EXHIBIT 13.1
TABLE OF CONTENTS
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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
RoTech Medical Corporation and Subsidiaries
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TO OUR SHAREHOLDERS
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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:
Net Operating Net Income Wtd. Average
Revenue Net Income per Share No. of Shares
------------- ---------- ---------- -------------
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
(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
offerings 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
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
RoTech Medical Corporation and Subsidiaries
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CONSOLIDATED BALANCE SHEETS
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JULY 31
1996 1995
----------------------------
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
============================
See accompanying notes.
4
RoTech Medical Corporation and Subsidiaries
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CONSOLIDATED BALANCE SHEETS
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JULY 31
1996 1995
-----------------------------
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
=============================
See accompanying notes.
5
RoTech Medical Corporation and Subsidiaries
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CONSOLIDATED STATEMENTS OF INCOME
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YEAR ENDED JULY 31
1996 1995 1994
-------------------------------------------
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
See accompanying notes.
6
RoTech Medical Corporation and Subsidiaries
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
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- --------------------------------------------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
---------------------- TREASURY PAID-IN
SHARES AMOUNT STOCK CAPITAL EARNINGS
----------------------------------------------------------------
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
================================================================
See accompanying notes.
7
RoTech Medical Corporation and Subsidiaries
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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YEAR ENDED JULY 31
1996 1995 1994
------------------------------------------
OPERATING ACTIVITIES
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
See accompanying notes.
8
RoTech Medical Corporation and Subsidiaries
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CONSOLIDATED STATEMENTS OF CASH FLOWS
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YEAR ENDED JULY 31
1996 1995 1993
---------------------------------------------
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 8,957,000 6,774,000 4,456,000
See accompanying notes.
9
RoTech Medical Corporation and Subsidiaries
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
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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
RoTech Medical Corporation and Subsidiaries
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
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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, 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
RoTech Medical Corporation and Subsidiaries
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
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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
RoTech Medical Corporation and Subsidiaries
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
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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:
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
============
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
RoTech Medical Corporation and Subsidiaries
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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.
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
----------------------------------------------------------------
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
14
RoTech Medical Corporation and Subsidiaries
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1996
- -----------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED)
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
-----------------------------------------------------------------------------------------------
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
15
RoTech Medical Corporation and Subsidiaries
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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:
Number of Shares Value of Shares
---------------- ---------------
1994 605,832 $3,077,135
1995 391,976 3,197,418
1996 301,816 3,061,282
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
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:
NUMBER OF OPTIONS
1993 PLAN 1996 PLAN PRICE PER SHARE
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 -
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
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:
JULY 31
1996 1995
---------------------------
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
===========================
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 0.70% 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
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:
FOR THE YEARS ENDING JULY 31
----------------------------
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
===========
19
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:
1996 1995 1994
Current
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
===================================
20
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:
1996 1995
---- ----
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%
=============================
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
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:
JULY 31, 1996
FIRST SECOND THIRD FOURTH
-------------------------------------------------------
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
13. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities include:
JULY 31
1996 1995
-------------------------
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
=========================
22
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
- -----------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------------
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
(1) Certain amounts in each year are charged against gross operating revenue
and are not included herein.
(2) 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.
23
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
RoTech Medical Corporation and Subsidiaries
- -----------------------------------------------------------------------------
SELECTED CONSOLIDATED FINANCIAL DATA
- -----------------------------------------------------------------------------
(in thousands, except per share and percentage amounts)
Year Ended July 31
- -------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------
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
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
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
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
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
RoTech Medical Corporation and Subsidiaries
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SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
- ----------------------------------------------------------------------------
(in thousands, except per share amounts and prices of Common Stock)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------
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
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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
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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
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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
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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
RoTech Medical Corporation and Subsidiaries
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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 1490
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