Document/Exhibit Description Pages Size
1: 10-K Form 10-K for Fiscal Year Ended 07/31/97 22 130K
2: EX-10.2 Second Amended and Restated Revolving Credit 299 1.03M
3: EX-11 Computation of Earnings Per Share 1 5K
4: EX-13.1 Annual Report to Security Holders 32 145K
5: EX-21 Rotech Medical Corporation and Subsidiaries 6 21K
6: EX-27 Financial Data Schedule 2 7K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------- ---------------
Commission File Number 0-14003
ROTECH MEDICAL CORPORATION
(Exact name of Registrant as specified in its charter)
Florida 59-2115892
-------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
4506 L.B. McLeod Road, Suite F
Orlando, Florida 32811
----------------------------------------
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (407) 841-2115
Securities registered pursuant to Section 12(g) of the Act:
Title of Class: Common Stock, par value $.0002 per share
5-1/4% Convertible Subordinated Debentures Due 2003
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
Indicated by check mark, if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Aggregate market value of the Registrant's Common Stock held by non-affiliates:
N/A (On October 21, 1997, a wholly-owned subsidiary of Integrated Health
Services, Inc. ("IHS") was merged with and into Registrant with Registrant
becoming a wholly-owned subsidiary of HIS and each share of Registrant's Common
Stock was converted into .5806 shares of HIS Common Stock) Documents
incorporated by reference:
ROTECH MEDICAL CORPORATION
FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED JULY 31, 1997
PART I: PAGE
Item 1 Business............................................... 3
Item 2 Properties............................................. 9
Item 3 Legal Proceedings...................................... 9
Item 4 Submission of Matters to a Vote of Security Holders.... 9
PART II:
Item 5 Market for Registrant's Common Equity and Related
Stockholder Matters.................................... 10
Item 6 Selected Financial Data................................ 10
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 10
Item 8 Financial Statements and Supplementary Data............ 13
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 14
ITEM III:
Item 10 Directors and Executive Officers of the Registrant..... 14
Item 11 Executive Compensation................................. 17
Item 12 Security Ownership of Certain Beneficial Owners and
Management............................................. 18
Item 13 Certain Relationships and Related Transactions......... 18
PART IV:
Item 14 Exhibits, Financial Statement Schedules, and Reports on
Form 8-K............................................... 19
2
PART I
Item 1. Business
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GENERAL
RoTech Medical Corporation ("RoTech" or the "Company") provides
comprehensive home health care and primary care physician services, principally
to patients in non-urban areas. RoTech operates 631 home health care locations
in 36 states. The Company's home health care business provides a diversified
range of products and services, with emphasis on home respiratory, home medical
equipment and infusion therapies. RoTech has pursued an aggressive acquisition
strategy since 1988 which included in fiscal 1997 acquisitions of 174 locations
of smaller home health care companies and the opening of 49 new locations.
Current industry estimates indicate that approximately half of the nation's home
health care industry remains fragmented and is run by either single operators or
small, local chains. These smaller providers are RoTech's main competition and
main acquisition opportunities. The Company plans to continue to enter new home
health care markets through acquisition or start-up as competitive and pricing
pressures encourage consolidation and economies of scale.
On October 21, 1997 the shareholders of RoTech approved a merger agreement
pursuant to which Integrated Health Services, Inc. acquired RoTech. The merger
transaction closed on October 21, 1997. See Item 4.
Recent data suggests that there is a shortage of health care services in non-
urban markets. According to the United States Census Bureau, in 1990 non-urban
areas of the United States accounted for roughly 25% of the national population,
or approximately 62 million people. However, according to the American Medical
Association, just 11% of physicians, or approximately 75,000 physicians,
practice in non-metropolitan markets. This data indicates that rural markets are
underserved, and suggests that there may be opportunities for improvement in
access to primary care physicians, as well as specialty services. The Company
believes that these needs result in significant opportunities for companies such
as RoTech, which can attract, retain and network physicians in non-urban
settings while offering ancillary services such as home health care, to become a
full-service non-institutional based primary health care provider.
OPERATING AND EXPANSION STRATEGY
RoTech was founded in 1981 to provide home respiratory and home medical
equipment products and services to patients in Florida. With its founders' roots
in pharmacy and pharmaceutical sales, the Company's marketing directive has
always been to provide information to primary care physicians regarding the
utilization of home health care techniques, products and services for their
patient base. Providing information to these physicians as to disease
management leads to earlier identification and treatment of patients, enhancing
the patient's quality of life and longevity. The Company has not targeted
specialists, as their patients are more acute and since specialists have
historically been tied to the hospital systems which results in higher
hospitalizations. RoTech's marketing is directed at identifying patients of
primary care physicians prior to hospitalization and prior to an acuity level
that would require utilizing a specialist.
The Company's strategy is to develop integrated health care delivery systems
through the acquisition of smaller local home health care companies in non-urban
areas. The Company targets non-urban markets of smaller cities and rural areas,
due to the dominance of primary care physicians in these markets, reduced
competition and a tendency to care for patients in the home setting. The Company
believes that acquisitions of home health care companies will continue to expand
the base of relationships with primary care physicians in these markets. Primary
care physicians in these markets typically have long-standing relationships with
loyal patient bases. These physicians are usually solo practitioners and are the
key decision makers in the treatment of their patients. The Company believes
that making home health care products and services available to these physicians
will result in better, less expensive health care that provides an improved
quality of life for the patients and their caregivers in these communities.
SALES AND MARKETING
RoTech believes that the sales and marketing skills of its employees have been
instrumental in its growth to date and are critical to its future success.
RoTech emphasizes to its employees the importance of patient base growth and
retention by providing quality service to physicians and their patients.
Approximately 28% of RoTech's employees are actively involved in sales and
marketing. The sales representatives employed by the Company
3
include registered or certified respiratory therapists, registered pharmacists
and registered nurses who market all of the Company's services and products and
are responsible for maintaining and expanding the Company's relationships with
physicians, targeting primary care physicians in non-urban areas.
RoTech provides formal marketing, training, product and service information to
all of its technical and sales personnel so they can communicate effectively
with physicians about the Company's services and products. These personnel are
instructed on methods of serving the physicians by counseling them on new
procedures and medical technologies. Each technical and sales person must attend
periodic seminars conducted on a Company-wide basis. The Company emphasizes the
cross-marketing of all its products to physicians with which its salespeople
have already developed professional relationships. The Company believes its
marketing approach allows the primary care physician to identify acute and
chronic patients earlier in the disease process. Treatment is done at the
primary care level and accordingly at less cost than the advanced treatment of
the disease by specialists or in a hospital setting.
REIMBURSEMENT FOR SERVICES
A substantial percentage of RoTech's revenue is attributable to third-party
payors, including private insurers, Medicare and, to a lesser extent, Medicaid.
The Company has substantial expertise at processing claims and continues to
create and improve systems to manage third-party reimbursements, to produce
clean claims and obtain timely reimbursements by third-party payors. The Company
has developed distinct billing and collection departments for Medicare and
Medicaid reimbursements and for private insurance company claims which are
supported by customized computer systems. These departments work closely with
reimbursement officers at branch locations and third-party payors and are
responsible for the review of patient coverage, the adequacy and timeliness of
documentation and the follow-up with third-party payors to expedite
reimbursement payments. Reimbursement from the Medicare program as a percentage
of RoTech's total operating revenue approximated 51% for fiscal 1997, 48% for
fiscal 1996, 49% for fiscal 1995.
RoTech has achieved increased operating revenue in home respiratory and other
medical equipment operations despite increased regulation and corresponding
reimbursement reductions. While the increased regulation tends to reduce the
amount of reimbursement from government sources for individual cases, the
Company believes the continued increased regulation also benefits the Company by
reducing the competition from joint ventures and fee revenue sharing
arrangements, which the Company has historically avoided.
The Company's levels of operating revenue and profitability of the Company,
like those of other health care companies, are affected by the continuing
efforts of third-party payors to contain or reduce the costs of health care by
lowering reimbursement rates, increasing case management review of services and
negotiating reduced contract pricing. Home health care, which is generally less
costly to third-party payors than hospital-based care, has benefitted from those
cost containment objectives. However, as expenditures in the home health care
market continue to grow, initiatives aimed at reducing the costs of health care
delivery at non-hospital sites are increasing. Changes in reimbursement policies
by third-party payors, or the reduction in or elimination of such reimbursement
programs, could have a material adverse impact on the Company's revenues.
Various state and federal health reform initiatives may lead to additional
changes in reimbursement programs.
PRODUCTS AND SERVICES
HOME HEALTH CARE PRODUCTS AND SERVICES
HOME RESPIRATORY THERAPY AND EQUIPMENT
RoTech provides a variety of home respiratory therapy products and services on
a monthly rental or sale basis. Home respiratory therapy and equipment
represented 50%, 42% and 42% of the Company's revenues for the years ended July
1997, 1996 and 1995, respectively. RoTech focuses on serving patients of
primary care physicians with chronic pulmonary diseases in their pre-acute
stages. Early identification and retention of these patients at the
4
primary care level reduces the cost of health care and should improve the
quality of life of the patients and their families. RoTech also enjoys patient
retention post-hospitalization at the patient's or physician's request and does
not rely on referrals of patients by hospital discharge planners or case
managers. Overall home respiratory market revenues were approximately $1.6
billion in 1993.
The Company's home respiratory care product line includes oxygen
concentrators, portable liquid oxygen systems, nebulizers, and ventilator care.
Oxygen concentrators extract oxygen from room air and generally provide the
least expensive supply of oxygen for patients who require a continuous supply of
oxygen, are not ambulatory and who do not require excessive flow rates. Liquid
oxygen systems store oxygen under pressure in a liquid form. The liquid oxygen
is stored in a stationary unit that can be easily refilled at the patient's home
and can be used to fill a portable device that permits greatly enhanced patient
mobility. Nebulizers are devices which aerosolize medications, allowing them to
be inhaled directly into the patient's lungs. Ventilator therapy is used for the
individual that suffers from respiratory failure by mechanically assisting the
individual to breathe. The Company provides technicians who deliver and/or
install the respiratory care equipment, instruct the patient in its use, refill
the high pressure and liquid oxygen systems as necessary and provide continuing
maintenance of the equipment.
HOME MEDICAL EQUIPMENT AND SUPPLIES
RoTech provides a full line of equipment and supplies of home medical
equipment and supplies for convalescents, including custom pieces required for
rehabilitation patients. Home medical equipment and supplies represented 29%,
35%, and 24% of the Company's revenues for the years ended July 31, 1997, 1996
and 1995 respectively. Provision of home medical equipment enables the Company
to provide a "one-stop shopping" presence in its non-urban markets, which is
required for full patient service satisfaction. These products are provided on a
monthly rental or sale basis and include wheelchairs, hospital beds, walkers,
patient lifts, orthopedic supplies, catheters, syringes and bathroom aids.
HOME INFUSION THERAPY AND OTHER PHARMACY RELATED PRODUCTS AND SERVICES
Home infusion therapy involves the administration of antibiotics, nutrients or
other medications intravenously, intramuscularly, subcutaneously or through a
feeding tube. The Company focuses on providing home infusion therapy to patients
prior to or in lieu of hospitalization, which generally offers significant cost
savings and preferable logistics for patients, their families and caregivers
over hospital-based treatments. RoTech believes that its marketing methods of
consulting with primary care physicians on home infusion therapies and the
continuing evolution of related technological advances should enable further
growth of this portion of the business. Focus on the referring primary care
physician facilitates the identification of patients requiring sub-acute
antibiotic treatments, which constitute 39% of the home infusion therapy market.
Home infusion therapies and other pharmacy products accounted for 14%, 16% and
25% of RoTech's revenues for the years ended July 31, 1997, 1996, and 1995,
respectively which includes the following types:
Antibiotic Therapy (The majority of the Company's home infusion therapy
revenues)--Antibiotic therapy requires the infusion of antibiotic drugs into the
patient's bloodstream to treat infections and diseases, such as osteomyelitis
(bone infections), bacterial endocarditis (infection of the lining around the
heart), wound infections, infections associated with HIV/AIDS, and infections of
the kidneys and urinary tract. Antibiotics are generally believed to be more
effective when infused directly into the bloodstream than when taken orally.
These treatments can be prescribed by primary care physicians, are short-term in
nature and recur occasionally.
Enteral Nutrition Therapy--Enteral nutrition therapy is administered to
patients who cannot eat as a result of an obstruction to the upper
gastrointestinal tract or because they are otherwise unable to be fed orally. As
with total parenteral nutrition therapy, enteral nutrition therapy is often
administered over a long period.
Pain Management and Chemotherapy--Pain management therapy is the
administration of pain controlling drugs to terminally or chronically ill
patients and is often administered in conjunction with intravenous chemotherapy.
Chemotherapy is the continuous or intermittent intravenous administration of
anti-cancer drugs. Chemotherapy generally is administered periodically for
several weeks or months.
5
Total Parenteral Nutrition Therapy--Total parenteral nutrition (TPN) therapy
involves the intravenous feeding of nutrients to patients with impaired
digestive tracts due to gastrointestinal illnesses or conditions, due to
underlying conditions including cancer or HIV/AIDS. TPN is usually longer in
duration than other forms of infusion therapy, and can be lifelong.
Other Therapies. Other therapies and services include therapies such as
congestive heart failure therapy, hydration therapy and related nursing
services.
The Company's home infusion therapy business is dependent in large measure
upon physicians continuing to prescribe the administration of drugs and
nutrients through intravenous and other infusion methods. Orally administered
drugs and alternative drug delivery systems may have an effect upon the demand
for certain infusion therapies. The Company can predict neither the ultimate
impact of these treatments on the Company's business nor the nature of future
medical advances or their eventual impact on the Company's business.
PRIMARY CARE PHYSICIANS' PRACTICES
RoTech has acquired primary care physician practices in the States of Florida
and Mississippi. The Company believes that it will be able to increase the
profitability of the individual practices through economies of scale and greater
efficiencies, and that its centralized billing and reimbursement functions will
typically result in lower costs per claim and quicker reimbursement. Physician
practices represented 7%, 7% and 9% of the Company's revenues for the years
ended July 31, 1997, 1996 and 1995, respectively.
GOVERNMENT REGULATION
The home care industry is subject to extensive government regulation at the
federal level through the Medicare program and at the state level through the
Medicaid program. Medicare is a federally funded health insurance program which
provides health insurance coverage for persons age 65 and older and certain
disabled persons, and generally provides reimbursement at specified rates for
sales and rentals of specified medical equipment and supplies, provided such
equipment and supplies are determined to be medically necessary by the treating
physician. Medicaid is a health insurance program administered by state
governments which provides reimbursements for health care for certain
financially or medically needy persons regardless of age.
The Company is subject to government audits of its Medicare and Medicaid
reimbursement claims and has not, to date, experienced any material loss as a
result of any such government audits. Under existing federal law, the knowing
and willful offer or payment of any remuneration (including any kickback, bribe
or rebate) of any kind to another person to induce the referral of Medicare or
Medicaid beneficiaries for whom medical supplies and services may be reimbursed
by the Medicare or Medicaid programs is prohibited and could subject the parties
to such an arrangement to substantial criminal and civil penalties, including
exclusion from participation in these programs, for Medicare or Medicaid fraud.
The Office of Inspector General of the Department of Health and Human Services
("OIG") has promulgated regulatory "safe harbors" that describe certain
practices and business arrangements that comply with Medicare and Medicaid
regulations. The OIG and law enforcement authorities have recently increased
their investigatory efforts to determine whether various business practices
constitute remuneration for, or to induce, referrals. Certain states have also
passed statutes and regulations that prohibit payments for referral of patients.
These laws vary significantly from state to state. The result of legislative and
regulatory efforts is an extra compliance challenge and, therefore, risk.
RoTech reached a settlement with the U.S. Attorney for the Middle District of
Florida in a civil action related to Medicare claims the government believes it
erroneously paid between 1987 and 1989. RoTech remains confident that it was in
compliance with all material Medicare and other legal requirements related to
this matter. However, in an effort to reduce legal defense costs and to
preserve internal resources, RoTech paid $612,500 (approximately $380,000 on an
after tax basis) to resolve the matter. These monies represent a repayment of a
portion of the estimated disputed claims and related interest over approximately
ten years.
6
The Company received an inquiry from the Medicaid Department of the State of
Mississippi and subsequently received two subpoenas from the OIG concerning the
Company's 1994 cost report for its Mississippi Rural Health Clinics. The Company
is cooperating fully with such inquiries. There has been no statement of issues
or particular concerns giving the Company sufficient information to permit the
Company to determine the extent of financial exposure, if any. The Company is
not aware of any material error in the one year's cost report under inquiry,
following consultation with its outside consultant, who also assisted in the
preparation and filing of the original report. If any adjustments occur, such
would likely relate only to Mississippi physician clinics for 1994. However,
medicaid and OIG have the right to audit years subsequent to 1994 and RoTech can
not predict the outcome of any such audit.
The types of services and products delivered by the Company, the required
quality of such services and products and the manner in which such services and
products are delivered and billed are each subject to significant and complex
regulations promulgated, interpreted and administered by the appropriate federal
or state governmental agency. Although the Company believes that its products,
services and procedures comply in all respects with such regulations applicable
to reimbursement eligibility, the unavailability of advance formal
administrative rulings in most regulated areas subjects the Company to possible
subsequent adverse interpretations and rulings which may affect the eligibility
of some or all of the Company's services and products for reimbursement. Such an
adverse interpretation or ruling could have a substantial adverse impact on the
Company's business.
In addition, the Company is required to obtain federal and state licenses and
permits relating to the distribution of pharmaceutical products, including a
federal Controlled Dangerous Substance Registration Certificate and Florida
State Wholesaler License. The Company is required to obtain similar licenses
from each state in which it does business.
The Company's acquisitions of primary care physician practices are structured
to attempt to comply with federal and state law restrictions on business
relationships between the Company and persons who may be in a position to refer
patients to the Company for the provision of health care related items or
services. Accordingly, the Company endeavors to undertake such acquisitions in a
manner where the consideration offered and paid is consistent with fair market
value in arms-length transactions and is not determined in a manner that takes
into account the volume or value of any referrals or business that might
otherwise be generated between the Company and the physician whose practice is
to be acquired and for which payment may be made under Medicare or Medicaid.
While the Company believes that its acquisitions do not entail any form of
unlawful remuneration, there can be no assurances that enforcement authorities
will not attempt to construe the consideration exchanged in certain acquisition
transactions as entailing unlawful remuneration and to challenge such
transactions on such basis.
In many states, the "corporate practice of medicine doctrine" prohibits
business corporations from providing, or holding themselves out as providers of,
medical care through the employment of physicians. Although the two states in
which the Company has acquired practices of primary care physicians, Florida and
Mississippi, have not adopted this prohibition, there can be no assurance that
either state will not adopt this doctrine in the future. Enforcement of such
doctrine could require divestiture of acquired practices or restructuring of
physician relationships.
Health care is an area of extensive and dynamic regulatory change. Changes in
the law or new interpretations of existing laws can have a dramatic effect on
permissible activities, the relative costs associated with doing business, and
the amount of reimbursement by government and third-party payors. The Omnibus
Budget Reconciliation Act of 1987 ("OBRA 1987") created six categories of
durable medical equipment for purposes of reimbursement under the Medicare Part
B program. There is a separate fee schedule for each category. OBRA 1987 also
controls whether durable medical equipment products will be paid for on a rental
or sale basis and established fixed payment rates for oxygen service as well as
a 15-month rental ceiling on certain medical equipment. An interim final rule
implementing the payment methodology under the fee schedules recently was
published in the Federal Register. Payment based on the fee schedules is
effective with covered items furnished on or after January 1, 1989. Generally,
Medicare pays 80% of the lower of the supplier's actual charge for the item or
the fee schedule amount, after adjustment for the annual deductible amount. OBRA
1990 made changes to Medicare Part B reimbursement that were implemented in
1991. The substantive change was the standardization of Medicare rates for
certain equipment categories. Laws and regulations often are adopted to regulate
new products, services and
7
industries. 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 therapy 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. There can be no assurances that either the states or the federal
government will not impose additional regulations upon the Company's activities
which might adversely affect the Company's business.
Political, economic and regulatory influences are subjecting the health care
industry in the United States to fundamental change. Although Congress has
failed to pass comprehensive health care reform legislation thus far, the
Company anticipates that Congress and state legislatures will continue to review
and assess alternative health care delivery and payment systems and may in the
future propose and adopt legislation effecting fundamental changes in the health
care delivery system. Further, each area of medical care is subject to scrutiny
and revision as to the amount of reimbursement which is reasonable. Any
reduction in reimbursement in those goods and services provided by the Company
would have a direct effect on gross revenues of the Company. Legislative debate
is expected to continue in the future, and the Company cannot predict what
impact the adoption of any federal or state health care reform measures or
future private sector reform may have on its industry or business.
Pursuant to federal legislation (commonly known as "Stark II") enacted as
part of The Omnibus Budget Reconciliation Act of 1993, and effective January 1,
1995, physicians are prohibited from making referrals to entities in which they
(or immediate family members) have an investment interest or compensation
arrangement, where such referral is for any "designated health service"
covered by Medicare/Medicaid, including parenteral and enteral nutrients,
equipment and supplies, and home health services. Ownership by a physician of
investment securities in a publicly-held corporation with stockholders' equity
exceeding $75 million at the end of the corporation's most recent fiscal year or
on average during the previous three fiscal years is exempt from the investment
prohibition if the securities are traded on the New York, American or a regional
stock exchange, or The Nasdaq National Market. Exemptions from the compensation
arrangement prohibition include (i) amounts paid by an employer to a physician
pursuant to a bona fide employment relationship meeting specified requirements,
including payments being unrelated to referrals and consistent with the fair
market value of the services provided and (ii) other personal service
arrangements if certain requirements are met, including that compensation be
paid over the term of a written agreement with a term of one year or more, be
set in advance, not exceed fair market value, and be unrelated to referrals.
While RoTech intends to structure its acquisitions and operations to comply with
Stark II, there can be no assurance that future interpretations of that law will
not require structural and organizational modifications of the Company's
existing relationships with physicians, nor can assurance be given that present
or future relationships between the Company and physicians will be found to be
in compliance with such law.
Competition
The home healthcare market is highly competitive and is divided among a large
number of providers, some of which are national providers but most of which are
either regional or local providers. RoTech believes that the primary
competitive factors in this market are the ability of a company to provide
prompt and reliable service, the expertise and availability of personnel, the
range of products and services offered and, to a limited extent, the price of
the product or service. RoTech's current and potential competitors include
several national providers which have significantly greater financial and other
resources than RoTech. There can be no assurance that RoTech will not encounter
increased competition which could adversely affect its business, results of
operations or financial condition.
RoTech also competes with other home healthcare companies for acquisitions and
managed care contracts (deriving approximately 5% of its revenues from managed
care contracts). There can be no assurance that additional acquisitions can be
made and managed care contracts can be obtained on favorable terms or at all.
8
INSURANCE
In recent years, participants in the health care market have become subject to
an increasing number of malpractice and product liability lawsuits, many of
which involve large claims and significant defense costs. As a result of the
liability risks inherent in the Company's lines of business, including the risk
of liability due to the negligence of physicians or other health care
professionals employed by or otherwise under contract to the Company, the
Company maintains liability insurance intended to cover such claims. There can
be no assurance that the coverage limits of the Company's insurance policies
will be adequate, or that the Company can obtain liability insurance in the
future on acceptable terms or at all.
The Company currently has in force various liability insurance policies, with
total coverage limits of $26 million per occurrence and in the aggregate
annually. These policies contain various levels of deductibles and self-insured
retentions. They provide the Company protection against claims alleging bodily
injury or property damage arising out of the Company's operations, including
home health care, but excluding the Company's employed physicians. The Company
has in force, with respect to physicians employed by the Company, individual
professional liability insurance policies, with coverage limits ranging from
$250,000 per occurrence to $1 million per occurrence, and ranging from $750,000
in the aggregate annually to $3 million in the aggregate annually. The Company's
insurance policies are subject to annual renewal.
ITEM 2. PROPERTIES
-------------------
The Company leases all of its offices and facilities. The Company's corporate
headquarters is currently located in a 25,300 square foot warehouse/office
building located at 4506 L.B. McLeod Road, Suite F, Orlando, Florida 32811,
leased by the Company for a 5 year period ending September 30, 2000 at a current
rate of $3.40 per square foot with utilities, taxes and insurance being the
financial responsibility of the Company.
In addition to its corporate headquarters, the Company leases office
facilities for its 613 locations. These facilities are primarily used for
general office work and the dispatching of registered respiratory therapists,
registered nurses, registered pharmacists and delivery personnel.
The Company's office facilities vary in size from approximately 200 to 6,000
square feet. The total space leased for these offices is approximately
1.5 million square feet at an average price of $8.11 per square foot. All of
such office space is leased pursuant to operating leases.
Management believes that its office and warehouse facilities are suitable and
adequate for its planned needs.
ITEM 3. LEGAL PROCEEDINGS
--------------------------
The Company is from time to time involved in various legal proceedings.
Although the Company does not believe that any currently pending proceeding will
materially and adversely affect the Company, there can be no assurance that any
current or future proceeding will not have a material adverse affect on the
Company's financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
------------------------------------------------------------
On October 21, 1997 a special meeting of shareholders was held. At that
meeting, shareholders approved a proposal to approve and adopt the Agreement and
Plan of Merger dated July 6, 1997 between the Company and Integrated Health
Services, Inc. ("IHS"). As a result of this approval, the Company became a
wholly-owned subsidiary of IHS on October 21, 1997. Each outstanding share of
RoTech Common Stock was converted into the right to receive and each report to
acquire a share of RoTech Common Stock was converted into the right to purchase,
.5806 of a share of common stock of IHS.
9
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
--------------------------------------------------------------------------
Matters
-------
On October 21, 1997 a special meeting of shareholders was held. At that
meeting, shareholders approved a proposal to approve and adopt the Agreement and
Plan of Merger dated July 6, 1997 between the Company and Integrated Health
Services, Inc. ("IHS"). As a result of this approval, the Company became a
wholly-owned subsidiary of IHS on October 21, 1997 (the "Merger"). Each
outstanding share of RoTech Common Stock was converted into the right to receive
and each report to acquire a share of RoTech Common Stock was converted into the
right to purchase, .5806 of a share of common stock of IHS. As a result,
RoTech's Common Stock is no longer publicly traded.
ITEM 6. SELECTED FINANCIAL DATA
--------------------------------
The information required by this item is set forth under the heading "Selected
Consolidated Financial Data" on Page 22 of the Company's Annual Report to the
Shareholders for the fiscal year ended July 31, 1997, and is hereby incorporated
by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
OF OPERATION
------------
Statements in this Annual Report on Form 10-K concerning the Company's business
outlook or future economic performance; anticipated profitability, revenues,
expenses or other financial items; and product line growth, together with other
statements that are not historical facts, are "forward-looking statements" as
that term is defined under Federal Securities Laws. Forward-looking statements
are subject stated in such statements. Such risks, uncertainties and factors
include, but are not limited to, the Company's substantial indebtedness, growth
strategy, capital requirements and recent acquisitions as well as competition,
government regulation, general economic conditions and the other risks detailed
in the Company's filings with the Securities and Exchange Commission, including
this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
The following table presents the percentage of certain items relative to total
operating revenue:
[Enlarge/Download Table]
Year Ended July 31
-------------------------------------
1997 1996 1995
------------------- ---------------- ------------------
Operating Revenue:
Home respiratory therapy and equipment............ 50% 42% 42%
Home medical equipment and supplies............... 29 35 24
Home infusion therapy and other pharmacy
related products and services.................... 14 16 25
Physician practices............................... 7 7 9
---- ---- ----
Total Operating Revenue............................ 100% 100% 100%
COST AND EXPENSES:
Cost of revenue................................... 25% 27 27
Selling, general and administrative............... 49 48 49
Depreciation and amortization..................... 10 10 7
Interest.......................................... 4 2 1
---- ---- ----
Total Cost and Expenses............................ 88 88 84
---- ---- ----
Income before income taxes......................... 12 12 16
Income tax expense................................. 5 5 6
---- ---- ----
Net Income......................................... 7% 8% 10%
==== ==== ====
10
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. The Company anticipated growth in this line of business to 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. The Company anticipated
growth in this line of business to 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.
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.
11
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.
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.
Cost of revenue as a percentage of operating revenue decreased to 27.0% for
fiscal 1996 from 27.1% for fiscal 1995 due to changes in the product mix in the
last year resulting from mid-year fiscal 1995 and fiscal 1996 acquisitions.
Selling, general and administrative expenses as a percentage of operating
revenue reduced to 48.4% for fiscal 1996 from 49.6% for fiscal 1995, as the
revenue base has grown faster than the Company's costs. Changes in the Company's
mix of business also affect these categories. For example, physician practices
have no cost of revenue and all expenses are of a selling, general and
administrative nature.
Depreciation and amortization expense increased 177% to $26.5 million for
fiscal 1996 from $9.6 million for fiscal 1995. Depreciation and amortization
expense as a percentage of operating revenue was 10.1% for fiscal 1996 and 7.1%
for fiscal 1995. The dollar increase was attributable to the Company's purchase
of fixed and intangible assets resulting from various acquisitions and the fixed
assets needed for the increased rentals of equipment. All acquisitions in
fiscal 1996 were accounted for by the purchase method for acquisitions.
Interest expense, net of interest income, increased to $5.2 million for
fiscal 1996 from $835,000 for fiscal 1995. This increase resulted from the
Company borrowing monies to fund certain acquisitions along with the issuance of
the convertible subordinated debentures on June 1, 1996.
Income tax expense was provided at a 37.5% effective rate, compared to
37.2% the prior fiscal 1995.
12
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.
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.
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 were
converted 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. As a result of the Merger, the debentures
are converted into IHS Common Stock at a conversion price of $45.21 per share,
subject to adjustments in certain circumstances. 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. In connection with the Merger, the credit facility was paid in full
and terminated. Management believes that its credit capacity and cash flow from
operations, will be sufficient for the Company's projected growth in the near
future.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
----------------------------------------------------
Financial Statements:
---------------------
The information required by this item is set forth on page 1 through 20 in the
Company's Annual Report to Shareholders for the fiscal year ended July 31, 1997,
and is hereby incorporated by reference.
13
Selected Quarterly Consolidated Financial Data:
-----------------------------------------------
The supplementary financial information is set forth on page __ on the Company's
Annual Report to Shareholders for the fiscal year ended July 31, 1997, and is
hereby incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------------------------------
As of July 31, 1997, the following were directors of the Company:
[Enlarge/Download Table]
NAME OF NOMINEE AND POSITION
WITH THE COMPANY AGE DIRECTOR SINCE PRINCIPAL OCCUPATION LAST FIVE YEARS
---------------------------- --- -------------- ------------------------------------
William P. Kennedy, 53 1981 Chairman, Board of Directors and Chief
Chairman, Board of directors Executive Officer of the company;
and Chief Executive Officer Chairman, Board of Directors and
President of Thayers
Stephen P. Griggs, Director, 39 1991 Director, Chief Operating Officer,
Chief Operating Officer, President and Assistant Secretary of the
President and Assistant Company.
Secretary
William A. Walker II, Director 56 1984 Director and Secretary of the Company;
and Secretary Practicing attorney in Winter Park and
Orlando, Florida as a shareholder in the
law firm of Windeweedle, Haines,
Ward and Woodman, P.A.
Leonard E. Williams, Director 66 1988 Director of the Company; President and
Chief Executive Officer of Wayne
Densch, Inc.; President of Wayne
Densch Charities; previously District
Sales Manager for Tom's Foods, Inc.;
Director of Orlando Board of Directors,
First Union National Bank of Florida;
President of Leonard E. Williams
Company.
Jack T. Weaver, D.O., Director 64 1992 Director of the company; Osteopathy
Physician; Chairman, Board of Trustees
at the University of Health Sciences,
College of osteopathie Medicine,
Kansas City, Missouri.
14
The company has established an Executive Committee consisting of William P.
Kennedy, Stephen P. Griggs and William A. Walker, II; a Stock Option Plan
Committee consisting of William A. Walker II, a Compensation Committee
consisting of William A. Walker II and Leonard E. Williams; an Audit Committee
consisting of William A. Walker II, Leonard E. Williams and Jack T. Weaver, D.O.
and a Nominating Committee consisting of William A. Walker II and Leonard E.
Williams. During the company's fiscal year ended July 31, 1997, its Audit
Committee held two (2) meetings and each committee member attended such meeting.
Also, during the Company's fiscal year ended July 31, 1997, the Company's Board
of Directors held four meetings, and a quorum of directors was present at each
meeting.
The following persons are executive officers (but not directors) of the Company:
[Enlarge/Download Table]
NAME OF OFFICER AND POSITION EXECUTIVE PRINCIPAL OCCUPATION LAST FIVE
WITH THE COMPANY AGE OFFICER SINCE YEARS
---------------------------- --- ------------- ------------------------------
Rebecca R. Irish, Chief 35 1991 Chief Financial Officer, Treasurer
Financial Officer, Treasurer and and Assistant Secretary of the
Assistant Secretary Company.
Janet L. Ziomek 40 1996 Vice President - Finance of the
Company, previously Chief
Financial Officer and Treasurer of
Designed Furniture Associates,
Inc., Orlando, Florida.
N. Scott Novell 44 1997 Chief Legal Officer, previously
practicing attorney in Orlando,
Florida at Gray, Harris & Robinson
law firm.
On October 21, 1997, the shareholders of the Company approved a merger with
Integrated Health Services, Inc. see Item 4. As a result, the following are the
executive officers and directors of RoTech Medical Corporation as of October 21,
1997:
[Download Table]
Directors:
----------
Marc B. Levin 42 1989 Executive Vice President-Investor
Relations, previously Senior Vice
President-Investor Relations and Vice
President of Investor Relations with
Integrated Health Services, Inc.
Marshall A. Elkins 49 1990 Executive Vice President and General
Counsel, previously Senior Vice President
and General Counsel of Integrated Health
Services, Inc.
Stephen P. Griggs 39 1997 President of RoTech Medical Corporation
subsidiary of Integrated Health
Services. Previously President and
Chief Operating Officer of RoTech
Medical Corporation.
Officers:
C. Christian Winkle 34 1990 Executive Vice President - Field
Operations, previously Senior Vice
President-Operations with Integrated
Health Services, Inc.
Lawrence P. Cirka 45 1994 Executive Vice President, previously
President and Chief Operating Officer
of Company.
15
[Enlarge/Download Table]
Directors:
----------
Brian K. Davidson 39 1991 Executive Vice President - Development, previously
Senior Vice President - Development and Senior Vice
President-Managed Operations of the Company.
Anthony R. Masso 55 1994 Executive Vice President - Managed Care of the
Company, previously, Senior Vice President of
American MedCenters, and HMO company in
Minneapolis.
John Heller 38 1991 Executive Vice President - Facility Operations; Eastern
Division, previously Senior Vice President - Facility
Operations, Senior Vice President - Northern
Operations and Senior Vice President - MSU Operations
for the Company.
W. Bradley Bennett 31 1991 Executive Vice President - Chief Accounting Officer,
previously Senior Vice President-Chief Accounting
Officer, Senior Vice President-Corporate Controller,
Vice President - Controller and as Assistant Corporate
Controller.
Eleanor C. Harding 47 1993 Executive Vice President - Finance, previously Senior
Vice President - Finance and Treasurer and Vice
President - Finance and Treasurer of the Company.
Prior to joining company served as Senior Vice President,
Chief Financial Officer and Treasurer of Marcor Company.
Virgina Dollard 45 1995 Executive Vice President - Post-Acute Network
Operations, previously Senior Vice President, Southeast
Division of the company. Prior to joining the Company
served as Executive Vice President and Chief Operating
Officer of HealthPlus-New York Life Health Plan.
C. Taylor Pickett 35 1993 Executive Vice President, previously Senior Vice
President-Symphony Health Services and Vice
President of Acquisitions and Taxes. Prior to joining
the Company he served as Director of Taxes for PHH
Corporation.
16
ITEM 11. EXECUTIVE COMPENSATION
--------------------------------
The following table sets forth the annual and long-term compensation for the
Company's Chief Executive Officer at July 31, 1997 and the only executive
officers at July 31,1997 whose aggregate salary and bonus compensation exceeded
$100,000, as well as the total compensation paid to each individual for the
Company's previous two fiscal years:
[Download Table]
COMPENSATION LONG-TERM
NAME AND PRINCIPAL POSITION YEAR ANNUAL SALARY BONUS & OTHER COMPENSATION
--------------------------- ---- ------------- ------------- ------------
William P. Kennedy, Chairman 1997 $200,000 --- ---
of the Board of Directors and 1996 $153,137 --- ---
Chief Executive Officer 1995 $151,289 --- ---
Stephen P. Griggs, Director, 1997 $150,000 --- ---
Chief Operating Officer, 1996 $112,263 --- ---
President and Assistant 1995 $110,784 --- ---
Secretary
See "Item 13. Certain Relationships and Related Transactions" for information
with respect to payments to companies wholly or partially owned by Mssrs. Griggs
and Kennedy.
17
In connection with and as a condition to the Merger, Mr. Griggs will enter into
a five-year agreement with RoTech whereby he will serve as President of RoTech
at a base salary of $500,000 per annum. Under his employment agreement, Mr.
Griggs will receive a $500,000 bonus in each year in which RoTech's net income
contribution to IHS equals or exceeds specified targets, with an additional
bonus determined by IHS to be paid if the net income contribution target is
exceeded. In addition, in connection with the Merger Mr. Griggs will receive a
one-time cash sign-on bonus of $3.5 million, payable at Closing, and be issued
warrants to purchase 750,000 shares of IHS Common Stock on the NYSE for the 15
business days prior to the Closing Date (subject to acceleration upon Mr.
Grigg's death or the occurrence of a change in control of IHS). Pursuant to a
related agreement, RoTech will also be obligated to pay to Mr. Griggs the amount
of any excise tax payable by him under Section 4999 of the Code (or any
corresponding provisions of state or local tax law) as a result of any payments
to him pursuant to his employment agreement or in connection with the Merger, as
well as the income tax and excise tax on such additional compensation such that,
after the payment of income and excise taxes, Mr. Griggs is in the same economic
position in which he would have been if the provisions of Section 4999 of the
Code (or any corresponding provisions of state of local tax) had not been
applicable.
On October 21, 1997, the shareholders of the Company approved a merger with
Integrated Health Services, Inc. whereby each share of common stock and each
stock option was converted to .5806 shares of IHS stock. Therefore, further
information regarding executive stock options is considered not applicable.
1996 Key Employee Stock Option Plan
On April 1, 1996, the Board of Directors adopted a non-qualified stock option
plan under the name "1996 Key Employee Stock Option Plan". The provisions of
this plan are identical to the 1993 stock option plan, except that the total
number of shares subject to the 1996 plan, post stock split, is 1,000,000
shares. The 1996 Key Employee Stock Option Plan is intended to not qualify as
an "Incentive Stock Option Plan" as that term is described in the Federal
Internal Revenue Code of 1986, as amended.
Key Man Life Insurance
The Company currently maintains a split dollar key life insurance policy on the
life of Mr. Kennedy in the face amount of $10,000,000. The beneficiaries of the
policy are Mr. & Mrs. Kennedy's designated heirs pursuant to an irrevocable
trust established by Mr. Kennedy. The company shall have the unqualified right
to receive a portion of the death benefit equal to the greater of the total
amount of premiums paid by the Company or the cash surrender value of the policy
reduced by any outstanding indebtedness on the policy.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
------------------------------------------------------------------------
As of October 21, 1997, RoTech was acquired by Integrated Health Services, Inc.
and all shares of RoTech common stock were converted to .5806 of Integrated
Health Services, Inc. common stock. All shares of RoTech Common Stock are now
owned by IHS.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------------------------------------------------------
The Company leases office space in a building located at 942 S.E. 17th Street,
Ocala, Florida, a building in which Mr. Kennedy owns an undivided one-half
interest. Such lease is a month-to month lease providing for monthly rental
payments of approximately $1,500. Aggregate payments made by the Company under
such lease during fiscal 1997 were approximately $18,000.
The Company purchased approximately $711,000 of products from companies owned by
Mr. Kennedy in fiscal 1997. Companies owned by Mr. Kennedy purchased
approximately $11,000 of products from the Company.
A & C Business Services, Inc., a Florida corporation, of which Mr. Kennedy is
the sole shareholder, provides certain business services to the Company. The
cost of such services to the Company during fiscal year 1996 amounted to
approximately $203,000.
L&G of Orlando, Inc., a Florida corporation, of which Mr. Griggs is a
shareholder, provides certain business services to the Company. The cost of
such services to the Company during fiscal year 1997 amounted to approximately
$301,000.
Mr. Walker, the former Secretary and a former Director of the Company, is a
shareholder, director, assistant secretary, assistant treasurer and a member of
the Executive Committee of Winderweedle, Haines, Ward & Woodman, P.A. ("WHWW"),
a law firm with offices in Winter Park and Orlando, Florida. This law firm is
general counsel to the Company and each of its subsidiaries and was paid
approximately $362,000 in fiscal 1997. WHWW entered into a stock option
agreement ("Agreement") with the Company on July 1, 1995. The Agreement grants
WHWW the unassignable and non-transferable right and option to purchase from the
Company up to, but not exceeding in the aggregate, 20,000 shares of the
Company's common stock, par value $.0002, at an option price of $13.88. Any
options not exercised on or before June 30, 2000 terminate on such date and are
null and void.
As a result of the Merger, the options represent the right to purchase 11,612
shares of IHS Common Stock at $23.91 per share and 11,612 shares of IHS Common
Stock at $33.59 per share.
18
In the opinion of management, each of the foregoing transactions with officers,
directors, principal shareholders or affiliates were on terms no less favorable
to the Company than terms available from persons not affiliated with the
Company. The terms of any future transactions with officers, directors,
principal shareholders or affiliates will be no less favorable to the Company
than those which could be obtained from unaffiliated parties, and any future
transactions with affiliated parties, including loans to Company officers, will
be approved by a majority of the independent and disinterested members of the
Company's Board of Directors.
PART IV
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ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
--------------------------------------------------------------------------
(a) Documents filed as part of this report:
1. Financial Statements: The audited consolidated balance
--------------------
sheets of the Registrant and subsidiaries as of July 31, 1997 and July
31, 1996, and the related consolidated statements of income, changes
in stockholders' equity and cash flows of the Registrant and
subsidiaries for the three fiscal years ended July 31, 1997, are set
forth on pages 1 through 20 of the Registrant's Annual Report to
Shareholders for the fiscal year ended July 31, 1997, which statements
are incorporated in this report by reference.
2. Financial Statement Schedules. The following Financial Statement
-----------------------------
Schedule for the fiscal years ended July 31, 1997, 1996, and 1995 is
set forth under the heading "Financial Statement Schedule" on page 21
of the Company's Annual Report to Shareholders for the fiscal year
ended July 31, 1997 and is hereby incorporated by reference.
19
Schedule II Valuation and Qualifying Accounts for
the fiscal years ended July 31, 1997,
1996 and 1995
All other schedules are omitted because they are not required,
are not applicable, or the required information is included in the
Consolidated Financial Statements or notes thereto.
(a) 3. Exhibits. The exhibits filed as a part of this Report are listed in
--------
the attached Index to Exhibits.
(b) Reports on Form 8-K filed in the fourth quarter of fiscal 1997.
--------------------------------------------------------------
Current Report on Form 8-K dated May 28, 1997 reporting the settlement with the
U.S. Attorney for the Middle District of Florida in a civil action relating to
Medicare claims the United States Government believes it erroneously paid
between 1987 and 1989;
Current Report on Form 8-K dated July 6, 1997 reporting the execution of the
Merger Agreement; and
Current Report on 8-K dated September 17, 1997 reporting earnings for the fourth
quarter and year ended July 31, 1997; and
Current Report on 8-K dated October 21, 1997 reporting the completion of the
merger with Integrated Health Services.
Index to Exhibits
Except as otherwise indicated, the following Exhibits are incorporated by
reference as a part of this Report on Form 10-K:
[Enlarge/Download Table]
Exhibit Sequentially
Number Description Numbered Page
------- ----------- ---------------
2.1 Agreement and Plan of Merger with IHS
3.1 Articles of Incorporation of RoTech Medical Corporation (F/K/A
Southern Oxygen Systems, Inc.) filed with the Florida Department of
State on September 1, 1981. (Incorporated by reference to Exhibit 3.1
to the Company's Registration Statement No. 33-8711 on Form S-1).
3.2 Amendment to Articles of Incorporation of Southern Oxygen Systems,
Inc., changing its name to RoTech Medical Corporation and restating
its Articles of Incorporation, filed with the Florida Department of
Sate on March 29, 1984. (Incorporated by reference to Exhibit 3.2 to
the Company's Registration Statement No. 33-8711 on Form S-1.)
3.3 Amendment to Articles of Incorporation of RoTech Medical Corporation,
changing the authorized capital stock to 1,500,000 shares of Common
Stock having a par value of $1.00 per share, filed with the Florida
Department of State on June 13, 1984. (Incorporated by reference to
Exhibit 3.3 to the Company's Registration Statement No. 33-8711 of
Form S-1.)
3.4 Amendment to Articles of Incorporation of RoTech Medical Corporation,
changing the authorized capital stock to 50,000,000 shares of Common
Stock having a par value of $.0002 per share, filed with the Florida
Department of State on June 15, 1984. (Incorporated by reference to
Exhibit 3.4 to the Company's Registration Statement No. 33-8711 of
Form S-1.)
3.5 By-Laws of RoTech Medical Corporation (F/K/A Southern Oxygen
Systems, Inc.) (Incorporated by reference to Exhibit 3.5 to the
Company's Registration Statement No. 33-8711 of Form S-1.)
3.6 Amended and Restated By-Laws of RoTech Medical Corporation, as
amended. (Incorporated by reference to Exhibit 3.6 to the Company's
Registration Statement No. 33-8711 of Form S-1.)
20
4.1 Form of Stock Certificate. (Incorporated by reference to Exhibit 4.1
to the Company's Registration Statement No. 33-8711 of Form S-1.)
4.2 Indenture dated as of June 1, 1996, between the Company and PNC
Bank, Kentucky, Inc. (Incorporated by reference to Exhibit 4.1 to the
Company's Registration Statement No. 333-10915 on Form S-3).
10.1 Form of Registrant's 1986 Incentive Stock Option Plan. (Incorporated
by reference to Exhibit 10.5 to the Company's Registration Statement
No. 33-8711 of Form S-1.)
10.2 Amended and Restated Revolving Credit and Line of Credit Agreement,
dated June 4, 1996, by and among RoTech Medical Corporation, and
SunTrust Bank, Central Florida, National Association, individually as
an Agent, Nationsbank of Florida, N.A., NBD Bank, PNC Bank, Kentucky,
Inc., Barnett Bank of Central Florida, N.A. and Cooperatieve to be
Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank Nederland", New
York Branch, filed herewith.
10.3 Form of Registrant's Incentive Compensation Plan (Incorporated by
reference to Exhibit 10.3 to the Company's Registration Statement No.
33-41097 of Form S-2.)
10.4 Form of Registrant's Restricted Stock Plan for Non-Employee Directors
(Incorporated by reference to Exhibit 10.4 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1992.)
10.5 Form of Registrant's July 9, 1993 Stock Option Plan, (Incorporated by
reference to Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1994.)
10.6 Form of Registrant's Amended Restricted Stock Plan for Non-Employee
Directors (Incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended July 31, 1995.)
10.7 RoTech Medical Corporation 1996 Key Employee Stock Option Plan
(Incorporated by reference to Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended July 31, 1996.)
11.0 Computation of Earnings Per Share (Incorporated by reference to
Exhibit 11.0 to the Company's Annual Report on Form 10-K for the
fiscal year ended July 31, 1996.)
13.1 Annual report to security holders, filed herewith.
22.1 Subsidiaries of Registrant (Incorporated by reference to Exhibit 22.1
to the Company's Annual Report on Form 10-K for the fiscal year ended
July 31, 1996.)
Joint Proxy Statement of Integrated Health Services, Inc. and RoTech
Medical Corporation for the Special Meeting of Shareholders to be
held on October 21, 1997.
21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, RoTech Medical Corporation has duly caused this Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
ROTECH MEDICAL CORPORATION,
a Florida corporation
By: /s/ Stephen P. Griggs
-----------------------
Stephen P. Griggs,
President
Date:
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
[Download Table]
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Stephen P. Griggs President, Assistant Secretary, October 29, 1997
--------------------------- Chief Operating Officer; and
STEPHEN P. GRIGGS Director
/s/ Marc B. Levin Executive Vice President-Investeor October 29, 1997
--------------------------- Relations and Director
MARC B. LEVIN
/s/ Marshall A. Elkins Executive Vice President and General October 29, 1997
--------------------------- Counsel and Director
MARSHALL A. ELKINS
22
Dates Referenced Herein and Documents Incorporated by Reference
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