stock as quoted on the NASDAQ National Market System for the
five business days following the date of payment of such cash dividend. The
additions to an Eligible Director's Account pursuant to this Section 2(b) shall
continue
<PAGE>
until the Eligible Director's Plan Benefit is forfeited or fully paid.
SECTION 3. Plan Benefits.
--------------
(a) Form. the plan benefit of an eligible director shall consist of
-----
shares of RoTech stock equal in number to the stock units in the Eligible
Director's Account. Any fractional stock unit shall be paid in cash.
(b) Distribution.
-------------
(i) The Plan Benefit of an Eligible Director shall be
distributed in five annual installments commencing on the January 1 following
the termination of the Eligible Director's service as a Director of RoTech. The
first installment shall be measured by one-fifth of the stock units in the
Eligible Director's Account as of the distribution date, and the second through
fifth annual installments shall be measured by one-fourth, one-third, one-half
and all, respectively, of the stock units in the Eligible Director's Account as
of the date of each distribution.
(ii) Notwithstanding Section 3(b)(i), no distribution of a Plan
Benefit shall commence prior to the January 1 following the attainment of age 62
by the Eligible Director.
(iii) Notwithstanding Sections 3(b)(i) and (ii), in the case of
the death of an Eligible Director, the balance of any Plan Benefit shall be
distributed, within a reasonable time as determined by RoTech, after the
Eligible Director's death to the Eligible Director's beneficiary or
beneficiaries, as specified by the Eligible Director on a form furnished by and
filed with the Secretary of RoTech. If no beneficiary has been designated by the
Eligible Director or if no beneficiary survives the Eligible Director, the
undistributed balance of his or her Plan Benefit shall be distributed to the
Eligible Director's surviving spouse as beneficiary if such spouse is still
living or, if not living, in equal shares to the then living children of the
Eligible Director as beneficiaries or, if none, to the Eligible Director's
estate as beneficiary.
(iv) The entire Plan Benefit of an Eligible Director shall be
forfeited if an eligible Director's service as a Director shall terminate, for
any reason whatsoever, before such Eligible Director has served for five years;
provided, however, that such forfeiture shall not apply if the Eligible Director
dies or reaches age 72 while serving as a Director of RoTech. Years of service
as a director of RoTech prior to the effective date of the Plan shall be taken
into account. If an Eligible Director whose Plan Benefit is forfeited under this
Section 3(b)(iv) resumes service as a Director, his or her Plan Benefit
2
<PAGE>
as of the date of forfeiture shall be restored as of the date such resumed
service begins.
(v) If an Eligible Director shall, for any reason other than
death, cease to serve as a Director of RoTech prior to any Annual Meeting of the
Shareholders of RoTech, there shall be forfeited (A) the portion of the Eligible
Director's Plan Benefit represented by the most recent stock units credited to
his or her Account in accordance with Section 2(a); and (B) all stock units
credited to his or her Account in accordance with Section 2(b) on account of
stock units required to be forfeited by clause (A). Stock units forfeited under
this Section 3(b)(v) will be restored in the event the Eligible Director resumes
service as a Director prior to any Annual Meeting of the Shareholders of RoTech
if the number of calendar days of service as a Director after the Annual Meeting
date as of which the forfeited stock units were awarded and prior to the next
Annual Meeting date as of which a new grant of stock units is made to such
Director is greater than 182.
SECTION 4. General.
--------
(a) Except as provided in Section 3(b)(iii), no payment of any Plan
Benefit of an Eligible Director shall by such Eligible Director or his or her
creditor be anticipated, assigned, attached, garnished, optioned, transferred or
made subject to any creditor's process, whether voluntarily or involuntarily or
by operation of law. Any act in violation of this subsection shall be void.
(b) To the extent required by applicable federal, state or local law,
the recipient of any payment or distribution under the Plan shall make
arrangements satisfactory to RoTech for the satisfaction of any withholding or
employment tax obligations that may arise by reason of the crediting of stock
units or the distribution of any part of a Plan Benefit.
(c) The Board of Directors may, at any time and for any reason, amend or
terminate the Plan; provided, however, that the Plan shall not be amended more
than once every six months, other than to comport with changes in the Internal
Revenue Code or rules or regulations issued thereunder.
(d) In the event of a stock split, stock dividend or similar change in
capitalization affecting RoTech Stock, an appropriate number of stock units
shall be substituted for or added to each stock unit credited to an Eligible
Director's Account, and such substituted or added stock units shall be subject
to the same terms and conditions as the original stock units. This provision
does not, however, authorize the delivery of a fractional share of RoTech Stock
under the Plan.
3
<PAGE>
(e) Neither the Plan nor the crediting of stock units under the Plan
shall be deemed to give any individual a right to remain a Director of RoTech or
create any obligation on the part of the Board of Directors of RoTech to
nominate any Director for reelection by the shareholders of RoTech.
(f) The RoTech Stock distributed as a Plan Benefit under the Plan may
be either authorized but unissued shares or shares which have been or may be
reacquired by RoTech. All shares of RoTech Stock distributed under the Plan
shall constitute restricted securities and may not be sold, hypothecated or
transferred except as permitted under the applicable federal and state
securities laws.
(g) In the event of an acquisition of more than sixty percent (60%) of
the stock or assets of RoTech, the Plan Benefit shall immediately vest and be
distributed in such manner as will permit the Eligible Director to participate
in such acquisition equivalent with other shareholders of RoTech.
(h) This Plan shall be governed by the laws of the State of Florida.
SECTION 5. Execution.
----------
To record the adoption of the Plan by the Board of Directors, RoTech has
caused its authorized officer to execute the same this ____ day of October,
1992.
ROTECH MEDICAL CORPORATION
By:
---------------------------
ATTEST:
- --------------------------------
Secretary
4
<PAGE>
EXHIBIT 13.1
ROTECH
1995
ANNUAL REPORT
A HOME HEALTH CARE COMPANY
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Table of Contents
- -------------------------------------------------------------------------------
July 31, 1995
<TABLE>
<CAPTION>
<S> <C>
Letter to Shareholders............................... 2-3
Consolidated Financial Statements.................... 4-21
Financial Statement Schedule......................... 21
Reports of Independent Certified Public Accountants.. 22-23
Selected Consolidated Financial Data................. 24
Management's Discussion and Analysis of Financial
Condition and Results of Operations............. 25-28
Selected Quarterly Consolidated Financial Data....... 29
Prices of Common Stock............................... 29
</TABLE>
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
To Our Shareholders
- -------------------------------------------------------------------------------
RoTech's commitment to bringing home health care to patients in non-urban
America resulted in our seventh consecutive year of record revenues and
earnings. Throughout fiscal 1995, the Company continued to implement its
acquisition and expansion strategy, increasing the number of non-urban markets
served, while increasing the portfolio of home health care products and services
available to patients in those markets. The recent historical growth of home
health care has been driven by technological advances, increased acceptance of
home health care, the need to reduce the cost of care, the aging of America's
population and the enhanced life expectancy of Americans compared to past years.
Our industry faces health care reform efforts, cost containment measures and
managed care initiatives that will drive the management of the business. RoTech
continued to devote significant time and focus to its operations, including
information systems, to posture itself to handle the future billing, management,
operational and reporting needs.
Record net operating revenue, net income and net income per share amounts posted
during fiscal 1995 and prior years are shown in the table below. These record
amounts were all posted despite increases in shares outstanding, primarily as a
result of our various stock offerings.
<TABLE>
<CAPTION>
Net Operating Net Income Wtd. Average
Revenue Net Income per Share # of Shares
------- ---------- --------- -----------
<S> <C> <C> <C> <C>
1995 $134,111 $13,145 $1.27 10,342
1994 71,470 8,112 .99 8,147
1993 48,383 5,127 .77 6,692
1992 37,122 3,686 .60 6,175
1991 26,321 2,169 .43 5,090
</TABLE>
(all amounts are shown in 000's except per share amounts)
The home health care industry has experienced an active consolidation trend for
the last seven years, yet the current pace has increased exponentially over the
past few years. All home health care companies are concerned about the trends
being discussed and/or implemented by the governmental payors and managed care
entities. They are concerned about their inability to influence such changes and
what will be required to weather these changes financially. Such industry
changes are not controllable and they may drive many smaller businesses out of
the marketplace, leaving their patient bases which would still require care.
With Medicare reimbursement reduction imminent, we have seen a heightened
consolidation pace. RoTech's profits improved after the 30% reduction in
Medicare reimbursement experienced in 1989 through increasing its patient bases
without corresponding increases in costs, which management believes could happen
again, depending on the magnitude of the final reimbursement reduction. In
response to the pending revenue reductions, RoTech plans to scrutinize its
operations to provide only those required services to Medicare beneficiaries,
implement tougher collection procedures on Medicare patient copayments and
continue consolidation of our buying power to reduce costs for all patients. The
opportunities to purchase good home health care operations are ample in this
environment for companies such as RoTech that can obtain capital to consolidate
these operations for overall continued and enhanced profitability.
2
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
To Our Shareholders
- -------------------------------------------------------------------------------
Acquisitions completed during fiscal 1995 took RoTech into additional non-urban
states including Colorado, Oklahoma, South Dakota and Wyoming, while we also
strengthened our market penetration in Arkansas, Louisiana, Mississippi, Texas
and Montana. Acquisitions completed to date since August 1, 1995 furthered our
market presence in Alabama, Arkansas, Louisiana, Mississippi, Tennessee and
Texas along with the October 1, 1995 acquisition of Hook's Home Health Care's 32
locations which dynamically increased our market coverage in Indiana, Illinois
and Ohio. The Hook's transaction presents significant volume to the Company to
drive revenues and purchasing capabilities. We believe there are opportunities
to introduce new products and services to the Hook's patient and referral bases,
to consolidate some and improve other operational aspects thereby improving
profitability of Hook's and other RoTech locations.
In May 1995, the Company sold 1,700,000 shares of its common stock for
approximate net proceeds of $50 million, which is approximately the same amount
spent on acquisitions during fiscal 1995. The proceeds were used to paydown the
existing line of credit balance and to fund pending acquisitions. All monies
from the offering were utilized in operations by the first week of July 1995.
Effective June 1, 1995, the Company's line of credit was increased to $75
million. Additionally, during fiscal 1995 the Company generated $17.1 million in
cash from operations. The Company believes that its positive cash flow
capabilities and credit capacity are sufficient to fund its acquisition and
expansion activities for the next twelve months.
We believe patients benefit from an approach to health care controlled
comprehensively by the primary care physician and we have historically targeted
the patients of such physicians in our non-urban marketplaces. Continued
development of our long term strategy of developing cost-effective health care
delivery systems lead to the acquisition of twenty physician practices in
Florida and Mississippi over the last 20 months. Market penetration is necessary
to effectively benefit from these investments. We continue to invest in these
two geographic areas so that our strategy can be realized to its fullest
potential resulting in better, less expensive patient care through early
detection, early treatment and the use of preventive protocols that governmental
payors and managed care entities will demand.
A renewed focus on durable medical equipment rentals emerged in our company this
year. Through certain of its recent acquisitions, RoTech has been able to
increase revenues by introducing newer durable medical equipment products which
enable patients to receive less expensive care. Our corporate sales force's
continual education of the patient and the primary care physician in the arena
has broadened our revenue base.
RoTech values its relationships with its patients and would like to thank all of
its patients and its shareholders for their support of the Company in these
changing times.
/s/ William P. Kennedy
William P. Kennedy
Chairman of the Board
3
<PAGE>
<TABLE>
<CAPTION>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
JULY 31
1995 1994
------------- ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 577,283 $ 331,681
Accounts receivable:
Trade, less allowance for contractual adjustments
and doubtful accounts of $7,958,000 in 1995 and
$6,333,000 in 1994 42,236,981 29,568,314
Other 1,418,918 1,622,975
Inventories 12,036,188 5,918,437
Prepaid expenses 388,728 711,350
------------ -----------
Total Current Assets 56,658,098 38,152,757
Other Assets:
Intangible assets, less accumulated amortization of
$8,179,000 in 1995 and $3,636,000 in 1994 68,811,955 30,880,930
Other assets ------------ -----------
249,070 2,009,230
------------ -----------
69,061,025 32,890,160
Property and equipment, less accumulated depreciation 45,912,848 23,389,838
------------ -----------
Total Assets $171,631,971 $94,432,755
============ ===========
</TABLE>
4
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Consolidated Balance Sheets
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JULY 31
1995 1994
----------- -----------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,870,171 $ 2,950,631
Accrued expenses and other liabilities 3,972,000 2,570,402
Note payable 9,980,000 4,098,000
Deferred Income Taxes 334,504 598,594
Income taxes payable (306,849) 152,015
------------ -----------
Total Current Liabilities 18,849,826 10,369,642
Other Liabilities:
Deferred income taxes 3,123,625 742,650
------------ -----------
3,123,625 742,650
Shareholders' Equity:
Common Stock, par value $.0002 per share,
50,000,000 shares authorized, 11,421,821 in 1995
and 9,504,770 in 1994 shares issued and 2,293 1,909
outstanding
Treasury stock (814,535) (814,535)
Additional paid-in capital 118,031,491 64,520,077
Retained earnings 32,439,271 19,613,012
------------ -----------
149,658,520 83,320,463
------------ -----------
Total Liabilities and Shareholders' Equity $171,631,971 $94,432,755
============ ===========
</TABLE>
5
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Consolidated Statements of Income
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
1995 1994 1993
------------ ----------- -----------
<S> <C> <C> <C>
Operating revenue $134,111,458 $71,469,618 $48,383,021
Cost and expenses:
Cost of revenue 36,287,811 17,408,548 12,358,678
Selling, general and administrative 66,477,381 35,879,483 25,063,878
Depreciation and amortization 9,565,238 5,338,494 2,801,415
Interest 835,462 66,676 76,230
------------ ----------- -----------
113,165,892 58,693,201 40,300,201
------------ ----------- -----------
Income before income taxes 20,945,566 12,776,417 8,082,820
Income tax expense 7,800,800 4,664,197 2,955,470
------------ ----------- -----------
Net Income $ 13,144,766 $ 8,112,220 $ 5,127,350
============ =========== ===========
Net Income Per Share $1.27 $0.99 $0.77
============ =========== ===========
</TABLE>
See accompanying notes.
- ----------------------
6
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Consolidated Statements of Shareholders' Equity
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------- TREASURY PAID-IN RETAINED
SHARES AMOUNT STOCK CAPITAL EARNINGS
---------- ------ --------- ------------ -----------
<S> <C> <C> <C> <C> <C>
Balance at August 1, 1992 6,130,962 $1,226 $ $ 11,005,068 $ 6,511,754
Issuance of Common Stock pursuant to
Employees Stock Compensation Plan 3,100 1 31,273
Issuance of Common Stock in acquisition of
subsidiaries 68,950 14 577,518
Repurchase and retirement of Common
Stock pursuant to exercise of put and other options (110,187) (22) (1,117,024) (138,312)
Issuance of Common Stock in Public Offering 1,150,000 230 14,198,272
Net income 5,127,350
---------- ------ --------- ------------ -----------
Balance at July 31, 1993 7,242,825 1,449 24,695,107 11,500,792
Issuance of Common Stock pursuant to
Employees Stock Compensation Plan 800 9,015
Issuance of Common Stock in acquisition of
subsidiaries 302,916 60 3,077,075
Repurchase of Common Stock (41,771) (814,535)
Issuance of Common Stock in Public Offering 2,000,000 400 36,738,880
Net income 8,112,220
---------- ------ --------- ------------ -----------
BALANCE AT JULY 31, 1994 9,504,770 1,909 (814,535) 64,520,077 19,613,012
ISSUANCE OF COMMON STOCK PURSUANT TO
EMPLOYEES STOCK COMPENSATION PLAN 16,063 4 185,580
ISSUANCE OF COMMON STOCK IN
ACQUISITION OF SUBSIDIARIES 195,988 39 3,197,379
ISSUANCE AND REPURCHASE AND RETIREMENT
OF COMMON STOCK PURSUANT TO EXERCISE 173,299 (318,507)
OF STOCK OPTIONS
ISSUANCE OF COMMON STOCK IN PUBLIC OFFERING 1,700,000 340 49,885,157
ISSUANCE OF COMMON STOCK PURSUANT TO EXERCISE
OF STOCK OPTIONS 5,000 1 69,999
NET INCOME 13,144,766
---------- ------ --------- ------------ -----------
BALANCE AT JULY 31, 1995 11,421,821 $2,293 $(814,535) $118,031,491 $32,439,271
========== ====== ========= ============ ===========
</TABLE>
See accompanying notes.
- ----------------------
7
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
1995 1994 1993
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $13,144,766 $ 8,112,220 $ 5,127,350
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation 4,974,785 3,341,919 2,100,863
Amortization of intangible assets 4,590,453 1,996,575 700,552
Provision for deferred income taxes 2,116,885 715,932 296,513
Gain on sale of property and equipment (15,160) (15,983) (11,505)
Issuance of Common Stock as employee
compensation and pursuant to exercise of
stock options 255,583 9,015 31,274
Equity in income from affiliated company (910,246) (109,493) (20,000)
Changes in operating assets and liabilities:
Increase in trade accounts receivable (5,452,570) (6,645,093) (1,810,374)
(Increase) decrease in other receivables 364,006 (1,198,602) 280,476
Increase in inventories (2,633,575) (872,687) (437,369)
(Increase) decrease in prepaid expenses 391,366 (140,712) (253,232)
Increase (decrease) in accounts payable 1,919,540 1,315,516 (3,226,656)
Decrease in accrued expenses and other
liabilities (1,181,063) (1,512,257) (920,339)
Decrease in income taxes payable (458,864) (240,128) (283,387)
----------- ----------- -----------
Net cash provided by operating activities 17,105,906 4,756,222 1,574,166
</TABLE>
See accompanying notes.
- ----------------------
8
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Consolidated Statements of Cash Flows
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
1995 1994 1993
------------- ------------ ------------
<S> <C> <C> <C>
INVESTING ACTIVITIES
Purchases of property and equipment (17,298,613) (9,389,526) (4,047,553)
Payments for acquisitions of net assets, net of
cash acquired (55,643,515) (37,734,909) (2,176,877)
Proceeds from sale of property and equipment 68,167 15,983 86,655
Advances and deposits 391,368 44,253 (293,329)
------------- ------------ ------------
Net cash used in investing activities (72,482,593) (47,064,199) (6,431,104)
FINANCING ACTIVITIES
Proceeds from long-term debt and notes
payable 109,037,900 32,493,900 8,694,181
Payments on long-term debt and notes payable (103,155,900) (28,396,000) (14,465,900)
Proceeds from issuance of Common Stock 49,885,497 36,739,280 14,198,502
Repurchase of Common Stock (145,208) (814,535) (1,255,358)
------------- ------------ ------------
Net cash provided by financing activities 55,622,289 40,022,645 7,171,425
------------- ------------ ------------
Increase (decrease) in cash 245,602 (2,285,332) 2,314,487
Cash at beginning of period 331,681 2,617,013 302,526
------------- ------------ ------------
Cash at end of period $ 577,283 $ 331,681 $ 2,617,013
============= ============ ============
Supplemental disclosures of cash flow
information
Cash paid during the year for:
Interest $ 933,000 $ 69,000 $ 148,000
Income taxes 6,774,000 4,546,000 2,905,000
</TABLE>
See accompanying notes.
- ----------------------
9
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1995
- -------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
RoTech Medical Corporation (the "Company") was incorporated on September 1,
1981. The Company, through its subsidiaries, markets and provides home health
care products and services and rents home health care equipment to patients,
primarily in the Southeastern United States. These products and services, which
are typically prescribed by a physician, include home health care products (such
as respiratory therapy equipment and convalescent medical equipment) and home
infusion therapy products and related services.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of RoTech Medical
Corporation and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.
FINANCIAL INSTRUMENTS
The Company believes the book value of their financial instruments (cash
equivalents, accounts receivable, line of credit, accounts payable, accrued
expenses and income taxes payable) approximates their fair value due to their
short-term nature.
REVENUE RECOGNITION
Revenues are reported on the accrual basis in the period in which services are
provided. Operating revenue represents the estimated net realizable amounts
from patients, third-party payors, and others for services rendered.
Rental income under short-term leasing arrangements is recognized on a straight-
line basis over the term of the lease and approximated $59,017,000, $31,142,000
and $20,895,000 in 1995, 1994 and 1993, respectively. The provision for
doubtful accounts approximated $4,499,000, $3,377,000 and $3,284,000 in 1995,
1994 and 1993, respectively.
INVENTORIES
Inventories consist principally of durable medical equipment, medical supplies
and pharmaceutical products and are stated at the lower of cost (first-in,
first-out method) or market.
10
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1995
- -------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided on the
straight-line method over the estimated useful lives of the assets (generally
three to seven years). Amortization of leasehold improvements is included in
depreciation.
INTANGIBLE ASSETS
The excess of cost over the fair value of assets acquired and other intangibles,
primarily non-compete agreements, are being amortized over 2 to 25 years on a
straight-line basis.
INCOME TAXES
Deferred income taxes are provided for all items included in the determination
of earnings in different periods for tax and financial reporting purposes.
Effective August 1, 1993, the Company changed its method of accounting for
income taxes from the deferred method to the liability method required by FASB
Statement No. 109, "Accounting for Income Taxes." As permitted under the new
rules, prior years' financial statements have not been restated.
INCOME PER SHARE
Income per share has been computed using the weighted average number of shares
of Common Stock outstanding during each period, including any Common Stock
equivalents resulting from outstanding stock options and warrants calculated
using the treasury stock method. The number of shares used in the calculation of
income per share for 1995, 1994, and 1993 was 10,342,000, 8,147,000 and
6,692,000, respectively. The difference between shares for primary and fully
diluted income per share was not significant in any year. Accordingly, fully
diluted income per share is not presented.
2. THIRD-PARTY RATE ADJUSTMENTS AND REVENUE
Approximately 63% in 1995, 48% in 1994, and 43% in 1993 of gross revenue was
derived under federal and state third-party reimbursement programs. A portion
of these revenues is based on cost reimbursement principles and is subject to
audit and retroactive adjustment by the respective third-party fiscal
intermediaries. In the opinion of management, retroactive adjustments, if any,
would not be material to the financial position or results of operations of the
Company.
11
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1995
- -------------------------------------------------------------------------------
3. ACQUISITIONS
During the fiscal year ended July 31, 1995, the Company issued 195,988 shares of
its restricted Common Stock valued at $3,197,000, issued 313,236 shares of its
restricted Common Stock which were placed in escrow pending the attainment of
certain operating profit thresholds (see Note 4), and paid cash of approximately
$52,075,000 to purchase the net assets of certain home health care companies,
all of the outstanding common stock of certain home health companies and
substantially all of the assets of a home health partnership.
The combined fair market values of those assets acquired and (liabilities
assumed) in 1995 are reflected in the following classifications on the balance
sheet:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 597,000
Accounts receivable 7,304,000
Inventories 3,484,000
Prepaid expenses 69,000
Other assets 53,000
Property and equipment 10,199,000
Accounts payable, accrued expenses and other liabilities (6,497,000)
-----------
Net assets acquired $15,209,000
===========
</TABLE>
Operating results of the acquired companies have been included in the statements
of income since the respective dates of acquisition. The acquisitions have been
accounted for by the purchase method of accounting. The excess of the purchase
price over the fair market values of the assets acquired and liabilities assumed
will be amortized over 2 to 25 years on a straight-line basis.
The operations of entities acquired subsequent to July 31, 1995 (see Note 13)
are not included in the Company's historical statement of income as presented
herein. The net assets of those entities acquired subsequent to July 31, 1995
are also not included in the Company's balance sheet as of July 31, 1995.
The pro forma condensed combined statements of income were prepared as if the
purchases and sales had occurred on the first day of the respective years
presented to illustrate the estimated combined effects of the various Agreements
for Purchase and Sale (Agreements) upon the Company. The pro forma condensed
combined statements of income presented are not necessarily indicative of the
results of operations that might have occurred had such transactions been
completed as of the date specified or of the results of operations of the
Company and its subsidiaries for any future period.
12
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1995
- -------------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED)
No changes in operating revenue and expenses have been made to reflect the
results of any modification to operations that might have been made had the
Agreements been consummated on the aforesaid assumed effective date for purposes
of presenting pro forma results. Certain supportable payroll costs attributable
to acquired entities' employees whose services would have been terminated upon
the effective date of purchase and sale have been eliminated. The pro forma
condensed combined statements of income include amortization of goodwill as if
the Agreements had been completed on the assumed effective date referred to
above.
The pro forma condensed combined statements of income should be read in
conjunction with the audited consolidated financial statements and related notes
thereto included elsewhere herein.
(a) Supportable general and administrative expenses relating directly to
the payroll and related expenses of those terminated employees
determined to be duplicated by the Company's existing personnel and
therefore would not be needed after the acquisitions.
(b) Amortization on intangibles recorded in the combined acquisitions
(amortized over various lives from 2 to 25 years).
(c) Additional net interest expense related to borrowings for cash paid to
acquire combined entities.
(d) Adjustment to income tax expense for the tax expense relating to the
net income as adjusted for the combined acquired entities. Income taxes
are calculated on the basis that operations of the consolidated company
could be combined as one company for federal income tax purposes at the
actual historical rate for the period.
(e) Additional shares of the Company's common stock issued pursuant to the
Agreements; assumed issued on the first day of the respective years
presented.
13
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended July 31, 1994
------------------------------------------------------------------------------------
(Unaudited)
RoTech RoTech
Medical Medical
Corporation Corporation
Consolidated Combined Combined
Year Ended Acquired Pro Forma Pro Forma
July 31, 1994 Entities Adjustments Results
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenue $71,469,618 $43,695,309 $115,164,927
Cost and expenses:
Cost of revenue 17,408,548 12,414,129 29,822,677
Selling, general
and administrative 35,879,483 22,780,833 $(800,000)(a) 57,860,316
Depreciation and amortization 5,338,494 1,596,376 2,670,955 (b) 9,605,825
Interest 66,676 326,600 3,797,806 (c) 4,191,083
----------- ----------- ----------- ------------
58,693,201 37,117,938 5,668,761 101,479,901
----------- ----------- ----------- ------------
Income before income taxes 12,776,417 6,577,370 (5,668,761) 13,685,026
Income tax expense 4,664,197 2,264,974 (1,838,341)(d) 5,090,830
----------- ----------- ----------- ------------
Net Income $ 8,112,220 $ 4,312,397 $(3,830,420) $ 8,594,196
=========== =========== =========== ============
Net Income Per Share $0.99 $1.03
=========== ============
Weighted Average Number
of Shares Outstanding 8,147,144 195,988 (e) 8,343,132
</TABLE>
14
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Year Ended July 31, 1995
---------------------------------------------------------------
(Unaudited)
RoTech RoTech
Medical Medical
Corporation Corporation
Consolidated Combined Combined
Year Ended Acquired Pro Forma Pro Forma
July 31, 1995 Entities Adjustments Results
---------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenue $134,111,458 $23,162,255 $157,273,713
Cost and expenses:
Cost of revenue 36,287,811 6,132,065 42,419,876
Selling, general
and administrative 66,477,381 12,904,336 (600,000)(a) 78,781,717
Depreciation and amortization 9,565,238 1,109,666 1,335,477 (b) 12,010,381
Interest 835,462 220,446 1,582,419 (c) 2,638,327
------------ ----------- ----------- ------------
113,165,892 20,366,513 2,317,896 135,850,301
------------ ----------- ----------- ------------
Income before income taxes 20,945,566 2,795,742 (2,317,896) 21,423,412
Income tax expense 7,800,800 674,371 (580,111)(d) 7,969,509
------------ ----------- ----------- ------------
Net Income $ 13,144,766 $ 2,121,371 $(1,737,785) $ 13,453,903
============ =========== =========== ============
Net Income Per Share $1.27 $1.28
============ ============
Weighted Average Number
of Shares Outstanding 10,342,000 195,988 (e) 10,537,988
</TABLE>
15
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - JULY 31, 1995
- -------------------------------------------------------------------------------
4. SHAREHOLDERS' EQUITY
On May 10, 1995, the Company completed a public offering of 1,700,000 shares of
its Common Stock at $31.00 per share. The proceeds of the sale, after deducting
issuance costs, were $49,885,497. The Company used the proceeds to reduce
outstanding debts, to complete certain acquisitions and invested the remainder
in short-term interest-bearing obligations.
In July 1993, pursuant to the Company's Stock Option Plan, the Company issued
options to certain members of management to purchase up to 784,000 shares of the
Company's Common Stock at prices ranging from $11.88 to $18.75 per share.
During the year, 14,000 options were exercised. At July 31, 1995, 416,926
options were exercisable.
On June 1, 1992, pursuant to an employment agreement, the Company issued 10,000
options to purchase its Common Stock at $14.25 per share. The options are
exercisable until April 1, 1997; all options were exercised subsequent to July
31, 1995.
Certain acquisitions transacted in prior years included provisions for the
issuance of up to 50,000 additional shares based on cash collections of a
subsidiary and 25,024 warrants to purchase the Company's Common Stock at $15.00
per share through November 1, 1995. No warrants were exercised as of July 31,
1995.
Certain acquisitions transacted in fiscal years 1995 and 1994 include provisions
for the issuance of up to 313,236 and 134,066 additional shares of Common Stock,
respectively, based on operating profit thresholds of certain subsidiaries.
On July 1, 1995, the Company entered into a stock option agreement ("Agreement")
with a firm which provides legal services to the Company (See Note 9.). The
Agreement issued the firm options to purchase up to, but not exceeding in the
aggregate, 10,000 shares of the Company's Common Stock at $27.75 per share. The
options are exercisable until June 30, 2000.
Certain acquisitions transacted in the fiscal year 1995 include provisions for
the issuance of 505,511 put options. At July 31, 1995, 927,168 put options were
outstanding. The put options are exercisable at certain points throughout the
period August 1, 1994 to December 31, 1998 at call prices ranging from $13.00 to
$30.17.
16
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1995
- -------------------------------------------------------------------------------
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JULY 31
1995 1994
------------ ------------
<S> <C> <C>
Rental equipment $ 48,271,671 $ 25,128,053
Furniture and equipment 14,499,465 7,547,422
Vehicles 3,947,514 1,741,651
Leasehold improvements 1,357,378 1,144,099
------------ ------------
68,076,028 35,561,225
Accumulated depreciation (22,163,180) (12,171,387)
------------ ------------
$ 45,912,848 $ 23,389,838
============ ============
</TABLE>
6. CURRENT NOTES PAYABLE
Current notes payable at July 31, 1995 were $9,980,000 under a $75,000,000
working capital line of credit expiring on January 1, 1997. The rate on July
31, 1995 was 6.825%. The working capital line of credit is payable on demand
and provides for an interest rate of LIBOR plus 70 basis points or prime rate
minus 1% for the first $20 million borrowed and LIBOR plus 82.5 basis points or
prime rate minus 1% for amounts borrowed in excess of $20 million.
The credit facility is collateralized by substantially all trade accounts
receivable, inventory, property and equipment, cash and investments of the
Company and guaranteed by the Company's subsidiaries. As of July 31, 1995, the
Company was in compliance with all covenants contained in the credit facility.
7. LEASE COMMITMENTS
Rental expense approximated $3,924,000, $1,837,000 and $1,021,000 for the years
ended July 31, 1995, 1994 and 1993, respectively. Future minimum rental
commitments under leases, primarily for buildings, are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING JULY 31
----------------------------
<S> <C>
1996 $2,924,000
1997 2,168,000
1998 1,610,000
1999 1,227,000
2000 548,000
----------
$8,477,000
==========
</TABLE>
17
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1995
- -------------------------------------------------------------------------------
8. INCOME TAXES
Income tax expense for the years ended July 31, consists of the following:
<TABLE>
<CAPTION>
LIABILITY Liability Deferred
METHOD Method Method
---------- ---------- ----------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Current
Federal $6,064,000 $3,632,313 $2,365,908
State 606,000 448,529 293,049
---------- ---------- ----------
6,670,000 4,080,842 2,658,957
Deferred
Federal 1,040,800 519,670 263,834
State 90,000 63,685 32,679
---------- ---------- ----------
1,130,800 583,355 296,513
---------- ---------- ----------
$7,800,800 $4,664,197 $2,955,470
========== ========== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Provisions have been made
for deferred income taxes arising primarily from the use of different
depreciation methods for equipment and different lives for intangible assets for
financial and tax reporting purposes. Significant components of the Company's
deferred tax liabilities and assets as of July 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------- -----------
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 481,000 $ 514,000
Tax over book intangibles amortization 2,934,000 587,000
Prepaid insurance 43,000 240,000
---------- ----------
Total deferred tax liabilities 3,458,000 1,341,000
Deferred tax assets:
Net operating loss carryforwards 385,000 420,000
Uniform Capitalization 185,000 157,000
---------- ----------
Total deferred tax assets 570,000 577,000
Valuation allowance for deferred tax assets (385,000) (420,000)
---------- ----------
Net deferred tax assets 185,000 157,000
---------- ----------
Net deferred tax liabilities $3,273,000 $1,184,000
========== ==========
</TABLE>
18
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1995
- -------------------------------------------------------------------------------
8. INCOME TAXES (CONTINUED)
In 1991, the Company acquired net operating loss carryforwards of VitalCare
which are restricted to offset future taxable income of VitalCare of
approximately $1,500,000. These carryforwards are restricted to usage of
approximately $100,000 per year and expire in years 2001 through 2006. Amounts
unused in any year can be carried forward to the expiration date. In 1995, the
Company used approximately $100,000 of the carryforwards, leaving approximately
$1,040,000 available at July 31, 1995. For financial reporting purposes, a
valuation allowance of $385,000 has been recognized to offset the deferred tax
assets related to those carry forwards.
The Company's effective tax rate differs from the statutory rate for the years
ended July 31, as follows:
<TABLE>
<CAPTION>
LIABILITY Liability Deferred
METHOD Method Method
--------- --------- --------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Percentage of pre-tax income:
Statutory rate 35.0% 34.0% 34.0%
Increase (decrease) in tax rate resulting from:
State income taxes, net of federal income tax benefit 2.0 3.8 2.3
Amortization of nondeductible intangible assets 2.5 1.9 2.2
Other (2.3) (3.2) (1.9)
---- ---- ----
37.2% 36.5% 36.6%
==== ==== ====
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company purchases certain products from companies owned by its chief
executive officer and shareholder. Such transactions amounted to $55,000,
$70,000 and $73,000 for the years ended July 31, 1995, 1994 and 1993,
respectively. These same companies purchased approximately $28,000, $236,000
and $409,000 of products from the Company for the fiscal years ended July 31,
1995, 1994 and 1993, respectively.
The Company leases certain facilities and equipment and purchases services from
companies owned by certain directors, officers and shareholders. Rent expense
under these cancelable operating leases amounted to $760,000, $536,000 and
$446,000 for the years ended July 31, 1995, 1994 and 1993, respectively.
19
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1995
- -------------------------------------------------------------------------------
9. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company executed a stock option agreement with a firm which provides certain
legal services to the Company. One of the Company's directors and officers is a
shareholder and officer of the firm. (See Note 4.)
10. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the years
ended July 31, 1995 and 1994:
<TABLE>
<CAPTION>
JULY 31, 1995
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenue $26,723,095 $32,581,640 $35,031,464 $39,775,259
Cost and expenses 22,452,032 27,647,200 29,780,618 33,286,042
Income tax expense 1,580,000 1,830,000 1,900,000 2,490,800
----------- ----------- ----------- -----------
Net income $ 2,691,063 $ 3,104,440 $ 3,350,846 $ 3,998,417
=========== =========== =========== ===========
Net income per share $ .28 $ .31 $ .34 $ .35
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
July 31, 1994
First Second Third Fourth
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Operating revenue $14,013,192 $15,879,528 $18,138,769 $23,438,129
Cost and expenses 11,789,932 13,084,208 14,698,347 19,120,714
Income tax expense 766,900 996,000 1,225,000 1,676,297
----------- ----------- ----------- -----------
Net income $ 1,456,360 $ 1,799,320 $ 2,215,422 $ 2,641,118
=========== =========== =========== ===========
Net income per share $ .20 $ .24 $ .26 $ .28
=========== =========== =========== ===========
</TABLE>
11. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities include:
<TABLE>
<CAPTION>
JULY 31
1995 1994
----------- -----------
<S> <C> <C>
Accrued payroll expenses $2,164,221 $1,123,570
Deferred payments 1,754,633 1,433,941
Deferred taxes and other accrued liabilities 53,146 12,891
---------- ----------
$3,972,000 $2,570,402
========== ==========
</TABLE>
20
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1995 AND
FINANCIAL STATEMENT SCHEDULE
- -------------------------------------------------------------------------------
12. OTHER ASSETS
In February, 1995, the Company sold its investment in an affiliated company.
The Company's 49% ownership was accounted for by the equity method. The
approximate $1,400,000 net gain and certain operating expenses incurred to carry
the assets are recorded in selling general and administrative expenses.
13. SUBSEQUENT EVENTS
During the period August 1, 1995 to October 17, 1995, the Company issued 99,777
shares of its restricted Common Stock valued at $1,915,000 and paid cash of
$28,101,000 to purchase the net assets of nineteen home health care companies
and three primary care physician practices. During the period August 1, 1995 to
October 17, 1995, the Company paid cash of $1,675,000 to purchase the stock of
one home health care company.
SCHEDULE II - VAluation and Qualifying Accounts
- ------------------------------------------------
<TABLE>
<CAPTION>
COLUMN C
-------------------------
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
- --------------------------------------------------------------------------------------------------------------
BALANCE AT CHARGED CHARGED TO
BEGINNING OF TO OTHER DEDUCTIONS BALANCE AT
CLASSIFICATION PERIOD COSTS AND ACCOUNTS- DESCRIBE (1) END OF
EXPENSES DESCRIBE PERIOD
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, 1995:
DEDUCTED FROM ASSET ACCOUNTS:
ALLOWANCE FOR CONTRACTUAL
ADJUSTMENTS AND DOUBTFUL
ACCOUNTS $6,333,000 $4,499,000 --- $2,874,000 $7,958,000
Year ended July 31, 1994:
Deducted from asset accounts:
Allowance for contractual
adjustments and doubtful
accounts $3,417,000 $3,377,000 --- $ 461,000 $6,333,000
Year ended July 31, 1993:
Deducted from asset accounts:
Allowance for contractual
adjustments and doubtful
accounts $3,214,000 $3,284,000 --- $3,081,000 $3,417,000
</TABLE>
(1) Uncollectible accounts written off, net of recoveries and net of the
allowance for contractual adjustments and doubtful accounts remaining at the
respective fiscal year-end recorded in conjunction with certain
acquisitions.
21
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- -------------------------------------------------------------------------------
To the Board of Directors and Shareholders of
RoTech Medical Corporation
Orlando, Florida
We have audited the accompanying consolidated balance sheets of RoTech Medical
Corporation and subsidiaries (the "Company") as of July 31, 1995 and 1994, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the two years then ended. Our audits also included the
financial statement schedule, for the years ended July 31, 1995 and 1994,
presented on page 21. These consolidated financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and the financial
statement schedule based on our audits.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of RoTech Medical Corporation and
subsidiaries at July 31, 1995 and 1994, and the results of their operations and
their cash flows for each of the two years then ended in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule for the two-year period ended July 31, 1995, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
October 19, 1995
Orlando, Florida
22
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Report of Independent Certified Public Accountants
Shareholders and Directors
RoTech Medical Corporation
We have audited the accompanying consolidated statements of income,
shareholders' equity, and cash flows of RoTech Medical Corporation and
subsidiaries for the year ended July 31, 1993. Our audit also included the
accompanying financial statement schedule for the year ended July 31, 1993.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of RoTech Medical Corporation and subsidiaries for the year ended
July 31, 1993, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly,
in all material respects, the information set forth therein.
ERNST & YOUNG LLP
Orlando, Florida
September 15, 1993
23
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Selected Consolidated Financial Data
- -------------------------------------------------------------------------------
(in thousands, except per share amounts)
- -------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended July 31
- ----------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statements of Income Data:
- --------------------------
Operating revenue:
Home respiratory and other
medical equipment $ 88,838 $41,579 $23,857 $15,706 $14,688
Home infusion therapy and other
pharmacy related services 33,554 25,492 21,715 19,959 10,886
Other products & services 11,719 4,399 2,811 1,457 747
- ----------------------------------------------------------------------------------------------
Total operating revenue 134,111 71,470 48,383 37,122 26,321
- ----------------------------------------------------------------------------------------------
Cost and expenses:
Cost of revenue 36,288 17,409 12,359 8,434 5,766
Selling, general and administrative 66,477 35,880 25,064 20,208 14,992
Depreciation and amortization 9,565 5,338 2,801 2,486 1,549
Interest 835 67 76 305 610
- ----------------------------------------------------------------------------------------------
Total cost and expenses 113,165 58,694 40,300 31,433 22,917
- ----------------------------------------------------------------------------------------------
Income before income taxes 20,946 12,776 8,083 5,689 3,404
Income tax expense 7,801 4,664 2,956 2,003 1,235
- ----------------------------------------------------------------------------------------------
Net income $ 13,145 $ 8,112 $ 5,127 $ 3,686 $ 2,169
- ----------------------------------------------------------------------------------------------
Earnings per share:
- -------------------
Net income per share $1.27 $0.99 $0.77 $0.60 $0.43
- ----------------------------------------------------------------------------------------------
Other Data:
- -----------
Weighted average shares outstanding 10,342 8,147 6,692 6,175 5,090
- ----------------------------------------------------------------------------------------------
Balance Sheet Data:
- -------------------
Working Capital $ 37,808 $27,783 $18,203 $ 9,617 $ 6,621
Total Assets 171,632 94,433 40,019 25,137 20,961
Long-term Debt
(less current portion) -- -- -- 1,053 1,538
Shareholders' Equity 149,659 83,320 36,197 17,518 13,673
- ----------------------------------------------------------------------------------------------
</TABLE>
The Company has acquired various businesses in the five years shown above.
Results of these acquisitions' operations are included from the respective dates
acquired.
24
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
- -------------------------------------------------------------------------------
FOR THE FISCAL YEARS ENDED JULY 31, 1995 AND 1994
- -------------------------------------------------
Operating revenue increased 87.6% to $134.1 million for the fiscal year ended
July 31, 1995 ("fiscal 1995") from $71.5 million for the fiscal year ended July
31, 1994 ("fiscal 1994"). The increase in operating revenue is attributable to
acquisitions and expanded product and service lines in existing areas of
operation. The Company continues to employ a single sales force to maintain and
develop both the home respiratory and other medical equipment and home infusion
therapy and other pharmacy related lines of business.
Operating revenue from home respiratory and other medical equipment increased
113.7% to $88.8 million for fiscal 1995 from $41.6 million for fiscal 1994. The
increase was due mainly to increases in patient bases throughout the Company's
locations and increased marketing efforts in certain locations acquired during
fiscal year 1994 and 1995.
Operating revenue from home infusion therapy and pharmacy related services
increased 31.6% to $33.6 million for fiscal 1995 from $25.5 million for fiscal
1994. Growth in this line of business should continue as the Company expands
both its service areas and available products and services.
Operating revenue from physician practices represented 8.7% of total
operating revenue for fiscal 1995, compared to less than 5% for fiscal 1994.
The Company currently owns 20 physician practices and employs 26 primary care
physicians. These practices are clustered in two rural marketplaces. Growth in
this line of business should continue yet decline as a percentage of operating
revenue as the Company continues to acquire mostly home health care operations.
Cost of revenue as a percentage of operating revenue increased to 27.1% for
fiscal 1995 from 24.4% for fiscal 1994 due to changes in the product mix in the
last year resulting from mid-year fiscal 1994 and fiscal 1995 acquisitions.
Selling, general and administrative expenses as a percentage of operating
revenue remained relatively stable at 49.6% for fiscal 1995, down from 50.2% for
fiscal 1994 as the revenue base has grown faster than the Company's costs.
Selling, general and administrative expenses included a net gain from the sale
of another asset. The gain resulted from years of operational expenses flowing
through the income statements rather than being capitalized. The net gain was
offset by increased bad debt expense, resulting in no net impact on selling,
general and administrative expenses and no impact on earnings from the gain.
Management took the opportunity provided by the gain to improve its overall
long-term financial position. Changes in the Company's mix of business also
affect these categories. For example, physician practices have no cost of
revenue, and all expenses are of a selling, general and administrative nature.
Depreciation and amortization expense increased 79.2% to $9.6 million for
fiscal 1995 from $5.3 million for fiscal 1994. Depreciation and amortization
expense as a percentage of operating revenue was 7.1% for fiscal 1995 and 7.5%
for fiscal 1994. The dollar increase was attributable to the Company's purchase
of fixed and intangible assets resulting from various acquisitions and the fixed
assets needed for the increased rentals of equipment. All acquisitions in
fiscal 1995 were accounted for by the purchase method of accounting for
acquisitions.
25
<PAGE>
Rotech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
- -------------------------------------------------------------------------------
Interest expense, net of interest income, increased to $835,000
for fiscal 1995 from $67,000 for fiscal 1994. This increase resulted from the
Company borrowing monies to fund certain acquisitions. The proceeds from the
Company's May 1995 stock offering were utilized to repay all bank indebtedness,
yet due to the acquisition pace, the Company became a borrower again in early
July 1995.
Income tax expense was provided at a 37.2% effective rate, compared to 36.5%
the prior fiscal year. The increase was due to the increase in non-deductible
amortization expense in fiscal 1995 and the entry into a higher tax bracket.
Net income for fiscal 1995 was $13.1 million, a 62.0% increase over the $8.1
million for fiscal 1994. Net income per share increased 28.3% to $1.27 for
fiscal 1995 compared to $0.99 for fiscal 1994. The weighted average number of
shares increased 26.9% to 10.3 million at July 31, 1995 from 8.1 million at July
31, 1994, primarily as a result of the March 1994 and May 1995 public stock
offerings and shares issued in conjunction with certain acquisitions.
FOR THE FISCAL YEARS ENDED JULY 31, 1994 AND 1993
- -------------------------------------------------
Operating revenue for fiscal 1994 increased to $71.5 million from $48.4
million for the fiscal year ended July 31, 1993 ("fiscal 1993"). The 48%
increase in operating revenue is attributable primarily to the increase from 71
locations to 134 locations in fiscal 1994 with approximately one-third of the
increase resulting from the acquired home respiratory and other medical
equipment companies. The balance of the growth in operating revenue was from
existing locations, inclusion of fiscal 1993 acquisitions for a full year and
locations internally developed in fiscal 1994.
Operating revenue from home respiratory and other medical equipment grew 74%
to $41.6 million for fiscal 1994 from $23.9 million for fiscal 1993. This 74%
increase was due mainly to a continued focus of the Company's sales force toward
home respiratory products and services and acquisitions of companies
predominantly in this line of business.
Operating revenue from home infusion therapy increased 17% to $25.5 million
for fiscal 1994 from $21.7 million for fiscal 1993. The slower growth is due to
the fiscal 1994 direction of the Company's single sales force toward home
respiratory products and services, and unit growth in home infusion therapy
products and services in spite of some pricing pressures experienced during the
year.
Cost of revenue as a percentage of operating revenue decreased to 24.4% for
fiscal 1994 from 25.5% for fiscal 1993. The Company continued to obtain better
volume pricing with the addition of new entities and refocused its acquisition
efforts on the home respiratory and other medical equipment line of business,
which has a lower cost of revenue as a percentage of operating revenue. Selling,
general and administrative expenses as a percentage of operating revenue
decreased to 50.2% from 51.8% for the same two periods.
26
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
- -------------------------------------------------------------------------------
Depreciation and amortization expense increased 91% to $5.3 million for fiscal
1994 from $2.8 million for fiscal 1993, and increased as a percentage of
operating revenue during the same periods. This dollar increase is attributable
to the Company's purchases of fixed and intangible assets resulting from various
acquisitions and the fixed assets needed for the increased rentals of equipment.
Net interest expense decreased to $67,000 for fiscal 1994 from $76,000 for
fiscal 1993. This decrease resulted from the payment of outstanding debt
balances in March 1994 with proceeds from the public offering and lower interest
rates charged on borrowings from banks prior to March 1994. The decrease was
also due to the interest income earned on short-term investments.
The effective tax rate was 36.5% for fiscal 1994, compared to 36.6% for fiscal
1993.
As a result of the foregoing, net income increased 58% to $8.1 million from
$5.1 million and net income as a percentage of operating revenue increased to
11.3% for fiscal 1994 from 10.6% for fiscal 1993.
The Company was required to adopt Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," in the first quarter of fiscal 1994 as
more fully described in Note 1 of the consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
At July 31, 1995, total current assets were $56.7 million and total current
liabilities were $18.8 million, resulting in working capital of $37.9 million.
The Company's current ratio was 3.01 to 1 at July 31, 1995 compared to 3.68 to 1
at July 31, 1994. Net trade accounts receivable increased $12.7 million in
fiscal 1995, or 42.8%. This increase is attributable to acquisitions of the net
assets of many home health care companies during the year and the 87.6% increase
in operating revenue over the prior year. As a result, the Company's days
revenue outstanding on net accounts receivable decreased to 98 days at July 31,
1995 from 116 days at July 31, 1994. Acquired receivables remaining outstanding
account for approximately 10 days revenue outstanding at July 31, 1995 and 21
days revenue outstanding at July 31, 1994.
Current liabilities increased $8.5 million in fiscal 1995, or 81.8%, as $10.0
million was borrowed on the working capital line of credit. The balance of the
change was due to the timing of payments to vendors.
During fiscal 1995, the Company generated cash of $17.1 million from operating
activities primarily as a result of net income of $13.1 million along with non-
cash expenses of $11.7 million. Advances on the working capital line of credit
were utilized to fund acquisitions and internal expansion. During fiscal 1995,
the Company spent $55.6 million to acquire various home health care companies
27
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
- -------------------------------------------------------------------------------
and $17.3 million to purchase property and equipment, primarily rental
equipment, for operational needs. The Company has been financing its revenue
growth and increased working capital requirements with positive net cash
provided by operating activities and short-term borrowings.
As of July 31, 1995, the Company had a working capital line of credit of $75.0
million, with approximately $65.0 million available for future borrowing. The
working capital and acquisition line of credit carries a negative pledge on all
Company assets, is payable on demand and provides for interest rates, at the
Company's election, of LIBOR plus .70% or prime rate minus 1% for the first
$20.0 million advanced to the Company and LIBOR plus .825% or prime rate minus
1% for any advances in excess of the first $20.0 million. The line of credit
requires compliance by the Company with certain financial and negative
covenants, including a restriction on dividends. Management believes that its
credit capacity and cash flow from operations, will be sufficient for the
Company's projected growth in the near future.
The Company completed a public offering in May of 1995 in which it issued an
additional 1.7 million shares for cash of $49.9 million, compared with its March
1994 public offering of 2.0 million shares which provided cash of $36.7
million.
For fiscal 1994, the Company's operating activities provided $4.8 million in
cash, compared to $1.6 million in fiscal 1993. The primary component of this
change was an increase in net income to $8.1 million for fiscal 1994, compared
to $5.1 million for fiscal 1993, offset by increased accounts receivable and
decreased amounts payable on operating liabilities. The Company has generated
positive net cash flow from operating activities in each of its last six fiscal
years despite increases in accounts receivable in each period resulting from the
similar growth in operating revenue.
During fiscal 1994, investing activities used $47.1 million in cash, compared
to $6.4 million during fiscal 1993. During fiscal 1994, the Company spent $9.4
million to purchase property and equipment, primarily rental equipment, for
operations and general equipment needs, compared to $4.0 million in fiscal 1993.
Purchases of property and equipment typically represent the major component of
the Company's investing activities. The Company paid $38.6 million to acquire
various home health care companies in fiscal 1994. Aside from increased
purchases of home respiratory and other medical equipment to support its sales
growth in its home respiratory and other medical equipment operations, the
Company does not require significant fixed capital investment.
Financing activities provided $40.0 million in cash during fiscal 1994,
compared to $7.2 million during fiscal 1993. The Company's strategy has been to
use net cash flow from operations and borrowings to finance expansion of its
business. The Company was able to complete an equity offering and repay all
borrowings with a portion of the proceeds to enable the same strategy to
continue for fiscal 1994.
28
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Selected Quarterly Consolidated Financial Data and Prices of Common Stock
- -------------------------------------------------------------------------------
(in thousands, except per share amounts and prices of Common Stock)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED JULY 31, 1995
OPERATING REVENUE $26,723 $32,582 $35,031 $39,775
NET INCOME $ 2,691 $ 3,104 $ 3,351 $ 3,998
NET INCOME PER SHARE $ 0.28 $0.31 $0.34 $ 0.35
WEIGHTED AVERAGE
NUMBER OF SHARES
OUTSTANDING 9,666 9,897 9,900 11,556
- -------------------------------------------------------------------------------
Year Ended July 31, 1994
Operating Revenue $14,013 $15,880 $18,139 $23,438
Net Income $ 1,456 $ 1,799 $ 2,215 $ 2,641
Net Income Per Share $ 0.20 $0.24 $0.26 $ 0.28
Weighted Average
Number of Shares
Outstanding 7,256 7,478 8,596 9,622
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PRICES OF COMMON STOCK HIGH ($) LOW ($)
- -------------------------------------------------------------------------------
<S> <C> <C>
FISCAL 1995 - QUARTER ENDED
OCTOBER 31, 1994 27 18 3/4
JANUARY 31, 1995 29 24
APRIL 30, 1995 32 1/2 25 1/2
JULY 31, 1995 33 24 1/2
- -------------------------------------------------------------------------------
Fiscal 1994 - Quarter Ended
October 31, 1993 14 1/4 10
January 31, 1994 19 12 1/4
April 30, 1994 23 1/4 16 3/8
July 31, 1994 21 1/2 17 3/4
- -------------------------------------------------------------------------------
</TABLE>
The Common Stock of the Company has traded on the over-the-counter market
since December 9, 1985 and is quoted on the NASDAQ National Market System under
the symbol "ROTC". The prices presented in the above table are the high and low
closing sales prices on the over-the-counter market for the Company's Common
Stock as reported on the NASDAQ Market System. On October 28, 1995, there were
11,990,779 shares of Common Stock outstanding which were held by approximately
609 shareholders of record. The Company has not paid any dividends since
formation. The Company anticipates that for the foreseeable future, it will
retain earnings in order to finance the development of its businesses and that
no cash dividends will be paid on its Common Stock.
29
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Directors William P. Kennedy
Chairman of the Board
Stephen P. Griggs
William A. Walker II
Jack T. Weaver
Leonard Williams
Executive Officers William P. Kennedy
Chief Executive Officer
Stephen P. Griggs
President, Assistant Secretary and
Chief Operating Officer
William A. Walker II
Secretary
Rebecca R. Irish
Treasurer, Assistant Secretary and
Chief Financial Officer
Corporate Office 4506 L. B. McLeod Road, Suite F
Orlando, FL 32811
(407) 841-2115
(800) 342-0416
Attorneys Winderweedle, Haines, Ward & Woodman,
P. A.
390 North Orange Avenue, Suite 600
Orlando, FL 32801
Auditors Deloitte & Touche LLP
200 South Orange Avenue, Suite 1800
Orlando, FL 32801
Financial Institution SunBank, National Association
200 South Orange Avenue
Orlando, FL 32801
Shareholder Information Transfer Agent:
The shares of RoTech Medical SunBank, National Association
Corporation's Common Stock commenced Attn: Corporate Trust Division
trading on the NASDAQ National 225 E. Robinson Street, Suite 350
Market System on December 9, 1985 Orlando, FL 32801
and are traded under the symbol
"ROTC". The approximate number of
shareholders of record as of October
28, 1995 was 609.
Annual Report: Annual Meeting:
A copy of RoTech Medical Corporation December 8, 1995 at 10:00 a.m.
Annual Report on Form 10-K as filed SunBank, National Association
will be made available without 200 South Orange Avenue
charge upon written request. 2nd Floor, Tower Side
Requests should be directed to: Campus Room
Orlando, FL 32801
Rebecca R. Irish
Treasurer and Chief Financial
Officer
RoTech Medical Corporation
Post Office Box 536576
Orlando, FL 32853-6576
30
<PAGE>
EXHIBIT 22.1
LIST OF SUBSIDIARIES OF ROTECH MEDICAL CORPORATION
A-1 Medical Equipment, Inc., a Florida corporation
American Medical Rentals, Inc., a Arkansas corporation
Beta Medical Equipment, Inc., a Florida corporation
Biocare Medical, Inc., a Florida corporation
Bravo Home Health Care, Inc., a Florida corporation
Breathing and Relief, Inc., a Florida corporation
Brister's Medical Associates, Inc., a Mississippi corporation
Brister Pharmacy, Inc., a Mississippi corporation
Brooksville Primary Care Clinic, Inc., a Florida corporation
Camden Medical Supply, Inc., a Florida corporation
Care Medical Supplies, Inc., a Illinois corporation
Charlotte Medical Supply, Inc., a Florida corporation
Church Street Clinic, Inc., a Mississippi corporation
Clinical Laboratory, Inc., a Mississippi corporation
Community Home Oxygen, Inc., a Montana corporation
Cynthiana Home Health Care, Inc., a Florida corporation
Distinct Home Health Care, Inc., a Florida corporation
Drew Primary Care Clinic, Inc., a Mississippi corporation
East Tennessee Infusion & Respiratory, Inc., a Florida corporation
Encore Home Health Care, Inc., a Florida corporation
Epsilon Home Health Care, Inc., a Florida corporation
Essential Home Health Care, Inc., a Florida corporation
Eta Home Health Care, Inc., a Florida corporation
<PAGE>
LIST OF SUBSIDIARIES OF ROTECH MEDICAL CORPORATION (CONT.)
Family Care Specialists, Inc., a Florida corporation
Gate City Medical Equipment, Inc., a Florida corporation
Greenville Primary Care Clinic, Inc., a Mississippi corporation
Greenwood Multi-Specialty Clinic, Inc., a Mississippi corporation
Grenada Doctors Clinic, Inc., a Mississippi corporation
Grenada Family Doctors, Inc., a Mississippi corporation
Headache Center of the West Coast, Inc., a Florida corporation
Headache Management of America, Inc., a Florida corporation
Headache and Pain Management Center, Inc., a Florida corporation
Health & Medications at Home, Inc., a North Carolina corporation
Health at Home, Inc., a Florida corporation
Healthcare Business Solutions, Inc., a Florida corporation
Healthcare Claims Recovery, Inc., a Florida corporation
Health Care Services of Mississippi, Inc., a Florida corporation
Heartland Home Care, Inc., a Florida corporation
Holland Medical Services, Inc., a Florida corporation
Hollandale Primary Care, Inc., a Florida corporation
Home Care Solutions of Murray, Inc., a Florida corporation
Home Medical Systems, Inc., a South Carolina corporation
Indianola Primary Care Clinic, Inc., a Mississippi corporation
Integral Home Health Care, Inc., a Florida corporation
Intensive Home Care Nurses, Inc., a Texas corporation
Intensive Home Care Services, Inc., a Texas corporation
Internal Medicine Grand View, Inc., a South Carolina corporation
International Medical Services and Supplies, Inc., a Florida corporation
International Therapeutic Services, Inc., a Florida corporation
LAMS, Inc., a Texas corporation
Lexington Primary Care, Inc., a Mississippi corporation
Liberty Home Health Care, Inc., a Florida corporation
Lovejoy Medical, Inc., a Kentucky corporation
MHB, Inc., a West Virginia corporation
Macon Primary Care Clinic, Inc., a Florida corporation
Major Medical Supply, Inc., a Texas corporation
Medic-Aire Medical Equipment, Inc., a Florida corporation
Medical Electro-Therapeutics, Inc., a Florida corporation
National Medical Equipment Centers, Inc., a Florida corporation
National Medicine Center - Groveland, Inc., a Florida corporation
Nightingale Home Health Care, Inc., a Texas corporation
North Florida Pain Institute, Inc., a Florida corporation
Oxygen Therapy Associates, Inc., a Texas corporation
PSI Health Care, Inc., a South Dakota corporation
Perry Family Practice, Inc., a Florida corporation
Physician's Formulary Services, Inc., a Florida corporation
Pioneer Medical Services, Inc., a West Virginia corporation
Polk City Pharmacy, Inc., a Florida corporation
Primary Home Health Care, Inc., a Florida corporation
<PAGE>
LIST OF SUBSIDIARIES OF ROTECH MEDICAL CORPORATION (CONT.)
Pulmo-Dose, Inc., a Florida corporation
Quality Home Health Care, Inc., a Florida corporation
RCG Information Services Corporation, a Florida corporation
RN Home Care Medical Equipment Company, Inc., a Mississippi corporation
Respitech Home Health Care, Inc., a Wyoming corporation
Responsive Home Health Care, Inc., a Florida corporation
RoTech Employee Benefits Corporation, a Florida corporation
RoTech Home Medical Care, Inc., a Florida corporation
RoTech Oxygen & Medical Equipment, Inc., a Florida corporation
RoTech/Texas, Inc., a Florida corporation
Rothert's Hospital Equipment, Inc., a Kentucky corporation
Select Home Health Care, Inc., a Florida corporation
Senatobia Family Practice, Inc., a Mississippi corporation
South County Health Care Services, a Texas corporation
South County Private Duty Agency, Inc., a Texas corporation
Southern IV Therapy, Inc., a Florida corporation
Southern Medical, Inc., a Florida corporation
Stat Medical Equipment, Inc., a Florida corporation
Sunshine Home Health Care, Inc., a Florida corporation
The Towne Pharmacy, Inc., a West Virginia corporation
Theta Home Health Care, Inc., a Florida corporation
Tupelo Home Health, Inc., a Florida corporation
Valley Medical, Inc., a Utah corporation
Value Care, Inc., a Florida corporation
VitalCare Health Services, Inc., a Florida corporation
VitalCare of America, Inc., a Texas corporation
VitalCare of Florida, Inc., a Florida corporation
VitalCare of Nevada, Inc., a Nevada corporation
VitalCare of Pennsylvania, Inc., a Pennsylvania corporation
VitalCare of Texas, Inc., a Texas corporation
Vitech Medical, Inc., a Florida corporation
Western North Carolina Home Health Care, Inc., a Florida corporation
Wichita Medical Care, Inc., a Kansas corporation
Women's Health Care Services, Inc., a Florida corporation
Zeta Home Health Care, Inc., a Florida corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FY 1995 FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JUL-31-1995 JUL-31-1994
<PERIOD-START> AUG-01-1994 AUG-01-1993
<PERIOD-END> JUL-31-1995 JUL-31-1994
<CASH> 577,283 331,681
<SECURITIES> 0 0
<RECEIVABLES> 50,194,981 35,901,314
<ALLOWANCES> 7,958,000 6,333,000
<INVENTORY> 12,036,188 5,918,437
<CURRENT-ASSETS> 56,658,098 38,152,757
<PP&E> 68,076,028 35,561,225
<DEPRECIATION> 22,163,180 12,171,387
<TOTAL-ASSETS> 171,631,971 94,432,755
<CURRENT-LIABILITIES> 18,849,826 10,369,642
<BONDS> 0 0
<COMMON> 2,293 1,909
0 0
0 0
<OTHER-SE> 149,656,227 83,318,554
<TOTAL-LIABILITY-AND-EQUITY> 171,631,971 94,432,755
<SALES> 0 0
<TOTAL-REVENUES> 134,111,458 71,469,618
<CGS> 36,287,811 17,408,548
<TOTAL-COSTS> 102,765,192 53,288,031
<OTHER-EXPENSES> 9,565,238 5,338,494
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 835,462 66,676
<INCOME-PRETAX> 20,945,566 12,776,417
<INCOME-TAX> 7,800,800 4,664,197
<INCOME-CONTINUING> 13,144,766 8,112,220
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 13,144,766 8,112,220
<EPS-PRIMARY> 1.27 0.99
<EPS-DILUTED> 1.27 0.99
</TABLE>
<PAGE>
EXHIBIT 99
ROTECH MEDICAL CORPORATION
4506 L. B. McLeod Road, Suite F
Orlando, Florida 32811
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 8, 1995
TO THE SHAREHOLDERS OF ROTECH MEDICAL CORPORATION:
The annual meeting of shareholders of RoTech Medical Corporation (the "Company")
will be held at the Sun Bank, N.A. Tower, located at 200 South Orange Avenue,
second floor, Campus Room, Orlando, Florida 32801 at 10:00 a.m. for the
following purposes:
1. To elect five directors to hold office until the next annual
meeting of shareholders and until their successors are elected and
have qualified;
2. To transact such other business as may properly come before the
meeting or any adjournment thereof.
Shareholders of record at the close of business on November 3, 1995 will be
entitled to vote at the meeting.
If there is any chance that you may not be able to attend the annual meeting,
please execute the enclosed Proxy and return it promptly in the self-addressed
envelope provided. If you attend the meeting, you may revoke the Proxy and vote
in person.
By Order of the Board of Directors:
/s/ William A. Walker II
- -------------------------
William A. Walker II,
Secretary
Orlando, Florida
November 8, 1995
<PAGE>
Mailing Date
November 8, 1995
ROTECH MEDICAL CORPORATION
4506 L.B. MCLEOD ROAD, SUITE F
ORLANDO, FLORIDA 32811
PROXY STATEMENT FOR ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD DECEMBER 8, 1995
This statement is furnished in connection with the solicitation of proxies by
the Board of Directors of RoTech Medical Corporation (the "Company") to be used
at the annual meeting of shareholders to be held on December 8, 1995, for the
purposes set forth in the accompanying Notice of Annual Meeting of Shareholders.
Shareholders who execute proxies have the right to revoke them at any time
before they are voted.
Shareholders of record as of November 3, 1995, will be entitled to vote at the
meeting. At the close of business on that day, there were outstanding 11,990,779
shares of the Company's Common Stock. Each share of Common Stock is entitled to
one vote with respect to each matter presented for action at the Meeting. The
affirmative vote of a majority of the shares cast at the Meeting is required for
the election of directors.
Proxies will be voted in accordance with instructions noted on the proxies.
Unless otherwise specifically instructed in the proxies, it is the intention of
the persons named in the proxy to vote all proxies received by them FOR
proposal 1.
The cost of this proxy solicitation will be borne by the Company. It is
contemplated that proxies will be solicited solely by mail. Banks, brokers and
other custodians will be requested to forward proxy soliciting materials to
their customers where appropriate, and the Company will reimburse such banks,
brokers and custodians for their reasonable out-of-pocket expenses in sending
the proxy materials to beneficial owners of shares.
PRINCIPAL HOLDERS OF VOTING SECURITIES
The following table sets forth, as of October 10, 1995, certain information with
respect to all persons known by the Company to beneficially own 5% or more of
its outstanding Common Stock, each director and all directors and officers of
the Company as a group. Unless otherwise indicated, each of the shareholders
listed below has sole voting and investment power with respect to the Common
Stock beneficially owned.
<PAGE>
ELECTION OF DIRECTORS
The Board of Directors proposes that the five nominees listed below be elected
as directors to serve until the next annual meeting of shareholders and until
their successors are elected and qualified. All of the nominees are currently
directors. Should any nominee for the office of director become unable to
accept nomination or election, which is not anticipated, it is the intention of
the persons named in the proxy, unless otherwise specifically instructed in the
proxy, to vote for the election in his stead of such other person as the Board
of Directors may recommend.
<TABLE>
<CAPTION>
Name of Nominee and Position with Director
the Company Age Since Principal Occupation Last Five Years
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
William P. Kennedy, Chairman, Board 51 1981 Chairman, Board of Directors and Chief
of Directors and Chief Executive Executive Officer of the Company; Chairman,
Officer Board of Directors and President of Thayer's.
Stephen P. Griggs, Director, Chief 38 1991 Director, Chief Operating Officer, President
Operating Officer, President and and Assistant Secretary of the Company.
Assistant Secretary
William A. Walker II, Director and 54 1984 Director and Secretary of the Company;
Secretary Practicing attorney in Winter Park and
Orlando, Florida as a shareholder in the law
firm of Winderweedle, Haines, Ward &
Woodman, P.A.
Leonard E. Williams, Director 64 1988 Director of the Company; President and Chief
Executive Officer of Wayne Densch, Inc.;
previously District Sales Manager for Tom's
Foods, Inc.; Director of First Union National
Bank of Orlando, President of Leonard E.
Williams Company.
Jack T. Weaver, D.O., Director 62 1992 Director of Company; Doctor of Osteopathy;
Chairman, Board of Trustees at the University
of Health Sciences, College of Osteopathic
Medicine, Kansas City, Missouri.
</TABLE>
There is currently no executive committee, but the Company has established a
Stock Option Plan Committee consisting of William A. Walker II, a Compensation
Committee consisting of William A. Walker II and Leonard E. Williams, an Audit
Committee consisting of William A. Walker II, Leonard E. Williams and Jack T.
Weaver, D.O., and a Nominating Committee consisting of William A. Walker II and
Leonard E. Williams. The Audit Committee will select the Company's independent
certified public accountants for the current fiscal year. During the Company's
fiscal year ended July 31, 1995, its Audit Committee held one (1) meeting and
each committee member attended such meeting. The Nominating Committee has a
current policy of not considering nominees recommended by security holders, a
policy which, however, is currently under review. Also, during the Company's
fiscal year ended July 31, 1995, the Company's Board of Directors held three (3)
meetings, and a quorum of directors was present at each meeting.
3
<PAGE>
The following person is an executive officer (but not a director) of the
Company:
<TABLE>
<CAPTION>
Executive
Name of Officer and Position with Officer
the Company Age Since Principal Occupation Last Five Years
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rebecca R. Irish, Chief Financial 33 1991 Chief Financial Officer, Treasurer and
Officer, Treasurer and Assistant Assistant Secretary of the Company;
Secretary Practicing Florida Certified Public
Accountant with Ernst & Young, C.P.A.s,
Orlando, Florida.
</TABLE>
MANAGEMENT REMUNERATION AND TRANSACTIONS
EXECUTIVE COMPENSATION
- ----------------------
The following table sets forth the annual and long-term compensation for the
Company's Chief Executive Officer and the four highest paid executive officers
(named executives) whose aggregate salary and bonus compensation exceeded
$100,000, as well as the total compensation paid to each individual for the
Company's previous two fiscal years:
<TABLE>
<CAPTION>
Annual Compensation Long-Term
Name and Principal Position Year Salary Bonus & Other Compensation
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
William P. Kennedy 1995 $151,289 --- ---
Chairman of the Board of Directors 1994 $151,289 --- ---
and Chief Executive Officer 1993 $153,278 --- ---
Stephen P. Griggs, Director, Chief 1995 $110,784 --- ---
Operating Officer, President and 1994 $110,784 --- ---
Assistant Secretary
</TABLE>
FISCAL YEAR-END OPTION VALUES
- -----------------------------
The following table summarizes for each of the Named Executive Officers the
total number of unexercised options held at July 31, 1995, and the aggregate
dollar value of in-the-money, unexercised options held at July 31, 1995.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-The-Money
Options at FY-End Options at FY-End
Exercisable/ Exercisable/
Name Unexercisable Unexercisable
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Stephen P. Griggs
Director, Chief Operating Officer, President
and Assistant Secretary 62,500/62,500 $1,085,938/$1,085,938
</TABLE>
The Company historically has not compensated Directors, nor reimbursed Directors
for attendance at meetings, but adopted a restrictive stock plan for non-
employee directors, which plan was approved by the Company's shareholders at its
annual meeting on December 4, 1992 and amended on December 9, 1994.
4
<PAGE>
KEY MAN LIFE INSURANCE
- ----------------------
The Company currently maintains key man life insurance coverage on the life of
Mr. Kennedy in the face amount of $2,000,000, with the Company named as the sole
beneficiary under such policy. In accordance with its debt covenants, the
Company has assigned $1,000,000 of the proceeds from such policy to Sun Bank,
N.A.
CERTAIN RELATED TRANSACTIONS
- ----------------------------
The Company sub-leases space at 1101 East Colonial Drive, Orlando, Florida, a
building owned by Mr. Kennedy and under lease to Thayer's, a company owned by
Mr. Kennedy, the Company's President and principal shareholder. Such sub-lease
is a month-to-month lease providing for monthly rental payments of approximately
$700. Aggregate payments made by the Company under such sub-lease during fiscal
year 1995 were approximately $8,400.
The Company leases office space in a building located at 942 S.E. 17th Street,
Ocala, Florida, a building in which Mr. Kennedy owns an undivided one-half
interest. Such lease is a month-to month lease providing for monthly rental
payments of approximately $1,500. Aggregate payments made by the Company under
such lease during fiscal 1995 were approximately $18,000.
The Company purchased approximately $28,000 of products from companies owned by
Mr. Kennedy in fiscal 1995.
A & C Business Services, Inc., a Florida corporation, of which Mr. Kennedy is
the sole shareholder, provides certain business services to the Company. The
cost of such services to the Company during fiscal year 1995 amounted to
approximately $608,000.
L&G of Orlando, Inc., a Florida corporation, of which Mr. Griggs is a
shareholder, provides certain business services to the Company. The cost of
such services to the Company during fiscal year 1995 amounted to approximately
$152,000.
Mr. Walker, the Secretary and a Director of the Company, is a shareholder,
director, assistant secretary, assistant treasurer and a member of the Executive
Committee of Winderweedle, Haines, Ward & Woodman, P.A. ("WHWW"), a law firm
with offices in Winter Park and Orlando, Florida. This law firm is general
counsel to the Company and each of its subsidiaries. WHWW entered into a stock
option agreement ("Agreement") with the Company on July 1, 1995. The Agreement
grants WHWW the unassignable and non-transferable right and option to purchase
from the Company up to, but not exceeding in the aggregate, 10,000 shares of the
Company's common stock, par value $.0002, at an option price of $27.75. Any
options not exercised on or before June 30, 2000 terminate on such date and are
null and void.
In the opinion of management, each of the foregoing transactions with officers,
directors, principal shareholders or affiliates were on terms no less favorable
to the Company than terms available from persons not affiliated with the
Company. The terms of any future transactions with officers, directors,
principal shareholders or affiliates will be no less favorable to the Company
than those which could be obtained from unaffiliated parties, and any future
transactions with affiliated parties, including loans to Company officers, will
be approved by a majority of the independent and disinterested members of the
Company's Board of Directors.
5
<PAGE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
- -------------------------------------------------------
The Compensation Committee of the Company's Board of Directors determines cash
and stock option compensation of the Company's employed executive officers,
Messrs. Kennedy and Griggs and Ms. Irish, and maintains administrative oversight
of all stock option plans.
The Compensation Committee consists of Directors Walker and Williams and meets
as circumstances require, but no less frequently than annually.
The Compensation Committee seeks to compensate employee executives at a cash
base salary level which is realistic in terms of minimizing the impact of any
future officer replacement, is adequate to meet living costs appropriate to
persons in the position held, and is appropriate to that customarily paid by
companies of comparable size in the health care industry. The Committee does
take into account that Mr. Kennedy, through his large stockholdings in the
Company, has a material inducement to closely attend to the success of the
Company without the higher cash compensation that might be typical for a Chief
Executive Officer with similar responsibilities.
Likewise, the Compensation Committee has utilized a Stock Option Plan, described
in the 1995 Annual Report on Form 10-K for the fiscal year of the Company ended
July 31, 1995, to align the efforts of key executives and key employees with
those of stockholders. The essential philosophy of the Compensation Committee
is that cash base compensation is not tied to performance factors. Cash bonuses
are not currently paid to executive officers, although the Compensation
Committee retains the option of granting future cash bonuses not exceeding
thirty percent (30%) of base compensation, per annum, based upon extraordinary
performance in enhancing stockholder value.
Current stock options were granted only to Mr. Griggs and Ms. Irish among the
executive officers, the amount of which were determined by factors of longevity,
responsibility, and necessity to compete with similar opportunities granted by
competitors.
STOCK PERFORMANCE GRAPH
- -----------------------
The following graph compares the cumulative total shareholder return of the
Company's common stock with (a) the CRSP Total Return Index for the NASDAQ
Health Services Stocks (the "NASDAQ Health Services Index") and (b) the CRSP
Total Return Index for the NASDAQ Stock Market (U.S.) (the "NASDAQ Composite
Index"). The graph assumes the investment of $100 on August 1, 1990 in the
Company's common stock and in each of the indices.
[GRAPH APPEARS HERE]
COMPARISON OF FIVE YEAR CUMULATIVE RETURN
AMONG ROTECH, NASDAQ HEALTH SERVICES INDEX AND NASDAQ COMPOSITE INDEX
<TABLE>
<CAPTION>
NASDAQ NASDAQ
Measurement period Health Services Composite
(Fiscal year Covered) RoTech Index Index
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Measurement PT--
08/01/90 $100 $100 $100
FYE 08/01/91 $100 $170 $118
FYE 08/01/92 $164 $200 $139
FYE 08/01/93 $144 $225 $169
FYE 08/01/94 $249 $250 $174
FYE 08/01/95 $384 $259 $243
</TABLE>
6
<PAGE>
DEADLINE FOR SUBMITTING
SHAREHOLDERS PROPOSALS
Any proposal by a shareholder for consideration at the 1996 annual meeting of
shareholders must be received at the Company's executive offices at 4506 L.B.
McLeod Road, Suite F, Orlando, Florida 32811, no later than July 14, 1996, if
any such proposal is to be eligible for inclusion in the Company's proxy
materials for its 1996 annual meeting.
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The accounting firm of Deloitte & Touche LLP was appointed by the Board of
Directors on June 7, 1994, and has served as the Company's independent certified
public accountants for the fiscal years ended July 31, 1994 and July 31, 1995.
At some point later in the current fiscal year, the Company's audit committee
will designate the Company's auditors for the fiscal year ending July 31, 1996.
OTHER MATTERS
New regulations adopted by the SEC, effective May 1, 1991, require the Company
to identify the names of persons who failed to file or filed late a report
required under Section 16. Generally, the reporting regulations under Section 16
require directors, officers and certain shareholders to report changes in
ownership in Company securities. To the knowledge of the Company, each Form 4
required to be filed was filed on a timely basis.
The management of the Company is not aware of any other matters to be brought
before the annual meeting of shareholders. If other matters are duly presented
for action, it is the intention of the persons named in the enclosed proxy to
vote on such matters in accordance with their judgment.
/s/ William A. Walker II
------------------------
William A. Walker II
Secretary
Orlando, Florida
November 8, 1995
Each shareholder is urged to execute and return the enclosed proxy promptly. In
the event a shareholder decides to attend the meeting, he may, if he wishes,
revoke his proxy and vote his shares in person.
7
<PAGE>
PROXY ROTECH MEDICAL CORPORATION
This Proxy is Solicited By The Board of Directors
The undersigned hereby appoints WILLIAM P. KENNEDY, WILLIAM A. WALKER II,
LEONARD E. WILLIAMS, STEPHEN P. GRIGGS AND JACK T. WEAVER, or any of them, as
proxies, each with full power of substitution, acting by a majority or by any
one of them if only one can be present and acting, to vote in the following
manner (according to the number of shares which the undersigned would be
entitled to cast if then personally present) at the Annual Meeting of
Shareholders of ROTECH MEDICAL CORPORATION to be held on December 8, 1995, and
at any adjournment thereof.
(1) ELECTION OF DIRECTORS
[_] FOR all Nominees listed below [_] WITHHOLD AUTHORITY to vote for
[except as marked to the all nominees listed below
contrary below]
WILLIAM P. KENNEDY, WILLIAM A. WALKER II, LEONARD E. WILLIAMS, STEPHEN P.
GRIGGS, JACK T. WEAVER
(INSTRUCTION: To withhold authority to vote for any individual nominee,
write that nominee's name in the space provided below.)
- --------------------------------------------------------------------------------
(2) In their discretion upon such other business as may properly come before the
meeting.
(Please date and sign reverse side)
ROTECH MEDICAL CORPORATION
This proxy shall be voted as directed. If no direction to this contrary is
indicated, this proxy shall be voted FOR proposal 1. Discretionary authority is
hereby confirmed as to all other matters that may come before the meeting.
WITNESS my name and seal this ________ day of _________________, 1995.
____________________________________________
____________________________________________
Signature of Shareholder
PLEASE SIGN this proxy exactly as your name
or names appear herein, if stock is held
jointly, signatures should appear for both
names. When signing as attorney, executor,
administrator, trustee, guardian or
custodian, please indicate the capacity in
which you are acting. Please fill in date
and sign the proxy and return in the
enclosed postpaid envelope.
(See Proxy On Reverse Side.)
