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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, 1996
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)
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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)
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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 non-
affiliates of the Registrant, computed by reference to the last sale price per
share, as of October 21, 1996, was $419,662,667.
On October 21, 1996, RoTech Medical Corporation had 25,434,101 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 9, 1996, are incorporated
into Part III.
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ROTECH MEDICAL CORPORATION
FORM 10-K ANNUAL REPORT
Fiscal Year Ended July 31, 1996
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PART I: PAGE
Item 1 Business ................................................................. 3
Item 2 Properties ............................................................... 12
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 .................................................. 13
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................... 13
Item 8 Financial Statements and Supplementary Data .............................. 16
Item 9 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure ..................................................... 16
ITEM 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 I
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, principally
to patients in non-urban areas. RoTech operated 366 home health care locations
and 24 primary care physician practices, employing 29 physicians as of July 31,
1996, and has subsequently acquired an additional 31 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 1996 acquisitions of 145 locations of smaller home health care companies
and the opening of 20 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 $37 million for the
fiscal year ended July 31, 1992 to $263 million for the fiscal year ended July
31, 1996.
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
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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 primary care physicians to identify patients prior to hospitalization
and prior to an acuity level that would require utilizing a specialist.
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
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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.
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
fully and properly documented claims, and to 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 48% for
fiscal 1996, 49% for fiscal 1995, and 35% for fiscal 1994.
RoTech has achieved increased operating revenue in home respiratory and
other medical equipment operations despite increased regulation and
corresponding reimbursement reductions. While 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 of the Company,
like those of other health care companies, are affected by the continuing
efforts of third-party payors to contain or reduce the costs of health care 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 benefitted from those
cost containment objectives. However, as expenditures in the home health care
market continue to grow, initiatives aimed at reducing the costs of health care
delivery 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.
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PRODUCTS AND SERVICES
HOME HEALTH CARE PRODUCTS AND SERVICES
HOME RESPIRATORY THERAPY AND EQUIPMENT
RoTech provides a variety of home respiratory therapy products and
services on a monthly rental or sale basis. Home respiratory therapy and
equipment represented 42% of the Company's revenues for fiscal 1996. 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 the cost of health care and should
improve the quality of life of the patients and their families. 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. Overall home respiratory market revenues were
approximately $1.6 billion in 1993.
The Company's home respiratory care product line includes oxygen
concentrators, portable and home 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 easily 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 and caregivers in its use, refill the high pressure and
liquid oxygen systems as necessary and provide continuing maintenance of the
equipment.
HOME MEDICAL EQUIPMENT AND SUPPLIES
RoTech provides a full line of equipment and supplies of home medical
equipment and supplies for convalescents, including custom pieces required for
rehabilitation patients. Home medical equipment and supplies represented 35% of
the Company's revenues for fiscal 1996. 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 AND OTHER PHARMACY RELATED PRODUCTS AND SERVICES
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
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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 16% of RoTech's revenues for
fiscal 1996, which includes the following types:
Antibiotic Therapy (The majority of the Company's 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--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.
Pain Management and Chemotherapy--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--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.
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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 practice revenue currently represents
7% of the Company's total revenues.
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
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regulatory efforts is an extra compliance challenge and, therefore, risk. The
Company has been 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
elected in May, 1995, to file a civil suit, Case No. 95-558-CIV-ORL-18, in which
it contends that Medicare made some unspecified amount of payments to the
Company for respiratory care services to certain Florida patients by mistake in
part of 1987, in 1988, and in 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 Company received an inquiry from the Medicaid Department of the State
of Mississippi and subsequently received a subpoena from the OIG concerning the
Company's 1994 cost report for its Mississippi Rural Health Clinics. The Company
is cooperating fully with such inquiries. There has been no statement of issues
or particular concerns given the Company sufficient to permit the Company to
determine the extent of financial exposure, if any. The Company is not aware of
any material error in the one year's cost report under inquiry, following
consultation with its outside consultant, who also assisted in the preparation
and filing of the 1994 cost report. If any adjustments occur, such would likely
relate only to Mississippi physician clinics for 1994.
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,
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 is
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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 or another 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
recently 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 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. Further, each area of medical care is subject to scrutiny
and revision as to the amount of reimbursement which is reasonable. Any
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reduction in reimbursement in those goods and services provided by the Company
would have a direct effect on gross revenues of the Company. 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 various liability insurance policies,
with total coverage limits of $26 million in total limits for liabilities
arising out of all operations, except employed physicians. These policies
contain various levels of deductibles and self-insured retentions. They provide
the Company protection against claims alleging bodily injury or property damage
arising out of the Company's operations, including home health care, but
excluding the Company's employed physicians. 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
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$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 and its subsidiaries
lease office facilities for its 389 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
904,797 square feet at an average price of $8.54 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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The Company is from time to time involved in various legal proceedings.
Although the Company does not believe that any currently pending proceeding will
materially and adversely affect the Company, there can be no assurance that any
current or future proceeding will not have a material adverse affect on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this Report
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
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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 30 of the Company's Annual Report to shareholders for the
fiscal year ended July 31, 1996, 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 25 of the Company's Annual Report to the
Shareholders for the fiscal year ended July 31, 1996, and is hereby incorporated
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATION
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RESULTS OF OPERATIONS
The following table presents the percentage of certain items relative to total
operating revenue:
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<CAPTION>
Year Ended July 31
-------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING REVENUE:
Home respiratory therapy and equipment .................. 41.9% 42.2% 58.1(a)%
Home medical equipment and supplies ..................... 35.0 24.1 (a)
Home infusion therapy and other pharmacy relate
products and services ................................. 15.8 25.0 35.7
Physician practices ..................................... 7.3 8.7 6.2
----- ----- -----
Total Operating Revenue 100.0% 100.0% 100.0%
COST AND EXPENSES:
Cost of revenue ........................................ 27.0 27.1 24.4
Selling, general and administrative .................... 48.4 49.6 50.2
Depreciation and amortization .......................... 10.1 7.1 7.5
Interest ............................................... 2.0 0.6 0.1
----- ----- -----
Total Cost and Expenses .................................. 87.5 84.4 82.2
----- ----- -----
Income before income taxes ............................... 12.5 15.6 17.8
Income tax expense ....................................... 4.7 5.8 6.5
----- ----- -----
Net Income ............................................... 7.8% 9.8% 11.3%
===== ===== =====
</TABLE>
- ----------
(a) A breakout of home respiratory therapy and equipment revenues and home
medical equipment and supplies as a percentage of total revenue was not
available for the year ended July 31, 1994. All revenue related to these two
product lines has been presented as "home respiratory therapy and
equipment."
FOR THE FISCAL YEARS ENDED JULY 31, 1996 AND 1995
Operating revenue increased 96% to $263.0 million for the fiscal year
ended July 31, 1996 ("fiscal 1996") from $134.1 million for the fiscal year
ended July 31, 1995 ("fiscal 1995"). The increase in operating revenue is
attributable to acquisitions and expanded product and service lines in existing
areas of operation. During fiscal 1996, the Company added 165 home care
locations and operated 366 home care locations in 28 states as of July 31, 1996.
The Company continues to employ a single sales force to maintain and develop
both the home respiratory therapy, other medical equipment, home infusion
therapy and other pharmacy related lines of business.
Operating revenue from home respiratory therapy and equipment increased
95% to $110.1 million for fiscal 1996 from $56.5 million for fiscal 1995.
Operating revenue from home medical equipment and supplies increased 185% to
$92.1 million for fiscal 1996 from $32.3 million for fiscal 1995. The increases
in these two product lines were due mainly to increases in patient bases
13
<PAGE>
throughout the Company's locations and increased marketing efforts in certain
locations acquired during fiscal year 1995 and 1996. The majority of the
Company's acquisitions are of businesses that operate primarily in these two
product lines.
Operating revenue from home infusion therapy and pharmacy related services
increased 24% to $41.5 million for fiscal 1996 from $33.6 million for fiscal
1995. Growth in this line of business should continue as the Company expands its
service areas.
Operating revenue from physician practices increased 65% to $19.4 million
for fiscal 1996, from $11.7 million for fiscal 1995. The Company currently owns
24 physician practices and employs 29 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 home health care operations.
Cost of revenue as a percentage of operating revenue decreased to 27.0%
for fiscal 1996 from 27.1% for fiscal 1995 due to changes in the product mix in
the last year resulting from mid-year fiscal 1995 and fiscal 1996 acquisitions.
Selling, general and administrative expenses as a percentage of operating
revenue reduced to 48.4% for fiscal 1996 from 49.6% for fiscal 1995, as the
revenue base has grown faster than the Company's costs. 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 177% to $26.5 million for
fiscal 1996 from $9.6 million for fiscal 1995. Depreciation and amortization
expense as a percentage of operating revenue was 10.1% for fiscal 1996 and 7.1%
for fiscal 1995. 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
1996 were accounted for by the purchase method for acquisitions.
Interest expense, net of interest income, increased to $5.2 million for
fiscal 1996 from $835,000 for fiscal 1995. This increase resulted from the
Company borrowing monies to fund certain acquisitions along with the issuance of
the Convertible Subordinated Debentures on June 1, 1996.
Income tax expense was provided at a 37.5% effective rate, compared to
37.2% the prior fiscal 1995.
Net income for fiscal 1996 was $20.6 million, a 56.4% increase over the
$13.1 million for fiscal year 1995. Net income per share on a fully diluted
basis increased 30.2% to $0.82 for fiscal 1996 compared to $0.63 for fiscal
1995. The weighted average number of shares on a fully diluted basis increased
20.1% to 25.2 million at July 31, 1996 from 21.0 million at July 31, 1995,
primarily as a result of the May 1995 public stock offering and shares issued in
conjunction with certain acquisitions.
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
14
<PAGE>
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 therapy and equipment and home
medical equipment and supplies 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. The majority of
the Company's acquisitions are of businesses that operate primarily in these two
product lines.
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 6.2% for fiscal 1994. At July 31,
1995 the Company owned 20 physician practices and employed 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%, 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 not cost of revenue and all expenses are
of selling, general and administrative natures.
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.
15
<PAGE>
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 on a fully diluted basis
increased 26% to $0.63 for fiscal 1995 compared to $0.50 for fiscal 1994. The
weighted average number of shares on fully diluted basis increased 28.8% to 21.0
million on July 31, 1995 from 16.3 million at July 1994, primarily as a result
of the March 1994 and May 1995 public stock offerings and shares issued in
conjunction with certain acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1996, total current assets were $112.5 million and total
current liabilities were $76.5 million, resulting in working capital of $36.0
million. The Company's current ratio was 1.47 to 1 at July 31, 1996 compared to
3.20 to 1 at July 31, 1995. Net trade accounts receivable increased $41.2
million in fiscal 1996, or 98%. This increase is attributable to acquisitions
of the net assets of many home health care companies during the year and the 96%
increase in operating revenue over the prior year. As a result, the Company's
days revenue outstanding on net accounts receivable decreased to 92 days at July
31, 1996 from 98 days at July 31, 1995. Acquired receivables remaining
outstanding account for approximately 16 days revenue outstanding at July 31,
1996 compared to 10 days revenue outstanding at July 31, 1995.
Current liabilities increased $57.6 million in fiscal 1996, or 305%, as
an additional $42 million was borrowed on the syndicated bank line of credit.
The balance of the change was due to the timing of payments to vendors.
During fiscal 1996, the Company generated cash of $37.5 million from
operating activities primarily as a result of net income of $20.6 million along
with non-cash expenses of $31.4 million. Advances on the syndicated bank line
of credit were utilized to fund acquisitions and internal expansion. During
fiscal 1996, the Company spent $146.6 million to acquire various home health
care companies and $29.6 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.
On June 1, 1996, the Company issued $110,000,000 aggregate principal
amount of 5 1/4% Convertible Subordinated Debentures ("Debentures"). Upon
receipt, the proceeds were used to reduce the syndicated bank line of credit.
The Debentures are due 2003 with interest payable on June 1 and December 1,
commencing December 1, 1996. The debentures do not provide for a sinking fund.
The Debentures are convertible into Common Stock of the Company at any time
after the 60th day following the date of original issuance of the Debentures and
at or before maturity at a conversion price of $26.25 per share, subject to
adjustment in certain events, plus accrued interest. The Debentures are
redeemable at the option of the Company, in whole or in part, but not before
June 4, 1999. The Company's ability to repurchase the Debentures is dependent
upon the Company's having sufficient funds and may be limited by the terms of
the Company's senior indebtedness or the subordination provisions of the related
indenture.
As of July 31, 1996, the Company had a syndicated bank line of credit of
$200 million, with approximately $127.6 million available for future
borrowing, as of October 21, 1996. The syndicated bank 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 a Bankers'
Acceptance rate plus 0.75%. The syndicated bank line of credit requires
compliance by the Company with certain financial and negative covenants,
including a restriction on dividends. As of July 31, 1996 the Company was in
compliance with all covenants contained in the credit facility. Management
believes that its credit capacity and cash flow from operations, will be
sufficient for the Company's projected growth in the near future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
Financial Statements:
- ---------------------
The information required by this item is set forth on page 1 through 31 in the
Company's Annual Report to Shareholders for the fiscal year ended July 31, 1996,
and is hereby incorporated by reference.
Selected Quarterly Consolidated Financial Data:
- -----------------------------------------------
The supplementary financial information is set forth on page 30 on the Company's
Annual Report to Shareholders for the fiscal year ended July 31, 1996, and is
hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable
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, 1996 for the annual meeting of shareholders to be held on
December 9, 1996, pages 3 and 4, "ELECTION OF DIRECTORS". Such definitive
proxy statement will be filed with the Securities and Exchange Commission no
later than November 7, 1996.
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
Information concerning executive compensation is incorporated herein by
reference to the Company's definitive proxy statement dated November 8, 1996 for
the annual meeting of shareholders to be held on December 9, 1996, 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 November 7, 1996.
16
<PAGE>
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, 1996 for the annual meeting of shareholders to be
held on December 9, 1996, 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 November 7, 1996.
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, 1996 for the annual meeting of shareholders to be held on
December 9, 1996, page 5, "Certain Related Transactions". Such definitive proxy
statement will be filed with the Securities and Exchange Commission no later
than November 7, 1996.
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, 1996 and July 31,
1995, 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, 1996, are set forth on pages
1 through 31 of the Registrant's Annual Report to Shareholders
for the fiscal year ended July 31, 1996, which statements are
incorporated in this report by reference.
2. Financial Statement Schedules. The following Financial Statement
Schedule for the fiscal years ended July 31, 1996, 1995 and 1994 is
set forth under the heading "Financial Statement Schedule" on page 23
of the Company's Annual Report to Shareholders for the fiscal year
ended July 31, 1996 and is hereby incorporated by reference.
Schedule II Valuation and Qualifying Accounts
for the fiscal years ended July 31,
1996, 1995 and 1994
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 1996.
--------------------------------------------------------------
The Company filed a Current Report on Form 8-K dated May 7, 1996. The
Current Report discussed that the Registrant, through itself and its wholly-
owned subsidiaries purchased an aggregate of individually insignificant
businesses, as
17
<PAGE>
defined per Regulation S-X Rule 3-05. The individually insignificant businesses
were acquired during the period November 15, 1995 to April 1, 1996, for an
approximate aggregate purchase price of $58 million. The acquisitions of the
following businesses comprise the mathematical majority of the aggregate of
individually insignificant businesses: Physician Management Group, Inc., Rhema,
Inc., Respiratory Home Care, Inc., CP02, Inc., National Home Care, Inc., Murray
Medical, Inc. and Roth Medical Inc.; that provide home health care products and
services through its locations in Texas, Louisiana, Tennessee, Utah, Colorado,
Georgia, Pennsylvania, and Florida; that the Registrant intends to continue the
business as acquired; that the Sellers had no material relationship with
Registrant prior to the acquisition; 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. The Company filed
a current report on Form 8-KA dated June 4, 1996 to provide the required
financial statements of the acquired companies reported under Form 8-K dated May
7, 1996. The Company filed a current report on Form 8-K dated May 17, 1996
announcing the Company's intention to offer a new issue of $100 million of
Convertible Subordinated Debentures due 2003.
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
Number Description Numbered 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.)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
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.)
4.2 Indenture dated as of June 1, 1996, between the Company and PNC Bank, Kentucky, Inc.
(Incorporated by reference to Exhibit 4.1 to the Company's Registration Statement
No. 333-10915 on Form S-3).
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.)
10.2 Amended and Restated Revolving Credit and Line of Credit Agreement, dated June 4, 1996,
by and among RoTech Medical Corporation, and SunTrust Bank, Central Florida, National
Association, individually and as Agent, NationsBank of Florida, N.A., NBD Bank,
PNC Bank, Kentucky, Inc., Barnett Bank of Central Florida, N.A. and Cooperatieve
Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New York Branch, to be
filed by amendment.
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 (Incorporated
by reference to Exhibit 10.6 to the Company's Annual Report in Form 10-K for the fiscal
year ended July 31, 1995.)
10.7 RoTech Medical Corporation 1996 Key Employee Stock Option Plan, filed herewith.
11.0 Computation of Earnings Per Share, filed herewith.
13.1 Annual report to security holders, filed herewith.
22.1 Subsidiaries of Registrant, filed herewith.
</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 29, 1996
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 29, 1996
- ---------------------------
WILLIAM P. KENNEDY
/s/ Stephen P. Griggs President, Assistant Secretary, Chief Operating Officer; and Director October 29, 1996
- ---------------------------
STEPHEN P. GRIGGS
/s/ Janet L. Ziomek Vice President - Finance October 29, 1996
- ---------------------------
JANET L. ZIOMEK
/s/ William A. Walker II Secretary, and Director October 29, 1996
- ---------------------------
WILLIAM A. WALKER II
- --------------------------- Director October 29, 1996
JACK T. WEAVER
- --------------------------- Director
LEONARD E.WILLIAMS October 29, 1996
/s/ Rebecca R. Irish Treasurer; Assistant Secretary, Principal Financial and
- --------------------------- Accounting Officer; and Chief Financial Officer October 29, 1996
REBECCA R. IRISH
</TABLE>
20
<PAGE>
EXHIBIT 10.7
ROTECH MEDICAL CORPORATION
1996 KEY EMPLOYEE STOCK OPTION PLAN
1. PURPOSE. The purposes of this Stock Option Plan ("Plan") are to encourage
stock ownership by key executive officers of RoTech Medical Corporation (herein
called the "Corporation") and its Subsidiaries, to provide an incentive for such
employees to expand and improve the profits and prosperity of the Corporation
and its Subsidiaries, and to assist the Corporation and its Subsidiaries in
attracting and retaining key personnel through the grant of options to purchase
shares of the Corporation's common stock.
2. DEFINITIONS. When used in this Plan, unless the context otherwise
-----------
requires:
(a) "ACT" shall mean the Securities Exchange Act of 1934, as amended.
(b) "BOARD" shall mean the Board of Directors of the Corporation.
(c) "COMMITTEE" shall mean the Stock Option Plan Committee, which is
appointed by the Board, and which shall be composed of at least two (2) members
of the Board.
(d) "CORPORATION" shall mean RoTech Medical Corporation, a Florida
corporation.
(e) "CODE" shall mean the Internal Revenue Code of 1986, as amended.
(f) "ISO" shall mean a stock option which, at the time such Option is
granted, qualifies as an Incentive Stock Option as defined in Section 422 of the
Code.
(g) "NQSO" shall mean an Option granted under this Plan, or any other
stock option which, at the time such Option is granted, does not qualify as an
ISO as defined in the Code.
(h) "OPTION" shall mean a right to purchase Shares granted pursuant to
the Plan.
(i) "OPTION PRICE" shall mean the purchase price for Shares under an
Option, as determined in Paragraph 7 below.
(j) "PARTICIPANT" shall mean an employee of the Corporation, or of any
Subsidiary to whom an Option is granted under the Plan.
(k) "PLAN" shall mean this RoTech Medical Corporation Stock Option Plan.
(l) "SHARE" shall mean a share of the common stock, par value $.0002, of
the Corporation.
(m) "SUBSIDIARY" shall mean a subsidiary corporation of the Corporation,
as defined in Section 424(f) of the Code.
3. ADMINISTRATION. The Plan shall be administered by the Committee, which
--------------
shall consist of not less than two (2) directors of the Corporation, who shall
<PAGE>
be appointed by, and shall serve at the pleasure of, the Board. Each member of
such Committee, while serving as such, shall be deemed to be acting in his
capacity as a director of the Corporation. Until the Committee has been
appointed, all of the members of the Board shall constitute the Committee.
Subject to the terms of the Plan, the Committee shall have full authority
to select the persons to whom Options may be granted under the Plan, to grant
options on behalf of the Corporation, to condition the grant of any such Options
upon the exchange of existing Options held by an Optionee, and to set the number
of Shares to be covered by such Options, the times and dates at which such
Options shall be granted and exercisable and the other terms of such Options.
The Committee also shall have the authority to establish such rules and
regulations, not inconsistent with the provisions of the Plan, for the proper
administration of the Plan, and to amend, modify or rescind any such rules and
regulations, and to make such determinations and interpretations under, or in
connection with, the Plan, as it deems necessary or advisable. All such rules,
regulations, determinations and interpretations shall be binding and conclusive
upon the Corporation, its shareholders and all employees, and upon their
respective legal representatives, beneficiaries, successors and assigns and upon
all other persons claiming under or through any of them.
No member of the Board or the Committee shall be liable for any action or
determination made in good faith with respect to the Plan or any Option granted
under it. Nothing herein shall be deemed to expand the personal liability of a
member of the Board or Committee beyond that which may arise under any
applicable standards set forth in the Corporation's by-laws and Florida law, nor
shall anything herein limit any rights to indemnification or advancement of
expenses to which any member of the Board or the Committee may be entitled under
any by-law, agreement, vote of the shareholders or directors, or otherwise.
4. ELIGIBILITY. The Committee may grant Options to any key executive
-----------
officer (including an employee who is a director) of the Corporation, or its
Subsidiaries. For purposes of this Plan, "key executive officer" shall be
defined as follows:
The Chief Executive Officer, Chief Operating Officer, Chief Financial
Officer, President, all Vice Presidents, Secretary and Treasurer who are
employed by the Corporation.
Options may be awarded by the Committee at any time and from time to time to new
Participants, or to then Participants, or to a greater or lesser number of
Participants, and may include or exclude previous Participants, as the Committee
shall determine. Options granted to different Participants, or to the same
-2-
<PAGE>
Participants at different times, need not contain similar provisions.
5. AMOUNT OF STOCK. The stock to be offered for purchase pursuant to
---------------
Options granted under this Plan shall be treasury or authorized but unissued
Shares, and the total number of such Shares which may be issued pursuant to
Options under this Plan shall not exceed 500,000 Shares (as of April 1, 1996),
subject to adjustment as provided in Paragraph 14 hereof. If any unexercised
Options are exchanged for new Options, lapse or terminate for any reason, the
Shares covered thereby may again be optioned.
6. STOCK OPTION AGREEMENT. Each Option granted under this Plan shall be
----------------------
evidenced by an appropriate stock option agreement ("Agreement"), which
Agreement shall be executed by the Corporation and by the Participant. The
Agreement shall contain such terms and provisions, not inconsistent with the
Plan, as shall be determined by the Committee. Such terms and provisions may
vary between Participants or as to the same Participant to whom more than one
Option may be granted.
7. OPTION PRICE. The purchase price for Shares under each Option shall be
------------
one hundred percent (100%) of the fair market value of the Shares, as determined
by last sales price quoted on NASDAQ on the date the Option is granted.
8. TERM AND EXERCISE OF OPTION. Each Option shall expire on such date as
---------------------------
may be determined by the Committee with respect to such Option, but in no event
shall any Option expire more than ten years from the date it is granted. The
date on which an Option shall be granted shall be the date of the Committee's
authorization of the Option or such later date as may be determined by the
Committee at the time the Option is authorized.
Options shall be exercisable in such installments and on such dates, and/or
upon the occurrence of such events, as the Committee may specify. The Committee
may accelerate the exercise date of any outstanding Options, in its discretion,
if it deems such acceleration to be desirable. Except as provided in Paragraph
9, no Option shall be exercised unless at the time of such exercise the
Participant is then an employee of the Corporation or any Subsidiary.
Exercisable Options may be exercised, in whole or in part, from time to time, by
giving written notice of exercise to the Corporation at its principal office,
specifying the number of Shares to be purchased and accompanied by payment in
full of the aggregate Option Price for such Shares. Only full Shares shall be
issued under the Plan, and any fractional Share which might otherwise be
issuable upon exercise of an Option granted hereunder shall be forfeited.
-3-
<PAGE>
The Option price shall be payable (a) in cash or its equivalent; (b) in the
discretion of the Committee, in Shares previously acquired by the Participant,
provided that if such Shares were acquired through exercise of an ISO, such
Shares have been held by the Participant for a period not less than the holding
period described in Section 422(a)(1) of the Code on the date of exercise, or if
such Shares were acquired through exercise of an NQSO or of an option under a
similar plan, such Shares have been held by the Participant for a period of more
than one (1) year on the date of exercise, and further provided that the
Participant shall not have tendered Shares in payment of the exercise price of
any other Option under the Plan or any other stock option plan of the
Corporation within six calendar months of the date of exercise; or (c) in the
discretion of the Committee, in any combination of (a) and (b) above. In the
event the Option price is paid, in whole or in part, with Shares, the portion of
the Option price so paid shall be equal to the fair market value on the date of
tender of the Shares so tendered in payment of such Option price.
9. TERMINATION OF EMPLOYMENT.
-------------------------
(a) Except as set forth below with regard to the death of a Participant,
in the event of termination (voluntary or involuntary) for any reason, with or
without cause, of a Participant's employment by the Corporation, any unexercised
Option must be exercised within one (1) year after termination of employment (or
two (2) years after termination of employment for Participants subject to
Section 16(b) of the Act at the time of termination), but in no event shall any
Option be exercisable after the expiration of its term. Any Options not so
exercised shall expire and be null and void for all purposes.
(b) If, however, the termination of employment is due to death of the
Participant while in the employ of the Corporation or a Subsidiary, the estate
of the holder or the person or persons who acquired the right to exercise such
Option by bequest or inheritance, shall have the privilege of exercising the
unexpired Option, to the extent such option was exercisable on the date of such
termination due to death, within one year of such date, but in no event shall
any Option be exercisable after the expiration of its term.
10. WITHHOLDING AND USE OF SHARES TO SATISFY TAX OBLIGATIONS. The
--------------------------------------------------------
obligation of the Corporation to deliver Shares upon the exercise of any Option
shall be subject to applicable federal, state and local tax withholding
requirements.
If the exercise of any Option is subject to the withholding requirements of
applicable federal tax laws, the Committee, in its discretion (and subject to
such withholding rules ("Withholding Rules") as shall be adopted by the
Committee), may permit the Participant to satisfy the federal withholding tax,
-4-
<PAGE>
in whole or in part, by electing to have the Corporation withhold (or by
returning to the Corporation) Shares, which Shares shall be valued, for this
purpose, at their fair market value on the date the amount of tax required to be
withheld is determined (the "Determination Date"). Such election must be made
in compliance with and subject to the Withholding Rules, and the Committee may
not withhold Shares in excess of the number necessary to satisfy the minimum
federal income tax withholding requirements. In the event Shares acquired under
the exercise of an ISO are used to satisfy such withholding requirement, such
Shares must have been held by the Participant for a period not less than the
holding period described in Section 422(a)(1) of the Code on the Determination
Date. In the event Shares acquired under the exercise of an NQSO or of an
option under a similar plan are used to satisfy such withholding requirement,
such Shares must have been held by the Participant for a period of more than one
(1) year on the Determination Date.
11. NON-ASSIGNABILITY. Each Option granted under the Plan shall be non-
-----------------
transferable by the Participant except by will or the laws of descent and
distribution, and each Option shall be exercisable during the Participant's
lifetime only by the Participant.
12. ISSUANCE OF SHARES AND COMPLIANCE WITH SECURITIES ACTS. Within a
------------------------------------------------------
reasonable time after exercise of an Option, the Corporation shall cause to be
delivered to the Participant a certificate for the Shares purchased pursuant to
the exercise of the Option. At the time of any exercise of any Option, the
Corporation may, if it shall deem it necessary and desirable for any reason
connected with any law or regulation of any governmental authority relative to
the regulation of securities, require the Participant to represent in writing to
the Corporation that it is the Participant's then intention to acquire the
Common Stock for investment and not with a view to distribution thereof and that
such Participant will not dispose of such Shares in any manner that would
involve a violation of applicable securities laws. In such event, no Shares
shall be issued to such holder unless and until the Corporation is satisfied
with such representation. Certificates for Shares issued pursuant to the
exercise of Options may bear an appropriate securities law legend.
13. RIGHTS AS A SHAREHOLDER. A Participant shall have no rights as a
-----------------------
shareholder with respect to Shares covered by Participant's Option until the
date of the issuance or transfer of the Shares to Participant and only after
such Shares are fully paid. No adjustment shall be made for dividends or other
-5-
<PAGE>
rights for which the record date is prior to the date of such issuance or
transfer.
14. STOCK ADJUSTMENTS. In the event of a reorganization, recapitalization,
-----------------
change of shares, stock split, or spinoff, stock dividend, reclassification,
subdivision or combination of shares, merger, consolidation, rights offering, or
any other change in the corporate structure or shares of the Corporation, the
Committee shall make such adjustment as it, in its sole discretion, deems
appropriate in the number and kind of shares authorized by the Plan, in the
number and kind of shares covered by grants made under the Plan or in the
purchase prices of outstanding Options, and such adjustments shall be effective
and binding on the Participant and the Corporation for all purposes of the Plan.
In the event of a corporate transaction (as that term is described in
Section 424(a) of the Code and the Treasury Regulations issued thereunder as,
for example, a merger, consolidation, acquisition of property or stock,
separation, reorganization, or liquidation), each outstanding Option shall be
assumed by the surviving or successor corporation, provided, however, that in
the event of a proposed corporate transaction, the Committee may terminate all
or a portion of the outstanding Options if it determines that such termination
is in the best interests of the Corporation. If the Committee decides to
terminate outstanding Options, the Committee shall give each Participant holding
an Option to be terminated not less than seven days' notice prior to any such
termination by reason of such a corporate transaction, and any such outstanding
Option which is to be so terminated may be exercised (if and only to the extent
that it is then exercisable) up to and including the date immediately preceding
such termination. Notwithstanding the preceding sentence, as provided in
Paragraph 8 hereof, the Committee, in its discretion, may accelerate, in whole
or in part, the date on which any or all Options become exercisable.
15. ADOPTION BY BOARD. This Plan becomes effective on the date of its
-----------------
adoption by the Board.
16. TERMINATION AND AMENDMENT OF THE PLAN. Subject to the right of the
-------------------------------------
Board to terminate the Plan prior thereto, the Plan shall automatically
terminate ten years after its adoption by the Board of Directors. The Board
shall have the power at any time, in its discretion, to amend, abandon or
terminate the Plan, in whole or in part, provided that no such action shall
affect any Options theretofore granted and then outstanding under the Plan.
Nothing contained in this Paragraph 16, however, shall terminate or affect the
continued existence of rights created under Options issued hereunder and
outstanding under the Plan, which by their terms extend beyond such date.
17. INTERPRETATION. A determination of the Committee as to any question
--------------
which may arise with respect to the interpretation of the provisions of this
Plan or any Options shall be final and conclusive, and nothing in this Plan, or
in any regulation hereunder, shall be deemed to give any Participant, his legal
representatives, assigns or any other person any right to participate herein
except to such extent, if any, as the Committee may have determined or approved
pursuant to this Plan. The Committee may consult with legal counsel who may be
counsel to the Corporation and shall not incur any liability for any action
taken in good faith in reliance upon the advice of such counsel.
Date of Board Approval: April 1, 1996
Effective Date: May 1, 1996
-6-
<PAGE>
EXHIBIT 11.0
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------------------------
1996 1995 1994
<S> <C> <C> <C>
Net income (A) $20,555,775 $13,144,766 $ 8,112,220
Weighted average shares outstanding $23,164,857 20,182,042 16,187,480
Incremental shares - contingent shares 880,361 76,923
Incremental shares - stock options 611,782 425,035 96,808
----------- ----------- -----------
Subtotal (C) 24,657,000 20,684,000 16,294,288
Incremental shares - Contingent shares 549,000 300,000 -
------------ ----------- -----------
Total (D) 25,206,000 20,984,000 16,294,288
============ =========== ===========
Primary earnings per share:
Net Income (A/C) $ 0.83 $ 0.64 $ 0.50
=========== =========== ===========
Fully diluted earnings per share:
Net Income (A/D) $ 0.82 $ 0.63 $ 0.50
=========== =========== ===========
</TABLE>
<PAGE>
EXHIBIT 13.1
TABLE OF CONTENTS
- --------------------------------------------------------------------------
July 31, 1996
Letter to Shareholders.................................................. 2
Consolidated Financial Statements....................................... 4
Financial Statement Schedule............................................ 23
Report of Independent Certified Public Accountants...................... 24
Selected Consolidated Financial Data.................................... 25
Management's Discussion and Analysis of Financial
Condition and Results of Operations................................. 26
Selected Quarterly Consolidated Financial Data.......................... 30
Prices of Common Stock.................................................. 30
<PAGE>
RoTech Medical Corporation and Subsidiaries
- ----------------------------------------------------------------------------
TO OUR SHAREHOLDERS
- ----------------------------------------------------------------------------
RoTech is pleased to announce that fiscal 1996 was our eighth consecutive year
of record growth in revenue and earnings. We have grown to 366 home health care
locations in 28 states. Our internal growth in fiscal 1996 was 14% with the
remainder of our growth from fiscal 1995 and fiscal 1996 acquisitions. The
opportunities for further consolidation coupled with the growth of the home care
industry make for exciting times for RoTech. The following table shows our
growth over the last five years:
<TABLE>
<CAPTION>
Net Operating Net Income Wtd. Average
Revenue Net Income per Share No. of Shares
------------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
1996 $263,030 $20,556 $0.82 25,206
1995 134,111 13,145 0.63 20,984
1994 71,470 8,112 0.50 16,294
1993 48,343 5,127 0.38 13,384
1992 37,122 3,686 0.30 12,350
</TABLE>
(all amounts are shown in 000's except fully diluted per share amounts)
Two years ago, RoTech made a commitment to expand our presence in the Western
United States. During fiscal 1996 we entered New Mexico, Utah and Arizona while
significantly enhancing our market presence in Colorado. We also remain the
market leaders in Montana, Wyoming and South Dakota. In fiscal 1997 to date we
have acquired companies with 31 locations including our first locations in
Kansas and Idaho. We have found the dynamics in non-urban America to be
consistent from region to region which should enable our ability to apply our
operating model upon entry into new markets.
In fiscal 1994 we had a renewed focus on respiratory therapy products and
services. In fiscal 1995, we began to refocus on providing more home medical
equipment to our patient bases, which is largely responsible for the strong
internal growth rate experienced by the Company in fiscal 1996. We plan to
continue to strengthen our existing businesses along with assessing the
feasibility of new products and services for our patients. As technological
advances provide products for use in the home care setting and as home care
becomes more accessible and accepted, we should continue to experience growth in
our industry. This growth is required to manage the country's growing demand for
health care services for the aging population base within cost effective
parameters.
RoTech plans to focus on management and information systems in fiscal 1997 to
improve our profitability and management capabilities. We also plan to continue
to focus on internal growth opportunities with expanded product and service
offering in our existing operations. This strategy has been successful, as was
proven this last year with our acquisition of Hooks Oxygen and Medical Equipment
in October 1995. Hooks' had strong name recognition in Indiana, Ohio and
Illinois but was losing money under its previous owners. Upon purchase, we
immediately replaced the information systems at Hooks' and gave each store on-
line capabilities. We began sales, marketing and operations training designed to
change the product mix and improve profitability. Within the first 9 months of
ownership, our rental and respiratory bases of business grew significantly in
those markets. Hooks' now posts pre-tax profitability of approximately twenty
percent of its operating revenue.
The reimbursement and regulatory environments are a source of constant change
which concern many shareholders. Modifications to the rules, procedures and
allowable relationships can cause detrimental effects for the smaller home care
company that may not be able to make necessary changes. RoTech is attentive to
such changes and strives to minimize their impact on the Company by acting
quickly to implement the changes required. As we have experienced in the past,
changes to the framework within which we do business often create opportunities
for companies that can move swiftly.
2
<PAGE>
On May 21, RoTech issued a 100% stock dividend to accomplish a stock split. All
of the numbers in this annual report have been restated to be comparable for the
years presented. Our hope was to enable the individual investor to purchase
shares, as we get many requests for information about the Company in the smaller
towns where we do business. We have also seen additional institutional investors
establish ownership positions in the past year.
On June 1, 1996, we completed an offering of convertible subordinated debentures
and received proceeds of $110 million. We immediately paid off our line of
credit with the banking syndicate and renegotiated the line of credit to $200
million, of which $127 million is currently available. The Company had $37
million in positive cash flow from operations, compared to $17 million in the
prior year. We believe our cash flow from operations along with our credit
capacity will support our acquisition and growth strategies planned for the next
year.
The past few years at RoTech and in our industry have been exciting. We
appreciate the support of our shareholders, patients and employees during these
changing times as we continue to balance our goals of enhancing shareholder
value and providing quality home health care products and services to the
communities where we live. We hope you will continue with RoTech through the
challenges of the times to come.
/s/ William P. Kennedy
William P. Kennedy
Chairman of the Board
3
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
JULY 31
1996 1995
----------------------------
<S> <C> <C>
ASSETS
Current Assets:
Cash $ 6,438,760 $ 577,283
Accounts receivable:
Trade, less allowance for contractual
adjustments and doubtful accounts of
$16,978,000 in 1996 and $7,958,000 in
1995 83,486,610 42,236,981
Other 2,583,756 1,418,918
Inventories 15,191,011 12,036,188
Prepaid expenses 884,437 388,728
Income taxes receivable 3,883,830 3,793,364
----------------------------
Total Current Assets 112,468,404 60,451,462
Other Assets:
Intangible assets, less accumulated
amortization of $18,163,000 in 1996
and $8,179,000 in 1995 168,101,082 68,811,955
Other assets 8,630,288 249,070
----------------------------
176,731,370 69,061,025
Property and equipment, less
accumulated depreciation 85,414,544 45,912,848
----------------------------
Total Assets $374,614,318 $175,425,335
============================
</TABLE>
See accompanying notes.
4
<PAGE>
RoTech Medical Corporation and Subsidiaries
- --------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
JULY 31
1996 1995
-----------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 10,151,998 $ 4,870,171
Accrued expenses and other liabilities 14,178,810 3,972,000
Notes payable to banks 52,055,008 9,980,000
Deferred income taxes 75,299 42,673
-----------------------------
Total Current Liabilities 76,461,115 18,864,844
Deferred income taxes 11,831,155 6,901,971
Convertible Subordinated Debentures 110,000,000 -
Redeemable Common Stock 1,646,933 -
Shareholders' Equity:
Common Stock, par value $.0002 per
share, 50,000,000 shares authorized,
23,303,586 in 1996 and 22,843,642 in
1995 shares issued and outstanding 4,669 4,586
Treasury stock (814,535) (814,535)
Additional paid-in capital 122,757,377 118,029,198
Retained earnings 52,727,604 32,439,271
-----------------------------
174,675,115 149,658,520
-----------------------------
Total Liabilities and Shareholders'
Equity $374,614,318 $175,425,335
=============================
</TABLE>
See accompanying notes.
5
<PAGE>
RoTech Medical Corporation and Subsidiaries
- --------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Operating revenue $263,029,963 $134,111,458 $71,469,618
Cost and expenses:
Cost of revenue 71,012,877 36,287,811 17,408,548
Selling, general and administrative 127,357,013 66,477,381 35,879,483
Depreciation and amortization 26,519,480 9,565,238 5,338,494
Interest 5,228,318 835,462 66,676
-------------------------------------------
230,117,688 113,165,892 58,693,201
-------------------------------------------
Income before income taxes 32,912,275 20,945,566 12,776,417
Income tax expense 12,356,500 7,800,800 4,664,197
-------------------------------------------
Net income $ 20,555,775 $ 13,144,766 $ 8,112,220
===========================================
Net income per share:
Primary $ 0.83 $ 0.64 $ 0.50
Fully diluted $ 0.82 $ 0.63 $ 0.50
Weighted average number of shares
outstanding:
Primary 24,657,000 20,684,000 16,294,288
Fully diluted 25,206,000 20,984,000 16,294,288
</TABLE>
See accompanying notes.
6
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
---------------------- TREASURY PAID-IN
SHARES AMOUNT STOCK CAPITAL EARNINGS
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at August 1, 1993 14,485,650 $2,898 $ 24,693,658 $11,500,792
Issuance of Common Stock in acquisition
of subsidiaries 605,832 120 3,077,015
Issuance of Common Stock pursuant to
Employee Stock Compensation Plan 1,600 9,015
Repurchase of Common Stock (83,542) $(814,535)
Issuance of Common Stock in Public 4,000,000 800 36,738,480
Offering
Net income 8,112,220
----------------------------------------------------------------
Balance at July 31, 1994 19,009,540 3,818 (814,535) 64,518,168 19,613,012
Issuance of Common Stock in acquisition
of subsidiaries 391,976 78 3,197,340
Issuance of Common Stock pursuant to
Employee Stock Compensation Plan 32,126 8 185,576
Issuance, repurchase and retirement of
common stock pursuant to exercise of
stock options and related put options 173,299 (318,507)
Issuance of Common Stock pursuant to
exercise of stock options 10,000 2 69,998
Issuance of Common Stock in Public 3,400,000 680 49,884,817
Offering
Net income 13,144,766
----------------------------------------------------------------
BALANCE AT JULY 31, 1995 22,843,642 4,586 (814,535) 118,029,198 32,439,271
Issuance of Common Stock in acquisition
of subsidiaries 301,816 52 3,061,230
Issuance of Common Stock pursuant to
Employee Stock Compensation Plan 22,068 4 164,569
Issuance, repurchase and retirement of
Common Stock pursuant to exercies of
stock options and related put options 128,844 (267,442)
Issuance of Common Stock pursuant to
exercise of stock options 136,060 27 1,373,536
NET INCOME 20,555,775
----------------------------------------------------------------
BALANCE AT JULY 31, 1996 23,303,586 $4,669 $(814,535) $122,757,377 $52,727,604
================================================================
</TABLE>
See accompanying notes.
7
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
1996 1995 1994
------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income $ 20,555,775 $13,144,766 $ 8,112,220
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation 16,889,027 4,974,785 3,341,919
Amortization of intangible assets 9,630,453 4,590,453 1,996,575
Provision for deferred income taxes 4,887,810 4,617,315 715,932
Gain on sale of property and equipment (15,160) (15,983)
Issuance of Common Stock as employee
compensation 164,573 255,583 9,015
Equity in income from affiliated company (910,246) (109,493)
Changes in operating assets and
liabilities:
Increase in trade accounts receivable (16,676,623) (5,452,570) (6,645,093)
(Increase) decrease in other receivables (552,575) 364,006 (1,198,602)
(Increase) decrease in inventories 658,504 (2,633,575) (872,687)
(Increase) decrease in prepaid expenses (111,228) 391,366 (140,712)
Increase in accounts payable 3,850,531 1,919,540 1,315,516
Decrease in accrued expenses and other
liabilities (2,248,914) (1,181,063) (1,512,257)
(Increase) decrease in income taxes
receivable (479,797) (2,959,294) (240,128)
------------------------------------------
Net cash provided by operating
activities 37,527,130 17,105,906 4,756,222
</TABLE>
See accompanying notes.
8
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JULY 31
1996 1995 1993
---------------------------------------------
<S> <C> <C> <C>
INVESTING ACTIVITIES
Purchases of property and equipment (29,621,755) (17,298,613) (9,389,526)
Issuance of notes and other receivables (4,078,350)
Payments for acquisitions of net
assets, net of cash acquired (146,561,420) (55,643,515) (37,734,909)
Proceeds from sale of property and equipment 68,167 15,983
Advances and deposits (943,838) 391,368 44,253
---------------------------------------------
Net cash used in investing activities (181,205,363) (72,482,593) (47,064,199)
FINANCING ACTIVITIES
Proceeds from notes payable to banks 188,773,070 109,037,900 32,493,900
Payments on notes payable to banks (146,698,062) (103,155,900) (28,396,000)
Proceeds from convertible subordinated debentures 110,000,000
Payments for debt issuance costs (3,200,000)
Proceeds from issuance of Common Stock 1,083,056 49,885,497 36,739,280
Repurchase of Common Stock (418,354) (145,208) (814,535)
---------------------------------------------
Net cash provided by financing activities 149,539,710 55,622,289 40,022,645
---------------------------------------------
Increase (decrease) in cash 5,861,477 245,602 (2,285,332)
Cash at beginning of year 577,283 331,681 2,617,013
---------------------------------------------
Cash at end of year $ 6,438,760 $ 577,283 $ 331,681
---------------------------------------------
Supplemental disclosures of cash flow
information
Cash paid during the year for
Interest $ 3,976,000 $ 933,000 $ 69,000
Income taxes 6,957,000 6,774,000 4,456,000
</TABLE>
See accompanying notes.
9
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
- -----------------------------------------------------------------------------
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 care equipment to patients. 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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist principally of cash and accounts
receivable. The Company places its cash with high credit quality institutions.
Concentrations of credit risk with respect to accounts receivable is limited due
to the large number and geographic distribution of patients, third-party payors,
and clients.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable and notes
payable to banks approximate fair value because of the short-term nature of
these items. Based on the current market rates offered for similar debt of the
same maturities, the carrying amount of the Company's Convertible Subordinated
Debentures approximates fair value at July 31, 1996.
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 $130,060,000,
$59,017,000 and $31,142,000 in 1996, 1995 and 1994, respectively. The provision
for doubtful accounts approximated $7,544,000, $4,499,000 and $3,377,000 in
1996, 1995 and 1994, 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, 1996
- -----------------------------------------------------------------------------
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 ("intangible assets") is being amortized over 5 to 25 years on a
straight-line basis. The Company annually evaluates the realizability of
intangible assets by utilizing an operating income realization test for the
applicable businesses acquired. In addition, the Company considers the effects
of external changes to the Company's business environment, including competitive
pressures, market erosion and technological and regulatory changes. The Company
believes its estimated intangible assets life is reasonable given the continuing
movement of patient care to noninstitutional settings, expanding demand due to
demographic trends, the emphasis of the Company on establishing significant
coverage in its markets, the consistent practice with other home care companies
and other factors.
INCOME TAXES
Deferred income taxes are provided on elements of income that are recognized
for financial accounting purposes in periods different than when such items are
recognized for income tax purposes.
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributed to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
INCOME PER SHARE
On April 17, 1996, the Board of Directors of the Company declared a two-for-
one split of its Common Stock, payable on May 21, 1996. This was affected in the
form of a 100% dividend to shareholders of record on April 30, 1996.
Shareholders' equity has been restated to give retroactive recognition to the
stock split for all periods presented by reclassifying from additional paid in
capital to Common Stock, the par value of the additional shares arising from the
split. In addition, for all periods presented, all references in the
consolidated financial statements and footnotes thereto to number of
11
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
- -----------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shares, per share amounts, weighted average shares outstanding, as well as stock
option and related price information have been restated to give retroactive
effect to the two-for-one stock split affected on May 21, 1996.
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 consolidated financial
statements to conform to the 1996 presentation.
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS No.
121 "Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," which will become effective for the year ending July 31, 1997.
The adoption of SFAS No. 121 is not expected to have a material impact on the
Company's consolidated financial statements. Also in 1995, the FASB issued SFAS
No. 123, "Accounting for Stock-Based Compensation", which requires
companies to measure employee stock compensation plans based on the fair value
method of accounting or to continue to apply APB No. 25, "Accounting for Stock
Issued to Employees", and provide pro forma footnote disclosures under the fair
value method in SFAS No. 123. The Company will continue to apply the principles
of APB No. 25 and provide pro forma fair value disclosures starting in the 1997
Annual Report.
2. THIRD-PARTY RATE ADJUSTMENTS AND REVENUE
Approximately 60% in 1996, 63% in 1995, and 48% in 1994 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.
12
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
- -----------------------------------------------------------------------------
3. ACQUISITIONS
During the fiscal year ended July 31, 1996, the Company issued 301,816 shares
of its restricted Common Stock valued at $3,061,282, released 230,075 shares of
its restricted Common Stock from escrow which is recorded as Redeemable Common
Stock (see Note 4) and is valued at $1,646,933, issued 675,664 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 $147,882,000 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 1996 are reflected in the following classifications on the balance
sheet:
<TABLE>
<CAPTION>
<S> <C>
Cash $ 1,320,000
Accounts receivable 25,185,000
Inventories 3,813,000
Prepaid expenses 384,000
Other assets 85,000
Property and equipment 26,769,000
Accounts payable, accrued expenses and other liabilities (13,887,000)
------------
Net assets acquired $ 43,669,000
============
</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 5 to 25 years on a straight-line
basis.
The operations of entities acquired subsequent to July 31, 1996 (see Note 15)
are not included in the Company's historical statements of income as presented
herein. The net assets of those entities acquired subsequent to July 31, 1996
are also not included in the Company's balance sheet as of July 31, 1996.
Operations of such entities are included in the accompanying pro forma results.
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 periods
presented to illustrate the estimated combined effects of the various Agreements
for Purchase and Sales (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.
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. The pro forma condensed combined statements of
income include amortization of intangible assets 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.
13
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
- -----------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED)
(a) Amortization on intangible assets recorded in the combined acquisitions
(amortized over various lives from 5 to 25 years).
(b) Additional net interest expense related to borrowings for cash paid to
acquire combined entities.
(c) 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.
(d) Additional shares of the Company's Common Stock issued pursuant to the
Agreements; assumed issued on the first day of the respective years
presented.
<TABLE>
<CAPTION>
For the Year Ended July 31, 1995
----------------------------------------------------------------
(Unaudited)
RoTech
Medical RoTech
Corporation Medical
Consolidated Corporation
Year Combined Combined
Ended Acquired Pro Forma Pro Forma
July 31, 1995 Entities Adjustments Results
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenue $134,111,458 $158,230,182 $292,341,640
Cost and expenses:
Cost of revenue 36,287,811 54,961,356 91,249,167
Selling, general
and administrative 66,477,381 79,470,338 145,947,719
Depreciation and amortization 9,565,238 3,782,754 $ 7,071,380 (a) 20,419,372
Interest 835,462 1,632,662 9,946,222 (b) 12,414,346
-------------- ------------- ------------- -------------
113,165,892 139,847,110 17,017,602 270,030,604
-------------- ------------- ------------- -------------
Income before income taxes 20,945,566 18,383,072 (17,017,602) 22,311,036
Income tax expense 7,800,800 1,865,163 (1,299,324)(c) 8,366,639
-------------- ------------- ------------- -------------
Net Income $ 13,144,766 $ 16,517,909 $(15,718,278) $ 13,944,397
============== ============= ============= =============
Net Income Per Share:
Primary $ 0.64 $ 0.63
Fully Diluted $ 0.63 $ 0.63
Weighted Average Number
of Shares Outstanding:
Primary 20,684,000 1,307,327(d) 21,991,327
Fully Diluted 20,984,000 1,307,327(d) 22,291,327
</TABLE>
14
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
- -----------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED)
<TABLE>
<CAPTION>
For the Year Ended July 31, 1996
--------------------------------------------------------------------------------------------------
(Unaudited)
RoTech Medical
Corporation Consolidated RoTech Medical
Year Ended Combined Pro Forma Corporation Combined
July 31, 1996 Acquired Entities Adjustments Pro Forma Results
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenue $263,029,963 $63,280,623 $326,310,586
Cost and expenses:
Cost of revenue 71,012,877 20,417,473 91,430,350
Selling, general
and administrative 127,357,013 31,262,999 158,620,012
Depreciation and amortization 26,519,480 1,535,462 $ 3,693,489 (a) 31,748,431
Interest 5,228,318 833,348 4,968,091 (b) 11,029,757
-----------------------------------------------------------------------------------------------
230,117,688 54,049,282 8,661,580 292,828,550
-----------------------------------------------------------------------------------------------
Income before income taxes 32,912,275 9,231,341 (8,661,580) 33,482,036
Income tax expense 12,356,500 556,823 (357,560) (c) 12,555,763
-----------------------------------------------------------------------------------------------
Net Income $ 20,555,775 $ 8,674,518 $(8,304,020) $ 20,926,273
===============================================================================================
Net Income Per Share:
Primary $ 0.83 $ 0.81
Fully diluted $ 0.82 $ 0.79
Weighted Average Number of
Shares Outstanding
Primary 24,657,000 1,307,327(d) 25,964,327
Fully diluted 25,206,000 1,307,327(d) 26,513,327
</TABLE>
15
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
Notes to Consolidated Financial Statement - July 31, 1996
- -----------------------------------------------------------------------------
4. SHAREHOLDERS' EQUITY
The Company has 50,000,000 shares of Common Stock authorized at a par value of
$0.0002 per share. On May 21, 1996, the Company distributed a 100% common
stock dividend to shareholders of record as of April 30, 1996 to effect a 2-for-
1 stock split. Shareholders' equity has been restated to give retroactive
recognition to the stock split for all periods presented by reclassifying from
additional paid-in capital to Common Stock the par value of the additional
shares arising from the split. In addition, for all periods presented, all
references in the consolidated financial statements and footnotes thereto to
number of shares, per share amounts, weighted average shares outstanding, as
well as stock option and related price information have been restated to give
retroactive effect to the split.
On May 10, 1995, the Company completed a public offering of 3,400,000 shares
of its Common Stock at $15.50 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.
On March 31, 1994, the Company completed a public offering of 4,000,000 shares
of its Common Stock at $9.75 per share. The proceeds of the sale, after
deducting issuance costs, were $36,739,280. The Company used the proceeds to
reduce outstanding debts, to complete certain acquisitions and invested the
remainder in short-term interest-bearing obligations.
The Company utilizes its Common Stock as consideration in the acquisition
process along with cash payments. The Company issued the following shares in
the related fiscal years to effect purchases of home care companies:
<TABLE>
<CAPTION>
Number of Shares Value of Shares
---------------- ---------------
<S> <C> <C>
1994 605,832 $3,077,135
1995 391,976 3,197,418
1996 301,816 3,061,282
</TABLE>
Certain additional shares of Common Stock are issued and held in escrow
pending the resolution of specific conditions set out in the related purchase
transactions. Such shares are not shown as outstanding until the contingency is
satisfied and amounted to 1,732,740 shares as of July 31, 1996.
The Company has issued certain Common Stock shares subject to put options at
the sole discretion of the shareholder at specified prices and are recorded as
Redeemable Common Stock. As of July 31, 1996, the Company had 230,075 shares
outstanding subject to put options ranging in call prices from $8.75 to $9.75.
The put options expire at dates ranging from April 1997 to July 1997.
The Company has an Employee Stock Compensation Plan designed to reward
employees with ownership in the Company in lieu of cash compensation. Shares
issued under the Plan amounted to 22,068 shares, 32,126 shares, and 1,600 shares
in fiscal 1996, 1995 and 1994, respectively.
16
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
- -----------------------------------------------------------------------------
4. SHAREHOLDERS' EQUITY (CONTINUED)
The Company has two plans under which stock options may be granted. The 1993
Stock Option Plan the ("1993 Plan") provides for the granting of up to 3,000,000
stock options to purchase Common Stock over a ten year period, at a price of
fair market value on the date of grant to key management employees of the
Company. The 1996 Key Employee Stock Option Plan ("1996 Plan") provides for
the granting of up to 1,000,000 stock options to purchase Common Stock over a 10
year period, at a price of fair market value on the date of grant to key
executive officers of the Company. The 1993 Plan and the 1996 Plan are
administered by the Stock Option Plan Committee ("the Committee") of the Board
of Directors of the Company. Options become exercisable at such times and in
such installments as granted by the Committee. Participants generally vest in
the options over a four-year period.
Information regarding the Company's stock option plans is summarized below:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS
1993 PLAN 1996 PLAN PRICE PER SHARE
<S> <C> <C> <C>
Outstanding August 1, 1993 1,350,000 - $ 5.94
Granted 217,706 - 6.88 - 9.38
Exercised - - -
Canceled - - -
--------- -------
Outstanding July 31, 1994 1,567,706 - 5.94 - 9.38
Granted - - -
Exercised (28,854) - 6.88
Canceled - - -
--------- -------
Outstanding July 31, 1995 1,538,852 - 5.94 - 9.38
Granted 682,000 600,000 11.38 - 19.13
Exercised (128,852) - 5.94 - 6.88
Canceled - - -
--------- -------
Outstanding July 31, 1996 2,092,000 600,000 $ 5.94 - 19.13
Exercisable at July 31, 1996 1,121,500 - $ 5.94 - 14.00
Reserved for future grant 750,294 400,000 -
</TABLE>
During fiscal 1994, the Company repurchased 83,542 shares of its restricted
Common Stock in connection with the satisfaction of a receivable from a related
party. An acquisition transacted in fiscal 1992 included 50,048 warrants to
purchase the Company's Common Stock at $15.00 per share; 2,060 warrants were
exercised during fiscal year 1996 and the remaining warrants expired on November
30, 1995.
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
11). The Agreement issued the firm options to purchase up to, but not exceeding
in the aggregate, 20,000 shares of the Company's Common Stock at $13.88 per
share. The options are exercisable until June 30, 2000.
17
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
- -----------------------------------------------------------------------------
4. SHAREHOLDERS' EQUITY (CONTINUED)
During fiscal years 1993 and 1992, pursuant to employment agreements, the
Company issued 20,000 and 20,000, respectively, options to purchase its Common
Stock at prices ranging from $7.00 to $7.13 per share. All options issued in
1992 were exercised during the year ended July 31, 1996. During the year ended
July 31, 1995, 10,000 of the 20,000 options issued in fiscal 1993 were
exercised.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
JULY 31
1996 1995
---------------------------
<S> <C> <C>
Rental equipment $ 97,242,445 $ 48,271,671
Furniture and equipment 24,377,848 14,499,465
Vehicles 8,249,870 3,947,514
Leasehold improvements 2,221,288 1,357,378
---------------------------
132,091,451 68,076,028
Less accumulated depreciation (46,676,907) (22,163,180)
---------------------------
$ 85,414,544 $ 45,912,848
===========================
</TABLE>
6. CURRENT NOTES PAYABLE TO BANKS
Current notes payable to banks at July 31, 1996 were $52,055,008 under a
$200,000,000 syndicated bank line of credit expiring on June 3, 1997. The rate
on July 31, 1996 was 6.12%. The syndicated bank line of credit is payable on
demand and provides for an interest rate to be selected by the Company based on
either LIBOR plus 70 basis points or a Bankers' Acceptance rate plus 0.75%.
The credit facility carries a negative pledge on all Company assets and
requires compliance by the Company with certain financial and negative
covenants, including a restriction on dividends. As of July 31, 1996, the
Company was in compliance with all covenants contained in the credit facility.
18
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
- ------------------------------------------------------------------------------
6. CURRENT NOTES PAYABLE TO BANKS (CONTINUED)
Upon receipt, the proceeds of the Convertible Subordinated Debentures
were used to reduce outstanding indebtedness under the Company's existing
$150,000,000 syndicated bank line of credit. On June 4, 1996, the Company
expanded the same line of credit to $200,000,000.
7. CONVERTIBLE SUBORDINATED DEBENTURES
On June 1, 1996, the Company issued $110,000,000 aggregate principal
amount of 5 1/4% Convertible Subordinated Debentures ("Debentures") due 2003
with interest payable on June 1 and December 1, commencing December 1, 1996.
The Debentures and related 4,190,476 shares of the Common Stock of the Company,
which are initially issuable upon conversion of the Debentures, were registered
with the Securities and Exchange Commission on September 11, 1996.
The Debentures are convertible into Common Stock of the Company at any
time after the 60th day following the date of original issuance of the
Debentures and at or before maturity at a conversion price of $26.25 per share,
subject to adjustment in certain events, plus accrued interest. The Debentures
are redeemable at the option of the Company, in whole or in part, but not before
June 4, 1999. The Debentures do not provide for a sinking fund. The Company's
ability to repurchase the Debentures is dependent upon the Company's having
sufficient funds and may be limited by the terms of the Company's senior
indebtedness or the subordination provisions of the related indenture.
8. COMMITMENTS AND CONTINGENCIES
Lease Commitments
Rental expense approximated $7,765,000, $3,924,000 and $1,837,000 for the
years ended July 31, 1996, 1995 and 1994, respectively. Future minimum rental
commitments under leases, primarily for buildings, are as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDING JULY 31
----------------------------
<S> <C>
1997 $ 5,132,187
1998 3,612,622
1999 2,472,895
2000 1,320,092
2001 893,802
Thereafter 1,566,639
===========
$14,998,237
===========
</TABLE>
19
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
- -----------------------------------------------------------------------------
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Healthcare Regulatory Environment
A significant portion of the Company's revenues are reimbursed under the
Federal Medicare program. Various budgets currently under consideration by
Congress and the Federal Administration propose reductions in Medicare spending
including, among other matters, reimbursement for home oxygen. It is currently
uncertain when a budget agreement will be reached and the ultimate impact such
budget will have on home oxygen reimbursement.
Litigation
The Company is engaged in the defense of certain claims and lawsuits
arising out of the ordinary course and conduct of its business, the outcome of
which are not determinable at this time. The Company has insurance policies
covering such potential losses where such coverage is cost effective. In the
opinion of management, any liability that might be incurred by the Company upon
resolution of these claims and lawsuits will not, in the aggregate, have a
material adverse effect on its consolidated financial condition.
9. RETIREMENT BENEFITS
The Company instituted a 401(k) Savings Plan ("Savings Plan") on May 1,
1996. The Savings Plan covers all full-time employees who have met certain
eligibility requirements and is funded by voluntary employee contributions and
by Company contributions equal to a certain percentage of employee
contributions. Employees' interests in Company contributions vest over five
years. The cost of the Savings Plan was $26,314 for the fiscal year ended July
31, 1996.
10. INCOME TAXES
Income tax expense for the years ended July 31, consists of the
following:
<TABLE>
<CAPTION>
1996 1995 1994
Current
<S> <C> <C> <C>
Federal $ 6,796,500 $2,894,000 $3,632,313
State 672,190 289,485 448,529
-----------------------------------
7,468,690 3,183,485 4,080,842
Deferred
Federal 4,447,910 4,210,800 519,670
State 439,900 406,515 63,685
-----------------------------------
4,887,810 4,617,315 583,355
-----------------------------------
$12,356,500 $7,800,800 $4,664,197
===================================
</TABLE>
20
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
- -----------------------------------------------------------------------------
10. INCOME TAXES (CONTINUED)
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>
1996 1995
---- ----
<S> <C> <C>
Deferred tax liabilities:
Tax over book depreciation $ 7,046,700 $3,906,411
Tax over book intangibles amortization 4,784,455 2,995,560
Prepaid insurance 75,299 42,673
-----------------------------
Total deferred tax liabilities 11,906,454 6,944,644
Deferred tax assets:
Uniform capitalization 259,000 185,000
-----------------------------
Total deferred tax assets 259,000 185,000
-----------------------------
Net deferred tax liabilities $ 11,647,454 $6,759,644
=============================
The Company's effective tax rate
differs from the statutory rate for
the years ended July 31, as follows:
1996 1995 1994
------------------------------
Percentage of pre-tax income:
Statutory rate 35.0% 35.0% 34.0%
Increase (decrease) in tax rate
resulting from:
State income taxes, net of federal 2.0 2.0 3.8
income tax benefit
Amortization of nondeductible 2.2 2.5 1.9
intangible assets
Other (1.7) (2.3) (3.2)
-----------------------------
37.5% 37.2% 36.5%
=============================
</TABLE>
11. RELATED PARTY TRANSACTIONS
The Company purchases certain products from companies owned by its chief
executive officer and shareholder. Such transactions amounted to approximately
$74,000, $55,000 and $70,000 for the years ended July 31, 1996, 1995 and 1994,
respectively. These same companies purchased approximately $46,000, $28,000 and
$236,000 of products from the Company for the fiscal years ended July 31, 1996,
1995 and 1994, 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 $740,000,
$760,000 and $536,000 for the years ended July 31, 1996, 1995 and 1994,
respectively.
21
<PAGE>
RoTech Medical Corporation and Subsidiaries
- ---------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
- ----------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company executed a stock option agreement with a firm which provided
certain legal services in the amount of $302,000, $270,000, and $340,000 for the
years ended July 31, 1996, 1995, and 1994, respectively, to the Company. One of
the Company's directors and officers is a shareholder and officer of the firm.
(See Note 4.)
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended July 31, 1996 and 1995:
<TABLE>
<CAPTION>
JULY 31, 1996
FIRST SECOND THIRD FOURTH
-------------------------------------------------------
<S> <C> <C> <C> <C>
Operating revenue $45,119,179 $61,463,199 $72,983,865 $83,463,720
Cost and expenses 38,235,210 53,634,405 64,644,579 73,603,494
Income tax expense 2,560,836 2,897,599 2,897,933 4,000,132
-------------------------------------------------------
Net income $ 4,323,133 $ 4,931,195 $ 5,441,353 $ 5,860,094
=======================================================
Net income per share:
Primary $ .18 $ .20 $ .22 $ .23
Fully diluted $ .18 $ .20 $ .22 $ .23
JULY 31, 1995
First Second Third Fourth
-------------------------------------------------------
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:
Primary $ .14 $ .16 $ .17 $ .17
Fully diluted $ .14 $ .16 $ .16 $ .17
</TABLE>
13. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities include:
<TABLE>
<CAPTION>
JULY 31
1996 1995
-------------------------
<S> <C> <C>
Accrued payroll expenses $ 3,847,179 $2,164,221
Deferred payments 2,978,161 1,754,633
Payments due on acquisition transactions 3,200,000 -
Liabilities assumed through acquisitions 1,434,293 -
Accrued interest 1,232,086 -
Other accrued liabilities 1,487,091 53,146
-------------------------
$14,178,810 $3,972,000
=========================
</TABLE>
22
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
- -----------------------------------------------------------------------------
14. 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 asset are recorded in selling, general and administrative expense.
15. SUBSEQUENT EVENTS
During the period August 1, 1996 to October 28, 1996, the Company issued
40,000 shares of its restricted Common Stock valued at $494,000 and paid cash of
$10,306,000 to purchase the net assets of sixteen home health care companies.
During the period August 1, 1996 to October 28, 1996, the Company issued 77,700
shares of its restricted Common Stock valued at $994,832, paid cash of
$5,431,000 and forgave a note receivable of $3,679,000 to purchase the stock of
five health care companies. The note receivable was included in other non
current assets at July 31, 1996.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------
<TABLE>
<CAPTION>
COLUMN C
----------------------------------
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
- --------------------------------------------------------------------------------------------------------------------------
CHARGED TO
BALANCE AT OTHER
BEGINNING OF CHARGED TO COSTS ACCOUNTS- DEDUCTIONS BALANCE AT END OF
CLASSIFICATION PERIOD AND EXPENSES (1) DESCRIBE DESCRIBE (2) PERIOD
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended July 31, 1996:
Deducted from asset
accounts:
Allowance for contractual
adjustments and doubtful
accounts $7,958,000 $7,544,000 - $(1,476,000) $16,978,000
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
</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.
(2) Certain amounts in each year are charged against gross operating revenue
and are not included herein.
23
<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, 1996 and 1995, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended July 31, 1996. Our audits
also included the financial statement schedule, for the three-year period ended
July 31, 1996, presented on page 23. These consolidated financial statements
and financial statement 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 audits 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 audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of RoTech Medical Corporation and
subsidiaries at July 31, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years then ended in conformity with
generally accepted accounting principles. Also, in our opinion, such financial
statement schedule for the three-year period ended July 31, 1996, 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
Orlando, Florida
October 28, 1996
24
<PAGE>
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
- -----------------------------------------------------------------------------
(in thousands, except per share and percentage amounts)
<TABLE>
<CAPTION>
Year Ended July 31
- -------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statements of Income Data:
Operating revenue:
Home respiratory therapy & equipment $110,118 $56,533 $41,579(a) $23,857(a) $15,706(a)
Home medical equipment & supplies 92,062 32,305 (a) (a) (a)
Home infusion therapy & other
pharmacy related services 41,498 33,554 25,492 21,715 19,959
Other products & services 19,352 11,719 4,399 2,811 1,457
- -------------------------------------------------------------------------------------------------
Total operating revenue 263,030 134,111 71,470 48,383 37,122
- -------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of revenue 71,013 36,288 17,409 12,359 8,434
Selling, general and administrative 127,357 66,477 35,880 25,064 20,208
Depreciation and amortization 26,520 9,565 5,338 2,801 2,486
Interest 5,228 835 67 76 305
- -------------------------------------------------------------------------------------------------
Total cost and expenses 230,118 113,165 58,694 40,300 31,433
- -------------------------------------------------------------------------------------------------
Income before income taxes 32,912 20,946 12,776 8,083 5,689
Income tax expense 12,356 7,801 4,664 2,956 2,003
- -------------------------------------------------------------------------------------------------
Net income $ 20,556 $ 13,145 $ 8,112 $ 5,127 $ 3,686
- -------------------------------------------------------------------------------------------------
Net income per share:
Primary $0.83 $0.64 $0.50 $0.38 $0.30
Fully diluted $0.82 $0.63 $0.50 $0.38 $0.30
- -------------------------------------------------------------------------------------------------
Other Data:
Weighted average shares outstanding:
Primary 24,657 20,684 16,294 13,384 12,350
Fully diluted 25,206 20,984 16,294 13,384 12,350
- -------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working Capital $ 36,007 $ 41,587 $27,783 $18,203 $ 9,617
Total Assets 374,614 175,425 94,433 40,019 25,137
Long-term Debt
(less current portion) 110,000 - - - 1,053
Shareholders' Equity 174,675 149,659 83,320 36,197 17,518
- -------------------------------------------------------------------------------------------------
</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.
(a) A breakout of home respiratory therapy and equipment revenues and home
medical equipment and supplies was not available for the years ended July
31, 1994, 1993 and 1992. All revenue related to these two product lines
has been presented as "home respiratory therapy and equipment" for the
years indicated.
25
<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, 1996 AND 1995
Operating revenue increased 96% to $263.0 million for the fiscal year
ended July 31, 1996 ("fiscal 1996") from $134.1 million for the fiscal year
ended July 31, 1995 ("fiscal 1995"). The increase in operating revenue is
attributable to acquisitions and expanded product and service lines in existing
areas of operation. During fiscal 1996, the Company added 165 home care
locations and operated 366 home care locations in 28 states as of July 31, 1996.
The Company continues to employ a single sales force to maintain and develop
both the home respiratory therapy, other medical equipment, home infusion
therapy and other pharmacy related lines of business.
Operating revenue from home respiratory therapy and equipment
increased 95% to $110.1 million for fiscal 1996 from $56.5 million for fiscal
1995. Operating revenue from home medical equipment and supplies increased 185%
to $92.1 million for fiscal 1996 from $32.3 million for fiscal 1995. The
increases in these two product lines were due mainly to increases in patient
bases throughout the Company's locations and increased marketing efforts in
certain locations acquired during fiscal year 1995 and 1996. The majority of
the Company's acquisitions are of businesses that operate primarily in these two
product lines.
Operating revenue from home infusion therapy and pharmacy related
services increased 24% to $41.5 million for fiscal 1996 from $33.6 million for
fiscal 1995. Growth in this line of business should continue as the Company
expands its service areas.
Operating revenue from physician practices increased 65% to $19.4
million for fiscal 1996, from $11.7 million for fiscal 1995. The Company
currently owns 24 physician practices and employs 29 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 home health care operations.
Cost of revenue as a percentage of operating revenue decreased to
27.0% for fiscal 1996 from 27.1% for fiscal 1995 due to changes in the product
mix in the last year resulting from mid-year fiscal 1995 and fiscal 1996
acquisitions. Selling, general and administrative expenses as a percentage of
operating revenue reduced to 48.4% for fiscal 1996 from 49.6% for fiscal 1995,
as the revenue base has grown faster than the Company's costs. 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 177% to $26.5 million
for fiscal 1996 from $9.6 million for fiscal 1995. Depreciation and
amortization expense as a percentage of operating revenue was 10.1% for fiscal
1996 and 7.1% for fiscal 1995. 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 1996 were accounted for by the purchase method for
acquisitions.
26
<PAGE>
RoTech Medical Corporation and Subsidiaries
- ----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION - CONTINUED
- ----------------------------------------------------------------------------
Interest expense, net of interest income, increased to $5.2 million
for fiscal 1996 from $835,000 for fiscal 1995. This increase resulted from the
Company borrowing monies to fund certain acquisitions along with the issuance of
the Convertible Subordinated Debentures on June 1, 1996.
Income tax expense was provided at a 37.5% effective rate, compared to
37.2% the prior fiscal 1995.
Net income for fiscal 1996 was $20.6 million, a 56.4% increase over
the $13.1 million for fiscal year 1995. Net income per share on a fully diluted
basis increased 30.2% to $0.82 for fiscal 1996 compared to $0.63 for fiscal
1995. The weighted average number of shares on a fully diluted basis increased
20.1% to 25.2 million at July 31, 1996 from 21.0 million at July 31, 1995,
primarily as a result of the May 1995 public stock offering and shares issued in
conjunction with certain acquisitions.
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 therapy and equipment and home
medical equipment and supplies 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. The majority of
the Company's acquisitions are of businesses that operate primarily in these two
product lines.
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 6.2% for fiscal 1994. At July 31,
1995 the Company owned 20 physician practices and employed 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.
27
<PAGE>
RoTech Medical Corporation and Subsidiaries
- ----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION - CONTINUED
- ----------------------------------------------------------------------------
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%, 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 selling, general and administrative natures.
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 on a fully diluted basis
increased 26% to $0.63 for fiscal 1995 compared to $0.50 for fiscal 1994. The
weighted average number of shares on fully diluted basis increased 28.8% to 21.0
million on July 31, 1995 from 16.3 million at July 1994, primarily as a result
of the March 1994 and May 1995 public stock offerings and shares issued in
conjunction with certain acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1996, total current assets were $112.5 million and total
current liabilities were $76.5 million, resulting in working capital of $36.0
million. The Company's current ratio was 1.47 to 1 at July 31, 1996 compared to
3.20 to 1 at July 31, 1995. Net trade accounts receivable increased $41.2
million in fiscal 1996, or 98%. This increase is attributable to acquisitions
of the net assets of many home health care companies during the year and the 96%
28
<PAGE>
RoTech Medical Corporation and Subsidiaries
- ----------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION - CONTINUED
- ----------------------------------------------------------------------------
increase in operating revenue over the prior year. As a result, the Company's
days revenue outstanding on net accounts receivable decreased to 92 days at July
31, 1996 from 98 days at July 31, 1995. Acquired receivables remaining
outstanding account for approximately 16 days revenue outstanding at July 31,
1996 compared to 10 days revenue outstanding at July 31, 1995.
Current liabilities increased $57.6 million in fiscal 1996, or 305%,
as an additional $42 million was borrowed on the syndicated bank line of credit.
The balance of the change was due to the timing of payments to vendors.
During fiscal 1996, the Company generated cash of $37.5 million from
operating activities primarily as a result of net income of $20.6 million along
with non-cash expenses of $31.4 million. Advances on the syndicated bank line
of credit were utilized to fund acquisitions and internal expansion. During
fiscal 1996, the Company spent $146.6 million to acquire various home health
care companies and $29.6 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.
On June 1, 1996, the Company issued $110,000,000 aggregate principal
amount of 5 1/4% Convertible Subordinated Debentures ("Debentures"). Upon
receipt, the proceeds were used to reduce the syndicated bank line of credit.
The Debentures are due 2003 with interest payable on June 1 and December 1,
commencing December 1, 1996. The debentures do not provide for a sinking fund.
The Debentures are convertible into Common Stock of the Company at any time
after the 60th day following the date of original issuance of the Debentures and
at or before maturity at a conversion price of $26.25 per share, subject to
adjustment in certain events, plus accrued interest. The Debentures are
redeemable at the option of the Company, in whole or in part, but not before
June 4, 1999. The Company's ability to repurchase the Debentures is dependent
upon the Company's having sufficient funds and may be limited by the terms of
the Company's senior indebtedness or the subordination provisions of the related
indenture.
As of July 31, 1996, the Company had a syndicated bank line of credit
of $200 million, with approximately $127.6 million available for future
borrowing, as of October 21, 1996. The syndicated bank 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 a Bankers'
Acceptance rate plus 0.75%. The syndicated bank line of credit requires
compliance by the Company with certain financial and negative covenants,
including a restriction on dividends. As of July 31, 1996 the Company was in
compliance with all covenants contained in the credit facility. Management
believes that its credit capacity and cash flow from operations, will be
sufficient for the Company's projected growth in the near future.
29
<PAGE>
RoTech Medical Corporation and Subsidiaries
- ----------------------------------------------------------------------------
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
- ----------------------------------------------------------------------------
(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, 1996
OPERATING REVENUE $45,119 $61,463 $ 72,984 $83,464
NET INCOME $ 4,323 $ 4,931 $ 5,441 $ 5,860
NET INCOME PER SHARE:
PRIMARY $ 0.18 $ 0.20 $ 0.22 $ 0.23
FULLY DILUTED $ 0.18 $ 0.20 $ 0.22 $ 0.23
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
PRIMARY 23,646 24,489 24,927 25,565
FULLY DILUTED 24,381 25,204 25,299 25,940
- ------------------------------------------------------------------------
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:
Primary $ 0.14 $ 0.16 $ 0.17 $ 0.17
Fully Diluted $ 0.14 $ 0.16 $ 0.16 $ 0.17
Weighted Average
Number of Shares
Outstanding:
Primary 19,332 19,794 19,800 23,112
Fully Diluted 19,832 19,930 20,692 23,482
- ------------------------------------------------------------------------
PRICES OF COMMON STOCK HIGH ($) LOW ($)
- ------------------------------------------------------------------------
Fiscal 1996 - quarter ended
October 31, 1995 15 10 13/16
January 31, 1996 15 1/4 11 3/8
April 30, 1996 21 7/8 15
July 31, 1996 23 1/2 14 3/4
- ------------------------------------------------------------------------
Fiscal 1995 - Quarter Ended
October 31, 1994 13 1/2 9 3/8
January 31, 1995 14 1/2 12
April 30, 1995 16 1/4 12 3/4
July 31, 1995 16 1/2 12 1/4
- ------------------------------------------------------------------------
</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 21, 1996,
there were approximately 25,434,101 shares of Common Stock outstanding which
were by approximately 690 shareholders of record. On April 17, 1996, the Board
of Directors declared a two-for-one split of its Common Stock, payable on May
21, 1996. This was affected in the form of a 100% dividend to shareholders of
record on April 30, 1996 for all periods presented. All references to number of
weighted average shares outstanding per share amounts and prices in the tables
above have been restated to give retroactive effect to the two-for-one stock
split. The Company has not paid any cash dividends since formation. The Company
anticipates that for the foreseeable future, it will retain earnings in order to
finance the development of its business and that no cash dividends will be paid
on its Common Stock.
30
<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
Rebecca R. Irish
Treasurer, Assistant Secretary and Chief Financial
Officer
Janet L. Ziomek
Vice President of Finance
William A. Walker II
Secretary
Corporate Office 4506 L. B. McLeod Road, Suite F
Orlando, FL 32811
(407) 841-2115
(800) 342-0416
Internet Address http://www.rotech.com
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 SunTrust Bank, Central Florida, N.A.
200 South Orange Avenue
Orlando, FL 32801
Shareholder Information Transfer Agent:
The shares of RoTech SunTrust Bank, Central Florida, N.A.
Medical Corporation Attn.: Corporate Trust Division
Common Stock commenced 225 E. Robinson Street, Suite 350
trading on the NASDAQ Orlando, FL 32801
National Market System on
December 9, 1985 and are
traded under the symbol
"ROTC". The approximate
number of shareholders of
record as of October 21,
1996 was 690.
Annual Report: Annual Meeting:
A copy of RoTech Medical December 9, 1996 at 10:00 a.m.
Corporation Annual Report SunTrust, National Association
on Form 10-K as filed 200 South Orange Avenue
will be made available 2nd Floor, Tower Side
without charge upon University Room
written request. Orlando, FL 32801
Requests should be
directed to:
Rebecca R. Irish
Treasurer and Chief
Financial Officer
RoTech Medical
Corporation
Post Office Box 536576
Orlando, FL 32853-6576
31
<PAGE>
EXHIBIT 22.1
LIST OF SUBSIDIARIES OF ROTECH MEDICAL CORPORATION
A-1 Medical Equipment, Inc. a Florida corporation
Abba Medical Equipment, Inc. a Florida corporation
Advanced Imaging Center, Inc. a Florida corporation
American Medical Rentals, Inc. an Arkansas corporation
Anniston Health & Sickroom Supplies, Inc. an Alabama corporation
Baumann Pharmaceutical Services, Inc. an Alabama corporation
Brister's Pharmacy, Inc., a Mississippi corporation
Brooksville Primary Care Clinic, Inc. a Florida corporation
Camden Medical Supply, Inc. a Florida corporation
Care Medical Supplies, Inc. an Illinois corporation
CHI Medical Equipment, Inc. a Florida corporation
Church Street Clinic, Inc. a Mississippi corporation
Clinical Laboratory, Inc. a Mississippi corporation
Coastal Surgical, Inc. a Florida corporation
Community Home Oxygen, Inc. a Montana corporation
Constant Home Health Care, Inc. a Florida corporation
Covington Home Health Care a Kentucky corporation
CPO2, Inc. a Pennsylvania corporation
Diversified Care, Inc. a Florida corporation
Doctors Management Group, Inc. a Louisiana corporation
Don Paul Respiratory Services, Inc. a Colorado corporation
Drew Primary Care Clinic, Inc. a Mississippi corporation
East Tennessee Infusion & Respiratory, Inc. a Florida corporation
Family Care Specialists, Inc. a Florida corporation
Four Rivers Home Healthcare, Inc. a Missouri corporation
Fundamental Home Health Care, Inc. a Florida corporation
G & G Medical, Inc. a Colorado 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 Family Doctors, Inc. a Mississippi corporation
Health Care Services of Mississippi, Inc. a Florida corporation
Heartland Home Care, Inc. a Florida corporation
Hollandale Primary Care, Inc. a Florida corporation
Holland Medical Services, Inc. a Florida corporation
Home Care Solutions, Inc. a Florida corporation
Home Medical Supply, Inc. a Florida corporation
Home Medical Systems, Inc. a South Carolina corporation
Indianola Primary Care Clinic, Inc. a Mississippi corporation
Infusion Services, Inc. an Alabama corporation
International Therapeutic Services, Inc. a Florida corporation
LAMS, Inc. (d/b/a Amco Medical Services) a Texas corporation
Lexington Primary Care, Inc., a Mississippi corporation
Liberty Home Health Care, Inc.
d/b/a/ Oxygen Specialties a Florida corporation
Lovejoy Medical, Inc. a Kentucky corporation
Macon Primary Care Clinic, Inc. a Florida corporation
Major Medical Supply, Inc. a Texas corporation
Medco Professional Services Corp. a Colorado corporation
Medical Electro-Therapeutics, Inc.
d/b/a/ Preferred Medical Equipment a Florida corporation
Murray Medical, Inc. a Colorado corporation
National Home Care, Inc. a Florida corporation
National Medicine Center - Groveland, Inc. a Florida corporation
Nightingale Home Health Care, Inc. a Texas corporation
Oxygen of Oklahoma, Inc. an Oklahoma corporation
Oxygen Plus Medical Equipment, Inc. a Florida corporation
Oxygen Therapy Associates, Inc. a Texas corporation
PSI Health Care, Inc. a South Dakota corporation
Pioneer Medical Services, Inc. a West Virginia corporation
<PAGE>
LIST OF SUBSIDIARIES OF ROTECH MEDICAL CORPORATION (CONT.)
Polk City Pharmacy, Inc. a Florida corporation
Professional Respiratory Home Healthcare, Inc. a Florida corporation
Respiracare Medical Equipment, Inc. a Florida corporation
Respitech Home Health Care, Inc.
d/b/a M&S Oxygen a Wyoming corporation
Respiratory Medical Equipment of Georgia, Inc. a Georgia corporation
Responsive Home Health Care, Inc.
d/b/a Hook's Oxygen and Medical Equipment a Florida corporation
RN Home Care Medical Equipment Company, Inc. a Mississippi corporation
Roswell Home Medical, Inc. a Florida corporation
RoTech Diagnostics, Inc. a Florida corporation
RoTech Employee Benefits Corporation, Inc. a Florida corporation
RoTech Home Medical Care, Inc. a Florida corporation
RoTech Oxygen & Medical Equipment, Inc. a Florida corporation
Roth Medical, Inc. a Colorado corporation
Rothert's Hospital Equipment, Inc. a Kentucky corporation
Select Home Health Care, Inc.
d/b/a Kelly's Home Health Care, Inc. a Florida corporation
Senatobia Family Practice, Inc. a Mississippi corporation
South County Health Care Services a Texas corporation
Southeastern Home Health, Inc. a Florida corporation
Stat Medical Equipment, Inc. a Florida corporation
Sunshine Home Health Care, Inc.
d/b/a Orthopedic Convalescent Centers a Florida corporation
Suwanee Valley Home Health Care, Inc. a Florida corporation
The Towne Pharmacy, Inc. a West Virginia corporation
Tupelo Home Health, Inc. a Florida corporation
Valley Medical Inc. a Utah corporation
VitalCare Health Services, 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
Whites Medical Rentals, Inc. a South Carolina corporation
Wichita Medical Care, Inc. a Kansas corporation
Wofford Pharmaceutical Services, Inc. an Alabama corporation
Women's Health Care Services, Inc. a Florida corporation
Worker's Health Care Clinic, 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 1996 FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> JUL-31-1995 JUL-31-1996
<PERIOD-START> AUG-01-1994 AUG-01-1995
<PERIOD-END> JUL-31-1995 JUL-31-1996
<CASH> 577,283 6,438,760
<SECURITIES> 0 0
<RECEIVABLES> 50,194,981 100,464,610
<ALLOWANCES> 7,958,000 16,978,000
<INVENTORY> 12,036,188 15,191,011
<CURRENT-ASSETS> 60,451,462 112,468,404
<PP&E> 68,076,028 132,091,451
<DEPRECIATION> 22,163,180 46,676,907
<TOTAL-ASSETS> 175,425,335 374,614,318
<CURRENT-LIABILITIES> 18,864,844 76,461,115
<BONDS> 0 110,000,000
0 0
0 0
<COMMON> 4,586 4,669
<OTHER-SE> 149,653,934 174,670,446
<TOTAL-LIABILITY-AND-EQUITY> 175,425,335 374,614,318
<SALES> 0 0
<TOTAL-REVENUES> 134,111,458 263,029,963
<CGS> 36,287,811 71,012,877
<TOTAL-COSTS> 102,765,192 198,369,890
<OTHER-EXPENSES> 9,565,238 26,519,480
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 835,462 5,228,318
<INCOME-PRETAX> 20,945,566 32,912,275
<INCOME-TAX> 7,800,800 12,356,500
<INCOME-CONTINUING> 13,144,766 20,555,775
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 13,144,766 20,555,775
<EPS-PRIMARY> .64 .83
<EPS-DILUTED> .63 .82
</TABLE>
