1997
ANNUAL REPORT
A HOME HEALTH CARE COMPANY
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Consolidated Financial Statements............................................... 1
Financial Statement Schedule....................................................21
Report of Independent Certified Public Accountants..............................22
Selected Consolidated Financial Data............................................23
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................24
Selected Quarterly Consolidated Financial Data..................................28
Prices of Common Stock..........................................................28
1
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JULY 31
1997 1996
----------------------------------------------
ASSETS
Current Assets:
Cash $ 12,819,471 $ 6,438,760
Accounts receivable:
Trade, less allowance for doubtful accounts of $23,718,000 in
1997 and $16,978,000 in 1996 112,341,406 83,486,610
Other 3,304,885 2,583,756
Inventories 23,357,451 15,191,011
Prepaid expenses 316,706 884,437
Income taxes receivable - 3,883,830
----------------------------------------------
Total Current Assets 152,139,919 112,468,404
Other Assets:
Intangible assets, less accumulated amortization of $33,9651,000
in 1997 and $18,163,000 in 1996 272,794,751 168,101,082
Other assets 4,557,580 8,630,288
----------------------------------------------
277,352,331 176,731,370
Property and equipment, less accumulated depreciation 131,239,570 85,414,544
----------------------------------------------
Total Assets $560,731,820 $374,614,318
==============================================
See accompanying notes.
2
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
JULY 31
1997 1996
------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 14,919,853 $ 10,151,998
Accrued expenses and other liabilities 13,520,246 14,178,810
Notes payable to banks 180,991,047 52,055,008
Income taxes payable 2,476,822 -
Deferred income taxes 52,998 75,299
------------------------------------------------------
Total Current Liabilities 211,960,966 76,461,115
Deferred INCOME TAXES 20,734,609 11,831,155
Convertible Subordinated Debentures 110,000,000 110,000,000
Redeemable Common Stock 4,076,189 1,646,933
Shareholders' Equity:
Common Stock, par value $.0002 per share,
50,000,000 shares authorized, 24,222,427 in 1997
and 23,303,586 in 1996 4,853 4,669
Treasury stock (848,285) (814,535)
Additional paid-in capital 131,269,024 122,757,377
Retained earnings 83,534,464 52,727,604
------------------------------------------------------
213,960,056 174,675,115
------------------------------------------------------
Total Liabilities and Shareholders' Equity $560,731,820 $374,614,318
======================================================
See accompanying notes.
3
CONSOLIDATED STATEMENTS OF INCOME
- --------------------------------------------------------------------------------
YEAR ENDED JULY 31
1997 1996 1995
---------------------------------------------------------------------------
Operating revenue $422,692,297 $263,029,963 $134,111,458
Cost and expenses:
Cost of revenue 105,564,558 71,012,877 36,287,811
Selling, general and administrative 208,976,965 127,357,013 66,477,381
Depreciation and amortization 44,017,317 26,519,480 9,565,238
Interest, net 13,560,897 5,228,318 835,462
---------------------- ---------------------- ---------------------
Total Costs and Expenses 372,119,737 230,117,688 113,165,892
Income before income taxes 50,572,560 32,912,275 20,945,566
Income tax expense 19,765,700 12,356,500 7,800,800
---------------------- ---------------------- ---------------------
Net income $ 30,806,860 $ 20,555,775 $ 13,144,766
====================== ====================== =====================
Net income per share:
Primary $1.17 $0.83 $0.64
Fully diluted $1.12 $0.82 $0.63
Weighted average number of shares
outstanding:
Primary 26,352,000 24,657,000 20,684,000
Fully diluted 30,940,000 25,206,000 20,984,000
See accompanying notes.
4
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- --------------------------------------------------------------------------------
COMMON STOCK ADDITIONAL
---------------------- TREASURY PAID-IN RETAINED
SHARES AMOUNT STOCK CAPITAL EARNINGS
-------------------------------------------------------------
Balance at August 1, 1994 19,009,540 $3,818 $(814,535) $ 64,518,168 $19,613,012
Issuance of Common Stock in acquisitions 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 Offering 3,400,000 680 49,884,817
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 acquisitions 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 exercise 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
ISSUANCE OF COMMON STOCK IN ACQUISITIONS OF
SUBSIDIARIES 854,574 171 8,108,892
ISSUANCE OF COMMON STOCK PURSUANT TO EMPLOYEE
Stock Compensation Plan 14,267 3 (33,750) 220,475
ISSUANCE OF COMMON STOCK PURSUANT TO EXERCISE OF STOCK
OPTIONS 50,000 10 182,280
NET INCOME 30,806,860
-------------------------------------------------------------
BALANCE AT JULY 31, 1997 24,222,427 $4,853 $(848,285) $131,269,024 $83,534,464
=============================================================
See accompanying notes.
5
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED JULY 31
1997 1996 1995
------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 30,806,860 $ 20,555,775 $13,144,766
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation 28,146,078 16,889,027 4,974,785
Amortization of intangible assets 15,871,239 9,630,453 4,590,453
Provision for doubtful accounts 19,822,000 7,544,000 4,499,000
Provision for deferred income taxes 8,881,153 4,887,810 4,617,315
Gain on sale of property and equipment - - (15,160)
Issuance of Common Stock as employee
compensation 220,478 164,573 255,583
Equity in income from affiliated company - - (910,246)
Changes in operating assets and liabilities:
Increase in trade accounts receivable (39,350,623) (24,220,623) (9,951,570)
(Increase) decrease in other receivables (418,875) (552,575) 364,006
(Increase) decrease in inventories (2,446,937) 658,504 (2,633,575)
(Increase) decrease in prepaid expenses 739,998 (111,228) 391,366
Increase in accounts payable 1,323,570 3,850,531 1,919,540
Decrease in accrued expenses and other liabilities
(135,799) (2,248,914) (1,181,063)
(Increase) decrease in income taxes
receivable/payable 6,360,742 479,797 (2,959,294)
------------------------------------------------------------------
Net cash provided by operating activities 69,819,884 37,527,130 17,105,906
See accompanying notes.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
YEAR ENDED JULY 31
1997 1996 1995
-------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of property and equipment (56,496,145) (29,621,755) (17,298,613)
Issuance of notes and other receivables - (4,078,350)
Payments for acquisitions of net assets, net of cash
acquired (136,588,104) (146,561,420) (55,643,515)
Proceeds from sale of property and equipment - - 68,167
Proceeds from option exercise 182,290 - -
Advances and deposits 526,746 (943,838) 391,368
-------------------------------------------------------------
Net cash used in investing activities (192,375,213) (181,205,363) (72,482,593)
FINANCING ACTIVITIES
Proceeds from notes payable to banks 128,936,040 188,773,070 109,037,900
Payments on notes payable to banks - (146,698,062) (103,155,900)
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
Repurchase of Common Stock - (418,354) (145,208)
-------------------------------------------------------------
Net cash provided by financing activities 128,936,040 149,539,710 55,622,289
-------------------------------------------------------------
Increase (decrease) in cash 6,380,711 5,861,477 245,602
Cash at beginning of year 6,438,760 577,283 331,681
Cash at end of year $ 12,819,471 $ 6,438,760 $ 577,283
=============================================================
Supplemental disclosures of cash flow information
Cash paid during the year for:
Interest, net 12,590,000 $ 3,976,000 $ 933,000
Income taxes 4,925,000 8,957,000 6,774,000
See accompanying notes.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1997
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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.
On July 7, 1997 the Company announced that they entered into a definitive
merger agreement pursuant to which RoTech Medical Corporation will merge with
Integrated Health Services ("IHS"). Under terms of the agreement, IHS will issue
0.5806 shares of IHS Common Stock for each share of RoTech common stock
currently outstanding.
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. The Company's revenues are generated through 613 locations in 35
states. The Company generally does not require collateral or other security in
extending credit to patients; however, the Company routinely obtains assignments
of (or is otherwise entitled to receive) benefits receivable under the health
insurance programs, plans or policies of patients (e.g. Medicare, Medicaid,
commercial insurance and managed care organizations). Percentage revenues from
payor sources at July 31, 1997 were as follows:
Medicare 51%
Medicaid 10%
Commercial insurance 19%
Retail Sales 14%
Other 6%
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, 1997.
The Company had $1.8 million of cash restricted due to statutory requirements at
July 31, 1997.
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1997
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 $256,737,000,
$130,060,000 and $59,017,000 in 1997, 1996 and 1995, respectively. The
provision for doubtful accounts approximated $19,882,000, $7,544,000 and
$4,499,000 in 1997, 1996 and 1995, 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.
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). Rental equipment is depreciated over five years.
Amortization of leasehold improvements is included in depreciation.
INTANGIBLE ASSETS
Intangible assets consists of the following as of July 31, 1997:
Excess of cost over fair value of net
Assets acquired and liabilities assumed $272,255,597
Non-compete agreements 31,561,435
Other intangibles 2,928,894
------------
306,745,926
Less accumulated amortizaton 33,951,175
------------
$272,794,751
============
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.
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1997
- --------------------------------------------------------------------------------
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 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 1996 consolidated
financial statements to conform to the 1997 presentation.
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1997
- --------------------------------------------------------------------------------
NEW ACCOUNTING STANDARDS
In February 1997, FAS No. 128, "Earnings Per Share," was issued. FAS
No. 128, which supersedes Accounting Principles Board ("APB") Opinion No. 15,
requires a dual presentation of basic and diluted earnings per share on the face
of the income statement. Basic earnings per share excludes dilution and is
computed by dividing income or loss attributable to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earning of the entity. Diluted earnings per share is computed similarly
to fully diluted earnings per share under APB Opinion No. 15, FAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997.
Has FAS No. 128 been adopted, pro forma basic earnings per share and pro forma
diluted earnings per share would have been as follows:
PRO FORMA EARNINGS PER SHARE
YEARS ENDED JUNE 30: BASIC DILUTED
1995 $ .65 $ .63
1996 $ .89 $ .82
1997 $1.28 $1.12
2. THIRD-PARTY RATE ADJUSTMENTS AND REVENUE
Approximately 61% in 1997, 60% in 1996, and 63% in 1995 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.
3. ACQUISITIONS
During the fiscal year ended July 31, 1997, the Company issued 854,574
shares of its restricted Common Stock valued at $8,109,063, released 460,708
shares of its restricted Common Stock from escrow which is recorded as
Redeemable Common Stock (see Note 4) and is valued at $4,329,268, issued
889,391 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 $124,272,000 to purchase the net assets of certain
home health care companies and all of the outstanding common stock of certain
home health companies.
The combined fair market values of those assets acquired and
(liabilities assumed) in 1997 are reflected in the following classifications on
the balance sheet:
Cash $ 2,013,000
Accounts receivable 14,907,000
Inventories 5,719,000
Prepaid expenses 172,000
Other assets 753,000
Property and equipment 17,509,000
Accounts payable, accrued expenses and other liabilities (11,444,000)
------------
Net assets acquired $ 29,629,000
============
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, 1997 (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, 1997 are also not included in the Company's balance sheet as of July 31,
1997. 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.
11
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.
(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, 1997
-----------------------------------------------------------------------------------------------------
(Unaudited)
RoTech Medical
Corporation RoTech Medical
Consolidated Corporation
Year Ended Combined Acquired Pro Forma Combined Pro
July 31, 1997 Entities Adjustments Forma Results
-----------------------------------------------------------------------------------------------------
Operating revenue $422,692,297 $79,240,442 - $501,932,739
Cost and expenses:
Cost of revenue 105,564,558 20,870,723 - 126,435,281
Selling, general and
administrative 208,976,965 42,491,050 - 251,468,015
-----------------------------------------------------------------------------------------------------
Depreciation and amortization 44,017,317 3,303,056 $ 2,778,680 (a) 50,099,053
Interest, net 13,560,897 983,438 4,620,771 (b) 19,165,106
-----------------------------------------------------------------------------------------------------
Total cost and expenses 372,119,737 67,648,267 7,399,451 447,167,455
Income before income taxes 50,572,560 11,592,175 (7,399,451) 54,765,284
Income tax expense 19,765,700 95,734 839,843 (c) 20,701,277
-----------------------------------------------------------------------------------------------------
Net Income $ 30,806,860 $11,496,441 $(8,239,294) $ 34,064,007
=====================================================================================================
Net Income Per Share:
Primary $ 1.17 $ 1.25
Fully diluted $ 1.12 $ 1.19
Weighted Average Number of
Shares Outstanding
Primary 26,352,000 854,000(d) 27,206,000
Fully diluted 30,940,000 854,000(d) 31,794,000
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENT - JULY 31, 1997
- --------------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED)
For the Year Ended July 31, 1996
------------------------------------------------------------------------------------------
(Unaudited)
RoTech
Medical RoTech
Corporation Medical
Consolidated Corporation
Year Ended Combined Pro Forma Combined Pro
July 31, 1996 Acquired Entities Adjustments Forma Results
----------------------------------------------------------------------------------------------------
Operating revenue $263,029,963 $155,600,112 $418,630,075
Cost and expenses:
Cost of revenue 71,012,877 44,341,035 - 115,353,912
Selling, general and
administrative 127,357,013 82,081,812 - 209,438,825
----------------------------------------------------------------------------------------------------
Depreciation and amortization 26,519,480 6,017,179 $6,064,805(a) 38,601,464
Interest, net 5,228,318 1,960,407 9,407,817(b) 16,596,542
----------------------------------------------------------------------------------------------------
Total cost and expenses 230,117,688 134,400,433 15,472,622 379,990,743
Income before income taxes 32,912,275 21,199,679 (15,472,622) 38,639,332
Income tax expense 12,356,500 199,568 2,049,599(c) 14,605,667
----------------------------------------------------------------------------------------------------
Net Income $ 20,555,775 $ 21,000,111 $(17,522,221) $ 24,033,665
====================================================================================================
Net Income Per Share:
Primary $ 0.83 $ 0.94
Fully diluted $ 0.82 $ 0.92
Weighted Average Number of
Shares Outstanding
Primary 24,657,000 854,000(d) 25,511,000
Fully diluted 25,206,000 854,000(d) 26,060,000
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.
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1997
- --------------------------------------------------------------------------------
4. SHAREHOLDERS' EQUITY (CONTINUED)
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.
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
---------------- ---------------
1995 391,976 3,197,418
1996 301,816 3,061,282
1997 854,574 8,109,063
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 1,735,601 shares as of July 31, 1997.
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, 1997, the Company had
422,651 shares outstanding subject to put options ranging in call prices from
$9.75 to $17.50. The put options expire at dates ranging from October 1997 to
December 1999.
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 14,267 shares, 22,068 shares and 32,126
shares, in fiscal 1997, 1996 and 1995, respectively.
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.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1997
- --------------------------------------------------------------------------------
Information regarding the Company's stock option plans is summarized below:
NUMBER OF OPTIONS
1993 PLAN 1996 PLAN PRICE PER SHARE
Outstanding August 1, 1994 1,567,706 - 5.94 - 9.38
Granted - - -
Exercised (28,854) - 6.88 - 7.13
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
Granted 470,000 - 11.00 - 18.00
Exercised (50,000) - 5.94
Canceled (230,000) - 11.38 - 13.75
--------- --------- --------------
Outstanding July 31, 1997 2,282,000 600,000 $ 5.94 - 19.13
Exercisable at July 31, 1997 1,648,500 200,000 $ 5.94 - 19.13
Reserved for future grant 280,294 400,000 -
The Company applies APB No. 25 and related interpretations in accounting for
its stock options. Accordingly, no compensation expense has been recognized in
connection with its stock options. Had compensation expense for the Company's
stock options been determined consistent with SFAS No. 123, the company's net
income and income per share would have been reduced to the pro forma amounts
indicated below:
1997 1996
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
Net income $30,806,860 $29,519,417 $20,555,775 $20,265,250
Primary income per share $ 1.17 $ 1.12 $ 0.83 $ 0.81
Fully diluted income per share $ 1.12 $ 1.07 $ 0.82 $ 0.79
The fair value of the options, for purposes of the above pro forma
disclosure, was estimated on the date of grant or modification using the Black-
Scholes option pricing model and the following assumptions: a risk-free interest
rate of 6.02% weighted average expected lives of 5 years for options, 0%
dividend yield and volatility of 28%. The effects of applying SFAS No. 123 in
the pro forma income and income per share for 1997 and 1996 may not be
representative of the effects on such pro forma information for future years.
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.
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1997
- --------------------------------------------------------------------------------
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 and 20,000 shares at $19.50 per share. The options are exercisable until
June 30, 2001.
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
1997 1996
---------------------------
Rental equipment $162,444,404 $ 97,242,445
Furniture and equipment 37,205,958 24,377,848
Vehicles 12,001,940 8,249,870
Leasehold improvements 4,465,543 2,221,288
---------------------------
216,117,845 132,091,451
Less accumulated depreciation (84,878,275) (46,676,907)
---------------------------
$131,239,570 $ 85,414,544
===========================
6. CURRENT NOTES PAYABLE TO BANKS
Current notes payable to banks at July 31, 1997 were $180,991,047 under
a $300,000,000 syndicated bank line of credit expiring on June 2, 1998. The rate
on July 31, 1997 and 1996 was 6.49% and 6.12%, respectively. The syndicated bank
line of credit is payable on demand and provides for an interest rate to be
selected by the Company based on LIBOR plus 0.75% or the prime rate.
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, 1997, the
Company was in compliance with all covenants contained in the credit facility.
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 60/th/ 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
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1997
- --------------------------------------------------------------------------------
7. CONVERTIBLE SUBORDINATED DEBENTURES (CONTINUED)
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 $14,492,000 $7,765,000, and $3,924,000 for
the years ended July 31, 1997, 1996, and 1995, respectively. Future minimum
rental commitments under leases, primarily for buildings, are as follows:
FOR THE YEARS ENDING JULY 31
- ----------------------------
1998 8,239,790
1999 6,442,878
2000 4,368,379
2001 2,626,044
2002 1,596,268
Thereafter 3,734,158
-----------
$27,007,517
===========
Healthcare Regulatory Environment
A significant portion of the Company's revenues are reimbursed under the
Federal Medicare program. The Balanced Budget Act of 1997 enacted in August
1997, reduces the Medicare national payment limits for oxygen and oxygen
equipment used in home respiratory by 25% in 1998 and 30% (from 1997 levels) in
1999 and each subsequent year. Approximately 22% of RoTech's total revenues for
the year ended July 31, 1997 were derived from the provision of oxygen services
to Medicare patients.
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 $300,000 and $26,000 for the fiscal
years ended July 31, 1997 and 1996, respectively.
17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1997
- --------------------------------------------------------------------------------
10. INCOME TAXES
Income tax expense for the years ended July 31, consists of the
following:
1997 1996 1995
------------------------------------
Current
Federal $10,078,747 $ 6,796,500 $2,894,000
State 996,800 672,190 289,485
------------------------------------
11,075,547 7,468,690 3,183,485
Deferred
Federal 7,908,053 4,447,910 4,210,800
State 782,100 439,900 406,515
------------------------------------
8,690,153 4,887,810 4,617,315
------------------------------------
$19,765,700 $12,356,500 $7,800,800
====================================
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:
1997 1996
-------------- -------------
Deferred tax liabilities:
Tax over book depreciation $12,294,020 $ 7,046,700
Tax over book intangibles amortization 8,440,589 4,784,455
Prepaid insurance 52,998 75,299
------------------------------
Total deferred tax liabilities $20,787,607 11,906,454
==============================
Deferred tax assets:
Uniform capitalization 450,000 259,000
------------------------------
Total deferred tax assets 450,000 259,000
------------------------------
Net deferred tax liabilities $20,337,607 $11,647,454
==============================
The Company's effective tax rate differs from the statutory rate for
the years ended July 31, as follows:
1997 1996 1995
------------------------------------------
Percentage of pre-tax income:
Statutory rate 35.0% 35.0% 35.0%
Increase (decrease) in tax rate resulting from:
State income taxes, net of federal income tax benefit 2.0 2.0 2.0
Amortization of nondeductible intangible assets 2.8 2.2 2.5
Other ( .8) (1.7) (2.3)
------------------------------------------
39.0% 37.5% 37.2%
==========================================
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1997
- --------------------------------------------------------------------------------
11. RELATED PARTY TRANSACTIONS
The Company purchases certain products from companies owned by its chief
executive officer and shareholder. Such transactions amounted to approximately
$11,000, $74,000 and $55,000 for the years ended July 31, 1997, 1996 and 1995,
respectively. These same companies purchased approximately $11,000, $46,000 and
$28,000 of products from the Company for the fiscal years ended July 31, 1997,
1996 and 1995, respectively.
The Company leases certain facilities and equipment from companies owned
by certain directors, officers and shareholders. Rent expense under these
cancelable operating leases amounted to $540,000, $740,000 and $760,000 for the
years ended July 31, 1997, 1996 and 1995, respectively.
The Company executed a stock option agreement with a firm which provided
certain legal services in the amount of $362,000, $302,000, and $270,000 for the
years ended July 31, 1997, 1996 and 1995, 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, 1997 and 1996:
JULY 31, 1997
(IN THOUSANDS)
FIRST SECOND THIRD FOURTH
-------------------------------------------------------------
OPERATING REVENUE $90,307,483 $97,835,317 $109,431,604 $125,117,893
COST AND EXPENSES 80,055,510 86,117,894 96,186,134 109,760,199
INCOME TAX EXPENSE 3,900,500 4,442,003 4,979,163 6,444,034
-------------------------------------------------------------
NET INCOME $ 6,351,473 $ 7,275,420 $ 8,266,307 $ 8,913,660
=============================================================
NET INCOME PER SHARE:
PRIMARY $ 0.25 $ 0.28 $ 0.31 $ 0.33
FULLY DILUTED $ 0.25 $ 0.27 $ 0.30 $ 0.31
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 $ 0.18 $ 0.20 $ 0.22 $ 0.23
Fully diluted $ 0.18 $ 0.20 $ 0.22 $ 0.23
19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1997
- --------------------------------------------------------------------------------
13. ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities include:
JULY 31
1997 1996
---------------------------
Accrued payroll expenses $ 3,597,502 $ 3,847,179
Deferred payments 2,914,520 2,978,161
Payments due on acquisition transactions - 3,200,000
Liabilities assumed through acquisitions 1,232,666 1,434,293
Accrued interest 2,001,820 1,232,086
Other accrued liabilities 3,773,738 1,487,091
---------------------------
13,520,246 $14,178,810
===========================
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, 1997 to September 16, 1997, the Company
acquired the net assets or outstanding stock of 11 home health care companies
for approximately $13.2 million.
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - JULY 31, 1997
- --------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- -----------------------------------------------
COLUMN C
-------------
COLUMN A COLUMN B ADDITIONS COLUMN D COLUMN E
- -----------------------------------------------------------------------------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING OF COSTS AND ACCOUNTS DEDUCTIONS END OF
CLASSIFICATION PERIOD EXPENSES(1) DESCRIBE DESCRIBE (2) PERIOD
- -----------------------------------------------------------------------------------------------------
YEAR ENDED JULY 31, 1997:
DEDUCTED FROM ASSET ACCOUNTS:
ALLOWANCE FOR DOUBTFUL
ACCOUNTS $16,978,000 $19,882,000 $13,142,000 $23,718,000
Year ended July 31, 1996:
Deducted from asset accounts:
Allowance for 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 doubtful
accounts $ 6,333,000 $ 4,499,000 - $ 2,874,000 $ 7,958,000
(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 doubtful accounts remaining at the respective fiscal year-end
recorded in conjunction with certain acquisitions.
21
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, 1997 and 1996, and
the related consolidated statements of income, shareholders' equity, and cash
flows for each of the three years in the period ended July 31, 1997. Our audits
also included the financial statement schedule, for the three-year period ended
July 31, 1997, presented on page 21. 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, 1997 and 1996, 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, 1997, 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
September 18, 1997 (October 21, 1997 as to Note 1)
22
SELECTED CONSOLIDATED FINANCIAL DATA
- --------------------------------------------------------------------------------
(in thousands, except per share and percentage amounts)
Year Ended July 31
- --------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------
Statements of Income Data:
Operating revenue:
Home respiratory therapy & equipment $211,346 $110,118 $ 56,533 $ 41,579(a) $ 23,857(a)
Home medical equipment & supplies 122,581 92,062 32,305 (a) (a)
Home infusion therapy & other
pharmacy related services 59,177 41,498 33,554 25,492 21,715
Other products & services 29,588 19,352 11,719 4,399 2,811
- --------------------------------------------------------------------------------------------------------------------------
Total operating revenue 422,692 263,030 134,111 71,470 48,383
- --------------------------------------------------------------------------------------------------------------------------
Cost and expenses:
Cost of revenue 105,565 71,013 36,288 17,409 12,359
Selling, general and administrative 208,977 127,357 66,477 35,880 25,064
Depreciation and amortization 44,017 26,520 9,565 5,338 2,801
Interest 13,561 5,228 835 67 76
- --------------------------------------------------------------------------------------------------------------------------
Total cost and expenses 372,120 230,118 113,165 58,694 40,300
- --------------------------------------------------------------------------------------------------------------------------
Income before income taxes 50,572 32,912 20,946 12,776 8,083
Income tax expense 19,765 12,356 7,801 4,664 2,956
- --------------------------------------------------------------------------------------------------------------------------
Net income $ 30,807 $ 20,556 $ 13,145 $ 8,112 $ 5,127
- --------------------------------------------------------------------------------------------------------------------------
Net income per share:
Primary $ 1.17 $ 0.83 $ 0.64 $ 0.50 $ 0.38
Fully diluted $ 1.12 $ 0.82 $ 0.63 $ 0.50 $ 0.38
- --------------------------------------------------------------------------------------------------------------------------
Other Data:
Weighted average shares outstanding:
Primary 26,352 24,657 20,684 16,294 13,384
Fully diluted 30,940 25,206 20,984 16,294 13,384
- --------------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Working Capital (59,821) $ 36,007 $ 41,587 $27,783 $18,203
Total Assets 560,732 374,614 175,425 94,433 40,019
Long-term Debt
(less current portion) 110,000 110,000 - - -
Shareholders' Equity 213,960 174,675 149,659 83,320 36,197
- --------------------------------------------------------------------------------------------------------------------------
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 and 1993. All revenue related to these two product lines has been
presented as "home respiratory therapy and equipment" for the years
indicated.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
- --------------------------------------------------------------------------------
FOR THE FISCAL YEARS ENDED JULY 31, 1997 AND 1996
Operating revenue increased 61% to $423 million for the fiscal year ended
July 31, 1997 ("fiscal 1997") from $263 million for the fiscal year ended July
31, 1996 ("fiscal 1996"). The increase in operating revenue is attributable to
acquisitions and expanded product and service lines in existing areas of
operation. Revenue from acquisitions in fiscal 1997 totaled $59 million.
During fiscal 1997, the Company added 174 home care locations and operated 589
home care locations in 35 states as of July 31, 1997. 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 92%
to $211.3 million for fiscal 1997 from $110.1 million for fiscal 1996.
Operating revenue from home medical equipment and supplies increased 33% to
$122.6 million for fiscal 1997 from $92.1 million for fiscal 1996. 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 1997 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 43% to $59.2 million for fiscal 1997 from $41.5 million for fiscal
1996. Growth in this line of business should continue as the Company expands
its service areas.
Operating revenue from physician and other services increased 53% to $29.6
million for fiscal 1997, from $19.4 million for fiscal 1996. 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 25.0% for
fiscal 1997 from 27.0% for fiscal 1996 due to changes in the product mix in the
last year resulting from mid-year fiscal 1996 and fiscal 1997 acquisitions.
Selling, general and administrative expenses as a percentage of operating
revenue increased to 49.4% for fiscal 1997 from 48.4% for fiscal 1996 due to an
increase in bad debt expense. 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 66% to $44.0 million for
fiscal 1997 from $26.5 million for fiscal 1996. Depreciation and amortization
expense as a percentage of operating revenue was 10.4% for fiscal 1997 and 10.1%
for fiscal 1996. 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 1997 were accounted for by the purchase method.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION - CONTINUED
- --------------------------------------------------------------------------------
FOR THE FISCAL YEARS ENDED JULY 31, 1997 AND 1996 (CONTINUED)
Interest expense, net of interest income, increased to $13.6 million for
fiscal 1997 from $5.2 million for fiscal 1996. 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 39.1% effective rate, compared to
37.5% the prior fiscal 1996.
Net income for fiscal 1997 was $30.8 million, a 50% increase over the $20.6
million for fiscal year 1996. Net income per share on a fully diluted basis
increased 37% to $1.12 for fiscal 1997 compared to $0.82 for fiscal 1995. The
weighted average number of shares on a fully diluted basis increased 23% to 30.9
million at July 31, 1997 from 25.2 million at July 31, 1996, primarily as a
result of shares issued in conjunction with certain acquisitions.
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. 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 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 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 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.
Operating revenue from physician practices represented 7% of total
operating revenue for fiscal 1996, compared to 9% for fiscal 1995. At July 31,
1996, the Company owned 24 physician practices and employed 29 primary care
physicians. These practices are clustered in two rural marketplaces.
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 remained relatively stable at 48.4%, down 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 selling, general and
administrative natures.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION - CONTINUED
- --------------------------------------------------------------------------------
FOR THE FISCAL YEARS ENDED JULY 31, 1996 AND 1995 (CONTINUED)
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 of accounting.
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 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 fully diluted basis increased 20.1% to 25.2
million on July 31, 1996 from 21.0 million at July 31, 1995, primarily as a
result of the May 1995 public stock offerings and shares issued in conjunction
with certain acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, total current assets were $152.1 million and total
current liabilities were $212.0 million, resulting in a working capital deficit
of $59.8 million. This deficit results from the classification of the Company's
line of credit as a current liability. The Company's current ratio was 0.72 to
1 at July 31, 1997 compared to 1.47 to 1 at July 31, 1996. Net trade accounts
receivable increased $28.9 million in fiscal 1997, or 35%. This increase is
attributable to acquisitions of the net assets of many home health care
companies during the year and the 61% increase in operating revenue over the
prior year. The Company's days revenue outstanding on net accounts receivable
decreased to 81 days at July 31, 1997 from 92 days at July 31, 1996. Acquired
receivables remaining outstanding account for approximately 11 days revenue
outstanding at July 31, 1997 compared to 16 days revenue outstanding at July 31,
1996.
Current liabilities increased $135.5 million in fiscal 1997, as an
additional $129 million was borrowed on the syndicated bank line of credit. The
balance of the change was due to income taxes payable.
During fiscal 1997, the Company generated cash of $70 million from
operating activities primarily as a result of net income of $30.8 million along
with non-cash expenses of $73 million. Advances on the syndicated bank line of
credit were utilized to fund acquisitions and internal expansion. During fiscal
1997, the Company spent $137 million to acquire various home health care
companies and $56 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.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION - CONTINUED
- --------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
On June 1, 1996, the Company issued $110 million 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 60/th/ 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, 1997, the Company had a syndicated bank line of credit of
$300 million, with approximately $113.5 million available for future borrowing,
as of September 16, 1997. 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 .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, 1997, 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.
27
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, 1997
OPERATING REVENUE $90,307 $ 97,835 $ 109,432 $125,118
NET INCOME 6,351 7,275 8,266 8,914
NET INCOME PER SHARE:
PRIMARY $ 0.25 $ 0.28 $ 0.31 $ 0.33
FULLY DILUTED $ 0.25 $ 0.27 $ 0.30 $ 0.31
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING:
PRIMARY 25,547 26,432 26,580 26,850
FULLY DILUTED 25,858 30,944 31,194 31,572
- ---------------------------------------------------------------------------------------------------------------------------------
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 Share Outstanding:
Primary 23,646 24,489 24,927 25,565
Fully Diluted 24,381 25,204 25,299 25,940
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PRICES OF COMMON STOCK HIGH LOW
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FISCAL 1997 - QUARTER ENDED
OCTOBER 31, 1996 $ 18 1/2 $ 13 5/8
JANUARY 31, 1997 21 3/4 15 19/32
APRIL 30, 1997 20 3/8 14 1/2
JULY 31, 1997 20 1/16 14 7/8
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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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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, 1997, there were
approximately 26,443,147 shares of Common Stock outstanding which were by
approximately 658 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.
28
NOTES
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29
Directors Stephen P. Griggs
Marc B. Levin
Marshall A. Elkins
Executive Officers Stephen P. Griggs
President
Marc B. Levin
Executive Vice President - Investor Relations
Marshall A. Elkins
Executive Vice President and General Counsel
C. Christian Winkle
Executive Vice President - Field Operations
Lawrence P. Cirka
Executive Vice President
Brian K. Davidson
Executive Vice President - Development
Anthony R. Masso
Executive Vice President - Managed Care
John Heller
Executive Vice President - Facility Operations
W. Bradley Bennett
Executive Vice President - Chief Accounting
Officer
Eleanor C. Harding
Executive Vice President - Finance
Virginia Dollard
Executive Vice President - Post Acute Network
Operations
C. Taylor Pickett
Executive Vice President
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
30
OUTSIDE BACK COVER
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