Pre-Effective Amendment to Registration of Securities Issued in a Business-Combination Transaction — Form S-4
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-4/A Amendment No.2 to Form S-4 202 1.09M
2: EX-5.1 Opinion of Brown Raysman Milstein Felder & Stein 2 13K
3: EX-10.14 Letter Agreement With Janet Ziomek 4 18K
4: EX-10.15 Letter Agreement With Albert A. Prast 3 14K
5: EX-16.1 Letter From Kpmg LLP Regarding Change in Auditors 1 9K
6: EX-23.1 Consent of Kpmg LLP 1 6K
| Page | (sequential) | | | | (alphabetic) | Top |
|---|
| | |
- Alternative Formats (Word, et al.)
- Additional information
- Albert A. Prast
- Asset Sales
- Backup Withholding and Information Reporting
- Bankruptcy case, The
- Board of Directors
- Book-entry, delivery and form
- Book-entry transfer
- Business
- Capitalization
- Certain Covenants
- Certain definitions
- Change of Control
- Company and others in the health care business are subject to certain inherent risks, including the following:, The
- Condensed Consolidated Balance Sheets
- Condensed Consolidated Statements of Cash Flows
- Condensed Consolidated Statements of Operations
- Conditions to the Exchange Offer
- Corporate integrity agreement
- Description of Capital Stock
- Description of Credit Facilities
- Description of Notes
- Designation of Restricted and Unrestricted Subsidiaries
- Employee profit sharing plan
- Events of Default and Remedies
- Exchange agent, The
- Exchange Offer, The
- Exchange of global notes for certificated notes
- Executive officer agreements
- Exhibits and Financial Statement Schedules
- Experts
- Expiration Date
- Fees and expenses
- Focus on operating efficiencies and improving margins
- Forward-Looking Statements
- Government regulation
- Guaranteed Delivery Procedures
- If you tender old notes in the exchange offer with the intention of participating in any manner in a distribution of the new notes:
- Incurrence of Indebtedness and Issuance of Disqualified Stock
- Indemnification of Directors and Officers
- Independent Auditors' Report
- Index to Consolidated Financial Statements
- Janet L. Ziomek
- Legal defeasance and covenant defeasance
- Legal Matters
- Liens
- Management
- Management's Discussion and Analysis of Financial Condition and Results of Operations
- Merger, Consolidation or Sale of Assets
- Notes, The
- Notes to Condensed Consolidated Financial Statements
- Notes to Consolidated Financial Statements
- Optional Redemption
- Other
- Our business strategy
- Philip L. Carter
- Plan of Distribution
- Procedures for tendering
- Purpose and effect of the exchange offer
- Ratio of Earnings to Fixed Charges
- Rebecca L. Myers
- Registration rights; liquidated damages
- Repurchase at the option of holders
- Resale of New Notes
- Restatement of financial results
- Restricted Payments
- Restructuring transaction and related transactions
- Risk Factors
- Selected Historical Consolidated Financial Data
- Series A convertible redeemable preferred stock
- Subordination
- Successor
- Summary
- Summary Consolidated Financial Data
- Summary of terms of the new notes
- Summary of the exchange offer
- Tendering through DTC's automated tender offer program
- The bankruptcy case
- The Company and others in the health care business are subject to certain inherent risks, including the following:
- The exchange agent
- The Exchange Offer
- The notes
- Unaudited Pro Forma Consolidated Statements of Operations Data
- Undertakings
- United States Federal Income Tax Consequences
- Use of Proceeds
- Where You Can Find More Information
- Your ability to enforce the guarantees of the notes may be limited
- Your representations to us
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| 1 | 1st Page - Filing Submission
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| " | Philip L. Carter
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| 7 | Summary
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| " | The Exchange Offer
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| 9 | Restatement of financial results
|
| 10 | Summary of the exchange offer
|
| 12 | If you tender old notes in the exchange offer with the intention of participating in any manner in a distribution of the new notes:
|
| 14 | The exchange agent
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| 15 | Summary of terms of the new notes
|
| 18 | Summary Consolidated Financial Data
|
| " | Successor
|
| 23 | Risk Factors
|
| 34 | Your ability to enforce the guarantees of the notes may be limited
|
| 35 | Forward-Looking Statements
|
| " | Use of Proceeds
|
| 36 | Capitalization
|
| 37 | Ratio of Earnings to Fixed Charges
|
| 39 | Selected Historical Consolidated Financial Data
|
| 44 | Unaudited Pro Forma Consolidated Statements of Operations Data
|
| 47 | Management's Discussion and Analysis of Financial Condition and Results of Operations
|
| 62 | Purpose and effect of the exchange offer
|
| 63 | Resale of New Notes
|
| 64 | Expiration Date
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| 65 | Conditions to the Exchange Offer
|
| " | Procedures for tendering
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| 66 | Book-entry transfer
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| " | Tendering through DTC's automated tender offer program
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| 68 | Your representations to us
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| 69 | Guaranteed Delivery Procedures
|
| 70 | Fees and expenses
|
| 71 | Other
|
| 72 | Business
|
| 75 | Our business strategy
|
| 76 | Focus on operating efficiencies and improving margins
|
| 78 | The bankruptcy case
|
| 82 | Restructuring transaction and related transactions
|
| 83 | Corporate integrity agreement
|
| 84 | Government regulation
|
| 93 | Management
|
| 95 | Board of Directors
|
| 97 | Employee profit sharing plan
|
| " | Executive officer agreements
|
| 98 | Janet L. Ziomek
|
| " | Albert A. Prast
|
| 99 | Rebecca L. Myers
|
| 104 | Description of Notes
|
| " | The notes
|
| 106 | Subordination
|
| 108 | Optional Redemption
|
| 109 | Repurchase at the option of holders
|
| " | Change of Control
|
| 110 | Asset Sales
|
| 111 | Certain Covenants
|
| " | Restricted Payments
|
| 113 | Incurrence of Indebtedness and Issuance of Disqualified Stock
|
| 115 | Liens
|
| 116 | Merger, Consolidation or Sale of Assets
|
| 118 | Designation of Restricted and Unrestricted Subsidiaries
|
| 119 | Events of Default and Remedies
|
| 121 | Legal defeasance and covenant defeasance
|
| 124 | Additional information
|
| " | Book-entry, delivery and form
|
| 126 | Exchange of global notes for certificated notes
|
| 127 | Registration rights; liquidated damages
|
| 129 | Certain definitions
|
| 144 | Description of Credit Facilities
|
| 147 | Description of Capital Stock
|
| 148 | Series A convertible redeemable preferred stock
|
| 150 | United States Federal Income Tax Consequences
|
| 151 | Backup Withholding and Information Reporting
|
| 153 | Plan of Distribution
|
| 154 | Legal Matters
|
| " | Experts
|
| " | Where You Can Find More Information
|
| 155 | Index to Consolidated Financial Statements
|
| 156 | Independent Auditors' Report
|
| 161 | Notes to Consolidated Financial Statements
|
| 177 | The Company and others in the health care business are subject to certain inherent risks, including the following:
|
| 181 | Condensed Consolidated Balance Sheets
|
| 182 | Condensed Consolidated Statements of Operations
|
| 183 | Condensed Consolidated Statements of Cash Flows
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| 184 | Notes to Condensed Consolidated Financial Statements
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| 193 | Item 20. Indemnification of Directors and Officers
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| 194 | Item 21. Exhibits and Financial Statement Schedules
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| 195 | Item 22. Undertakings
|
As filed with the Securities and Exchange Commission on February 10, 2003
Registration Statement No. 333-100750
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
Amendment No. 2
to
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-----------------
ROTECH HEALTHCARE INC.
and the additional registrants identified on the following page
(Exact Name of Registrant as Specified in Its Charter)
[Download Table]
Delaware 7352 030408870
(State or Other (Primary Standard (I.R.S.
Jurisdiction of Incorporation) Industrial Employer Identification
Classification Code Number)
Number)
Rotech Healthcare Inc.
2600 Technology Drive
Suite 300
Orlando, Florida 32804
(407) 822-4600
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
-----------------
Philip L. Carter
President and Chief Executive Officer
Rotech Healthcare Inc.
2600 Technology Drive
Suite 300
Orlando, Florida 32804
(407) 822-4600
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
-----------------
Copies to:
Stuart Bressman
Brown Raysman Millstein Felder & Steiner LLP
900 Third Avenue
New York, New York 10022
(212) 895-2000
-----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earliest effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
-----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
Table of Additional Registrants
[Download Table]
State or Other I.R.S.
Jurisdiction of Employer
Exact name of Registrant as Incorporation or Identification
Specified in its Charter(1)(2) Organization Number
------------------------------ ---------------- --------------
A-1 Medical Equipment, Inc................. Florida 59-3334401
Abba Medical Equipment, Inc................ Florida 59-3344117
Acadia Home Care, Inc...................... Maine 01-0486177
Allied Medical Supply, Inc................. Arizona 86-0423257
Always Medical Equipment, Inc.............. Florida 59-3387512
American Medical Rental, Inc............... Arkansas 71-0679003
Andy Boyd's InHome Medical, Inc., West..... West Virginia 55-0749187
Andy Boyd's InHome Medical, Inc............ West Virginia 55-0744360
Anniston Health & Sickroom Supplies, Inc... Alabama 63-0719873
Baumann Pharmaceutical Services, Inc....... Alabama 63-0682329
Berkeley Medical Equipment, Inc............ Florida 59-3402227
Best Care Medical Supply, Inc.............. Michigan 38-2918055
Beta Medical Equipment, Inc................ Florida 59-3334408
Cambria Medical Supply, Inc................ Florida 59-3260476
Camden Medical Supply, Inc................. Florida 59-3203186
Canyon State Medical Supply, Inc........... Arizona 86-0627468
Care Medical Supplies, Inc................. Illinois 37-1175959
Centennial Medical Equipment, Inc.......... Florida 59-3406826
Charlotte Medical Supply, Inc.............. Florida 59-3208925
Collins Rentals, Inc....................... Missouri 43-1222037
Community Home Oxygen, Inc................. Montana 81-0490456
Contour Medical Supply, Inc................ Florida 59-3406822
Corley Home Health Care, Inc............... Georgia 58-1729882
CP02, Inc.................................. Pennsylvania 23-2271084
Cynthiana Home Medical Equipment, Inc...... Florida 59-3250409
Daniel Medical Systems, Inc................ Oklahoma 73-0737988
Distinct Home Health Care, Inc............. Florida 59-3143941
Don Paul Respiratory Services, Inc......... Colorado 59-3143941
DuMed, Inc................................. Iowa 42-1336634
East Tennessee Infusion & Respiratory, Inc. Florida 59-3007561
Encore Home Health Care, Inc............... Florida 59-3221477
Epsilon Home Health Care, Inc.............. Florida 59-3250417
Excel Medical of Ames, Inc................. Iowa 42-1309650
Excel Medical of Fort Dodge, Inc........... Iowa 42-1324351
Excel Medical of Marshalltown, Inc......... Iowa 42-1336085
First Community Care of Niagara, Inc....... New York 16-1361366
Firstcare, Inc............................. Kansas 48-1104362
Fischer Medical Equipment Co., Inc......... Idaho 82-0361262
Four Rivers Home Healthcare, Inc........... Missouri 43-1336602
G & G Medical, Inc......................... Colorado 84-1033419
Gate City Medical Equipment, Inc........... Florida 59-3339037
Georgia Medical Resources, Inc............. Georgia 58-1484343
Gladwin Area Home Care, Inc................ Michigan 38-2870154
Hamilton Medical Equipment Service, Inc.... Iowa 42-1129500
Health at Home, Inc........................ Florida 59-2954576
Health Care Services of Mississippi, Inc... Florida 59-2893038
Health-Med, Inc............................ Mississippi 64-0714560
Holland Medical Services, Inc.............. Florida 59-3180731
[Enlarge/Download Table]
State or Other I.R.S.
Jurisdiction of Employer
Exact name of Registrant as Incorporation or Identification
Specified in its Charter(1)(2) Organization Number
------------------------------ ---------------- --------------
Home Care Oxygen Service, Inc........................... Minnesota 41-1335036
Home Health Services Co., Inc........................... Iowa 42-1196189
Home Medical Systems, Inc............................... South Carolina 59-3154523
IHS Acquisition XXVII, Inc.............................. Delaware 52-1748938
Infusion Services, Inc.................................. Alabama 63-1086135
Integrated Health Services at Jefferson Hospital, Inc... Delaware 52-1843408
Integrated of Garden Terrace, Inc....................... Delaware 52-1843387
Intensive Home Care Services, Inc....................... Texas 75-2323364
IOTA Medical Equipment, Inc............................. Florida 59-3366769
LAMBDA Medical Equipment, Inc........................... Florida 59-3374213
LAMS, Inc............................................... Texas 75-2253169
Lawrence Medical Equipment, Inc......................... Kansas 48-1066529
Liberty Home Health Care, Inc........................... Florida 59-3172251
Lovejoy Medical, Inc.................................... Kentucky 59-3267284
Major Medical Supply, Inc............................... Texas 75-1583420
Medco Professional Services Corp........................ Colorado 84-1188104
MedCorp International, Inc.............................. Arizona 86-0601512
Medic-Aire Medical Equipment, Inc....................... Florida 59-3334409
Medical Electro-Therapeutics, Inc....................... Florida 59-2973806
Medicare Rental Supply, Inc............................. West Virginia 55-0574420
Michigan Medical Supply, Inc............................ Michigan 38-2401565
National Medical Equipment Centers, Inc................. Florida 59-2874381
Neumann's Home Medical Equipment, Inc................... Illinois 36-2534719
Nightingale Home Health Care, Inc....................... Florida 59-2973784
North Central Washington Respiratory Care Services, Inc. Washington 91-1364195
Northeast Medical Equipment, Inc........................ Florida 59-3345262
Northwest Home Medical, Inc............................. Idaho 82-0388664
Omega Medical Equipment, Inc............................ Florida 59-3366772
OMICRON Medical Equipment, Inc.......................... Florida 59-3374215
Oxygen of Oklahoma, Inc................................. Oklahoma 73-1144965
Oxygen Plus Medical Equipment, Inc...................... Florida 59-3344115
Oxygen Plus, Inc........................................ Colorado 84-1143534
Oxygen Therapy Associates, Inc.......................... Texas 75-2461923
Peterson's Home Care, Inc............................... California 33-0439765
PHI Medical Equipment, Inc.............................. Florida 59-3366766
Pioneer Medical Services, Inc........................... West Virginia 55-0689719
Preferential Home Health Care, Inc...................... Florida 59-3155850
Premier Medical, Inc.................................... New Mexico 85-0436331
Principal Medical Equipment, Inc........................ Florida 59-3387513
Professional Breathing Associates, Inc.................. Michigan 38-2201020
Professional Respiratory Home Healthcare, Inc........... Florida 59-3344111
PSI Health Care, Inc.................................... South Dakota 46-0360287
Pulmo-Dose, Inc......................................... Florida 59-3098866
Pulmonary Homecare, Inc................................. New Jersey 22-2476666
Quality Home Health Care, Inc........................... Florida 59-2954571
R.C.P.S. Inc............................................ California 33-0429101
RCG Information Services Corporation.................... Florida 59-3223052
RCI Medical Corp........................................ New Jersey 22-3214474
Regency Medical Equipment, Inc.......................... Florida 59-3387515
Resp-A-Care, Inc........................................ Kentucky 61-0906717
[Download Table]
State or Other I.R.S.
Jurisdiction of Employer
Exact name of Registrant as Incorporation or Identification
Specified in its Charter(1)(2) Organization Number
------------------------------ ---------------- --------------
Respiracare Medical Equipment, Inc.......... Florida 59-3358640
Respiratory Medical Equipment of GA, Inc.... Florida 59-3345258
Respitech Home Health Care, Inc............. Wyoming 83-0310603
Responsive Home Health Care, Inc............ Florida 59-3182438
Rhema, Inc.................................. Texas 75-2622932
Ritt Medical Group, Inc..................... Arizona 86-0340564
RN Home Care Medical Equipment Company, Inc. Florida 59-2932598
Roswell Home Medical, Inc................... Florida 59-3358647
Rotech Employee Benefits Corporation........ Florida 59-3098434
Rotech Home Medical Care, Inc............... Florida 59-2919059
Rotech Oxygen and Medical Equipment, Inc.... Florida 59-1450889
Roth Medical, Inc........................... Colorado 84-1117477
Rothert's Hospital Equipment, Inc........... Kentucky 59-3270420
Sampson Convalescent Medical Supply, Inc.... North Carolina 56-1660509
Select Home Health Care, Inc................ Florida 59-3223150
SIGMA Medical Equipment, Inc................ Florida 59-3367143
Signature Home Care of Kansas, Inc.......... Kansas 48-1124109
Signature Home Care of New Jersey, Inc...... Delaware 22-3204810
Southeastern Home Health, Inc............... Florida 59-3358645
Southern IV Therapy, Inc.................... Florida 59-3204556
Stat Medical Equipment, Inc................. Florida 59-3334411
Sun Medical Supply, Inc..................... North Carolina 56-1574796
Sunshine Home Health Care, Inc.............. Florida 59-3221497
The Kilroy Company, Inc..................... North Carolina 56-1453738
The Towne Pharmacy, Inc..................... West Virginia 55-0616297
Theta Home Health Care, Inc................. Florida 59-3279824
Tupelo Home Health, Inc..................... Florida 59-2957024
UPSILON Medical Equipment, Inc.............. Florida 59-3367145
Valley Medical Equipment, Inc............... Utah 87-0547456
Value Care, Inc............................. Florida 59-3250410
VitalCare Health Services, Inc.............. Florida 59-3143938
VitalCare of America, Inc................... Texas 75-2223205
VitalCare of Pennsylvania, Inc.............. Pennsylvania 23-2505962
VitalCare of Texas, Inc..................... Texas 76-0245707
Vitech Medical, Inc......................... Florida 59-3170915
Whites Medical Rentals, Inc................. South Carolina 57-0770401
Wichita Medical Care, Inc................... Kansas 48-1156368
Wofford Pharmaceutical Services, Inc........ Alabama 63-0997399
Zeta Home Health Care, Inc.................. Florida 59-3250414
(1) The address, including zip code, and telephone number, including area code,
of each registrant's principal executive offices is 2600 Technology Drive,
Suite 300, Orlando, Florida 32804, (407) 822-4600.
(2) The primary standard industrial classification code number for each
registrant is 7352.
THE INFORMATION CONTAINED IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO
BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion, Dated February 10, 2003
PRELIMINARY PROSPECTUS
[LOGO] ROTECH Healthcare Inc.
ROTECH HEALTHCARE INC.
$300,000,000
Offer to Issue
Registered 9 1/2% Senior Subordinated Notes due 2012
unconditionally and irrevocably guaranteed by substantially all of
the subsidiaries of Rotech Healthcare Inc.
in Exchange for
All Outstanding 9 1/2% Senior Subordinated Notes due 2012
-----------------
We are offering to exchange up to $300 million of our 9 1/2% Senior
Subordinated Notes due 2012, which will be registered under the Securities Act
of 1933, as amended, for up to $300 million of our issued and outstanding
9 1/2% Senior Subordinated Notes due 2012. We are offering to issue the new
notes to satisfy our obligations contained in the registration rights agreement
we entered into when the old notes were sold in transactions in reliance on
Rule 144A and Regulation S under the Securities Act.
The terms of the new notes are identical in all material respects to the
terms of the old notes, except that the transfer restrictions, registration
rights and additional interest provisions relating to the old notes do not
apply to the new notes. The new notes are unconditionally guaranteed by
substantially all of our subsidiaries.
The exchange offer and withdrawal rights will expire at midnight, New York
City time, on , 2003 unless extended.
You should carefully review the risk factors beginning on page 17 of this
prospectus before participating in the exchange offer.
-----------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The date of this prospectus is , 2003.
Table of Contents
Page
----
Summary................................................................... 1
Risk Factors.............................................................. 17
Forward-Looking Statements................................................ 29
Use of Proceeds........................................................... 29
Capitalization............................................................ 30
Ratio of Earnings to Fixed Charges........................................ 31
Selected Historical Consolidated Financial Data........................... 33
Unaudited Pro Forma Consolidated Statements of Operations Data............ 38
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 41
The Exchange Offer........................................................ 56
Business.................................................................. 66
Management................................................................ 87
Description of Notes...................................................... 98
Description of Credit Facilities.......................................... 138
Description of Capital Stock.............................................. 141
United States Federal Income Tax Consequences............................. 144
Plan of Distribution...................................................... 147
Legal Matters............................................................. 148
Experts................................................................... 148
Where You Can Find More Information....................................... 148
Index to Consolidated Financial Statements................................ F-1
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Rotech Healthcare Inc. is a Delaware corporation. Our principal executive
offices are located at 2600 Technology Drive, Suite 300, Orlando, Florida 32804
and our telephone number is (407) 822-4600. Our website is located at
www.rotech.com. The information on our website is not part of this prospectus.
Each broker-dealer that receives new notes for its own account pursuant to
the exchange offer must acknowledge that it will deliver a prospectus in
connection with any resale of new notes. The letter of transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act of 1933, as amended, which we refer to as the Securities Act.
This prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of new notes received in
exchange for old notes where the old notes were acquired by the broker-dealer
as a result of market-making activities or other trading activities. We have
agreed that, for a period of up to one year after the expiration date of the
exchange offer, we will make this prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of distribution."
In making your investment decision, you should rely only on the information
contained in this prospectus. We have not authorized anyone to provide you with
any other information. If you receive any other information, you should not
rely on it.
We are offering the notes only in places where offers are permitted.
-----------------
INDUSTRY AND MARKET DATA
In this prospectus, we rely on and refer to information regarding market
research reports, analyst reports and other publicly available information. We
have obtained these reports and information from various third party sources
and have not participated in the preparation of the reports or the compilation
or verification of the information contained in the reports.
i
SUMMARY
The following summary highlights the most significant aspects of the
exchange offer. However, it may not contain all of the information that is
important to you in deciding whether to participate in the exchange offer. You
should read the entire prospectus carefully, including the "Risk factors"
section beginning on page 17 and the financial statements and the notes to
those financial statements included in this prospectus. As used herein, unless
otherwise specified or the context otherwise requires, references to the
"Company", "we", "our" and "us" refer to the business and operations of Rotech
Healthcare Inc., a Delaware corporation, and its subsidiaries for all periods
beginning on March 26, 2002 and to the business and operations of our
predecessor, Rotech Medical Corporation, a Florida corporation, and its
subsidiaries for all periods prior to March 26, 2002. All financial data
included in this prospectus for each of the fiscal years ended December 31,
1999, 2000 and 2001 and the three months ended March 31, 2002 reflect the
restatement of our financial results for those periods that we issued in
September 2002. For more information regarding the restatement of our financial
results, see the information under the section captioned "Business--Restatement
of financial results" on page 86 of this prospectus.
The Exchange Offer
In March 2002, we issued and sold $300 million aggregate principal amount of
9 1/2% senior subordinated notes due 2012, or old notes. In connection with
that sale, we entered into a registration rights agreement with the initial
purchasers of the old notes in which we agreed to deliver this prospectus to
you and to complete an exchange offer for the old notes. Pursuant to the
registration rights agreement, we are offering to issue $300 million aggregate
principal amount of our new 9 1/2% senior subordinated notes due 2012, or new
notes, in exchange for a like aggregate principal amount of our old notes. We
refer to this offer to issue new notes in exchange for old notes in accordance
with the terms set forth in this prospectus and the accompanying letter of
transmittal as the exchange offer. You are entitled to exchange your old notes
for new notes. We urge you to read the sections captioned "The exchange offer"
and "Description of notes" for further information regarding the exchange offer
and the new notes.
The Company
We are one of the largest providers of home medical equipment and related
products and services in the United States, with a comprehensive offering of
respiratory therapy and durable home medical equipment and related services. We
provide equipment and services in 48 states through over 600 operating centers
located primarily in non-urban markets. We believe that these markets provide
certain advantages, including less competition from national providers and
lower operating costs. We provide our equipment and services to the expanding
population of principally older patients with breathing disorders such as
chronic obstructive pulmonary diseases, or COPD (which include chronic
bronchitis and emphysema), obstructive sleep apnea and other cardiopulmonary
disorders.
Our revenues are principally derived from respiratory equipment rental and
related services (75.2% of revenues for the year ended December 31, 2001),
which include the rental of oxygen concentrators, liquid oxygen systems,
portable oxygen systems, ventilator therapy systems, nebulizer equipment and
sleep disorder breathing therapy systems, and the sale of nebulizer
medications. We also generate revenues through the rental and sale of durable
medical equipment (21.5% of revenues for the year ended December 31, 2001),
including hospital beds, wheelchairs, walkers, patient aids and ancillary
supplies. We derive a majority of our revenues from reimbursement by third
party payors, including Medicare, Medicaid, the Veterans Administration and
private insurers. For the year ended December 31, 2001, we generated net
revenues of $614.5 million and net earnings of $9.7 million. For the same
period, net cash provided by operating activities was $116.1 million, net cash
provided by operating activities and reorganization items was $114.0 million,
net cash used in investing activities was $85.0 million and net cash used in
financing activities was $39.1 million. Earnings from continuing
1
operations before interest, income taxes, depreciation and amortization
and nonrecurring items (including reorganization items (primarily restructuring
charges), provisions for inventory losses, provisions for settlement of
government claims and extraordinary items), which, unless otherwise noted,
we refer to as EBITDA, was $166.9 million for the year ended December 31, 2001.
For the six months ended September 30, 2002, we generated net revenues of
$308.1 million and net earnings of $11.8 million. For the same period, net cash
provided by operating activities was $58.7 million, net cash provided by
operating activities and reorganization items was $57.2 million, net cash used
in investing activities was $34.2 million and net cash used in financing
activities was $6.0 million. EBITDA for the six months ended September 30, 2002
was $74.5 million. During the six months ended September 30, 2002, we incurred
one-time charges of $4.9 million for special investigation and severance costs.
Had these one-time charges not been incurred, EBITDA for the six months ended
September 30, 2002 would have been $79.3 million.
Industry Overview
According to the Centers for Medicare and Medicaid Services, or CMS, the
home health care market was estimated to be $41.3 billion in the United States
in 2001, and is projected by CMS to grow at a rate of approximately 8% annually
through 2005. The home health care services industry consists of home nursing
and related services, infusion and nutrition therapies and home medical
equipment. The market segment in which we compete is the home medical equipment
market, which forms a part of the overall home healthcare market and primarily
consists of respiratory therapy and durable home medical equipment and related
services. The home medical equipment market is highly fragmented, with an
estimated 2,000 providers.
Equipment and Services
Our equipment and services support a range of therapies for the patient at
home. Our equipment and services are provided by technicians under a doctor's
prescription and can often be delivered to the patient's home within 24 hours.
Our business consists primarily of the provision of respiratory therapy
equipment and services, the sale and rental of durable medical equipment (such
as hospital beds, wheelchairs, walkers, patient aids and other ancillary
supplies) and other health care services (such as nutrition therapy and
pharmacy services).
Business Strategy
Our strategy is to enhance our leadership position in the home medical
equipment market and to increase our sales and profitability. The following are
the key elements of our strategy:
. continue to concentrate on non-urban markets;
. increase emphasis on respiratory therapy;
. focus on operating efficiencies and improving margins;
. expand our relationships with patients; and
. supplement internal growth with selective acquisitions.
Company History
Rotech Medical Corporation, our predecessor, was founded in 1981 and
completed its initial public offering in 1984. Its subsequent growth was
achieved in large part through the acquisition of a large number of small home
medical equipment providers in non-urban markets. In October 1997, it was
acquired by Integrated Health Services, Inc. (IHS), a large, publicly-held
provider of post-acute and related specialty health care services and products.
Following the acquisition, Rotech Medical Corporation operated as a
wholly-owned subsidiary of IHS. On February 2, 2000, IHS and substantially all
of its subsidiaries, including Rotech Medical Corporation, filed voluntary
bankruptcy petitions under Chapter 11 of the United States Bankruptcy Code with
the United States
2
Bankruptcy Court in the District of Delaware. The principal reason for our
predecessor's commencement of its Chapter 11 case was that it had jointly
guaranteed approximately $2.3 billion of obligations of IHS under credit
agreements with IHS' senior creditors. IHS defaulted on its obligations under
those agreements in 1999. The plan of reorganization of Rotech Medical
Corporation was confirmed by the Bankruptcy Court on February 13, 2002 and
became effective on March 26, 2002. See "Business--The bankruptcy case" for a
more detailed description of our history and Rotech Medical Corporation's
bankruptcy case. Pursuant to its plan of reorganization, on March 26, 2002,
Rotech Medical Corporation transferred to us substantially all of the assets it
used in connection with its businesses and operations (including stock of
substantially all of its subsidiaries). We have no continuing relationship with
Rotech Medical Corporation, except that immediately after the restructuring its
board of directors consisted of certain of our executive officers and
immediately after the restructuring we were owned by the same shareholders. See
also "Business--Restructuring transaction and related transactions" for a
description of the transactions that resulted in our becoming a successor to
the operations of Rotech Medical Corporation.
Restatement of Financial Results
In late June 2002, we discovered that an independent contractor (who was
also a former employee) had falsified certain bulk sales to the Department of
Veterans Affairs ("VA") by fabricating documentation for nonexistent sales of
medical equipment in bulk to the VA. Upon learning of these falsified sales, we
promptly:
. brought the matter to the attention of the relevant government
authorities;
. terminated the independent contractor;
. retained a nationally recognized law firm and a government contracts
consulting firm to conduct a comprehensive internal investigation; and
. commenced working with our independent certified public accountants to
determine the appropriate accounting treatment.
The investigation confirmed the existence of a pattern of falsified bulk
sales of equipment to the VA, as well as certain improperly recorded revenues
from non-bulk VA service contracts. The total of the falsified sales was
originally recorded to our books and records as net revenue of $30.4 million.
Of this amount, $14.8 million was recorded during the six-month period from
October 1, 2001 to March 31, 2002. In addition, $8.1 million of receivables
associated with non-bulk VA service contracts have been reversed.
As a result of the investigation, we restated our consolidated financial
statements for each of the years ended December 31, 1999, 2000 and 2001, as
well as the three months ended March 31, 2002. The restatement reflects a net
after-tax charge of $14.1 million over a three-year period. The principal
adjustments comprising the restatements are summarized in the section captioned
"Business--Restatement of financial results" on page 86 of this prospectus.
3
Summary of the Exchange Offer
You should read the discussion under the sections captioned "Summary of
terms of the new notes" beginning on page 9 and "Description of notes"
beginning on page 98 for further information regarding the new notes.
We summarize the terms of the exchange offer below. You should read the
discussion under the section captioned "The exchange offer" beginning on page
56 for further information regarding the exchange offer and resale of the new
notes.
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Notes Offered..................... $300 million aggregate principal amount of 9 1/2% Senior
Subordinated Notes due 2012. The terms of the new notes
and the terms of the old notes are identical in all material
respects, except for transfer restrictions, registration rights
and additional interest payments relating to the old notes.
The Exchange Offer................ We are offering the new notes to you in exchange for a like
principal amount of old notes. Old notes may be exchanged
only in integral multiples of $1,000. We are issuing the new
notes pursuant to the registration rights agreement described
under "Description of notes--Registration rights
agreement; liquidated damages" below.
Expiration Date................... The exchange offer will expire at midnight, New York City
time, on , 2003, or at a later date and time to
which we extend it.
Conditions to the Exchange Offer.. We will not be required to accept old notes for exchange if
the exchange offer would violate applicable law or if any
legal action has been instituted or threatened that would
impair our ability to proceed with the exchange offer. The
exchange offer is not conditioned on any minimum
aggregate principal amount of old notes being tendered.
Please read the section "The exchange offer--Conditions to
the exchange offer" beginning on page 59 for more
information regarding the conditions to the exchange offer.
Procedures for Tendering Old Notes If you wish to participate in the exchange offer, you must
complete, sign and date the letter of transmittal and mail or
deliver the letter of transmittal, together with your old
notes, to the exchange agent. If your old notes are held
through The Depository Trust Company, or DTC, you may
effect delivery of the old notes either by book-entry transfer
(after submitting a letter of transmittal to the exchange
agent) or through the automated tender offer program of
DTC. If you tender under this program, you will agree to be
bound by the letter of transmittal that we are providing with
this prospectus as though you had signed the letter of
transmittal.
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By signing or agreeing to be bound by the letter of
transmittal, you will represent to us, among other things,
that:
. you are not our "affiliate," as defined in Rule 144 of
the Securities Act or a broker-dealer tendering old
notes acquired directly from us for your own account;
. you have no arrangement or understanding with any
person to participate in the distribution of the new
notes or the old notes;
. any new notes you receive will be acquired in the
ordinary course of your business; and
. if you are not a broker-dealer or are a broker-dealer but
will not receive new notes for your own account, you
are not engaged in and do not intend to participate in a
distribution of the new notes.
If you are a broker-dealer that will receive new notes for
your own account in exchange for old notes, you must
represent to us that those old notes were acquired as a result
of market-making activities or other trading activities, and
that you will deliver a prospectus, as required by law, in
connection with any resale of those new notes.
Procedures for Beneficial Owners If you beneficially own old notes registered in the name of a
broker, dealer, commercial bank, trust company or other
nominee and you wish to tender your old notes in the
exchange offer, you should promptly contact the registered
holder and instruct the registered holder to tender the old
notes on your behalf.
If you wish to tender your old notes on your own behalf,
you must either arrange to have your old notes registered in
your name or obtain a properly completed bond power from
the registered holder before completing and executing the
letter of transmittal and delivering your old notes. The
transfer of registered ownership may take considerable
time.
Guaranteed Delivery Procedures.. If you wish to tender your old notes and cannot comply
with the requirement to deliver the letter of transmittal and
notes or use the applicable procedures under the automated
tender offer program of DTC before the expiration date, you
must tender your old notes according to the guaranteed
delivery procedures described in "The exchange offer--
Guaranteed delivery procedures" on page 63.
Withdrawal Rights............... Tenders may be withdrawn at any time before midnight,
New York City time, on , 2003.
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U.S. Federal Income Tax Considerations.. The exchange of new notes for old notes in the exchange
offer will not be a taxable event for U.S. federal income tax
purposes. Please read "United States federal income tax
consequences" beginning on page 144.
Use of Proceeds......................... There will be no proceeds from the issuance of the new
notes.
Resale of New Notes..................... Based on Securities and Exchange Commission ("SEC" or
the "Commission") staff interpretations in no-action letters,
we believe that each new note issued under the exchange
offer may be offered for resale, resold and otherwise
transferred by you, the holder of that new note, without
compliance with the registration and prospectus delivery
provisions of the Securities Act if:
. you are not our "affiliate" within the meaning of Rule
144 under the Securities Act;
. the new note is acquired in the ordinary course of your
business; and
. you do not intend to participate in the distribution of
new notes.
If you tender old notes in the exchange offer with the
intention of participating in any manner in a distribution of
the new notes:
. you cannot rely on these interpretations by the SEC
staff; and
. you must comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with a secondary resale transaction.
Failure to comply with the registration and prospectus
delivery requirements by a holder subject to these
requirements could result in that holder incurring liability
for which it is not indemnified by us. Please read "The
exchange offer" beginning on page 56 for more
information.
Plan of Distribution.................... All broker-dealers who receive new notes in the exchange
offer have a prospectus delivery obligation.
Based on SEC no-action letters, broker-dealers who
acquired the old notes as a result of market-making or other
trading activities may use this exchange offer prospectus, as
supplemented or amended, in connection with the resale of
the new notes.
6
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Broker-dealers who acquired the old notes from us may not
rely on SEC staff interpretations in no-action letters.
Broker-dealers who acquired the old notes from us must
comply with the registration and prospectus delivery
requirements of the Securities Act including being named
as selling noteholders in order to resell the old notes or the
new notes.
Consequences of Not Participating in the
Exchange Offer........................ If you do not exchange your old notes for new notes in the
exchange offer, your old notes will remain subject to the
existing restrictions on transfer. In general, you may not
offer or sell the old notes unless they are registered under
the Securities Act or the offer or sale is exempt from
registration under the Securities Act and applicable state
securities laws.
7
The Exchange Agent
We have appointed The Bank of New York as exchange agent for the exchange
offer. You should direct questions and requests for assistance, requests for
additional copies of this prospectus or of the letter of transmittal and
requests for the notice of guaranteed delivery to the exchange agent addressed
as follows:
For Delivery by Mail, Overnight Delivery or by Hand:
The Bank of New York
Corporate Trust Operations
Reorganization Unit
101 Barclay Street--7 East
New York, New York 10286
Attention: Diane Amoroso
By Facsimile Transmission (for eligible institutions only):
(212) 298-1915
To Confirm Receipt:
(212) 815-3738
8
Summary of Terms of the New Notes
The new notes will be freely tradable and otherwise substantially identical
to the old notes. The new notes will not have registration rights. The new
notes will evidence the same debt as the old notes, and the old notes and the
new notes will be governed by the same indenture.
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Issuer.................................. Rotech Healthcare Inc.
Notes Offered........................... We are offering $300 million aggregate principal amount of
our 9 1/2% Senior Subordinated Notes due 2012. The new
notes will be issued under an indenture dated as of March
26, 2002.
Interest................................ Interest will accrue at the rate of 9 1/2% per year. Interest
will be payable semi-annually in arrears on each April 1
and October 1, commencing on October 1, 2002.
Maturity Date........................... April 1, 2012.
Guarantees.............................. Certain of our current and future domestic subsidiaries will
unconditionally guarantee the new notes on a senior
subordinated basis. See "Description of notes."
Ranking................................. The new notes will be unsecured senior subordinated
obligations and will be subordinated to all our existing and
future senior debt. The new notes will rank equally with
future senior subordinated debt and will rank senior to all
other subordinated debt. Our subsidiaries' guarantees with
respect to the new notes will be general unsecured
unconditional senior subordinated obligations of such
guarantor subsidiaries and will be subordinated to all of
such guarantor subsidiaries' existing and future senior debt.
The guarantees will rank equally with any senior
subordinated indebtedness of the guarantor subsidiaries and
will rank senior to such guarantor subsidiaries'
subordinated debt, if any. Because the new notes are
subordinated, in the event of bankruptcy, liquidation or
dissolution, or certain other events, including certain
defaults on senior debt, we may be prevented from making
payments on the new notes. The term "senior debt" is
defined in the "Description of notes--Certain definitions"
section of this prospectus. At September 30, 2002, we and
our guarantor subsidiaries had approximately $194 million
of senior debt outstanding on a consolidated basis. The
indenture for the notes permits us to incur additional
indebtedness so long as the ratio of our Consolidated Cash
Flow to our Consolidated Interest Expense (each as defined
in the Indenture) for our most recently ended four full fiscal
quarters would have been at least 2.5 to 1.0, determined on
a pro forma basis as if the additional indebtedness had been
incurred at the beginning of the four quarter period. Our
revolving credit facilities contain additional covenants that
further restrict our ability to incur additional indebtedness.
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As of September 30, 2002, we would have been permitted
to borrow up to $2.9 million of additional indebtedness in
compliance with the restrictions contained in the indenture
and our revolving credit facilities. In addition, $70 million
is currently available for borrowing under our revolving
credit facilities.
Optional Redemption..................... We may redeem the new notes, in whole or part, at any time
on or after April 1, 2007 at a redemption price equal to
100% of the principal amount thereof plus a premium
described in this prospectus and accrued interest. Prior to
April 1, 2005, we may redeem up to 35% of the notes with
the net cash proceeds of qualified equity offerings. For
more information, see "Description of notes--Optional
redemption."
Change of Control....................... Upon certain change of control events, each holder of notes
may require us to repurchase all or a portion of its notes at a
purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest. Our ability to
repurchase the notes upon a change of control event will be
limited by the terms of our debt agreements, including our
senior secured credit facilities. We cannot assure you that
we will have the financial resources to repurchase the notes.
See "Description of notes--Repurchase at the option of
holders--Change of control."
Certain Covenants....................... The indenture governing the new notes contains covenants
that, among other things, limit our ability and the ability of
our restricted subsidiaries to:
. incur additional indebtedness and issue certain capital
stock;
. pay dividends on, redeem or repurchase capital stock;
. make investments;
. sell assets;
. engage in transactions with affiliates;
. create certain liens; and
. consolidate, merge or transfer all or substantially all of
our assets and the assets of our subsidiaries on a
consolidated basis.
These covenants are subject to important exceptions and
qualifications, which are described in the "Description of
notes" section in this prospectus.
Absence of a Public Market for the Notes Although the new notes will generally be freely transferable
(subject to certain restrictions discussed in "Description of
notes--Registration rights; liquidated damages"), they will
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be a new issue of securities for which there will not initially
be a market. Accordingly, there can be no assurance as to the
development or liquidity of any market for the new notes.
The initial purchasers have advised us that they currently
intend to make a market for the new notes as permitted by
applicable laws and regulations. However, they are not
obligated to do so and may discontinue any such market
making activities at any time without notice.
Form of New Notes....................... The new notes will be represented by one or more permanent
global securities deposited with DTC. You will not receive
certificates for your new notes unless one of the events
described under the section captioned "Description of
notes--Book-entry, delivery and form--Exchange of global
notes for certificated notes" on page 120 occurs. Instead,
beneficial ownership interests in the new notes will be shown
on, and transfers of beneficial ownership will be effected
only through, book-entry records maintained by DTC.
Risk Factors............................ See "Risk factors" beginning on page 17 for a discussion of
factors you should carefully consider before deciding to
participate in the exchange offer.
11
Summary Consolidated Financial Data
You should read the following summary consolidated financial data along with
the section captioned "Management's discussion and analysis of financial
condition and results of operations" and the audited consolidated financial
statements and the unaudited condensed consolidated financial statements and
the respective related notes included elsewhere in this prospectus. Listed
below is a summary of our consolidated statement of operations data for the
years ended December 31, 1999, 2000 and 2001, the six months ended September
30, 2001 and the three months ended March 31, 2001 and 2002 for our
predecessor, and for the six months ended September 30, 2002, for us, as the
successor company. You will also find a summary of our consolidated balance
sheet data as at December 31, 2001 for our predecessor and our unaudited
condensed consolidated balance sheet data as at September 30, 2002, for us, as
the successor company. Historical data have been presented for the three months
ended March 31, 2002 and six months ended September 30, 2002, rather than for
the nine months ended on such date, because we have had only six months of
operating results since our predecessor, Rotech Medical Corporation, emerged
from bankruptcy on March 26, 2002. For all periods prior to March 31, 2002, the
results of operations and other financial data set forth below refer to the
business and operations of our predecessor which, upon emerging from
bankruptcy, transferred substantially all of its assets to us in a
restructuring transaction accounted for effective as of March 31, 2002. For all
periods subsequent to March 31, 2002, the results of operations and other
financial data refer to our business and operations, as the successor company
to Rotech Medical Corporation. See "Business--Restructuring transaction and
related transactions." We have also included a summary of our unaudited pro
forma consolidated statement of operations data for the year ended December 31,
2001 and the nine months ended September 30, 2002.
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Successor
Predecessor Company Company
---------------------------------------------------------------------- -------------
Three Months Six Months Three Months Six Months
Year Ended December 31, Ended Ended Ended Ended
------------------------------ March 31, September 30, March 31, September 30,
(dollars in thousands, except 2001 2001 2002 2002(7)
ratios) 1999 2000 2001 (unaudited) (unaudited) (unaudited) (unaudited)
-----------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Net revenues..................... $586,809 $568,704(1) $614,487 $148,000 $310,475 $154,750 $308,133
Costs and expenses:
Cost of net revenues:
Product and supply costs...... 126,092 116,063 97,167 24,623 47,518 22,513 45,557
Patient service equipment
depreciation................. 27,939 36,723 44,679 10,292 22,006 12,147 25,736
-------- -------- -------- -------- -------- -------- --------
Total cost of net revenues... 154,031 152,786 141,846 34,915 69,524 34,660 71,293
Provision for doubtful
accounts...................... 26,791 27,352(1) 20,917 4,620 12,598 3,661 8,407
Selling, general and
administrative................ 292,601 315,106 329,516 79,678 164,931 84,996 179,705
Depreciation and
amortization(2)............... 27,169 50,614 60,736 14,699 30,174 2,839 5,087
Interest expense (income)....... 43 (46) (322) (16) (235) (17) 22,468
Provision for settlement of
government claims(3).......... 15,000 2,176 2,516 -- 2,010 -- --
Provision for inventory
losses........................ 23 211 2,141 434 605 264 --
-------- -------- -------- -------- -------- -------- --------
Total costs and expenses...... 515,658 548,199 557,350 134,330 279,607 126,403 286,960
-------- -------- -------- -------- -------- -------- --------
Earnings before
reorganization items,
income taxes and
extraordinary items........... 71,151 20,505 57,137 13,670 30,868 28,347 21,173
Reorganization items(4).......... -- 17,191 17,107 309 9,516 29,094 1,494
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) before
income taxes and
extraordinary items........... 71,151 3,314 40,030 13,361 21,352 (747) 19,679
Federal and state income
taxes (benefit)................. 33,860 12,081 30,324 10,121 16,174 (203) 7,871
-------- -------- -------- -------- -------- -------- --------
Earnings (loss) before
extraordinary items........... 37,291 (8,767) 9,706 3,240 5,178 (544) 11,808
Extraordinary gain on debt
discharge....................... -- -- -- -- -- 20,441 --
-------- -------- -------- -------- -------- -------- --------
Net earnings (loss)(2).......... $ 37,291 $ (8,767) $ 9,706 $ 3,240 $ 5,178 $ 19,897 $ 11,808
======== ======== ======== ======== ======== ======== ========
Ratio of earnings to fixed
charges(5)...................... 9.51x 1.40x 6.11x 7.80x 6.42x 0.61x 1.72x
Selected Historical Financial
Data:
EBITDA(6)........................ $141,325 $110,183 $166,887 $ 39,079 $ 85,428 $ 43,580 $ 74,464
Capital expenditures............. 60,976 71,557 79,765 18,448 44,182 15,299 30,965
Cash flows provided by
operating activities............ 123,722 161,637 116,127 12,452 66,963 33,338 58,673
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Pro Forma(8) Pro Forma(8)
Year Ended Nine Months Ended
(dollars in thousands, except ratios) December 31, 2001 September 30, 2002
---------------------------------------------------------------------------------------------------------------------
Statement of Operations Data:
Net revenues.................................................................... $ 614,487 $ 462,883
Costs and expenses
Cost of net revenues:
Product and supply costs..................................................... 97,167 68,070
Patient service equipment depreciation....................................... 40,776 36,907
---------- ----------
Total cost of net revenues.................................................. 137,943 104,977
Provision for doubtful accounts................................................ 20,917 12,068
Selling, general and administrative............................................ 329,516 264,701
Depreciation and amortization.................................................. 52,330 7,267
Interest expense (income)...................................................... 40,218 32,586
Provision for settlement of government claims.................................. 2,516 --
Provision for inventory losses................................................. 2,141 264
---------- ----------
Total costs and expenses..................................................... 585,581 421,863
---------- ----------
Earnings before reorganizations items, income taxes and extraordinary items.... 28,906 41,020
Reorganization items............................................................ 17,107 30,588
---------- ----------
Earnings (loss) before income taxes and extraordinary items.................... 11,799 10,432
Federal and state income taxes (benefit)........................................ 8,938 4,268
---------- ----------
Earnings (loss) before extraordinary items..................................... $ 2,861 $ 6,164
========== ==========
Ratio of earnings to fixed charges.............................................. 1.24x 1.26x
Selected Historical Financial Data:
EBITDA(6)....................................................................... $ 166,887 $ 118,044
September 30,
December 31, 2002(7)
(dollars in thousands) 2001 (unaudited)
---------------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Current assets.................................................................. $ 174,630 $ 147,340
Working capital................................................................. 135,116 101,360
Total assets.................................................................... 1,228,696 1,070,853
Total debt, including current portion........................................... -- 494,000
Convertible redeemable preferred stock.......................................... -- 5,233
Shareholder's equity............................................................ 688,096 506,575
--------
(1) We experienced a deterioration in the aging of certain receivables during
2000 due to a variety of factors including the operational effects of the
bankruptcy filing. Some of the factors that negatively affected the billing
and collections process include increased loss of office and other
personnel, problems experienced in the closure and consolidation of billing
locations and systems, and personnel shortages and the competing time
demands required in normalizing relations with payors and addressing a
variety of vendor issues. In the fourth quarter of 2000, management
performed a study and analysis of these issues and their effect, and
performed a re-evaluation of the allowance for doubtful accounts and
contractual adjustments. Accordingly, we recorded an increase to the
provision for bad debts of $5 million and an increase to contractual
adjustments of $15 million in the fourth quarter of 2000.
(2) In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142"). SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. We adopted the provisions of SFAS No.
142 effective January 1, 2002. Had SFAS No. 142 been in effect for the
years ended December 31, 1999, 2000 and 2001, amortization of goodwill
would have been reduced by $18.9 million, $41.0 million and $47.8 million,
13
respectively and net earnings for such periods would have increased by $15.9
million, $35.4 million and $42.2 million, respectively. Had SFAS No. 142
been in effect for the three months ended March 31, 2001 and the six months
ended September 30, 2001, amortization of goodwill would have been reduced
by $12.0 million and $23.9 million, respectively, and net earnings for such
periods would have increased by $10.6 million and $21.1 million,
respectively.
(3) In February 2002, we settled all outstanding government litigation and
pre-petition and certain post-petition claims arising from Medicare
payments made to certain of our operating centers as well as claims in
unliquidated amounts for a cash settlement of $17 million. In addition, on
February 13, 2002, IHS and its subsidiaries, including us, entered into a
stipulation with the Centers for Medicare and Medicaid Services, or CMS,
whereby CMS was permitted to off set certain underpayments to IHS with
certain overpayments to us in exchange for a full release of all CMS claims
against IHS and its subsidiaries, including us, to the effective date of
the stipulation. The Bankruptcy Court signed the stipulation on April 12,
2002.
In 1999, we recorded a provision of $15 million based on a preliminary
evaluation of the government's estimated claims. We revised this estimate
and recorded an additional provision of $2 million in 2001; related legal
costs incurred were $2.2 million in 2000 and $0.5 million in 2001. See also
note 1 to the audited financial statements.
(4) During the years ended December 31, 2000 and 2001, the six months ended
September 30, 2001 and the three months ended March 31, 2001 and March 31,
2002 and the six months ended September 30, 2002, we recorded the
reorganization items set forth below. We have also included a summary of
reorganization items on a pro forma basis for the nine months ended
September 30, 2002.
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Successor
Predecessor Company Company Pro Forma
----------------------------------------------------------------- ------------- Combined for
Year Year Three Months Six Months Three Months Six Months Nine Months
Ended ended Ended Ended Ended Ended Ended
December 31, December 31, March 31, September 30, March 31, September 30, September 30,
(dollars in thousands) 2000 2001 2001 2001 2002 2002 2002
---------------------------------------------------------------------------------------------------------------------------------
Severance and terminations......... $ 3,470 $ 753 $215 $ 561 $ 837 $ -- $ 837
Legal, accounting and consulting
fees.............................. 325 3,815 -- 981 175 497 672
Loss on sale/leaseback of vehicles. -- -- -- -- 4,686 169 4,855
Priority tax claim allowed......... -- -- -- -- 14,000 -- 14,000
Administrative expense claims
allowed........................... -- -- -- -- 7,800 -- 7,800
Loss on closure of discontinued
branch operations and
discontinued product lines,
long-term incentive compensation
and other charges resulting from
reorganization and restructuring.. 13,396 12,539 94 7,974 1,596 828 2,424
------- ------- ---- ------ ------- ------ -------
$17,191 $17,107 $309 $9,516 $29,094 $1,494 $30,588
======= ======= ==== ====== ======= ====== =======
For further information, see note 1 to the audited financial statements for
the years ended December 31, 1999, 2000 and 2001, and note 3 to the
unaudited condensed consolidated financial statements for the six months
ended September 30, 2001 and three months ended March 31, 2001 and March
31, 2002 and six months ended September 30, 2002.
(5) See "Ratio of earnings to fixed charges" on page 31 of this prospectus.
14
(6) EBITDA is defined as earnings from continuing operations before interest,
income taxes, depreciation and amortization and nonrecurring items
(including reorganization items (primarily restructuring charges),
provisions for inventory losses, provisions for settlement of government
claims and extraordinary items). EBITDA is commonly used as an analytical
indicator within the health care industry, and serves as a measure of
leverage capacity and debt service ability. EBITDA should not be considered
as a measure of financial performance under generally accepted accounting
principles, and the items excluded from EBITDA are significant components
in understanding and assessing financial performance. EBITDA should not be
considered in isolation or as an alternative to net income, cash flows
generated by operating, investing or financing activities or other
financial statement data presented in the consolidated financial statements
as an indicator of financial performance or liquidity. Because EBITDA is
not a measurement determined in accordance with generally accepted
accounting principles and is thus susceptible to varying calculations,
EBITDA as presented may not be comparable to other similarly titled
measures of other companies. A reconciliation of net earnings to EBITDA for
each period is presented below.
Reconciliation of Net Earnings to EBITDA
[Enlarge/Download Table]
Pro Forma for
Year Year Year Three Months Six Months Three Months Six Months Nine Months
Ended Ended Ended Ended Ended Ended Ended Ended
December 31, December 31, December 31, March 31, September 30, March 31, September 30, September 30,
1999 2000 2001 2001 2001 2002 2002 2002
------------ ------------ ------------ ------------ ------------- ------------ ------------- -------------
Net earnings (loss). $ 37,291 $ (8,767) $ 9,706 $ 3,240 $ 5,178 $ 19,897 $11,808 $ 26,605
Income taxes
(benefit).......... 33,860 12,081 30,324 10,121 16,174 (203) 7,871 4,268
Interest expense
(income)........... 43 (46) (322) (16) (235) (17) 22,468 32,586
Depreciation &
amortization....... 55,108 87,337 105,415 24,991 52,180 14,986 30,823 44,174
Provision for
settlement of
government claims.. 15,000 2,176 2,516 -- 2,010 -- -- --
Provision for
inventory losses... 23 211 2,141 434 605 264 -- 264
Reorganization items -- 17,191 17,107 309 9,516 29,094 1,494 30,588
Extraordinary items. -- -- -- -- -- (20,441) -- (20,441)
-------- -------- -------- ------- ------- -------- ------- --------
EBITDA.............. $141,325 $110,183 $166,887 $39,079 $85,428 $ 43,580 $74,464 $118,044
======== ======== ======== ======= ======= ======== ======= ========
(7) We adopted fresh-start reporting upon our emergence from bankruptcy,
effective as of March 31, 2002. Under fresh-start reporting, our
reorganization value is allocated to our assets based on their respective
fair values in conformity with the purchase method of accounting for
business combinations; any portion not attributed to specific tangible or
identified intangible assets are reported as an intangible asset referred
to as "reorganization value in excess of value of identifiable assets." In
adopting fresh-start reporting, we engaged an independent financial advisor
to assist in the determination of the reorganization value or fair value of
the entity.
Not all of the valuations required to determine the fair value of our
assets have been performed and, accordingly, the adjustments reflected in
the data are preliminary and subject to further revisions and adjustments.
We have arranged to obtain valuations of significant assets and, upon
completion of this process, the reorganization value will be allocated to
specific assets. It is anticipated that there will be reductions in the
carrying values of certain assets, and the fair value of certain other
assets may exceed the carrying values. Accordingly, the final valuation
could result in materially different amounts and allocations of
reorganization value from the amount and allocations presented in this
prospectus. See "Risk factors--Since our financial statements reflect
fresh-start reporting adjustments made upon our predecessor's
15
emergence from bankruptcy, information reflecting our results of operations
and financial condition will not be comparable to prior periods of our
predecessor," note 18 to the audited financial statements for the years
ended December 31, 1999, 2000 and 2001 and note 6 to the unaudited condensed
consolidated financial statements for the six months ended September 30,
2001 and three months ended March 31, 2001 and March 31, 2002 and six months
ended September 30, 2002 included elsewhere in this prospectus.
In connection with our adoption of fresh-start accounting, we have obtained
valuations of the patient service equipment and have reconsidered the
estimated useful lives for this equipment and our other fixed assets. The
new basis of patient service equipment, furniture and office equipment, and
vehicles at March 31, 2002 are being depreciated over their respective
remaining useful lives at that date, using the weighted average life of the
asset groups, which approximates four years. Purchases of such property and
equipment since March 31, 2002 are being depreciated over five years for
patient service equipment, three years for computer equipment and five
years for vehicles; leasehold improvements and furniture and equipment are
unchanged. The effect of this change in estimate for the six months ended
September 30, 2002 was to increase depreciation by $589.
(8) The summary of our unaudited pro forma consolidated statement of operations
data for the nine months ended September 30, 2002 combines the results of
operations of our predecessor for the three months ended March 31, 2002 and
our results of operations, as successor, for the six months ended September
30, 2002. In addition, such pro forma financial data gives effect to the
consummation of Rotech Medical Corporation's plan of reorganization,
including the $200 million senior secured term loan, the sale of the $300
million 9 1/2% Senior Subordinated Notes due 2012 and application of the
net proceeds therefrom, the implementation of "fresh-start" reporting and
the consummation of the restructuring as if such transactions had occurred
on the first day of such fiscal period. The pro forma financial data do not
purport to be indicative of our future operating results.
The pro forma information should be read in conjunction with our unaudited
pro forma consolidated statements of operations data and the accompanying
notes included in this prospectus. See the section captioned "Unaudited pro
forma consolidated statements of operations data" beginning on page 38.
16
RISK FACTORS
You should carefully consider the risks described below before participating
in the exchange offer, in addition to the other information discussed in this
prospectus. Additional risks and uncertainties not currently known to us or
that we currently consider to be immaterial may also materially and adversely
affect our business operations. If any of the following risks actually occur,
we could be materially adversely affected. In such case, you may lose all or
part of your investment.
Risks relating to our business
A substantial percentage of our revenue is attributable to Medicare and, to a
lesser extent, Medicaid. Our business may be significantly impacted by
changes in reimbursement policies and other legislative initiatives aimed at
reducing health care costs associated with these programs.
A substantial percentage of our revenue is attributable to Medicare and, to
a lesser extent, Medicaid. The remainder of our billings are paid by other
third-party payors, including private insurers, and by the patients themselves.
Medicare, Medicaid and other federally funded programs (primarily Veterans
Administration contracts) accounted for 64.7% of our revenues for fiscal 2000
and 66.9% of our revenues for fiscal 2001.
Reimbursement from Medicare, Medicaid and other government programs is
subject to federal and state statutory and regulatory requirements,
administrative rulings, interpretations of policy, implementation of
reimbursement procedures, retroactive payment adjustments and governmental
funding restrictions. Our levels of revenue and profitability, like those of
other health care companies, are affected by the continuing efforts of
government payors to contain or reduce the costs of health care by lowering
reimbursement rates.
Rotech Medical Corporation's business was significantly impacted by the
Balanced Budget Act of 1997, or BBA 97, which reduced Medicare reimbursement
rates for home oxygen therapy and respiratory drugs by 25% and 5%,
respectively, effective January 1, 1998. An additional reimbursement reduction
of 5% on home oxygen therapy became effective on January 1, 1999. The BBA 97
also imposed a freeze on Consumer Price Index-based reimbursement rate
increases for 1998 through 2002. The Medicare Balanced Budget Refinement Act of
1999, or BBRA, and the Medicare, Medicaid and SCHIP Benefits Improvement and
Protection Act of 2000, or BIPA, provide some relief from the Consumer Price
Index-based reimbursement rate freeze and other provisions contained in the BBA
97. However, these measures did not restore reimbursement rates to their prior
levels. In addition, further reimbursement reductions may be made in the future.
The Department of Health and Human Services, or DHHS, has held discussions
regarding, and continues to review a possible reduction in, reimbursement by
Medicare for certain pharmaceuticals, including nebulizer medications. In
September 2001, the United States General Accounting Office issued a report
which suggested that the price paid by Medicare for nebulizer medications is
significantly higher than the average price paid for these medications by other
participants in the health care industry. We are unable to predict with
certainty whether any reduction in reimbursement by Medicare for nebulizer
medications will occur or the possible extent of any such reduction. A
reduction in reimbursement by Medicare for nebulizer medications could cause
our revenues and profitability to decline.
The BBA 97 also made it easier for states to reduce their Medicaid
reimbursement levels. In some cases, states have enacted or are considering
enacting measures that are designed to reduce their Medicaid expenditures.
The BBA 97 also mandated that the Centers for Medicare and Medicaid
Services, or CMS (formerly known as the Health Care Financing Administration,
or HCFA), conduct competitive bidding demonstrations for certain Medicare
services, two of which are currently being conducted. The competitive bidding
demonstrations could provide CMS and Congress with a model for implementing
competitive pricing in all Medicare programs. In June 2002, the House of
Representatives passed a bill that contained a Medicare reimbursement package.
The bill included a provision requiring certain Medicare programs, including
durable medical equipment suppliers, to
17
compete for Medicare contracts. A similar bill is currently pending in the
Senate. If such a competitive bidding system were implemented, it could result
in lower reimbursement rates, exclude certain items and services from coverage
or impose limits on increases in reimbursement rates.
Our business may be significantly impacted by changes in reimbursement
policies and other legislative initiatives aimed at reducing health care costs
associated with Medicare and Medicaid. Payments from governmental or private
payors may not remain at levels comparable to present levels and, in the
future, may not be sufficient to cover costs allocable to patients eligible for
reimbursement pursuant to these programs. Our financial condition and results
of operations may be affected by the reimbursement process, which in the health
care industry is complex and can involve lengthy delays between the time that
we submit a claim for reimbursement to a payor and the time that the
reimbursement amounts are settled and received by us.
We are subject to periodic audits by Medicare and Medicaid programs, and the
oversight agencies for these programs have rights and remedies they can assert
against us if they determine we have overcharged the programs or failed to
comply with program requirements. These agencies could seek to require us to
repay any overcharges or amounts billed in violation of program requirements,
or could make deductions from future amounts otherwise due to us from these
programs. We could also be subject to fines, criminal penalties or program
exclusions.
Private payors also reserve rights to conduct audits and make monetary
adjustments. See "Business--Government regulation" for a discussion of recent
efforts by government payors to reduce health care costs.
Failure to maintain current levels of collectibility of our accounts
receivable would likely have a significant negative impact on our
profitability and cash flow.
Billing and collection for our services is a complex process requiring
constant attention and involvement by senior management and ongoing
enhancements to information systems and billing center operating procedures.
We are paid for our services by various payors, including patients,
insurance companies, Medicare, Medicaid and others, each with distinct billing
requirements. We recognize revenue when we provide services to patients.
However, our ability to collect these receivables is dependent on our
submissions to payors of accurate and complete documentation. In order for us
to bill and receive payment for our services, the physician and the patient
must provide appropriate billing information. Following up on incorrect or
missing information generally slows down the billing process and the collection
of accounts receivable. Failure to meet the billing requirements of the
different payors could result in a decline of our revenues, profitability and
cash flow.
Further, even if our billing procedures comply with all third-party payor
requirements, some of our payors may experience financial difficulties or may
otherwise not pay accounts receivable when due, which would result in increased
write-offs or provisions for doubtful accounts. There can be no assurance that
we will be able to maintain our current levels of collectibility or that
third-party payors will not experience financial difficulties. If we are unable
to collect our accounts receivable on a timely basis, our revenues,
profitability and cash flow likely will decline.
In addition, in connection with our ongoing consolidation of billing
centers, we have experienced in the past short-term disruptions in our
operations and collection efforts. If we experience such disruptions in the
future, our revenues, profitability and cash flow may decline.
Our business, including our participation in the Medicare and Medicaid
program, is subject to extensive laws and government regulations. Failure by
us to comply with these laws and regulations could subject us to severe
sanctions and have a significant negative impact on our operations.
We are subject to stringent laws and regulations at both the federal and
state levels, including with respect to:
. billing matters including substantiation and record keeping requirements;
. prohibitions on fraud and abuse, kickbacks, rebates and fee splitting;
18
. licensing and certification requirements;
. confidentiality, privacy and security issues in connection with medical
records and patient information;
. relationships with physicians and other referral sources;
. operating policies and procedures;
. qualifications of health care and support personnel;
. quality of durable medical equipment and other medical equipment;
. handling, distribution and disposal of pharmaceutical products and
medical waste;
. quality assurance; and
. occupational safety.
Existing United States laws governing Medicare and state health care
programs such as Medicaid, as well as similar laws enacted in many states,
impose a broad variety of prohibitions on soliciting, receiving, offering or
paying, directly or indirectly, any form of remuneration, payment or benefit
for the referral of a patient for services or products reimbursable by Medicare
or a state health care program. The federal government has published
regulations that provide exceptions or "safe harbors" for business transactions
that will be deemed not to violate these prohibitions. Violation of these
prohibitions may result in civil and criminal penalties and exclusion from
participation in Medicare and state health care programs.
The federal and state "Stark Laws" impose a broad range of restrictions upon
referring physicians (and their immediate family) and providers of certain
designated health services under Medicare and state health care programs,
including restrictions on financial relationships between the referring
physicians and the providers of the designated health care services. Services
which we provide are classified as designated health services and fall within
the regulatory scope of the Stark Laws. Significant criminal, civil and
administrative penalties may be imposed for violation of these laws.
We are also subject to strict licensing and safety requirements by the
federal government and many states. Furthermore, many state laws prohibit
physicians from sharing professional fees with non-physicians and prohibit
non-physician entities, such as us, from practicing medicine and from employing
physicians to practice medicine.
In addition, both federal and state government agencies have heightened and
coordinated civil and criminal enforcement efforts as part of numerous ongoing
investigations of health care companies, as well as their executives and
managers. These investigations relate to a wide variety of matters, including
referral and billing practices. Further, amendments to the False Claims Act
have made it easier for private parties to bring "qui tam" whistleblower
lawsuits against companies. Some states have adopted similar state
whistleblower and false claims provisions.
The Office of the Inspector General of the DHHS and the Department of
Justice, or DOJ, have, from time to time, established national enforcement
initiatives that focus on specific billing practices or other suspected areas
of abuse. Some of our activities could become the subject of governmental
investigations or inquiries. We have recently entered into a settlement
agreement with the DOJ and the DHHS to settle claims against Rotech Medical
Corporation relating to certain Medicare and Medicaid billings. In addition, we
or our executives could be included in other governmental investigations or
named as defendants in private litigation, resulting in adverse publicity
against us.
If we fail to comply with these laws and regulations, we could be subject to
civil and/or criminal penalties, demands from the government for refunds or
recoupment of amounts previously paid to us by the government, facility
shutdowns and possible exclusion from participation in federal health care
programs such as Medicare and Medicaid, any of which could have a significant
negative impact on our operations. Some statutes and regulations, principally
in the area of billing, have not been interpreted by the courts and may be
interpreted or
19
applied in a manner that might adversely affect us. In addition, changes in
health care law, new interpretations of existing laws, or changes in payment
methodology may have a dramatic effect on our business and results of
operations.
Lack of accreditation of our operating centers by the Joint Commission on
Accreditation of Healthcare Organizations could result in a decline in our
revenues.
The Joint Commission on Accreditation of Healthcare Organizations, or JCAHO,
is a nationally recognized organization which develops standards for various
health care industry segments and monitors compliance with those standards
through voluntary surveys of participating providers. Accreditation by JCAHO
entails a lengthy review process that is conducted at least every three years.
Since accreditation is expensive and time consuming, not all providers choose
to undergo the process. We believe that JCAHO accreditation not only is
indicative of our commitment to providing consistently high quality equipment
and services, but that it also provides us with a significant competitive
advantage over our competitors who do not seek or have not received
accreditation. If our operating centers that are not yet accredited by JCAHO do
not ultimately become JCAHO accredited, or if future reviews by JCAHO do not
result in continued accreditation of our operating centers, we would likely
experience a decline in our revenues.
If we fail to comply with our Corporate Integrity Agreement or the terms of
our settlement with the federal government, we could be subject to severe
sanctions and be excluded from participating in federal and state health care
programs, as well as adverse publicity, which could result in a material
decrease in our revenue and seriously undermine our ability to compete for
business, negotiate acquisitions, hire new personnel and otherwise conduct
our business.
On February 11, 2002, Rotech Medical Corporation entered into a Corporate
Integrity Agreement with the DHHS. We have assumed the obligations under this
agreement (and the settlement with the federal government) in connection with
the restructuring described under "Business--Restructuring transaction and
related transactions." Under the Corporate Integrity Agreement, which was
entered into in connection with settlement of claims made against Rotech
Medical Corporation by the federal government, Rotech Medical Corporation
agreed to implement procedures designed to ensure compliance with the
requirements of Medicare, Medicaid and all other federal health care programs.
The Corporate Integrity Agreement is effective for five years. Failure by us to
comply with the Corporate Integrity Agreement could subject us to substantial
monetary penalties, exclusion from participation in federal health care
programs, as well as adverse publicity, which could seriously undermine our
ability to compete for business, negotiate acquisitions, hire new personnel and
otherwise conduct our business, and could result in a deterioration in our
financial condition and results of operations. See "Business--Corporate
integrity agreement" for a more detailed description of the terms of the
Corporate Integrity Agreement.
Since our financial statements reflect fresh-start reporting adjustments made
upon our predecessor's emergence from bankruptcy, information reflecting our
results of operations and financial condition will not be comparable to prior
periods of our predecessor.
Upon our predecessor's emergence from bankruptcy, we adopted fresh-start
reporting. Under fresh-start reporting, our reorganization value is allocated
to our assets based on their respective fair values in conformity with the
purchase method of accounting for business combinations. Any portion not
attributed to specific tangible or identified intangible assets is reported as
an intangible asset referred to as "reorganization value in excess of value of
identifiable assets." In adopting fresh-start reporting, we engaged an
independent financial advisor to assist in the determination of the
reorganization value or fair value of the entity. Not all of the valuations
required to determine the fair value of our assets have been performed and,
accordingly, the adjustments reflected in this prospectus are preliminary and
subject to further revisions and adjustments. We have arranged to obtain
valuations of significant assets and, upon completion of this process, the
reorganization value will be allocated to specific assets. It is anticipated
that there will be reductions in the carrying values of certain assets, and the
fair value of certain other assets may exceed the carrying values. Accordingly,
the final valuation could result in materially different amounts and
allocations of reorganization value from the amount
20
and allocations presented in this prospectus. Furthermore, the book value of
our fixed assets and amortization schedules has changed. Accordingly, you will
not be able to compare certain information reflecting our results of operations
and financial condition to those of our predecessor for periods prior to its
emergence from bankruptcy.
We recently uncovered a pattern of falsified bulk sales of equipment to the
Department of Veterans Affairs, as well as certain improperly recorded
revenues from non-bulk VA service contracts.
In late June 2002, we discovered that an independent contractor (who was
also a former employee) had falsified certain bulk sales to the Department of
Veterans Affairs ("VA") by fabricating documentation for nonexistent sales of
medical equipment in bulk to the VA. Upon learning of these falsified sales, we
promptly:
. brought the matter to the attention of the relevant government
authorities;
. terminated the independent contractor;
. retained a nationally recognized law firm and a government contracts
consulting firm to conduct a comprehensive internal investigation; and
. commenced working with our independent certified public accountants to
determine the appropriate accounting treatment.
The investigation confirmed the existence of a pattern of falsified bulk
sales of equipment to the VA, as well as certain improperly recorded revenues
from non-bulk VA service contracts. The total of the falsified sales was
originally recorded to our books and records as net revenue of $30.4 million.
Of this amount, $14.8 million was recorded during the six-month period from
October 1, 2001 to March 31, 2002. In addition, $8.1 million of receivables
associated with non-bulk VA service contracts have been reversed. In connection
with the investigation, we have recovered approximately $12.5 million of
medical equipment inventory, virtually all of which is in resalable condition.
Although we have concluded our investigation, it is possible that our
investigation did not uncover every instance of fraudulent activity.
As a result of the investigation, we restated our consolidated financial
statements for each of the years ended December 31, 1999, 2000 and 2001 and for
the three months ended March 31, 2002. The restatement reflects a net after-tax
charge of $14.1 million over a three-year period. The principal adjustments
comprising the restatements are summarized in the section captioned
"Business--Restatement of financial results" on page 86 of this prospectus.
The consultants who assisted us with the investigation made certain
recommendations to improve controls for our non-core businesses to supplement
our existing procedures for our core business. Although we are currently
implementing their recommendations, including stricter segregation of employee
responsibilities, enhanced government contracts administration and ongoing
internal financial audits, the implementation of these recommendations may not
be adequate to prevent all future occurrences of any similar fraudulent
activity by any other independent contractors, agents or employees.
From 1997 until its emergence from bankruptcy, our predecessor, Rotech
Medical Corporation operated as a wholly-owned subsidiary of Integrated
Health Services, Inc., which also filed for bankruptcy protection in February
2000. It is possible that our prior affiliation with IHS, the bankruptcy
proceeding or the separation from IHS will adversely affect our operations
going forward.
From September 1981 until October 1997, our predecessor, Rotech Medical
Corporation operated as an independent company. In October 1997, Rotech Medical
Corporation was acquired by and became a wholly-owned subsidiary of IHS, a
large publicly-held provider of post-acute and related specialty health care
services and products and became its wholly-owned subsidiary. On February 2,
2000, IHS and substantially all its subsidiaries, including Rotech Medical
Corporation, filed voluntary petitions under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code"). The plan of reorganization of Rotech
Medical Corporation was confirmed by the Bankruptcy Court on February 13, 2002
and became effective on March 26, 2002. We believe that filing for bankruptcy
protection adversely affected Rotech Medical Corporation's ability to obtain
21
patient referrals and to attract and retain employees. Although we are no
longer a subsidiary of IHS, Rotech Medical Corporation's prior affiliation with
IHS or the fact that Rotech Medical Corporation was involved in its own
bankruptcy proceeding could continue to adversely affect our ability to obtain
patient referrals and attract and retain employees in the future.
In addition, as a subsidiary of IHS, we relied on IHS for certain services,
including integrated cash management services and insurance coverage.
Consequently, we may incur increased costs as a stand-alone company than those
incurred as a subsidiary of IHS and reflected in our historical financial
statements. Further, IHS also provided Rotech Medical Corporation with some of
the capital it used to make acquisitions. It is possible that our separation
from IHS could result in increased costs in our operations going forward.
If we do not comply with laws and regulations governing the confidentiality
of medical information, we could be subject to criminal penalties and civil
sanctions.
In 1996, the Health Insurance Portability and Accountability Act (HIPAA) was
enacted to, among other things, protect the security and privacy of
individually identifiable health information maintained or transmitted by
health care providers, health plans and health care clearinghouses.
HIPAA requires us to comply with standards for the exchange of health
information within our company and with third parties, such as payors, business
associates, and patients. These include standards for common health care
transactions, such as claims information, plan eligibility, payment information
and the use of electronic signatures; unique identifiers for providers,
employers, health plans and individuals; security; privacy; and enforcement. To
date, the DHHS has released two standards, one governing health care
transactions and the second relating to the privacy of individually
identifiable health information pursuant to which all patient identifiable
health information must be maintained in confidence and may not be disclosed
without the consent or authorization of the patient except under certain
permitted circumstances. Rules governing the security of health information
have been proposed but not finalized. We generally have two years from the
effective date of these standards to comply. We have to comply by October 16,
2003 for the transaction standards, and by April 14, 2003 for the privacy
standards. While the government intended this legislation to reduce
administrative expenses and burdens for the health care industry, the law may
require significant and costly changes for us. If we fail to comply with these
standards, we could be subject to criminal penalties and civil sanctions.
In addition to cost containment initiatives associated with Medicare and
Medicaid, we are affected by continuing efforts by private third-party payors
to control their costs. If we lower our prices due to pricing pressures from
private third-party payors, our results of operations and financial condition
would likely deteriorate.
Private payors continually seek to control the cost of providing health care
services through direct contracts with health care providers, increased
oversight and greater enrollment of patients in managed care programs and
preferred provider organizations. These private payors are increasingly
demanding discounted fee structures and the assumption by the health care
provider of all or a portion of the financial risk. Reimbursement payments
under private payor programs may not remain at current levels and may not be
sufficient to cover the costs allocable to patients eligible for reimbursement
pursuant to such programs, and we may suffer deterioration in pricing
flexibility, changes in payor mix and growth in operating expenses in excess of
increases in payments by private third-party payors. We may be compelled to
lower our prices due to increased pricing pressures, which could cause our
results of operations and financial condition to deteriorate.
If we lose relationships with managed care organizations and other
third-party payors, we could lose access to patients and our revenue would
likely decline.
Managed care organizations and other third-party payors have continued to
consolidate in order to enhance their ability to influence the delivery of
health care services and to build volume that justifies discounted prices.
Consequently, the health care needs of a large percentage of the United States
population are now provided by a small number of managed care organizations and
third-party payors. These organizations, including the Veterans
22
Administration, generally enter into service agreements with a limited number
of providers for needed services. To the extent such organizations terminate
agreements with us as a preferred provider and/or engage our competitors as a
preferred or exclusive provider, our business could be materially adversely
affected. If we lose relationships with managed care organizations and other
third-party payors, including the Veterans Administration, we could lose access
to patients and our revenue would likely decline.
If we fail to cultivate new or maintain established relationships with the
physician referral sources, our revenues may decline.
Our success, in part, is dependent upon referrals and our ability to
maintain good relations with physician referral sources. Physicians referring
patients to us are not our employees, and are free to refer their patients to
our competitors. If we are unable to successfully cultivate new referral
sources and maintain strong relationships with our current referral sources,
our revenues may decline.
We experience competition from numerous other home medical equipment
providers, and this competition could result in a deterioration in our
revenues and our business.
The home medical equipment market is highly competitive and divided among a
large number of providers, some of which are national providers but most of
which are either regional or local providers.
We believe that the primary competitive factors are availability of
personnel and quality considerations such as responsiveness, the technical
ability of the professional staff and the ability to provide comprehensive
services. The home medical equipment market is extremely fragmented with
approximately 2,000 providers. Some of our competitors may now or in the future
have greater financial or marketing resources than we do. Our largest national
home medical equipment provider competitors are Apria Healthcare Group, Inc.,
Lincare Holdings, Inc. and American Home Patient, Inc. The rest of the market
consists of several medium-size competitors, as well as hundreds of smaller
companies with under $5 million in revenues. There are relatively few barriers
to entry in local home health care markets. The competitive nature of the home
medical equipment environment could result in a deterioration in our revenues
and our business.
Our business and growth strategies will require additional capital, which we
may not be able to raise on terms satisfactory to us, if at all.
Our business requires us to make significant capital expenditures relating
to the purchase and maintenance of the medical equipment used in our business.
In the year ended December 31, 2001, Rotech Medical Corporation's capital
expenditures were $79.8 million, representing 13.0% of its revenues. In
addition, we plan to pursue our growth strategy in part through acquisitions or
start-ups, as competitive and pricing pressures encourage consolidation and
economies of scale. We may need to incur indebtedness and/or sell equity
securities, from time to time, to fund such capital expenditures. Sufficient
financing may not be available to us on terms satisfactory to us, if at all.
Our growth strategy includes acquisitions. If we fail to implement our
acquisition growth strategy as intended, or incur unknown liabilities for the
past practices of acquired companies, our results of operations could
deteriorate.
An element of our growth strategy is expansion through the acquisition of
smaller health care companies primarily in non-urban markets. Our competitors
may acquire or seek to acquire many of the facilities that would also be
suitable acquisition candidates for us. This competition could limit our
ability to grow by acquisition or increase the cost of our acquisitions. If we
are not able to acquire any smaller health care companies that meet our target
criteria on satisfactory terms, or at all, we may not meet the goals of our
growth strategy.
If we are able to acquire additional companies, there can be no assurance
that we will be able to integrate such companies successfully or manage our
expanded operations effectively and profitably. The process of integrating
newly acquired businesses may be costly and disruptive. Our operational,
financial and management
23
systems may be incompatible with or inadequate to cost-effectively integrate
and manage the acquired systems. As a result, billing practices could be
interrupted and cash collections on the newly acquired business could be
delayed pending conversion of patient files onto our billing systems and
receipt of provider numbers from government payors. The integration may place
significant demands on our management, diverting their attention from our
existing operations. If we are not successful in integrating acquired
businesses, our results of operations would likely decline.
We may acquire businesses with unknown or contingent liabilities, including
liabilities for failure to comply with health care laws and regulations. We
have policies to conform the practices of acquired facilities to our standards
and applicable law and generally intend to seek indemnification from
prospective sellers covering these matters. We may, however, incur material
liabilities for past activities of acquired businesses.
If we do not maintain effective and efficient information systems, our
operations may be disrupted.
Our operations are dependent on the continued and uninterrupted performance
of our information systems. Failure to maintain reliable information systems or
disruptions in our information systems could cause disruptions in our business
operations, including billing and collections, loss of existing patients and
difficulty in attracting new patients, patient and payor disputes, regulatory
problems, increases in administrative expenses or other adverse consequences,
any or all of which could disrupt our operations.
We are highly dependent on our key personnel
Our performance is substantially dependent on the performance and continued
efforts of our senior management team, especially our new President and Chief
Executive Officer, Philip L. Carter. We do not carry key person life insurance
on any of our personnel. The loss of the services of any of our executive
officers or other key employees could result in a decline in our business,
results of operations and financial condition.
Our business operations are labor intensive. If we are not able to hire
enough additional management and other personnel, or if costs of compensation
or employee benefits increase substantially, our ability to deliver equipment
and services effectively could suffer and our profitability would likely
decline.
The success of our business depends upon our ability to attract and retain
highly motivated, well-qualified management and other personnel. Our highest
cost is in the payment of salaries to our approximately 5,700 full time
employees. We face significant competition in the recruitment of qualified
employees, which has caused increased salary and wage rates. If we are unable
to recruit or retain a sufficient number of qualified employees, or if the
costs of compensation or employee benefits increase substantially, our ability
to deliver services effectively could suffer and our profitability would likely
decline.
If holders of a significant number of shares of our common stock were to act
as a group, such holders may be in a position to control certain aspects of
our business operations.
Pursuant to Rotech Medical Corporation's plan of reorganization,
substantially all shares of our common stock were distributed to Rotech Medical
Corporation for further distribution to Rotech Medical Corporation's creditors.
If holders of a significant number of these shares were to act as a group, such
holders may be in a position to control the outcome of actions requiring
shareholder approval, including the election of directors. Immediately after
the distribution of our stock to our predecessor's creditors, the five largest
holders of our common stock held in the aggregate approximately 42% of our
outstanding common stock.
We may write-off intangible assets, such as goodwill.
Intangible assets represent the excess of cost over fair value of assets
acquired and liabilities assumed of purchased operations. As a result of the
implementation of "fresh-start" reporting, the assets and liabilities of Rotech
Medical Corporation have been revalued, and its intangible asset value was
approximately $677.5 million as of September 30, 2002. Any future acquisitions
by us will likely result in the recognition of additional intangible assets.
24
On an ongoing basis, we evaluate, based upon projected undiscounted cash
flows, whether facts and circumstances indicate any impairment of value of
intangible assets. As circumstances after an acquisition can change, the value
of intangible assets may not be realized by us. If we determine that a
significant impairment has occurred, we would be required to write-off the
impaired portion of the unamortized intangible assets, which could have a
material adverse effect on our results of operations in the period in which the
write-off occurs.
We may be subject to claims arising from investigations and legal
proceedings, which could have a significant negative impact on our results of
operations and profitability.
The nature of our business subjects us to litigation in the ordinary course
of our business. In addition, we are from time to time involved in other legal
proceedings. Although the claims made against our predecessor prior to the date
it filed for bankruptcy protection have been satisfied in accordance with the
terms of its plan of reorganization or in connection with settlement agreements
that were approved by the Bankruptcy Court prior to its emergence from
bankruptcy (including all federal claims), any pending or future proceeding may
have a significant negative impact on our results of operations and
profitability.
States in other bankruptcy cases have challenged whether their claims could
be discharged in a federal bankruptcy proceeding if they never made an
appearance in the case. This issue has not been finally settled by the United
States Supreme Court. Therefore, our predecessor's emergence from bankruptcy
may not result in a discharge of all state claims against us with respect to
periods prior to the date it filed for bankruptcy protection. Any such claim
not discharged could result in a decline in our financial condition and
profitability.
If the coverage limits on our insurance policies are inadequate to cover our
liabilities or our insurance costs continue to increase, our financial
condition and results of operations would likely decline.
Participants in the health care industry, including us, are subject to
substantial claims and litigation in the ordinary course, often involving large
claims and significant defense costs. As a result of the liability risks
inherent in our lines of business we maintain liability insurance intended to
cover such claims.
From 1997 until its emergence from bankruptcy, our predecessor was covered
by insurance policies held by IHS. In connection with the plan of
reorganization and the separation from IHS' operations, we have obtained our
own insurance policies, including general liability coverage. The policies
contain various levels of deductibles and self-insured retentions and provide
us with protection against claims alleging bodily injury or property damage
arising out of our operations. They have total coverage limits of approximately
$50 million per occurrence and $50 million in the aggregate annually. The
policies are subject to annual renewal. The coverage limits of our insurance
policies may not be adequate, and we may not be able to obtain liability
insurance in the future on acceptable terms or at all. In addition, we have
been advised by our insurance carrier that our insurance premiums will be
subject to increases in the future, which increases may be material. If the
coverage limits are inadequate to cover our liabilities or our insurance costs
continue to increase, our financial condition and results of operations would
likely decline.
Rotech Medical Corporation's auditors' report contains an explanatory
paragraph stating that Rotech Medical Corporation's filing for bankruptcy
protection raised substantial doubt about its ability to continue as a going
concern.
The report of Rotech Medical Corporation's independent auditors on its
consolidated financial statements appearing in this prospectus contains an
explanatory paragraph relating to Rotech Medical Corporation's ability to
continue as a going concern. In connection with the plan of reorganization, we
were the successor to the business and operations of Rotech Medical
Corporation. Although we believe that the basis for the explanatory paragraph
relating to Rotech Medical Corporation's ability to continue as a going concern
no longer exists, we cannot assure you that the explanatory paragraph will be
removed from such independent auditor's report.
25
Risks relating to the notes
We have substantial outstanding indebtedness, which could adversely affect
our financial condition and prevent us from fulfilling our obligations under
the notes.
As of September 30, 2002, our total consolidated long-term debt (including
current maturities) accounted for approximately 50% of our total capitalization.
The degree to which we are leveraged could have important consequences to
you, because:
. it could affect our ability to satisfy our obligations under the new
notes;
. a substantial portion of our cash flow from operations will be required
to be dedicated to interest and principal payments and may not be
available for operations, working capital, capital expenditures,
expansion, acquisitions or general corporate or other purposes;
. our ability to obtain additional financing in the future may be impaired;
. we may be more highly leveraged than some of our competitors, which may
place us at a competitive disadvantage;
. our flexibility in planning for, or reacting to, changes in our business
and industry may be limited;
. it may make us more vulnerable in the event of a downturn in our
business, our industry or the economy in general; and
. we are more vulnerable to interest rate fluctuations because much of our
debt is subject to variable interest rates.
Our ability to make payments on and to refinance our debt, including the
notes, will depend on our ability to generate cash in the future. This, to a
certain extent, is subject to general economic, business, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
Our business may not generate sufficient cash flow from operations and
future borrowings may not be available to us under credit facilities in an
amount sufficient to enable us to pay our debt, including the notes, or to fund
our other liquidity needs. We may need to refinance all or a portion of our
debt, including the notes, on or before maturity. We may not be able to
refinance any of our debt, including any credit facilities and the notes, on
commercially reasonable terms or at all.
Despite current indebtedness levels, we and our subsidiaries may still be
able to incur substantially more debt which could increase the risks
associated with our leverage.
We and our subsidiaries may be able to incur substantial additional debt in
the future under the indenture relating to the notes. Our senior secured
revolving credit facility permits, subject to availability, additional
borrowings of up to $75 million (of which $70 million is currently available).
All of those borrowings would be senior to the notes. The indenture for the
notes permits us to incur additional indebtedness so long as the ratio of our
Consolidated Cash Flow to our Consolidated Interest Expense (each as defined in
the Indenture) for our most recently ended four full fiscal quarters would have
been at least 2.5 to 1.0, determined on a pro forma basis as if the additional
indebtedness had been incurred at the beginning of the four quarter period. Our
revolving credit facilities contain additional covenants that further restrict
our ability to incur additional indebtedness. As of September 30, 2002, we
would have been permitted to borrow up to $ 2.9 million of additional
indebtedness in compliance with the restrictions contained in the indenture and
our revolving credit facilities. If new debt is added to our and our
subsidiaries' current debt levels, the leverage-related risks that we and they
now face could intensify. We are currently required to pay approximately $40
million per annum in interest and principal payments under our credit
facilities and the notes.
26
The indenture for the notes imposes significant operating and financial
restrictions, which may prevent us from capitalizing on business
opportunities and taking some actions.
The indenture for the notes imposes significant operating and financial
restrictions on us, which may adversely affect our ability to finance future
operations or capital needs or engage in other business activities. These
restrictions will limit our ability, among other things, to:
. incur additional indebtedness and issue certain capital stock;
. pay dividends on, redeem or repurchase our capital stock;
. make investments;
. sell assets;
. engage in transactions with affiliates;
. create certain liens; or
. consolidate, merge or transfer all or substantially all of our assets and
the assets of our subsidiaries on a consolidated basis.
These covenants may adversely affect our ability to finance our future
operations or capital needs or to pursue available business opportunities.
The notes and the subsidiary guarantees are subordinated to our senior
indebtedness.
The notes are subordinated in right of payment to all of our current and
future senior indebtedness. By reason of the subordination of the notes, in the
event of insolvency, bankruptcy, liquidation, reorganization, dissolution or
winding up of our business, our assets will be available to pay the amounts due
on the notes only after all of our senior indebtedness has been paid in full.
In addition, upon default in payment with respect to certain of our senior
indebtedness or an event of default with respect to this indebtedness
permitting the acceleration thereof, we may be blocked from making payments on
the notes pursuant to the indenture. In addition, we conduct most of our
operations through our subsidiaries. The notes will be structurally
subordinated to indebtedness of our subsidiaries. Certain of our existing and
future domestic subsidiaries will guarantee, on a joint and several basis, our
obligations under the notes on a senior subordinated basis. However, the
guarantees will be subordinated to the senior indebtedness of these
subsidiaries. In the event of the insolvency, bankruptcy, liquidation,
reorganization, dissolution or winding up of the business of any of these
subsidiaries, senior creditors of these subsidiaries generally will have the
right to be paid in full before any distribution is made in respect of the
guarantees. As of September 30, 2002, we and our guarantor subsidiaries had
approximately $194 million of senior indebtedness on a consolidated basis. See
"Description of notes."
Our ability to repurchase the notes upon a change of control or in connection
with an asset sale repurchase may be limited.
In the event of certain changes of control involving us, you will have the
right, at your option, to require us to repurchase all or a portion of the
notes you hold at a purchase price equal to 101% of the aggregate principal
amount of your notes plus accrued interest thereon to the repurchase date. In
addition, under certain circumstances we may be required by the terms of the
indenture to make an offer to repurchase notes with proceeds from asset sales.
Our ability to repurchase the notes upon a change of control or in connection
with an asset sale repurchase may be limited by the terms of our senior
indebtedness and the subordination provisions of the indenture relating to the
notes. Further, our ability to repurchase the notes upon a change of control or
in connection with an asset sale repurchase will be dependent on the
availability of sufficient funds and our ability to comply with applicable
securities laws. Accordingly, there can be no assurance that we will be in a
position to repurchase the notes upon a change of control or in connection with
an asset sale repurchase. The term "change of control" under the indenture is
limited to certain specified transactions and may not include other events that
27
might adversely affect our financial condition or result in a downgrade of the
credit rating (if any) of the notes, nor would the requirement that we offer to
repurchase the notes upon a change of control necessarily afford holders of the
notes protection in the event of a highly leveraged reorganization.
Your ability to enforce the guarantees of the notes may be limited.
Although the notes are our obligations, they will be unconditionally
guaranteed on an unsecured senior subordinated basis by virtually all of our
domestic subsidiaries. The performance by each subsidiary guarantor of its
obligations with respect to its guarantee may be subject to review under
relevant federal and state fraudulent conveyance and similar statutes in a
bankruptcy or reorganization case or lawsuit by or on behalf of unpaid
creditors of such subsidiary guarantor. Under these statutes, if a court were
to find under relevant federal or state fraudulent conveyance statutes that a
subsidiary guarantor did not receive fair consideration or reasonably
equivalent value for incurring its guarantee of the notes, and that, at the
time of such incurrence, the subsidiary guarantor: (i) was insolvent; (ii) was
rendered insolvent by reason of such incurrence or grant; (iii) was engaged in
a business or transaction for which the assets remaining with such subsidiary
guarantor constituted unreasonably small capital; or (iv) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as
they matured, then the court, subject to applicable statutes of limitation,
could void the subsidiary guarantor's obligations under its guarantee, recover
payments made under the guarantee, subordinate the guarantee to other
indebtedness of the subsidiary guarantor or take other action detrimental to
the holders of the notes.
The measure of insolvency for these purposes will depend upon the governing
law of the relevant jurisdiction. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than the fair value of all of that company's property or if the present
fair salable value of that company's assets is less than the amount that will
be required to pay its probable liability on its existing debts as they become
absolute and matured or if a company is not able to pay its debts as they
become due. Moreover, regardless of solvency, a court could avoid an incurrence
of indebtedness, including the guarantees, if it determined that such
transaction was made with the intent to hinder, delay or defraud creditors. In
addition, a court could subordinate the indebtedness, including the guarantees,
to the claims of all existing and future creditors on similar grounds. The
guarantees could also be subject to the claim that, since the guarantees were
incurred for our benefit (and only indirectly for the benefit of the subsidiary
guarantors), the obligations of the subsidiary guarantors under the guarantees
were incurred for less than reasonably equivalent value or fair consideration.
It is not possible to predict with certainty what standard a court would
apply in order to determine whether a subsidiary guarantor was "insolvent" upon
the sale of the notes or that, regardless of the method of valuation, a court
would not determine that the subsidiary guarantor was insolvent upon
consummation of the sale of the notes.
You cannot be sure that an active trading market will develop for the new
notes.
We have been informed by UBS Warburg LLC, Goldman, Sachs & Co., Deutsche
Bank Alex. Brown Inc. and Scotia Capital (USA) Inc., the initial purchasers of
the old notes, that they intend to make a market in the new notes if the
exchange offer described in this prospectus is completed. However, the initial
purchasers may cease their market-making at any time. In addition, the
liquidity of the trading market in the new notes, and the market price quoted
for the new notes, may be adversely affected by changes in the overall market
for such type of security and by changes in our financial performance or
prospects or in the prospects for companies in our industry generally. In
addition, such market-making activities will be subject to limits imposed by
the Securities Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and may be limited for the new notes during the pendency of
any shelf registration statement. As a result, we cannot assure you that an
active trading market will develop for the new notes. Historically, the market
for non-investment grade debt has been subject to disruptions that have caused
volatility in prices. It is possible that the market for the new notes will be
subject to disruptions. Any such disruptions may have a negative effect on you
as a holder of the new notes, regardless of our prospects and financial
performance.
28
FORWARD-LOOKING STATEMENTS
This prospectus contains certain statements that constitute forward-looking
statements. These forward-looking statements include all statements regarding
the intent, belief or current expectations regarding the matters discussed in
this prospectus (including statements as to "beliefs," "expectations,"
"anticipations," "intentions" or similar words) and all statements which are
not statements of historical fact.
These forward-looking statements involve known and unknown risks,
uncertainties, contingencies and other factors that could cause results,
performance or achievements to differ materially from those stated in this
prospectus. The following are some but not all of such risks, uncertainties,
contingencies, assumptions and other factors, many of which are beyond our
control, that could cause results, performance or achievements to differ
materially from those anticipated: general economic, financial and business
conditions; issues relating to reimbursement by government and third party
payors for our products and services; the costs associated with government
regulation of the health care industry; the effects of competition and industry
consolidation; the costs and effects of legal proceedings; and other risks and
uncertainties described under "Risk factors." Should one or more of these risks
or uncertainties materialize or should underlying assumptions prove incorrect,
our actual results, performance or achievements could differ materially from
those expressed in, or implied by, such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date thereof. When you consider these
forward-looking statements, you should keep in mind these risk factors and
other cautionary statements in this prospectus, including in "Management's
discussion and analysis of financial condition and results of operations" and
"Business." We do not undertake any obligation to publicly release any
revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
USE OF PROCEEDS
The exchange offer is intended to satisfy our obligations under the
registration rights agreement that we entered into in connection with the
private offering of the old notes. We will not receive any cash proceeds from
the issuance of the new notes. In consideration for issuing the new notes as
contemplated by this prospectus, we will receive in exchange, old notes in like
principal amount. The form and terms of the new notes are identical in all
material respects to the form and terms of the old notes, except as otherwise
described herein under "Description of notes." The old notes surrendered in
exchange for the new notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the new notes will not result in any change in our
capitalization.
We received net proceeds from the sale of the old notes of approximately
$290 million, after deducting the initial purchasers' discount and our
estimated expenses. We distributed the net proceeds from the sale of the old
notes to our predecessor as partial consideration in exchange for substantially
all of the assets used in connection with its business and operations as part
of the restructuring described under "Business--Restructuring transaction and
related transactions." We did not retain any of the proceeds from the sale of
the old notes for use in our business.
29
CAPITALIZATION
The following table sets forth information as of September 30, 2002 with
respect to our consolidated capitalization. You should read the information
below in conjunction with "Management's discussion and analysis of financial
condition and results of operations" and the consolidated financial statements
and unaudited condensed consolidated financial statements and related notes
included in this prospectus.
[Download Table]
September 30,
2002(1)
(dollars in thousands) (unaudited)
-------------------------------------------------------------------------
Cash and cash equivalents.................................. $ 18,640
==========
Long-term obligations, including current portion:
Senior Secured Term Loan................................ 194,000
9 1/2% Senior Subordinated Notes due 2012............... 300,000
----------
Total long-term obligations......................... 494,000
----------
Preferred Stock, $0.0001 par value, 1,000,000 shares
authorized, 250,000 issued and outstanding as Series A
Convertible Redeemable Preferred Stock(2)................ 5,233
Stockholders' equity:
Common stock, $0.0001 par value, 50,000,000 shares
authorized, 25,000,000 shares issued and outstanding.. 2
Additional paid-in capital.............................. 494,998
Retained earnings....................................... 11,575
----------
Total stockholders' equity.......................... 506,575
----------
Total capitalization................................ $1,005,808
==========
--------
(1) We adopted fresh-start reporting upon our predecessor's emergence from
bankruptcy, effective as of March 31, 2002. Under fresh-start reporting,
our reorganization value is allocated to our assets based on their
respective fair values in conformity with the purchase method of accounting
for business combinations; any portion not attributed to specific tangible
or identified intangible assets are reported as an intangible asset
referred to as "reorganization value in excess of value of identifiable
assets." In adopting fresh-start reporting, we engaged an independent
financial advisor to assist in the determination of the reorganization
value or fair value of the entity.
Not all of the valuations required to determine the fair value of our
assets have been performed and, accordingly, the adjustments reflected in
this prospectus are preliminary and subject to further revisions and
adjustments. We have arranged to obtain valuations of significant assets
and, upon completion of this process, the reorganization value will be
allocated to specific assets. It is anticipated that there will be
reductions in the carrying values of certain assets, and the fair value of
certain other assets may exceed the carrying values. Accordingly, the final
valuation could result in materially different amounts and allocations of
reorganization value from the amount and allocations presented in this
prospectus. See "Risk factors--Since our financial statements reflect fresh
start reporting adjustments made upon our predecessor's emergence from
bankruptcy, information reflecting our results of operations and financial
condition will not be comparable to prior periods of our predecessor." See
also note 18 to the audited financial statements for the years ended
December 31, 1999, 2000 and 2001 and note 6 to the unaudited condensed
consolidated financial statements for the six months ended September 30,
2001 and the three months ended March 31, 2001 and March 31, 2002 and the
six months ended September 30, 2002 included elsewhere in this prospectus.
(2) As a result of the consummation of the plan of reorganization, we currently
have outstanding 250,000 shares of our Series A Convertible Redeemable
Preferred Stock, all of which is held by our employee profit sharing plan.
Each share of Series A Convertible Redeemable Preferred Stock is
non-voting. Each share of Series A Convertible Redeemable Preferred Stock
has a stated value of $20 and entitles the holder to an annual cumulative
dividend equal to 9% of its stated value, payable semi-annually. The Series
A Convertible Redeemable Preferred Stock, if not previously converted into
common stock, must be redeemed by us on the 92nd day following the tenth
anniversary of the first issuance of the Series A Convertible Redeemable
Preferred Stock at a redemption price of $20 per share plus any accrued but
unpaid dividends. See "Description of capital stock--Series A convertible
redeemable preferred stock" for a detailed description of the Series A
Convertible Redeemable Preferred Stock.
30
RATIO OF EARNINGS TO FIXED CHARGES
The following table sets forth certain information regarding our ratio of
earnings to fixed charges. The pro forma ratio of earnings to fixed charges
gives effect to the consummation of Rotech Medical Corporation's plan of
reorganization, including the $200 million senior secured term loan, the sale
of the $300 million 9 1/2% Senior Subordinated Notes due 2012 and application
of the net proceeds therefrom, the implementation of "fresh-start" reporting
and the consummation of the restructuring as if such transactions had occurred
on the first day of each of the fiscal periods set forth below. For more
information, see the section captioned "Unaudited pro forma consolidated
statements of operations data" beginning on page 38 of this prospectus.
[Enlarge/Download Table]
Three Months
Ended
Five Months Year Ended December 31, March 31,
Year Ended ----------------------------------------------- ----------------------
Ended December 31, Pro Forma
July 31, 1997 (1) 2001 2001 2002
(dollars in thousands) 1997 (unaudited) 1998 1999 2000 2001 (unaudited) (unaudited) (unaudited)
--------------------------- -------- ------------ -------- ------- ------- ------- ----------- ----------- -----------
Ratio of earnings to fixed
charges:
Pretax income (loss) from
continuing operations..... $50,573 $(16,199) $112,754 $71,151 $ 3,314 $40,030 $11,799 $13,361 $ (747)
Add fixed charges......... 18,027 11,207 6,589 8,363 8,251 7,832 48,372 1,965 1,900
------- -------- -------- ------- ------- ------- ------- ------- ------
Total Earnings (Loss)
(A)....................... $68,600 $ (4,992) $119,343 $79,514 $11,565 $47,862 $60,171 $15,326 $1,153
======= ======== ======== ======= ======= ======= ======= ======= ======
Interest Expense........... $13,843 $ 9,015 $ 221 $ 490 $ 108 $ 74 $40,614 $ 25 $ 14
Estimate of interest within
rental expense (33% of
total).................... 4,184 2,192 6,368 7,873 8,143 7,758 7,758 1,940 1,886
------- -------- -------- ------- ------- ------- ------- ------- ------
Total Fixed Charges (B).... $18,027 $ 11,207 $ 6,589 $ 8,363 $ 8,251 $ 7,832 $48,372 $ 1,965 $1,900
======= ======== ======== ======= ======= ======= ======= ======= ======
Ratio (A/B)................ 3.81x (0.45)x(2) 18.11x 9.51x 1.40x 6.11x 1.24x 7.80x 0.61x
======= ======== ======== ======= ======= ======= ======= ======= ======
[Download Table]
Six Months Six Months
Ended Ended
September 30, September 30,
2001 2002
(dollars in thousands) (unaudited) (unaudited)
--------------------------- ------------- -------------
Ratio of earnings to fixed
charges:
Pretax income (loss) from
continuing operations..... $21,352 $19,679
Add fixed charges......... 3,938 27,334
------- -------
Total Earnings (Loss)
(A)....................... $25,290 $47,013
======= =======
Interest Expense........... $ 40 $22,862
Estimate of interest within
rental expense (33% of
total).................... 3,898 4,472
------- -------
Total Fixed Charges (B).... $ 3,938 $27,334
======= =======
Ratio (A/B)................ 6.42x 1.72x
======= =======
[Download Table]
Nine Months Ended
September 30,
----------------------
Pro Forma Pro Forma
2001 2002
(dollars in thousands) (unaudited) (unaudited)
--------------------------------------------------------- ----------- -----------
Ratio of earnings to fixed charges:
Pretax income (loss) from continuing operations.......... $13,540 $10,432
Add fixed charges....................................... 36,308 39,369
------- -------
Total Earnings (Loss) (A)................................ $49,848 $49,801
======= =======
Interest Expense......................................... $30,470 $33,011
Estimate of interest within rental expense (33% of total) 5,838 6,358
------- -------
Total Fixed Charges (B).................................. $36,308 $39,369
======= =======
Ratio (A/B).............................................. 1.37x 1.26x
======= =======
--------
(1) During the periods presented, Rotech Medical Corporation made numerous
acquisitions of businesses which were accounted for by the purchase method
and which affect the comparability of the financial data herein. Also, in
October 1997, Rotech Medical Corporation was acquired by IHS and changed
its fiscal year end from July 31 to December 31. In addition, changes in a
variety of accounting estimates were made in order to conform with the
accounting policies of IHS. Provided below is a table of the ratio of
earnings to fixed charges of Rotech Medical Corporation for the two
separate periods (pre- and post-acquisition by IHS) within the five month
period ended December 31, 1997:
31
[Enlarge/Download Table]
August 1, 1997 October 22, 1997
to to
October 21, 1997 December 31, 1997
---------------- -----------------
Ratio of Earnings to fixed charges (dollars in thousands)
Pretax income (loss) from continuing operations.............. $(35,764) $19,565
Add: Fixed Charges......................................... 5,389 5,818
-------- -------
Total Earnings (Loss) (A).................................... $(30,375) $25,383
======== =======
Interest Expense............................................. $ 4,246 $ 4,769
Estimate of the interest within rental expense (33% of total) 1,143 1,049
======== =======
Total Fixed Charges (B)...................................... $ 5,389 $ 5,818
======== =======
Ratio (A/B).................................................. (5.64)x 4.36x
======== =======
Dollar amount of deficiency.................................. $ 35,764 --
(2) The dollar amount of deficiency for the five months ended December 31, 1997
was $16,199.
32
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
You should read the following selected consolidated financial data along
with the section captioned "Management's discussion and analysis of financial
condition and results of operations" and the audited consolidated financial
statements and unaudited condensed consolidated financial statements and the
related notes included in this prospectus. The consolidated statement of
operations data and consolidated balance sheet data for each of the years in
the three-year period ended December 31, 2001 have been derived from the
audited financial statements of our predecessor included in this prospectus.
The statement of operations data and balance sheet data for the years ended
December 31, 1998 and July 31, 1997 have been derived from the audited
financial statements of our predecessor not included in this prospectus. The
statement of operations data for the five-month period ended December 31, 1997
have been derived from the unaudited consolidated financial statements of our
predecessor not included in this prospectus. The unaudited condensed
consolidated statements of operations data for the three months ended March 31,
2001 and March 31, 2002 and the six months ended September 30, 2001 for our
predecessor, and for the six months ended September 30, 2002 for us, as the
successor company, and condensed consolidated balance sheet data as at
September 30, 2002 for us, as the successor company, have been derived from our
unaudited condensed consolidated financial statements included in this
prospectus. The unaudited consolidated financial statements have been prepared
on a basis consistent with the audited consolidated financial statements
appearing in this prospectus and, in the opinion of management, include all
adjustments necessary for a fair presentation of such data. Data have been
presented for the three months ended March 31, 2002 and six months ended
September 30, 2002, rather than for the nine months ended on such date, because
we have had only six months of operating results since our predecessor, Rotech
Medical Corporation, emerged from bankruptcy on March 26, 2002. For all periods
prior to March 31, 2002, the results of operations and other financial data set
forth below refer to the business and operations of our predecessor which, upon
emerging from bankruptcy, transferred substantially all of its assets to us in
a restructuring transaction accounted for as of March 31, 2002. For all periods
subsequent to March 31, 2002, the results of operations and other financial
data refer to our business and operations, as the successor company to Rotech
Medical Corporation. See "Business--Restructuring transaction and related
transactions."
[Enlarge/Download Table]
Predecessor Company
---------------------------------------------------------------------------------------------
Year Five Months Three Months Six Months
Ended Ended Year Ended December 31, Ended Ended
July 31, December 31, ----------------------------------------- March 31, September 30,
1997 1997(1) 1998 1999 2000 2001 2001 2001
(dollars in thousands) --------- (unaudited) --------- -------- -------- -------- (unaudited) (unaudited)
Statement of Operations Data:
Net revenues.................... $ 422,692 $ 199,600 $ 545,416 $586,809 $568,704(3) $614,487 $148,000 $310,475
Costs and expenses
Cost of net revenues:
Product and supply costs..... 105,564 49,782 116,353 126,092 116,063 97,167 24,623 47,518
Patient service equipment
depreciation................ 21,401 9,969 19,904 27,939 36,723 44,679 10,292 22,006
--------- --------- --------- -------- -------- -------- -------- --------
Total cost of net
revenues................... 126,965 59,751 136,257 154,031 152,786 141,846 34,915 69,524
Provision for doubtful
accounts...................... 19,822 27,445 22,182 26,791 27,352(3) 20,917 4,620 12,598
Selling, general and
administrative................ 189,155 109,879 250,064 292,601 315,106 329,516 79,678 164,931
Depreciation and
amortization(4)............... 22,616 9,870 24,296 27,169 50,614 60,736 14,699 30,174
Interest expense (income)...... 13,561 8,854 (137) 43 (46) (322) (16) (235)
Provision for settlement of
government claims(5).......... -- -- -- 15,000 2,176 2,516 -- 2,010
Provision for inventory losses. -- -- -- 23 211 2,141 434 605
--------- --------- --------- -------- -------- -------- -------- --------
Total costs and expenses..... 372,119 215,799 432,662 515,658 548,199 557,350 134,330 279,607
--------- --------- --------- -------- -------- -------- -------- --------
Earnings (loss) before
reorganization items, income
taxes and extraordinary
items......................... 50,573 (16,199) 112,754 71,151 20,505 57,137 13,670 30,868
Reorganization items(6)......... -- -- -- -- 17,191 17,107 309 9,516
--------- --------- --------- -------- -------- -------- -------- --------
Earnings (loss) before income
taxes and extraordinary
items......................... 50,573 (16,199) 112,754 71,151 3,314 40,030 13,361 21,352
Federal and state income taxes
(benefit)...................... 19,766 -- 47,601 33,860 12,081 30,324 10,121 16,174
--------- --------- --------- -------- -------- -------- -------- --------
Earnings (loss) before
extraordinary items........... 30,807 (16,199) 65,153 37,291 (8,767) 9,706 3,240 5,178
Extraordinary gain on debt
discharge...................... -- -- -- -- -- -- -- --
--------- --------- --------- -------- -------- -------- -------- --------
Net earnings (loss)(4)......... $ 30,807 $ (16,199) $ 65,153 $ 37,291 $ (8,767) $ 9,706 $ 3,240 $ 5,178
========= ========= ========= ======== ======== ======== ======== ========
Selected Historical Financial Data:
EBITDA(7)....................... $ 108,151 $ 12,494 $ 156,817 $141,325 $110,183 $166,887 $ 39,079 $ 85,428
Capital expenditures............ 56,496 26,790 44,898 60,976 71,557 79,765 18,448 44,182
Cash flows provided by operating
activities..................... 69,820 36,956 115,760 123,722 161,637 116,127 12,452 66,963
Cash flows used in investing
activities..................... (192,375) (126,211) (162,528) (69,974) (71,818) (84,989) (15,569) 51,854
Cash flows provided by (used in)
financing activities........... 128,936 81,093 79,054 (54,062) (74,982) (39,121) (2,479) (16,677)
[Download Table]
Successor
Company
-------------
Three Months Six Months
Ended Ended
March 31, September 30,
2002 2002(2)
(dollars in thousands) (unaudited) (unaudited)
Statement of Operations Data:
Net revenues.................... $154,750 $308,133
Costs and expenses
Cost of net revenues:
Product and supply costs..... 22,513 45,557
Patient service equipment
depreciation................ 12,147 25,736
-------- --------
Total cost of net
revenues................... 34,660 71,293
Provision for doubtful
accounts...................... 3,661 8,407
Selling, general and
administrative................ 84,996 179,705
Depreciation and
amortization(4)............... 2,839 5,087
Interest expense (income)...... (17) 22,468
Provision for settlement of
government claims(5).......... -- --
Provision for inventory losses. 264 --
-------- --------
Total costs and expenses..... 126,403 286,960
-------- --------
Earnings (loss) before
reorganization items, income
taxes and extraordinary
items......................... 28,347 21,173
Reorganization items(6)......... 29,094 1,494
-------- --------
Earnings (loss) before income
taxes and extraordinary
items......................... (747) 19,679
Federal and state income taxes
(benefit)...................... (203) 7,871
-------- --------
Earnings (loss) before
extraordinary items........... (544) 11,808
Extraordinary gain on debt
discharge...................... 20,441 --
-------- --------
Net earnings (loss)(4)......... $ 19,897 $ 11,808
======== ========
Selected Historical Financial Data:
EBITDA(7)....................... $ 43,580 $ 74,464
Capital expenditures............ 15,299 30,965
Cash flows provided by operating
activities..................... 33,338 58,678
Cash flows used in investing
activities..................... (5,268) (34,231)
Cash flows provided by (used in)
financing activities........... (22,505) (6,000)
33
[Enlarge/Download Table]
December 31, September 30,
July 31, ------------------------------------------------------ 2002(2)
(dollars in thousands) 1997 1997(1) 1998 1999 2000 2001 (unaudited)
---------------------------------------------------------------------------------------------------------------
Balance Sheet Data:
Current assets.................. $152,140 $ 138,169 $ 190,844 $ 182,780 $ 161,685 $ 174,630 $ 147,340
Working capital (deficit)....... (59,821) 94,012 153,222 139,660 136,134 135,116 101,360
Total assets.................... 560,732 1,004,288 1,275,155 1,283,650 1,238,643 1,228,696 1,070,853
Total debt, including current
portion........................ 290,991 8,325 5,462 8,256 -- -- 494,000
Convertible redeemable preferred
stock.......................... 4,076 -- -- -- -- -- 5,233
Shareholders' equity............ 213,960 526,103 649,866 687,157 678,390 688,096 506,575
--------
(1) During the periods presented, Rotech Medical Corporation made numerous
acquisitions of businesses which were accounted for by the purchase method
and which affect the comparability of the financial data herein. Also, in
October 1997, Rotech Medical Corporation was acquired by IHS and changed
its fiscal year end from July 31 to December 31. In addition, changes in a
variety of accounting estimates were made in order to conform with the
accounting policies of IHS. Provided below is the statement of operations
data of Rotech Medical Corporation for the five month period ended December
31, 1997 and the two separate periods (pre- and post-acquisition by IHS)
within such five month period:
[Enlarge/Download Table]
Predecessor Company
---------------------------------------------------
August 1, 1997 October 22, 1997 Five Months
to to Ended
October 21, 1997 December 31, 1997 December 31, 1997
(dollars in thousands) ---------------- ----------------- -----------------
Statement of Operations Data:
Net Revenues................................. $103,065 $96,535 $199,600
Costs and expenses
Cost of net revenues:
Product and supply costs................. 28,288 21,494 49,782
Patient service equipment depreciation... 6,933 3,036 9,969
-------- ------- --------
Total cost of net revenues............. 35,221 24,530 59,751
Provision for doubtful accounts........... 24,147 3,298 27,445
Selling, general and administrative....... 69,983 39,896 109,879
Depreciation and amortization............. 5,311 4,559 9,870
Interest expense (income)................. 4,167 4,687 8,854
-------- ------- --------
Total costs and expenses............... 138,829 76,970 215,799
-------- ------- --------
Earnings (loss) before income taxes....... (35,764) 19,565 (16,199)
======== ======= ========
(2) We adopted fresh-start reporting upon our emergence from bankruptcy,
effective as of March 31, 2002. Under fresh-start reporting, our
reorganization value is allocated to our assets based on their respective
fair values in conformity with the purchase method of accounting for
business combinations; any portion not attributed to specific tangible or
identified intangible assets are reported as an intangible asset referred
to as "reorganization value in excess of value of identifiable assets." In
adopting fresh-start reporting, we engaged an independent financial advisor
to assist in the determination of the reorganization value or fair value of
the entity.
34
Not all of the valuations required to determine the fair value of our
assets have been performed and, accordingly, the adjustments reflected in
the data are preliminary and subject to further revisions and adjustments.
We have arranged to obtain valuations of significant assets and, upon
completion of this process, the reorganization value will be allocated to
specific assets. It is anticipated that there will be reductions in the
carrying values of certain assets, and the fair value of certain other
assets may exceed the carrying values. Accordingly, the final valuation
could result in materially different amounts and allocations of
reorganization value from the amount and allocations presented in this
prospectus. See "Risk factors--Since our financial statements reflect
fresh-start reporting adjustments made upon our predecessor's emergence
from bankruptcy, information reflecting our results of operations and
financial condition will not be comparable to prior periods of our
predecessor" and note 18 to the audited financial statements for the years
ended December 31, 1999, 2000 and 2001 and note 6 to the unaudited
condensed consolidated financial statements for the six months ended
September 30, 2001, the three months ended March 31, 2001 and 2002 and the
six months ended September 30, 2002, included elsewhere in this prospectus.
In connection with our adoption of fresh-start accounting, we have obtained
valuations of the patient service equipment and have reconsidered the
estimated useful lives for this equipment and our other fixed assets. The
new basis of patient service equipment, furniture and office equipment, and
vehicles at March 31, 2002 are being depreciated over their respective
remaining useful lives at that date, using the weighted average life of the
asset groups, which approximates four years. Purchases of such property and
equipment since March 31, 2002 are being depreciated over five years for
patient service equipment, three years for computer equipment and five
years for vehicles; leasehold improvements and furniture and equipment are
unchanged. The effect of this change in estimate for the six months ended
September 30, 2002 was to increase depreciation by $589.
(3) We experienced a deterioration in the aging of certain receivables during
2000 due to a variety of factors including the operational effects of the
bankruptcy filing. Some of the factors that negatively affected the billing
and collections process include increased loss of office and other
personnel, problems experienced in the closure and consolidation of billing
locations and systems, and personnel shortages and the competing time
demands required in normalizing relations with payors and addressing a
variety of vendor issues. In the fourth quarter of 2000, management
performed a study and analysis of these issues and their effect, and
performed a re-evaluation of the allowance for doubtful accounts and
contractual adjustments. Accordingly, we recorded an increase to the
provision for bad debts of $5 million and an increase to contractual
adjustments of $15 million in the fourth quarter of 2000.
(4) In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets ("SFAS No. 142"). SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. SFAS No. 142 also requires that intangible
assets with estimable useful lives be amortized over their respective
estimated useful lives to their estimated residual values, and reviewed for
impairment in accordance with Statement of Financial Accounting Standards
No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. We adopted the provisions of SFAS No.
142 effective January 1, 2002. Had SFAS No. 142 been in effect for the
years ended December 31, 1999, 2000 and 2001,amortization of goodwill would
have been reduced by $18.9 million, $41.0 million and $47.8 million,
respectively, and net earnings for such periods would have increased by
$15.9 million, $35.4 million and $42.2 million, respectively. Had SFAS No.
142 been in effect for the three months ended March 31, 2001 and the six
months ended September 30, 2001, amortization of goodwill would have been
reduced by $12.0 million and $23.9 million, respectively, and net earnings
for such periods would have increased by $10.6 million and $21.1 million,
respectively.
(5) In February 2002, we settled all outstanding government litigation and
pre-petition and certain post- petition claims arising from Medicare
payments made to certain of our operating centers as well as claims in
unliquidated amounts for a cash settlement of $17 million. In addition, on
February 13, 2002, IHS and its subsidiaries, including us, entered into a
stipulation with the Centers for Medicare and Medicaid Services, or
35
CMS, whereby CMS was permitted to off set certain underpayments to IHS with
certain overpayments to us in exchange for a full release of all CMS claims
against IHS and its subsidiaries, including us, to the effective date of the
stipulation. The Bankruptcy Court signed the stipulation on April 12, 2002.
In 1999, we recorded a provision of $15 million based on a preliminary
evaluation of the government's estimated claims. We revised this estimate
and recorded an additional provision of $2 million in 2001; related legal
costs incurred were $2.2 million in 2000 and $0.5 million in 2001. See also
note 1 to the audited financial statements.
(6) During the years ended December 31, 2000 and 2001, the three months ended
March 31, 2001 and 2002 and the six months ended September 30, 2001 and
2002, we recorded the following as reorganization items:
[Enlarge/Download Table]
Successor
Predecessor Company Company
------------------------------------------------------- -------------
Years Ended Three Months Six Months Three Months Six Months
December 31, Ended Ended Ended Ended
--------------- March 31, September 30, March 31, September 30,
(dollars in thousands) 2000 2001 2001 2001 2002 2002
------------------------------------------------------------------------------------------------------------
Severance and terminations............ $ 3,470 $ 753 $215 $ 561 $ 837 $ --
Legal, accounting and consulting fees. 325 3,815 -- 981 175 497
Loss on sale/leaseback of vehicles.... -- -- -- -- 4,686 169
Priority tax claim allowed............ -- -- -- -- 14,000 --
Administrative expense claims
allowed.............................. -- -- -- -- 7,800 --
Loss on closure of discontinued branch
operations and discontinued product
lines, long-term incentive
compensation and other charges
resulting from reorganization and
restructuring........................ 13,396 12,539 94 7,974 1,596 828
------- ------- ---- ------ ------- ------
$17,191 $17,107 $309 $9,516 $29,094 $1,494
======= ======= ==== ====== ======= ======
For further information, see note 1 to the audited financial statements for
the years ended December 31, 1999, 2000 and 2001, and note 3 to the
unaudited condensed consolidated financial statements for the six months
ended September 30, 2001, the three months ended March 31, 2001 and 2002
and the six months ended September 30, 2002.
(7) EBITDA is defined as earnings from continuing operations before interest,
income taxes, depreciation and amortization and nonrecurring items
(including reorganization items (primarily restructuring charges),
provisions for inventory losses, provisions for settlement of government
claims and extraordinary items). EBITDA is commonly used as an analytical
indicator within the health care industry, and also serves as a measure of
leverage capacity and debt service ability. EBITDA should not be considered
as a measure of financial performance under generally accepted accounting
principles, and the items excluded from EBITDA are significant components
in understanding and assessing financial performance. EBITDA should not be
considered in isolation or as an alternative to net income, cash flows
generated by operating, investing or financing activities or other
financial statement data presented in the consolidated financial statements
as an indicator of financial performance or liquidity. Because EBITDA is
not a measurement determined in accordance with generally accepted
accounting principles and is thus susceptible to varying calculations,
EBITDA as presented may not be comparable to other similarly titled
measures of other companies. A reconciliation of net earnings to EBITDA for
each period is presented below.
36
Reconciliation of Net Earnings to EBITDA
[Enlarge/Download Table]
Predecessor Company
-------------------------------------------------------------------------------------------------------
Three Six Three
Months Months Months
Year Ended December 31, Ended Ended Ended
Year Ended Five Months Ended ------------------------------------- March 31, September 30, March 31,
(dollars in July 31, 1997 December 31, 1997 1998 1999 2000 2001 2001 2001 2002
thousands) ------------- ----------------- -------- -------- -------- -------- --------- ------------- ---------
Net earnings
(loss)....... $ 30,807 $(16,199) $ 65,153 $ 37,291 $ (8,767) $ 9,706 $ 3,240 $ 5,178 $ 19,897
Income taxes
(benefit).... 19,766 -- 47,601 33,860 12,081 30,324 10,121 16,174 (203)
Interest
expense
(income)..... 13,561 8,854 (137) 43 (46) (322) (16) (235) (17)
Depreciation
and
amortization. 44,017 19,839 44,200 55,108 87,337 105,415 24,991 52,180 14,986
Provision for
settlement
of
government
claims....... -- -- -- 15,000 2,176 2,516 -- 2,010 --
Provision for
inventory
losses....... -- -- -- 23 211 2,141 434 605 264
Reorganization
items........ -- -- -- -- 17,191 17,107 309 9,516 29,094
Extraordinary
items........ -- -- -- -- -- -- -- -- (20,441)
-------- -------- -------- -------- -------- -------- ------- ------- --------
EBITDA........ $108,151 $ 12,494 $156,817 $141,325 $110,183 $166,887 $39,079 $85,428 $ 43,580
======== ======== ======== ======== ======== ======== ======= ======= ========
[Download Table]
Successor
Company
-------------
Six Months
Ended
September 30,
(dollars in 2002
thousands) -------------
Net earnings
(loss)....... $11,808
Income taxes
(benefit).... 7,871
Interest
expense
(income)..... 22,468
Depreciation
and
amortization. 30,823
Provision for
settlement
of
government
claims....... --
Provision for
inventory
losses....... --
Reorganization
items........ 1,494
Extraordinary
items........ --
-------
EBITDA........ $74,464
=======
Provided below is the reconciliation of net earnings to EBITDA of Rotech
Medical Corporation for the five month period ended December 31, 1997 and the
two separate periods (pre- and post-acquisition by IHS) within such five month
period:
[Download Table]
August 1, 1997 October 22, 1997
to to Five Months Ended
October 21, 1997 December 31, 1997 December 31, 1997
(dollars in thousands) ---------------- ----------------- -----------------
Net earnings (loss)........ $ (35,764) $ 19,565 $ (16,199)
Interest expense (income).. 4,167 4,687 8,854
Depreciation & amortization 12,244 7,595 19,839
----------- --------- -----------
EBITDA..................... $ (19,353) $ 31,847 $ 12,494
=========== ========= ===========
37
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS DATA
The unaudited pro forma consolidated statements of operations data for the
year ended December 31, 2001 and the nine months ended September 30, 2001 and
2002 give effect to the consummation of our predecessor's, Rotech Medical
Corporation's, plan of reorganization, including the $200 million senior
secured term loan, the sale of the $300 million 9 1/2% Senior Subordinated
Notes due 2012 and application of the net proceeds therefrom, the
implementation of "fresh-start" reporting and the consummation of the
restructuring as if such transactions had occured on the first day of such
fiscal periods. The unaudited pro forma balance sheet is not presented, because
the historical balance sheet at September 30, 2002 reflects these transactions
effective as of March 31, 2002. Also, the historical statement of operations
data for the three months ended March 31, 2002 includes certain effects of
these transactions (effective as of March 31, 2002), related to reorganization
expense (estimated priority tax claims and administrative expense claims
allowed) and the extraordinary gain on debt discharge of $20.4 million. The
unaudited pro forma statements of operations data should be read in conjunction
with our consolidated financial statements, unaudited condensed consolidated
financial statements and accompanying notes included in this prospectus. The
pro forma financial statements do not purport to be indicative of our future
operating results.
We adopted fresh-start reporting upon our predecessor's emergence from
bankruptcy, effective as of March 31, 2002. Under fresh-start reporting, our
reorganization value is allocated to our assets based on their respective fair
values in conformity with the purchase method of accounting for business
combinations. Any portion not attributed to specific tangible or identified
intangible assets is reported as an intangible asset referred to as
"reorganization value in excess of value of identifiable assets." In adopting
fresh-start reporting, we engaged an independent financial advisor to assist in
the determination of the reorganization value or fair value of the entity.
Not all of the valuations required to determine the fair value of our assets
have been performed and, accordingly, the adjustments reflected in the data
following are preliminary and subject to further revisions and adjustments. We
have arranged to obtain valuations of significant assets and, upon completion
of this process, the reorganization value will be allocated to specific assets.
It is anticipated that there will be reductions in the carrying values of
certain assets, and the fair value of certain other assets may exceed the
carrying values. Accordingly, the final valuation could result in materially
different amounts and allocations of reorganization value from the amounts and
allocations presented in the following data.
[Download Table]
Year Ended December 31, 2001
----------------------------------
Pro Forma
(dollars in thousands) Historical Adjustments Pro Forma
--------------------------------------- ---------- ----------- ---------
Statement of Operations Data:
Net revenues.............................. $614,487 $614,487
Costs and expenses
Cost of net revenues:
Product and supply costs............. 97,167 97,167
Patient service equipment
depreciation....................... 44,679 $ (3,903)(1) 40,776
-------- --------- --------
Total cost of revenues............. 141,846 (3,903) 137,943
Provision for doubtful accounts........ 20,917 20,917
Selling, general and administrative.... 329,516 329,516
Depreciation and amortization.......... 60,736 (8,406)(1) 52,330
Interest expense (income).............. (322) 40,540(2) 40,218
Provision for settlement of
government claims.................... 2,516 2,516
Provision for inventory losses......... 2,141 2,141
-------- --------- --------
Total costs and expenses........... 557,350 28,231 585,581
-------- --------- --------
Earnings before reorganizations
items and income taxes............... 57,137 (28,231) 28,906
Reorganization items...................... 17,107 17,107
-------- --------- --------
Earnings before income taxes........... 40,030 (28,231) 11,799
Federal and state income taxes............ 30,324 (21,386)(3) 8,938
-------- --------- --------
Net earnings........................... $ 9,706 $ (6,845) $ 2,861
======== ========= ========
38
[Enlarge/Download Table]
Nine Months Ended September 30, 2002
--------------------------------------------------
Predecessor Successor
Company Company
------------ -------------
Three Months Six Months
Ended Ended
March 31, September 30, Pro Forma
(dollars in thousands) 2002 2002 Adjustments Pro Forma
----------------------------------------------- ------------ ------------- ----------- ---------
Statement of Operations Data:
Net revenues...................................... $154,750 $308,133 $462,883
Costs and expenses
Cost of net revenues:
Product and supply costs................... 22,513 45,557 68,070
Patient service equipment depreciation..... 12,147 25,736 $ (976)(1) 36,907
-------- -------- ------- --------
Total cost of net revenues.............. 34,660 71,293 (976) 104,977
Provision for doubtful accounts................ 3,661 8,407 12,068
Selling, general and administrative............ 84,996 179,705 264,701
Depreciation and amortization.................. 2,839 5,087 (659)(1) 7,267
Interest expense (income)...................... (17) 22,468 10,135 (2) 32,586
Provision for inventory losses................. 264 -- 264
-------- -------- ------- --------
Total costs and expenses................... 126,403 286,960 8,500 421,863
-------- -------- ------- --------
Earnings before reorganization items, income
taxes and extraordinary items................ 28,347 21,173 (8,500) 41,020
Reorganization items.............................. 29,094 1,494 30,588
-------- -------- ------- --------
Earnings (loss) before income taxes and
extraordinary items.......................... (747) 19,679 (8,500) 10,432
Federal and state income taxes (benefit).......... (203) 7,871 (3,400)(3) 4,268
-------- -------- ------- --------
Earnings (loss) before extraordinary items..... $ (544) $ 11,808 $(5,100) $ 6,164
======== ======== ======= ========
[Enlarge/Download Table]
Nine Months Ended September 30, 2001
----------------------------------
Pro Forma
(dollars in thousands) Historical Adjustments Pro Forma
------------------------------------------------- ---------- ----------- ---------
Statement of Operations Data:
Net revenues...................................... $456,174 $456,174
Costs and expenses
Cost of net revenues:
Product and supply costs................... 72,141 72,141
Patient service equipment depreciation..... 32,298 $ (2,927)(1) 29,371
-------- -------- --------
Total cost of net revenues.............. 104,439 (2,927) 101,512
Provision for doubtful accounts................ 14,918 14,918
Selling, general and administrative............ 244,609 244,609
Depreciation and amortization.................. 44,872 (6,305)(1) 38,567
Interest expense (income)...................... (251) 30,405 (2) 30,154
Provision for settlement of government claims.. 2,010 2,010
Provision for inventory losses................. 1,039 1,039
-------- -------- --------
Total costs and expenses................... 411,636 21,173 432,809
-------- -------- --------
Earnings before reorganization items and
income taxes................................. 44,538 (21,173) 23,365
Reorganization items.............................. 9,825 9,825
-------- -------- --------
Earnings before income taxes................... 34,713 (21,173) 13,540
Federal and state income taxes.................... 26,295 (16,039)(3) 10,256
-------- -------- --------
Net earnings................................... $ 8,418 $ (5,134) $ 3,284
======== ======== ========
39
--------
(1) To reduce amortization expense as follows (dollars in thousands):
Reduction in intangible assets--$115,360
2001 annual reduction in amortization (20 year life)--$5,768
2001 nine month reduction in amortization (20 year life)--$4,326
2002 nine month reduction in amortization--$0
To reduce depreciation expense as follows (dollars in thousands):
Reduction in property and equipment--$26,165*
2001 annual reduction in depreciation--$6,541*
2001 nine month reduction in depreciation--$4,906*
2002 nine month reduction in depreciation (representing three months of
depreciation)--$1,635*
* Reduced depreciation expense based on a $26,165 reduction in basis,
depreciated over a four-year period (the weighted average life of the asset
groups).
(2) To record estimated interest expense and amortization of deferred debt
issuance costs as if the senior secured credit facility and senior
subordinated notes were issued as of January 1, 2001 as follows:
[Download Table]
Year Ended Three Months Nine Months
December 31, Ended March 31, Ended September
(dollars in thousands) 2001 2002 30, 2001
------------------------------------------------------------------------
$200 million senior
secured term loan........ $ 9,640 $ 2,410 $ 7,230
$300 million senior
subordinated notes....... 28,500 7,125 21,375
Amortization of debt
issuance costs of
$17,135 over weighted
average term of 7.1385
years.................... 2,400 600 1,800
------- ------- -------
$40,540 $10,135 $30,405
======= ======= =======
The interest rate on the $200 million loan is based on actual rates in
effect during the period from March 26, 2002 through September 30, 2002.
Assuming a hypothetical interest rate increase of .125% on the $200 million
loan, the amount of estimated interest expense listed above would increase
by $250 for the year ended December 31, 2001, $63 for the three months
ended March 31, 2002, and $188 for the nine months ended September 30, 2001.
(3) Represents adjustment to reduce estimated tax provision to 76% of pre-tax
income for the nine months ended September 30, 2001 and year ended December
31, 2001, and 40% of pre-tax income for the nine months ended September 30,
2002.
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements, related notes and other financial information appearing elsewhere
in this prospectus. Our predecessor, Rotech Medical Corporation emerged from
bankruptcy on March 26, 2002 as described below in the section captioned
"Business--The bankruptcy case" and subsequently transferred substantially all
of its assets to us in a restructuring transaction described below in the
section captioned "Business--Restructuring transaction and related
transactions." In addition, see "Forward-looking statements" and "Risk
factors." As used herein, unless otherwise specified or the context otherwise
requires, references to "we", "our" and "us" refer to the business and
operations of Rotech Healthcare Inc. and its subsidiaries for all periods
beginning on March 26, 2002 and to the business and operations of Rotech
Medical Corporation and its subsidiaries for all periods prior to March 26,
2002. Financial data have been presented for the three months ended March 31,
2002 and the six months ended September 30, 2002, rather than for the nine
months ended on September 30, 2002, because we have had only six months of
operating results since our predecessor emerged from bankruptcy. All financial
data included in this prospectus for each of the fiscal years ended December
31, 1999, 2000 and 2001 and the fiscal quarter ended March 31, 2002 reflect the
restatement of our financial results that we issued in September 2002. For more
information regarding the restatement of our financial results, see the
information under the section captioned "Business--Restatement of financial
results" on page 86 of this prospectus.
Overview
Background. We are one of the largest providers of home medical equipment
and related products and services in the United States, with a comprehensive
offering of respiratory therapy and durable home medical equipment and related
services. We provide equipment and services in 48 states through over 600
operating centers located primarily in non-urban markets.
Our revenues are principally derived from respiratory equipment rental and
related services (75.2% of revenues for the year ended December 31, 2001),
which include the rental of oxygen concentrators, liquid oxygen systems,
portable oxygen systems, ventilator therapy systems, nebulizer equipment and
sleep disorder breathing therapy systems, and the sale of nebulizer
medications. We also generate revenues from the rental and sale of durable
medical equipment (21.5% of revenues for the year ended December 31, 2001),
including hospital beds, wheelchairs, walkers, patient aids and ancillary
supplies. We derive a majority of our revenues from reimbursement by third
party payors, including Medicare, Medicaid, the Veterans Administration and
private insurers.
Our predecessor, Rotech Medical Corporation, was founded in 1981 and
completed its initial public offering in 1984. Its subsequent growth was
achieved in large part through the acquisition of small home medical equipment
providers in non-urban markets. In October 1997, Rotech Medical Corporation was
acquired by Integrated Health Services, Inc. (IHS), a large, publicly-held
provider of post-acute and related specialty health care services and products.
Following the acquisition, Rotech Medical Corporation continued to operate as a
wholly-owned subsidiary of IHS. Financial and liquidity problems of IHS
required Rotech Medical Corporation to cease its acquisition strategy at the
end of the first quarter of 1999. We resumed a selective acquisition strategy
in 2001 and have completed several small acquisitions, including transactions
that were consummated on June 7, 2002, July 1, 2002 and July 26, 2002. We are
currently a party to non-binding letters of intent with respect to a number of
acquisitions; however, we are not currently a party to any definitive agreement
regarding any material acquisition.
Bankruptcy and Related Initiatives. On February 2, 2000, IHS and
substantially all of its subsidiaries, including Rotech Medical Corporation,
filed voluntary petitions for relief under Chapter 11 of the United States
Bankruptcy Code with the United States Bankruptcy Court in the District of
Delaware. The principal reason for Rotech Medical Corporation's Chapter 11 case
was that it had jointly guaranteed approximately $2.3 billion of obligations of
IHS under credit agreements with its senior creditors. Rotech Medical
Corporation's plan of
41
reorganization was confirmed on February 13, 2002. Beginning in mid-1999, and
during its Chapter 11 proceeding, Rotech Medical Corporation focused on
consolidating the hundreds of businesses it had acquired during the preceding
years and on integrating its operating systems. Rotech Medical Corporation
engaged in a series of restructuring activities to strengthen its
organizational structure and reposition itself for future growth. These actions
included selective reduction in headcount, renegotiation of certain vendor
contracts, substantial reduction in the number of billing centers,
discontinuation of certain product lines and branch locations, centralization
of certain administrative functions (including billing and purchasing),
development and implementation of an advanced information and billing system,
enhancement of regulatory compliance programs, hiring of additional compliance
personnel and changes both in management personnel and lines of reporting. We
believe that these actions made Rotech Medical Corporation a more integrated
and efficient operation. See "Business--Our business strategy--Focus on
operating efficiencies and improving margins" for a more detailed discussion of
the business initiatives undertaken. Pursuant to its plan of reorganization, on
March 26, 2002, Rotech Medical Corporation transferred to us substantially all
of the assets used in its businesses and operations (including stock of
substantially all of its subsidiaries).
We adopted fresh-start reporting upon our emergence from bankruptcy,
effective as of March 31, 2002. Under fresh-start reporting, our reorganization
value is allocated to our assets based on their respective fair values in
conformity with the purchase method of accounting for business combinations.
Any portion not attributed to specific tangible or identified intangible assets
are reported as an intangible asset referred to as "reorganization value in
excess of value of identifiable assets." In adopting fresh-start reporting, we
engaged an independent financial advisor to assist in the determination of the
reorganization value or fair value of the entity.
Not all of the valuations required to determine the fair value of our assets
have been performed and, accordingly, the adjustments reflected in this
prospectus are preliminary and subject to further revisions and adjustments. We
have arranged to obtain valuations of significant assets and, upon completion
of this process, the reorganization value will be allocated to specific assets.
It is anticipated that there will be reductions in the carrying values of
certain assets, and the fair value of certain other assets may exceed the
carrying values. Accordingly, the final valuation could result in materially
different amounts and allocations of reorganization value from the amount and
allocations presented in this prospectus. See "Risk factors--Since our
financial statements reflect fresh-start reporting adjustments made upon our
predecessor's emergence from bankruptcy, information reflecting our results of
operations and financial condition will not be comparable to prior periods of
our predecessor."
Reimbursement. Our business was significantly impacted by the BBA 97, which
reduced Medicare reimbursement rates for home oxygen therapy and respiratory
drugs by 25% and 5%, respectively, effective January 1, 1998. An additional
reimbursement reduction of 5% on home oxygen therapy became effective on
January 1, 1999. The BBA 97 also imposed a freeze on Consumer Price Index-based
reimbursement rate increases for 1998 through 2002. The BBRA and the BIPA
provided some relief from the Consumer Price Index-based reimbursement rate
freeze and other provisions contained in the BBA 97. However, these measures
did not restore reimbursement rates to their prior levels.
The DHHS has held discussions regarding, and continues to review, a possible
reduction in reimbursement by Medicare for certain pharmaceuticals, including
nebulizer medications. To our knowledge, no specific proposals are currently
under consideration. In September 2001, the United States General Accounting
Office issued a report which concluded that the price paid by Medicare for
nebulizer medications is significantly higher than the average price paid for
these medications by other participants in the health care industry. The report
recommended that CMS establish Medicare payment levels for these drugs and
related services that are more closely related to their costs. We are unable to
predict the timing or extent of any reduction in reimbursement by Medicare for
nebulizer medications.
See "Business--Government regulation" for a detailed description of the
regulations to which our operations are subject and the regulatory environment
in general, as well as an analysis of the potential effects of proposed new
regulations on our business.
42
Results of operations
The following table shows our results of operations as a percentage of its
net revenues for the six months ended September 30, 2001 and 2002.
[Download Table]
Six Months Ended
--------------------------
Predecessor Successor
Company Company
------------- -------------
September 30, September 30,
2001 2002
------------- -------------
Statement of Operations Data:
Net revenues........................................ 100.0% 100.0%
Costs and expenses:
Cost of net revenues............................. 22.4% 23.1%
Provision for doubtful accounts.................. 4.1% 2.7%
Selling, general and administrative.............. 53.1% 58.3%
Depreciation and amortization.................... 9.7% 1.7%
Interest expense................................. (0.1%) 7.3%
Provision for settlement of government claims.... 0.6% 0.0%
Provision for inventory losses................... 0.2% 0.0%
----- -----
Total costs and expenses..................... 90.1% 93.1%
----- -----
Earnings before reorganization items and
income taxes............................... 9.9% 6.9%
Reorganization items................................ 3.1% 0.5%
----- -----
Earnings before income taxes................. 6.9% 6.4%
Federal and state income taxes...................... 5.2% 2.6%
----- -----
Net earnings................................. 1.7% 3.8%
===== =====
EBITDA(1)........................................... 27.5% 24.2%
===== =====
--------
(1) See "Summary Consolidated Financial Data," footnote (6) on page 15 for a
detailed definition of EBITDA.
Six months ended September 30, 2002 as compared to the six months ended
September 30, 2001
Total net revenues for the six months ended September 30, 2002 decreased
$2.3 million, or 0.8%, to $308.1 million, from the comparable period in 2001.
The slight decrease was attributable to a 3.5% growth in our respiratory
therapy equipment and services revenues, which was offset by an 11.2% decrease
in our durable medical equipment revenues and a 27.2% decline in our pharmacy
related revenues (pharmacy related revenues represented 2.9% and 2.1% of our
revenues for the six month periods ended September 30, 2001 and September 30,
2002, respectively). The increase in respiratory equipment and services
revenues was primarily due to an increase in the number of rental units of
oxygen concentrators. The decrease in durable medical equipment revenues was
due to our efforts to focus our revenue growth on the more profitable
respiratory therapy equipment rental and related services and provide durable
medical equipment as a complementary offering to respiratory therapy services.
The large decline in our pharmacy related revenues is a result of the closure
of several non-nebulizer pharmacies.
Cost of net revenues for the six months ended September 30, 2002 increased
$1.8 million, or 2.5%, to $71.3 million, from the comparable period in 2001.
The increase in cost of net revenues is attributable to an increase in patient
service equipment depreciation costs. As our revenue composition has shifted
from lower gross margin durable medical equipment to respiratory therapy
equipment and services, this has required increased capital spending for
patient service equipment. Additionally, in connection with our adoption of
fresh-start accounting we reconsidered the estimated useful lives of our
patient service equipment, which resulted in decreasing the estimated useful
life on such equipment from seven years to five years. Cost of net revenues as
a percentage of net revenue was 23.1% for the six months ended September 30,
2002 as compared to 22.4% for the comparable period in 2001.
43
The provision for doubtful accounts for the six months ended September 30,
2002 decreased by $4.2 million, or 33.3%, from the comparable period in 2001.
The provision for doubtful accounts expense as a percentage of net revenue
decreased to 2.7% for the six months ended September 30, 2002 as compared to
4.1% for the same period in 2001. This improvement is attributed to a number of
factors, including: 1) improved billing procedures and system enhancements; 2)
increased collections on our accounts receivable; and 3) substantial
improvement in our earned but unbilled receivables, which were $18.3 million at
September 30, 2002, versus $28.3 million at September 30, 2001.
Selling, general and administrative expenses for the six months ended
September 30, 2002 increased by $14.8 million, or 9.0%, to $179.7 million, from
the comparable period in 2001. The large increase in selling, general and
administrative expenses resulted from the following: (i) $4.9 million of
special investigation costs related to a comprehensive internal investigation
by special counsel and government contracting specialists as well as an
estimate of the severance related costs resulting from recent changes in senior
management; (ii) a $4.9 million increase in salaries and benefits for company
personnel; (iii) a $2.2 million increase in insurance expense; and (iv) a $1.3
million increase in legal, consulting and other services. Selling, general and
administrative expenses as a percentage of net revenues increased to 58.3% for
the six months ended September 30, 2002 from 53.1% for the six months ended
September 30, 2001.
Depreciation and amortization for the six months ended September 30, 2002
decreased $25.1 million, or 83.1%, to $5.1 million, from the comparable period
in 2001. The decrease was primarily due to the adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets
("SFAS No. 142"). SFAS No. 142 requires that goodwill and intangible assets
with indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
Accordingly, for the six months ended September 30, 2002, there was no
amortization expense of intangible assets with indefinite lives. Had SFAS No.
142 been in effect for the six months ended September 30, 2001, amortization of
goodwill would have been reduced by $23.9 million and net earnings for such
period would have increased by $21.1 million.
Interest expense for the six months ended September 30, 2002 increased $22.7
million from the comparable period in 2001. The increase is attributable to
interest costs incurred on the $200 million senior secured term loan and the
$300 million 9 1/2% Senior Subordinated Notes due 2012 that relate to our
emergence from bankruptcy.
The provision for settlement of government claims for the six months ended
September 30, 2002 decreased $2.0 million from the comparable period in 2001.
In February 2002, we settled all outstanding government litigation and
pre-petition and certain post-petition claims arising from Medicare payments
made to certain of our operating centers.
Reorganization expenses related to Rotech Medical Corporation's bankruptcy
for the six months ended September 30, 2002, decreased $8.0 million to $1.5
million, from the comparable period in 2001.
Federal and state income taxes for the six months ended September 30, 2002
decreased $8.3 million to $7.9 million from the comparable period in 2001. The
decrease in federal and state income taxes was due to lower taxable income in
the six months ended September 30, 2002, and an unusually high effective tax
rate of 76% for the six months ended September 30, 2001. This high effective
tax rate resulted from the non-deductible amortization of goodwill.
Net earnings were $11.8 million for the six months ended September 30, 2002
as compared to $5.2 million for the same period in 2001. The increase in net
earnings was due to a decline in depreciation and amortization expense and a
decline in reorganization items. These items were offset by increases in
interest expense and selling, general and administrative expenses.
For the six months ended September 30, 2002, EBITDA was $74.5 million as
compared to $85.4 million for the six months ended September 30, 2001. See
"Summary Consolidated Financial Data," footnote (6) on page 15 for a detailed
definition of EBITDA.
44
The following table shows our unaudited results of operations as a
percentage of its net revenues for the three months ended March 31, 2001 and
2002.
[Download Table]
Three Months Ended
-----------------
March 31, March 31,
2001 2002
--------- ---------
Statement of Operations Data:
Net revenues................................................. 100.0% 100.0%
Costs and expenses:
Cost of net revenues...................................... 23.6% 22.4%
Provision for doubtful accounts........................... 3.1% 2.4%
Selling, general and administrative....................... 53.8% 54.9%
Depreciation and amortization............................. 9.9% 1.8%
Interest expense (income)................................. 0.0% 0.0%
Provision for inventory losses............................ 0.3% 0.2%
----- -----
Total costs and expenses.............................. 90.8% 81.7%
----- -----
Earnings before reorganization items, income
taxes and extraordinary items....................... 9.2% 18.3%
Reorganization items......................................... 0.2% 18.8%
----- -----
Earnings (loss) before income taxes and
extraordinary items................................. 9.0% (0.5%)
Federal and state income taxes (benefit)..................... 6.8% (0.1%)
----- -----
Earnings (loss) before extraordinary items............ 2.2% (0.4%)
Extraordinary gain on debt discharge......................... 0.0% 13.2%
----- -----
Net earnings.......................................... 2.2% 12.8%
===== =====
EBITDA(1).................................................... 26.4% 28.2%
===== =====
(1) See "Summary of Consolidated Financial Data," footnote (6) on page 15 for a
detailed definition of EBITDA.
Three months ended March 31, 2002 as compared to the three months ended March
31, 2001
Total net revenues for the three months ended March 31, 2002 increased $6.8
million, or 4.6%, to $154.8 million, from the comparable period in 2001. The
increase was attributable to a 10% growth in our respiratory therapy equipment
and services revenues, which was offset by a 4% decrease in our durable medical
equipment revenues, and a 30% decline in our pharmacy related revenues
(pharmacy related revenues represented 3.3% and 2.2% of our revenues for the
quarterly periods ended March 31, 2001 and March 31, 2002, respectively). The
increase in respiratory equipment and services revenues was primarily due to an
increase in the number of rental units of oxygen concentrators and an increase
in sales of nebulizer medications. The decrease in durable medical equipment
revenues was due to our efforts to focus our revenue growth on the more
profitable respiratory therapy equipment rental and related services and
provide durable medical equipment as a complementary offering to respiratory
therapy services. The large decline in our pharmacy related revenues is a
result of the closure of several non-nebulizer pharmacies.
Cost of net revenues for the three months ended March 31, 2002 decreased
$0.3 million, or 0.7%, to $34.7 million, from the comparable period in 2001.
The decrease in cost of net revenues is attributable to the change in revenue
composition from lower gross margin durable medical equipment to respiratory
therapy equipment and services as well as a price decrease in certain products.
Cost of net revenues as a percentage of net revenue was 22.4% for the three
months ended March 31, 2002 as compared to 23.6% for the comparable period in
2001.
45
The provision for doubtful accounts for the three months ended March 31,
2002 decreased by $1.0 million, or 20.8%, from the comparable period in 2001.
The provision for doubtful accounts expense as a percentage of net revenue
decreased to 2.4% for the three months ended March 31, 2002 as compared to 3.1%
for the same period in 2001. This improvement is attributed to improved billing
procedures and system enhancements.
Selling, general and administrative expenses for the three months ended
March 31, 2002 increased by $5.3 million, or 6.7%, to $85.0 million, from the
comparable period in 2001. The majority of this increase was due to the
increase in salary and related benefits for company personnel. Selling, general
and administrative expenses as a percentage of net revenues increased to 54.9%
for the three months ended March 31, 2002 from 53.8% for the three months ended
March 31, 2001.
Depreciation and amortization for the three months ended March 31, 2002
decreased $11.9 million, or 80.7%, to $2.8 million, from the comparable period
in 2001. The decrease was primarily due to the adoption of Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets.
SFAS No. 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. Accordingly,
for the three months ended March 31, 2002, there was no amortization expense of
intangible assets with indefinite lives. Had SFAS No. 142 been in effect for
the three months ended March 31, 2001, amortization of goodwill would have been
reduced by $12.0 million and net earnings for such period would have increased
by $10.6 million.
We incurred $29.1 million of reorganization expenses related to Rotech
Medical Corporation's bankruptcy in the three months ended March 31, 2002,
consisting of: (i) severance and termination payments in the amount of $0.8
million, (ii) priority tax claims allowed of $14.0 million, (iii)
administrative expense claims allowed of $7.8 million, (iv) loss on the
sale/leaseback of vehicles of $4.7 million, and (v) other charges resulting
from reorganization of $1.8 million.
Federal and state income taxes for the three months ended March 31, 2002
decreased $10.3 million to a credit of $0.2 million from the comparable period
in 2001. The decrease in federal and state income taxes was due to the pre-tax
loss in the three months ended March 31, 2002 and an unusually high effective
tax rate of 76% for the three months ended March 31, 2001. This high effective
tax rate resulted from the non-deductible amortization of goodwill.
Extraordinary gain on debt discharge was $20.4 million for the three months
ended March 31, 2002. This consisted of a debt discharge related to our
emergence from bankruptcy.
Net earnings were $19.9 million for the three months ended March 31, 2002 as
compared to $3.2 million for the same period in 2001. The increase was due to
the extraordinary gain on the debt discharge, the increased revenue described
above, a decline in depreciation and amortization expense and a decline in
income tax expense. These items were offset by increases in reorganization
items and selling, general and administrative expenses.
For the three months ended March 31, 2002, EBITDA was $43.6 million as
compared to $39.1 million for the three months ended March 31, 2001. See
"Summary Consolidated Financial Data," footnote (6) on page 15 for a detailed
definition of EBITDA.
46
The following table shows the results of our predecessor's operations as a
percentage of its net revenues for the fiscal years ended December 31, 1999,
2000 and 2001.
[Enlarge/Download Table]
Year Ended December 31,
--------------------
1999 2000 2001
----- ----- -----
Statement of Operations Data:
Net revenues..................................................... 100.0% 100.0% 100.0%
Costs and expenses:
Cost of net revenues.......................................... 26.2% 26.9% 23.1%
Provision for doubtful accounts............................... 4.6% 4.8% 3.4%
Selling, general and administrative........................... 49.9% 55.4% 53.6%
Depreciation and amortization................................. 4.6% 8.9% 9.9%
Interest expense (income)..................................... 0.0% 0.0% (0.1)%
Provision for settlement of government claims................. 2.6% 0.4% 0.4%
Provision for inventory losses................................ 0.0% 0.0% 0.3%
----- ----- -----
Total costs and expenses.................................. 87.9% 96.4% 90.7%
----- ----- -----
Earnings before reorganization items and income taxes..... 12.1% 3.6% 9.3%
Reorganization items............................................. 0.0% 3.0% 2.8%
----- ----- -----
Earnings before income taxes.............................. 12.1% 0.6% 6.5%
Federal and state income taxes................................... 5.8% 2.1% 4.9%
----- ----- -----
Net earnings (loss)....................................... 6.4% (1.5)% 1.6%
===== ===== =====
EBITDA(1)........................................................ 24.1% 19.4% 27.2%
===== ===== =====
(1) See "Summary Consolidated Financial Data," footnote (6) on page 15 for a
detailed definition of EBITDA.
Year ended December 31, 2001 as compared to the year ended December 31, 2000
Total net revenues for the year ended December 31, 2001 increased $45.8
million or 8.1% to $614.5 million, from the comparable period in 2000. The
increase was attributable to an 11.9% growth in our respiratory therapy
equipment and services revenues, which was off-set by a 14.0% decrease in our
durable medical equipment revenues. The increase in respiratory equipment and
services revenues was primarily due to an increase in oxygen concentrator
rentals and an increase in sales of nebulizer medications. The decrease in
durable medical equipment revenues was due to our efforts to focus our revenue
growth on the more profitable respiratory therapy equipment rental and related
services, to provide durable medical equipment as a complementary offering to
respiratory therapy services and to discontinue the sale of certain supplies.
In 2000, we experienced deterioration in the composition of accounts receivable
due to a variety of factors related to the bankruptcy filing. Some of the
factors that negatively affected the billing and collections process include
increased loss of office and other personnel, problems experienced in the
closure and consolidation of billing locations and systems, personnel shortages
and the competing time demands required in normalizing relations with payors
and addressing a variety of vendor issues. In the fourth quarter of 2000, we
performed a study and analysis of these issues and their effect, and performed
a re-evaluation of the allowance for doubtful accounts and contractual
adjustments. We recorded an increase to contractual adjustments of $15.0
million in 2000.
Cost of net revenues for the year ended December 31, 2001 decreased $10.9
million or 7.2% to $141.8 million, from the comparable period in 2000. The
decrease in cost of net revenues is attributable to the change in revenue
composition from lower gross margin durable medical equipment to respiratory
therapy equipment and services as well as a price decrease in certain products.
Cost of net revenues as a percentage of net revenue was 23.1% for 2001 as
compared to 26.9% for 2000.
The provision for doubtful accounts for the year ended December 31, 2001
decreased by $6.4 million or 23.5% from the comparable period in 2000. The
provision for doubtful accounts expense as a percentage of net
47
revenue decreased to 3.4% for the year ended December 31, 2001 as compared to
4.8% for 2000. This improvement is attributed to improved billing procedures
and system enhancements as well as the $5.0 million increase in expense
recorded in 2000 related to the deterioration of accounts receivable
experienced in that year, as discussed above.
Selling, general and administrative expenses for the year ended December 31,
2001 increased by $14.4 million or 4.6% to $329.5 million, from the comparable
period in 2000. The majority of this increase was due to an increase in salary
and related benefits for company personnel. Selling, general and administrative
expenses as a percentage of net revenues decreased to 53.6% for the year ended
December 31, 2001 from 55.4% for the year ended December 31, 2000. This
decrease is primarily due to our maintaining a relatively flat employee count
while increasing net revenues by 8.1%.
Depreciation and amortization for the year ended December 31, 2001 increased
$10.1 million or 20.0% to $60.7 million, from the comparable period in 2000.
The increase was due to increased depreciation on capital expenditures for 2001
as well as increased amortization on intangible assets. We adopted the
provisions of SFAS No. 142, Goodwill and Other Intangible Assets, effective
January 1, 2002. SFAS No. 142 requires that goodwill and intangible assets with
indefinite useful lives no longer be amortized, but instead be tested for
impairment at least annually in accordance with the provisions of SFAS No. 142.
SFAS No. 142 also requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of. Had SFAS No. 142 been in effect for the years ended December
31, 2001 and 2000, amortization of goodwill would have been reduced by $47.8
million and $41.0 million, respectively, and net earnings for such periods
would have increased by $42.2 million and $35.4 million, respectively.
We incurred $17.1 million of reorganization expenses related to our
predecessor's bankruptcy in the year ended December 31, 2001, consisting
primarily of: (a) severance and termination payments in the amount of
approximately $0.7 million, (b) legal, accounting and consulting fees of
approximately $3.8 million, (c) a loss on closure of discontinued billing
centers and pharmacies of $7.9 million, (d) provision for long-term incentive
bonus of approximately $3.6 million and (e) provision for discontinued life
insurance of $1.1 million.
Federal and state income taxes for the year ended December 31, 2001
increased $18.2 million to $30.3 million, from the comparable period in 2000.
The increase in federal and state income taxes was attributable to an increase
in earnings before income taxes and the impact of intangible asset amortization
and other book expenses not deductible for tax purposes.
Net earnings were $9.7 million for 2001 as compared to a net loss of $8.8
million for 2000. The increase was due to the increased revenue described
above, which was off-set by increases in selling, general and administrative
expenses, depreciation and amortization, and income taxes for the year 2001.
For the year ended December 31, 2001, EBITDA was $166.9 million as compared
to $110.2 million for the year ended December 31, 2000. See "Summary
Consolidated Financial Data," footnote (6) on page 15 for a detailed definition
of EBITDA.
Year ended December 31, 2000 as compared to the year ended December 31, 1999
Total net revenues for the year ended December 31, 2000 decreased $18.1
million or 3.1% to $568.7 million, from the comparable period in 1999. The
decrease was attributable to a 4.8% growth in our respiratory therapy equipment
and services revenues, which was off-set by a 15.5% decrease in our durable
medical equipment revenues. The increase in respiratory equipment and services
revenues was primarily due to an increase in oxygen concentrator rentals and an
increase in sales of nebulizer medications. The decrease in durable medical
equipment revenues was due to our efforts to focus our revenue growth on the
more profitable respiratory therapy equipment rental and related services, to
provide durable medical equipment as a complementary offering to respiratory
therapy services and to discontinue the sale of certain supplies. We
experienced deterioration in the composition of accounts receivable during 2000
due to a variety of factors related to the operational effects of the
bankruptcy filing. Some of the factors that negatively affected the billing
48
and collections process include increased loss of office and other personnel,
problems experienced in the closure and consolidation of billing locations and
systems, and personnel shortages and the competing time demands required in
normalizing relations with payors and addressing a variety of payor issues. In
the fourth quarter of 2000 we performed a study and analysis of these issues
and their effect, and performed a re-evaluation of the allowance for doubtful
accounts and contractual adjustments. Accordingly, we recorded an increase to
the provision for bad debts of $5.0 million and an increase to contractual
adjustments of $15.0 million in 2000.
Cost of net revenues for the year ended December 31, 2000 decreased $1.2
million, or 0.8%, to $152.8 million from the comparable period in 1999. The
decrease in cost of net revenues is attributable to the decrease in net
revenues. Cost of net revenues as a percentage of net revenue was 26.9% for
2000 as compared to 26.2% for 1999.
The provision for doubtful accounts for the year ended December 31, 2000
increased by $561,000 or 2.1% from the comparable period in 1999. Although
total provision for doubtful accounts expense increased for 2000, the provision
as a percentage of net revenue was 4.8% for the year ended December 31, 2000
and 4.6% for the year ended December 31, 1999.
Selling, general and administrative expenses for the year ended December 31,
2000 increased by $22.5 million or 7.7% to $315.1 million, from the comparable
period in 1999. This increase was due primarily to an increase in salaries and
related benefits for company personnel.
Depreciation and amortization for the year ended December 31, 2000 increased
$23.4 million, or 86.3%, to $50.6 million, from the comparable period in 1999.
The increase was due to depreciation on capital expenditures for 2000 and the
change in estimated life of intangible assets from 40 years to 20 years in the
fourth quarter of 1999. This change in estimated life increased amortization
for the year ended December 31, 2000 by approximately $22 million or 100% to
$44 million, from the comparable period in 1999. We adopted the provisions of
SFAS No. 142, Goodwill and Other Intangible Assets, effective January 1, 2002.
SFAS No. 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment at
least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of. Had SFAS No. 142 been in effect for the years ended December 31,
2000 and 1999, amortization of goodwill would have been reduced by $41.0
million and $18.9 million, respectively, and net earnings for such periods
would have increased by $35.4 million and $15.9 million, respectively.
We incurred $17.2 million of reorganization expenses related to our
predecessor's bankruptcy in the year ended December 31, 2000, consisting
primarily of: (a) severance and termination payments in the amount of
approximately $3.5 million, (b) legal, accounting and consulting fees of
approximately $0.3 million and (c) a loss on closure of discontinued branch
operations and product lines resulting from our reorganizing and restructuring
of approximately $13.4 million.
Federal and state income taxes for the year ended December 31, 2000
decreased $21.8 million or 64.3% to $12.1 million, from the comparable period
in 1999. The decrease in federal and state income taxes was attributable to the
decrease in earnings before income taxes and the impact of intangible asset
amortization and other book expenses not deductible for tax purposes.
Net loss was $8.8 million for 2000 as compared to net earnings of $37.3
million for 1999. The decrease was due to the decline in net revenues, combined
with the increased expenses described above in selling, general and
administrative expenses, depreciation and amortization and reorganization
expenses for the year 2000.
For the year ended December 31, 2000, EBITDA was $110.2 million as compared
to $141.3 million for the year ended December 31, 1999. See "Summary
Consolidated Financial Data," footnote (6) on page 15 for a detailed definition
of EBITDA.
49
Liquidity and capital resources
Our predecessor, Rotech Medical Corporation, was acquired by and became a
wholly-owned subsidiary of IHS in October 1997. From that time until its
emergence from bankruptcy, Rotech Medical Corporation had an integrated cash
management system with IHS under which any cash in the consolidated bank
account at the end of each day in excess of amounts needed by Rotech Medical
Corporation for its operations was transferred to IHS. During the bankruptcy
proceeding, Rotech Medical Corporation operated as a debtor-in-possession under
the jurisdiction of the United States Bankruptcy Court for the District of
Delaware. IHS was also in bankruptcy and had a debtor-in-possession financing
facility. Rotech Medical Corporation continued to operate pursuant to the
integrated cash management system previously in place. Upon emergence from
bankruptcy, Rotech Medical Corporation is no longer a subsidiary of IHS and we,
as the successor to Rotech Medical Corporation, are not a subsidiary of IHS. We
now have a separate independent cash management system. We have entered into
the credit facilities described under the section captioned "Description of
credit facilities." For more information regarding Rotech Medical Corporation's
bankruptcy case, see "Business--The bankruptcy case."
Net cash provided by operating activities and reorganization items was $57.2
million for the six months ended September 30, 2002, and $24.5 million for the
three months ended March 31, 2002. For the nine months ended September 30,
2001, net cash provided by operating activities and reorganization items was
$78.1 million. Cash flows in both years were sufficient to fund capital
expenditures and required repayments of debt.
Accounts receivable before allowance for doubtful accounts decreased $19.8
million from $142.0 million at December 31, 2001 to $122.2 million at September
30, 2002. Accounts receivable decreased as a result of an increase in cash
collections for the period. Days sales outstanding (calculated as of each
period end by dividing accounts receivable, less allowance for doubtful
accounts, by the 90-day rolling average of net revenue) were 59 days at
September 30, 2002 compared to 68 days at December 31, 2001.
Included in accounts receivable are earned but unbilled receivables of $18.3
million at September 30, 2002 and $24.9 million at December 31, 2001. Delays,
ranging from a day to several weeks, between the date of service and billing
can occur due to delays in obtaining certain required payor-specific
documentation from internal and external sources. Earned but unbilled
receivables are aged from date of service and are considered in our analysis of
historical performance and collectibility.
Due to the nature of the industry and the reimbursement environment in which
we operate, certain estimates are required to record net revenues and accounts
receivable at their net realizable values. Inherent in these estimates is the
risk that they will have to be revised or updated as additional information
becomes available. Specifically, the complexity of many third-party billing
arrangements and the uncertainty of reimbursement amounts for certain services
from certain payors may result in adjustments to amounts originally recorded.
Such adjustments are typically identified and recorded at the point of cash
application, claim denial or account review.
Management performs analyses to evaluate the net realizable value of
accounts receivable. Specifically, management considers historical realization
data, accounts receivable aging trends, other operating trends and relevant
business conditions. Because of continuing changes in the health care industry
and third-party reimbursement, it is possible that management's estimates could
change, which could have an impact on operations and cash flows.
Capital expenditures totaled $31.0 million for the six months ended
September 30, 2002, and $15.3 million for the three months ended March 31,
2002. For the nine months ended September 30, 2001, capital expenditures were
$62.6 million. The decrease in 2002 is attributed to a decline in the purchase
of vehicles (which are now leased under a master operating lease).
50
Cash flows from financing activities primarily relate to our predecessor's
emergence from bankruptcy, which was reflected in the three months ended March
31, 2002. On the effective date of the plan of reorganization, we entered into:
. a five-year $75 million senior secured revolving credit facility that
will constitute a working capital facility for general corporate purposes
including working capital, capital expenditures and acquisitions. We have
no immediate plans to draw on this facility other than issuance of
letters of credit. The interest rates per annum applicable to the senior
secured revolving credit facility is LIBOR or, at our option, the
alternate base rate, which is the higher of (a) the rate of interest
publicly announced by UBS AG as its prime rate in effect at its Stamford
Branch, and (b) the federal funds effective rate from time to time plus
0.50%, in each case, plus the applicable margin. The applicable margin
with respect to the revolving credit facility, is determined in
accordance with a performance grid based on our consolidated leverage
ratio and ranges from 3.25% to 2.25% in the case of Eurodollar rate
advances and from 2.25% to 1.25% in the case of alternate base rate
advances.
. a six-year $200 million senior secured term loan, the proceeds of which
were used to repay certain pre-petition claims owed to Rotech Medical
Corporation's creditors as part of its plan of reorganization. The term
loan is repayable in an aggregate annual amount equal to 1% of the
principal amount each year for the first five years with the balance due
in year six. Interest is payable based on the election of either the
Eurodollar rate plus 3.00% or the prime rate plus 2.00%.
. An aggregate principal amount of $300 million of the old notes described
in this prospectus, the proceeds of which were used to repay certain
pre-petition claims owed to the creditors of our predecessor as part of
its plan of reorganization. The notes mature on April 1, 2012. Interest
of 9 1/2% is payable semi-annually in arrears on April 1 and October 1 of
each year.
Borrowings under the revolving credit facility and term loan are secured by
substantially all of our assets and the agreements impose numerous
restrictions, including, but not limited to, covenants requiring the
maintenance of certain financial ratios, limitations on additional borrowing,
capital expenditures, acquisitions and investments.
Upon our predecessor's emergence from bankruptcy, settlement agreements that
it had entered into with IHS and with the United States Government became
effective. Pursuant to the settlement agreement with IHS, Rotech Medical
Corporation and IHS have fully and finally satisfied the claims they have
against each other by an allocation of $40 million in cash and a $5 million
promissory note and the remainder of the cash on hand (approximately $40
million) was retained by IHS. Pursuant to the terms of the settlement agreement
with the United States Government, Rotech Medical Corporation paid to the
federal government $17 million in cash, in full settlement and satisfaction of
its claims against Rotech Medical Corporation and us for the conduct covered in
the agreement.
Our working capital requirements relate primarily to the working capital
needed for general corporate purposes and our plans to grow through internal
growth supplemented by acquisitions primarily in non-urban markets. Rotech
Medical Corporation has historically satisfied its working capital requirements
and capital expenditures from its operating cash flow, except with respect to
acquisitions during the time Rotech Medical Corporation was a subsidiary of
IHS, which were principally funded by IHS.
We currently have no commitments for capital expenditures over the next
twelve months other than to acquire equipment as needed to supply our patients.
Our business requires us to make significant capital expenditures relating to
the purchase and maintenance of the medical equipment used in our business. In
the year ended December 31, 2001, Rotech Medical Corporation's capital
expenditures were $79.8 million, representing 13.0% of its revenues. For the
six month period ended September 30, 2002, our capital expenditures were $31.0
million, representing 10.0% of our net revenues. Although we contemplate
consummating acquisitions in the next twelve months, including several
acquisitions for which we have entered into non-binding letters of intent, we
are not a party to any definitive agreement regarding any material acquisition.
We believe that the cash generated from our operations, together with amounts
available under the $75 million revolving credit facility, will be sufficient
to meet our working capital, capital expenditure and other cash needs for the
foreseeable future.
51
Selected quarterly financial data (unaudited)
The following table presents our unaudited quarterly results of operations
for 2000, 2001, March 31, 2002, June 30, 2002 and September 30, 2002. You
should read the following table in conjunction with the consolidated financial
statements and related notes appearing elsewhere in this prospectus. This
unaudited information has been prepared on a basis consistent with the audited
consolidated financial statements contained in this prospectus and includes all
adjustments, consisting only of normal recurring adjustments, that are
considered necessary for a fair presentation of our financial position and
operating results for the quarters presented. You should not draw any
conclusions about our future results from the results of operations for any
quarter.
[Enlarge/Download Table]
Three Months Ended
------------------------------------------------------------------------------------------------------
Predecessor Company Successor Company
----------------------------------------------------------------------------------- ------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30,
2000 2000 2000 2000 2001 2001 2001 2001 2002 2002 2002
-------- -------- --------- -------- -------- -------- --------- -------- -------- -------- ---------
(dollars in thousands)
Net revenues... $147,645 $145,607 $143,583 $131,869 $148,000 $155,590 $154,885 $156,012 $154,750 $154,993 $153,140
EBITDA(1)...... 31,857 30,636 31,305 16,385 39,079 42,709 42,719 42,380 43,580 40,995 33,469
Net earnings
(loss)........ 3,644 2,725 2,762 (17,898) 3,240 3,646 1,531 1,289 19,897 7,375 4,433
(1) See "Summary Consolidated Financial Data," footnote (6) on page 15 for a
detailed definition of EBITDA.
Recent accounting pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS No. 141"), and Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies the criteria
intangible assets acquired in a purchase method business combination must meet
in order to be recognized and reported apart from goodwill. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that
intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.
We were required to adopt the provisions of SFAS No. 141 effective July 1,
2001, except with regard to business combinations initiated prior to July 1,
2001, and SFAS No. 142 effective January 1, 2002. Furthermore, goodwill and
intangible assets determined to have an indefinite useful life acquired in a
purchase business combination completed after June 30, 2001, but before SFAS
No. 142 is adopted in full, will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-SFAS No. 142
accounting literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized and
tested for impairment in accordance with the appropriate pre-SFAS No. 142
accounting requirements prior to the adoption of SFAS No. 142. Had SFAS No. 141
and SFAS No. 142 been in effect for the years ended December 31, 1999, 2000 and
2001, amortization of goodwill would have been reduced by $18.9 million, $41.0
million and $47.8 million, respectively, and net earnings for such periods
would have increased by $15.9 million, $35.4 million and $42.2 million,
respectively.
The FASB recently issued Statement of Financial Accounting Standards No. 143
entitled Accounting for Asset Retirement Obligations, Statement of Financial
Accounting Standards No. 144 entitled Accounting for the Impairment or Disposal
of Long-Lived Assets, and Statement of Financial Accounting Standards No. 145
entitled Rescission of FASB Statements No. 4, 44 and 64--Amendment of FASB
Statement No. 13 and Technical Corrections. We believe the adoption of these
statements will have no significant effect on our financial statements.
52
Quantitative and qualitative disclosure about market risk
Concurrently with our predecessor's emergence from bankruptcy and the
transfer to us of its business and operations, we entered into (i) a five-year
$75 million senior secured revolving credit facility and (ii) a six-year $200
million senior secured term loan. Our earnings may be affected by changes in
interest rates relating to these debt facilities. Variable interest rates may
rise, which could increase the amount of interest expense. We did not incur any
interest expense in the year ended December 31, 2001. In March 2002, in
consideration for the transfer of the assets of our predecessor to us, we
borrowed the entire amount of the $200 million term loan and transferred the
proceeds of that loan to Rotech Medical Corporation to fund a portion of the
cash distributions made by Rotech Medical Corporation in connection with its
plan of reorganization. As of November 1, 2002, the $75 million senior secured
revolving credit facility had not been drawn upon, although standby letters of
credit totaling $5.0 million have been issued under this credit facility.
Assuming a hypothetical increase of one percentage point for the variable
interest rate applicable to the $200 million term loan, we would incur
approximately $1.5 million in additional interest expense for the period March
27, 2002 through December 31, 2002.
Critical accounting policies
The preparation of our financial statements in accordance with generally
accepted accounting principles requires us to make assumptions that affect the
reported amounts of assets, liabilities and disclosure of contingencies as of
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting periods. Critical accounting
policies are those that require the most complex or subjective judgments often
as a result of the need to make estimates about the effects of matters that are
inherently uncertain. Thus, to the extent that actual events differ from our
estimates and assumptions, there could be a material impact to our financial
statements. We believe that the critical accounting policies for our company
are those related to revenue recognition, accounts receivable, goodwill and
other intangibles.
The below listing is not intended to be a comprehensive list of all our
accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles with limited or no need for management's judgment. There are also
areas in which management's judgment in selecting available alternatives may or
may not produce a materially different result. For more information, see our
audited consolidated financial statements and notes thereto.
Revenue Recognition and Accounts Receivable
Revenues are recognized on the date services and related products are
provided to patients and are recorded at amounts estimated to be received under
reimbursement arrangements with third-party payors.
Due to the nature of the industry and the reimbursement environment in which
we operate, certain estimates are required to record net revenues and accounts
receivable at their net realizable values. Inherent in these estimates is the
risk that they will have to be revised or updated as additional information
becomes available. Specifically, the complexity of many third-party billing
arrangements and the uncertainty of reimbursement amounts for certain services
from certain payors may result in adjustments to amounts originally recorded.
Such adjustments are typically identified and recorded at the point of cash
application, claim denial or account review.
Management performs analyses to evaluate the net realizable value of
accounts receivable. Specifically, management considers historical realization
data, accounts receivable aging trends, other operating trends and relevant
business conditions. Because of continuing changes in the healthcare industry
and third-party reimbursement, it is possible that management's estimates could
change, which could have an impact on operations and cash flows.
53
We adopted Staff Accounting Bulletin No. 101, Revenue Recognition in
Financial Statements ("SAB 101"), in the fourth quarter of 2000. SAB 101
provides guidance on the proper timing of revenue recognition in accordance
with generally accepted accounting principles. The adoption of SAB 101 did not
have a material effect on our consolidated results of operations or financial
position.
Intangible Assets
Intangible assets represent the excess of cost over the fair value of assets
acquired and liabilities assumed in business combinations. Such assets are
amortized on a straight-line basis. Prior to the fourth quarter of 1999, we
amortized such assets using an estimated life of 40 years. However, as a result
of an evaluation of the impact of the Balanced Budget Act and other factors
affecting the industry, we began amortizing intangible assets using an
estimated life of 20 years. This change has been treated as a change in
accounting estimate and has been recognized prospectively beginning October 1,
1999.
We adopted SFAS No. 142 effective January 1, 2002. SFAS No. 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in accordance
with the provision of SFAS No. 142.
Management annually evaluates whether events or circumstances have occurred
that would indicate an impairment in the value or the life of goodwill. In
accordance with Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of ("SFAS No. 121"), if there is an indication that the carrying value
of an asset, including goodwill, is not recoverable, we estimate the projected
undiscounted cash flows, excluding interest, of our business to determine if an
impairment loss should be recognized. In this connection, we consider the
effects of external changes to our business environment, including competitive
pressures, market erosion and technological and regulatory changes. The
impairment loss is determined by comparing the carrying amount of the asset to
its estimated fair value. We perform this impairment analysis at the business
segment level.
Contingencies
Our business is subject to extensive laws and government regulations,
including those related to the Medicare and Medicaid programs. We are also
subject to a Corporate Integrity Agreement with the DHHS. Non-compliance with
such laws and regulations or the Corporate Integrity Agreement could subject us
to severe sanctions, including penalties and fines.
In 1999, we recorded a provision of $15 million based on a preliminary
evaluation of the government's estimated claims against us arising from
Medicare payments made to certain of our operating centers. We revised this
estimate and recorded an additional provision of $2 million in 2001. Legal
costs incurred in connection with the government claims were approximately $2
million in 2000 and $0.5 million in 2001.
In February 2002, we settled all outstanding government litigation and
pre-petition and certain post-petition claims arising from Medicare payments
made to certain of our operating centers as well as claims in unliquidated
amounts for a cash settlement of $17 million.
The Financial Accounting Standards Board's Statement of Financial Accounting
Standards No. 5, Accounting for Contingencies, provides guidance on the
application of generally accepted accounting principles related to these
matters. We evaluate and record liabilities for contingencies based on known
claims and legal actions when it is probable a liability has been incurred and
the liability can be reasonably estimated. We believe that our accrued
liabilities related to such contingencies are appropriate and in accordance
with generally accepted accounting principles.
54
Change in Independent Auditors
On December 18, 2002, we notified KPMG LLP that we were dismissing them as
our independent auditors. The change in independent auditors was recommended by
the audit committee of our board of directors and was approved by our board of
directors. KPMG's report on our financial statements for our two most recent
fiscal years did not contain an adverse opinion or a disclaimer of opinion and
was not qualified or modified as to audit scope or accounting principles.
KPMG's report on our consolidated financial statements as of December 31, 2000
and 2001 and for each of the years in the three year period ended December 31,
2001 contains an explanatory paragraph that states that the bankruptcy case of
our predecessor and its subsidiaries raised substantial doubt about our ability
to continue as a going concern. See "Experts." KPMG's report also contains an
explanatory paragraph that states that such consolidated financial statements
have been restated. See "Business--Restatement of financial results." We are
not aware of any disagreements with KPMG during our two most recent fiscal
years or any subsequent interim period preceding their dismissal on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure. We are not aware of any reportable events
described in Item 304 of Regulation S-K under the Securities Act during our two
most recent fiscal years or any subsequent interim period preceding KPMG's
dismissal, except that we restated our financial statements as discussed above.
KPMG will continue to act as our "Independent Review Organization" in
connection with our Corporate Integrity Agreement.
Effective February 10, 2003, we engaged the accounting firm of Deloitte &
Touche, LLP ("Deloitte") as our new independent accountants to audit our
financial statements for the fiscal year ending December 31, 2002. The
engagement of Deloitte was approved by our board of directors, including the
audit committee of the board of directors.
During the two most recent years and the subsequent interim period through
the date of this prospectus, neither we, nor anyone on our behalf, has
consulted with Deloitte regarding (i) the application of accounting principles
to a specified transaction (either completed or proposed), (ii) the type of
audit opinion that might be rendered on our financial statements, or (iii) any
matter that was either the subject of a disagreement, as that term is defined
in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to Item
304 of Regulation S-K, or a reportable event set forth in Item 304(a)(1)(v) of
Regulation S-K.
55
THE EXCHANGE OFFER
We are offering to issue new 9 1/2% Senior Subordinated Notes due 2012 in
exchange for a like principal amount of our old 9 1/2% Senior Subordinated
Notes due 2012. We may extend, delay or terminate the exchange offer, and
holders of old notes will need to complete the exchange offer documentation
related to the exchange.
Purpose and effect of the exchange offer
We entered into a registration rights agreement with the initial purchasers
of the old notes in which we agreed to file a registration statement relating
to an offer to issue the new notes in exchange for old notes as soon as
practicable after the closing of the offering of the old notes and to use our
best efforts to have it declared effective within 180 days after issuing the
old notes. We are offering the new notes under this prospectus to satisfy those
obligations under the registration rights agreement.
To receive transferable new notes in exchange for your old notes in the
exchange offer, you, as the holder of an old note, will be required to make the
following representations:
. you are not one of our "affiliates," as defined in Rule 144 of the
Securities Act of 1933, as amended (the "Securities Act"), or a
broker-dealer tendering old notes acquired directly from us for your own
account;
. you have no arrangement or understanding with any person to participate
in a distribution of the old notes or the new notes within the meaning of
the Securities Act;
. you are acquiring the new notes in the ordinary course of your business;
and
. if you are not a broker-dealer or if you are a broker-dealer but will not
receive new notes for your own account in exchange for old notes, you are
not engaged in and do not intend to participate in a distribution of the
new notes.
If you are a broker-dealer that will receive new notes for your own account
in exchange for old notes, you will be required to further represent that the
old notes to be exchanged for new notes were acquired by you as a result of
market-making activities or other trading activities and you will be required
to acknowledge that you will deliver a prospectus meeting the requirements of
the Securities Act in connection with the resale of any new notes. It is
understood that you are not admitting that you are an "underwriter" within the
meaning of the Securities Act by acknowledging that you will deliver, and by
delivery of, a prospectus.
In addition to the exchange offer registration statement to which this
prospectus relates, we have also agreed to file a shelf registration statement
to cover resales of the old notes under limited circumstances. We will file a
shelf registration statement with the SEC if:
. we are not required to file the exchange offer registration statement;
or
. we are not permitted to consummate the exchange offer because the
exchange offer is not permitted by applicable law or SEC policy; or
. any holder of old notes notifies us prior to the 20th day following
consummation of the exchange offer that:
. it is prohibited by law or SEC policy from participating in the
exchange offer; or
. it may not resell the new notes acquired by it in the exchange
offer to the public without delivering a prospectus and the
prospectus contained in the exchange offer registration statement
is not appropriate or available for such resales; or
. it is a broker-dealer and owns old notes acquired directly from us
or our affiliates.
See "Description of notes--Registration rights; liquidated damages."
56
Resale of new notes
Based on interpretations of the SEC staff in "no-action letters" issued to
third parties, we believe that each new note issued under the exchange offer
may be offered for resale, resold and otherwise transferred by you, the holder
of that new note, without compliance with the registration and prospectus
delivery provisions of the Securities Act if:
. you are not our "affiliate" within the meaning of Rule 144 under the
Securities Act;
. the new note is acquired in the ordinary course of your business; and
. you do not intend to participate in the distribution of new notes.
However, the SEC has not considered the legality of our exchange offer in
the context of a "no-action letter," and there can be no assurance that the SEC
staff would make a similar determination with respect to our exchange offer as
in other circumstances.
If you tender old notes in the exchange offer with the intention of
participating in any manner in a distribution of the new notes:
. you cannot rely on these interpretations by the SEC staff; and
. you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
Unless an exemption from registration is otherwise available, any security
holder intending to distribute new notes should be covered by an effective
registration statement under the Securities Act containing the selling
securityholder's information required by Item 507 or Item 508, as applicable,
of Regulation S-K under the Securities Act. This prospectus may be used by you
to offer for resale, resell or otherwise transfer new notes only as
specifically described in this prospectus. Failure to comply with the
registration and prospectus delivery requirements by a holder subject to these
requirements could result in that holder incurring liability for which it is
not indemnified by us. Only broker-dealers that acquired the old notes as a
result of market-making activities or other trading activities may participate
in the exchange offer. Please read the section captioned "Plan of distribution"
for more details regarding the transfer of new notes.
Terms of the exchange offer
Upon the terms and subject to the conditions described in this prospectus
and in the letter of transmittal, we will accept for exchange any old notes
properly tendered and not withdrawn before the expiration date. We will issue
$1,000 principal amount of new notes in exchange for each $1,000 principal
amount of old notes surrendered under the exchange offer. Old notes may be
tendered only in integral multiples of $1,000. The exchange offer is not
conditioned upon any minimum aggregate principal amount of old notes being
tendered for exchange.
As of the date of this prospectus, $300 million aggregate principal amount
of old notes are outstanding. This prospectus and the letter of transmittal
included with this prospectus are being sent to all registered holders of old
notes. There will be no fixed record date for determining registered holders of
old notes entitled to participate in the exchange offer.
We intend to conduct the exchange offer according to the provisions of the
registration rights agreement, the applicable requirements of the Securities
Act and the Exchange Act and the rules and regulations of the SEC. Old notes
that are not tendered for exchange in the exchange offer will remain
outstanding and continue to accrue interest and will be entitled to the rights
and benefits the holders have under the indenture relating to the notes.
57
We will be deemed to have accepted for exchange properly tendered old notes
when we have given oral or written notice of the acceptance to the exchange
agent and complied with the applicable provisions of the registration rights
agreement. The exchange agent will act as agent for the tendering holders for
the purposes of receiving the new notes.
Holders tendering old notes in the exchange offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the letter
of transmittal, transfer taxes with respect to the exchange of old notes. We
will pay all charges and expenses, other than certain applicable taxes
described below, in connection with the exchange offer. It is important for
holders to read the section captioned "Fees and expenses" for more details
regarding fees and expenses incurred in the exchange offer.
We will return any old notes that we do not accept for exchange for any
reason without expense to the tendering holder as promptly as practicable after
the expiration or termination of the exchange offer.
Expiration date
The exchange offer will expire at midnight, New York City time, on
, 2003 unless, in our sole discretion, we extend the exchange offer.
Extensions, delay in acceptance, termination or amendment
We expressly reserve the right, at any time or at various times, to extend
the period of time during which the exchange offer is open. During any
extensions, all old notes previously tendered will remain subject to the
exchange offer, and we may accept them for exchange.
To extend the exchange offer, we will notify the exchange agent orally or in
writing of any extension. We will also make a public announcement of the
extension no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date.
If any of the conditions described below under "Conditions to the exchange
offer" have not been satisfied, we reserve the right, in our sole discretion:
. to delay accepting for exchange any old notes;
. to extend the exchange offer; or
. to terminate the exchange offer;
in each case by giving oral or written notice of a delay, extension or
termination to the exchange agent. Subject to the terms of the registration
rights agreement, we also reserve the right to amend the terms of the exchange
offer in any manner.
Any delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice to the registered
holders of the old notes. If we amend the exchange offer in a manner we
determine to constitute a material change, we will promptly disclose the
amendment by means of a prospectus supplement. The supplement will be
distributed to the registered holders of the old notes. Depending upon the
nature and significance of the amendment and the manner of disclosure to the
registered holders, we will extend the exchange offer for an additional 5 to 20
business days.
Without limiting the manner in which we may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the exchange offer, we will have no obligation to publish, advertise or
otherwise communicate any public announcement, other than by making a timely
release to the Dow Jones News Service.
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Conditions to the exchange offer
Despite any other term of the exchange offer, if in our reasonable judgment
the exchange offer, or the making of any exchange by a holder of old notes,
would violate applicable law or any applicable interpretation of the staff of
the SEC:
. we will not be required to accept for exchange, or exchange any new notes
for, any old notes; and
. we may terminate the exchange offer as provided in this prospectus before
accepting any old notes for exchange.
In addition, we will not be obligated to accept for exchange the old notes
of any holder that has not made:
. the representations described under "Purpose and effect of the exchange
offer," "Procedures for tendering" and "Plan of distribution"; and
. other representations as may be reasonably necessary under applicable SEC
rules, regulations or interpretations to make available to us an
appropriate form for registration of the new notes under the Securities
Act.
We expressly reserve the right to amend or terminate the exchange offer, and
to reject for exchange any old notes not previously accepted for exchange, upon
the occurrence of any of the conditions to the exchange offer specified above.
We will give oral or written notice of any extension, amendment, non-acceptance
or termination to the holders of the old notes as promptly as practicable.
These conditions are for our sole benefit, and we may assert them or waive
them, in whole or in part, at any time or at various times prior to the
expiration of the exchange offer in our sole discretion. If we fail at any time
to exercise any of these rights, this failure will not mean that we have waived
our rights. Each right will be deemed an ongoing right that we may assert at
any time or at various times prior to the expiration of the exchange offer. In
addition, we will not accept for exchange any old notes tendered and will not
issue new notes in exchange for any old notes, if at that time any stop order
has been threatened or is in effect with respect to the registration statement
of which this prospectus constitutes a part or the qualification of the
indenture relating to the notes under the Trust Indenture Act of 1939.
Procedures for tendering
How to Tender Generally
Only a holder of old notes may tender old notes in the exchange offer. To
tender in the exchange offer, you must either comply with the procedures for
manual tender or comply with the automated tender offer program procedures of
DTC described below under "Tendering through DTC's automated tender offer
program."
To complete a manual tender, you must:
. complete, sign and date the letter of transmittal, or a facsimile of the
letter of transmittal;
. have the signature on the letter of transmittal guaranteed if the letter
of transmittal so requires;
. mail or deliver the letter of transmittal or a facsimile of the letter of
transmittal to the exchange agent before the expiration date; and
. deliver (and the exchange agent must receive before the expiration date):
. the old notes along with the letter of transmittal; or
. a timely confirmation of book-entry transfer of the old notes into the
exchange agent's account at DTC according to the procedure for
book-entry transfer described below under "Book-entry transfer."
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If you wish to tender your old notes and cannot comply with the requirement
to deliver the letter of transmittal and your old notes or use the automated
tender offer program of DTC before the expiration date, you must tender your
old notes according to the guaranteed delivery procedures described below.
To be tendered effectively, the exchange agent must receive physical
delivery of the letter of transmittal and other required documents at its
address provided above under "Summary of the exchange offer--The exchange
agent" before the expiration date. The tender by a holder that is not withdrawn
before the expiration date will constitute an agreement between the holder and
us according to the terms and subject to the conditions described in this
prospectus and in the letter of transmittal.
The method of delivery of old notes, the letter of transmittal and all other
required documents to the exchange agent is at your election and risk. Rather
than mail these items, we recommend that you use an overnight or hand delivery
service. In all cases, you should allow sufficient time to assure delivery to
the exchange agent before the expiration date. You should not send the letter
of transmittal or old notes to us. You may request your brokers, dealers,
commercial banks, trust companies or other nominees to effect the above
transactions on your behalf.
Book-Entry Transfer
The exchange agent will make a request to establish an account with respect
to the old notes at DTC for purposes of the exchange offer promptly after the
date of this prospectus. Any financial institution participating in DTC's
system may make book-entry delivery of old notes by causing DTC to transfer the
old notes into the exchange agent's account at DTC according to DTC's
procedures for transfer. Holders of old notes who are unable to deliver
confirmation of the book-entry tender of their old notes into the exchange
agent's account at DTC or all other documents required by the letter of
transmittal to the exchange agent on or before the expiration date must tender
their old notes according to the guaranteed delivery procedures described below.
Tendering Through DTC's Automated Tender Offer Program
The exchange agent and DTC have confirmed that any financial institution
that is a participant in DTC's system may use DTC's automated tender offer
program to tender its old notes. Participants in the program may, instead of
physically completing and signing the letter of transmittal and delivering it
to the exchange agent, transmit their acceptance of the exchange offer
electronically. They may do so by causing DTC to transfer the old notes to the
exchange agent according to its procedures for transfer. DTC will then send an
agent's message to the exchange agent.
The term "agent's message" means a message transmitted by DTC, received by
the exchange agent and forming part of the book-entry confirmation, stating
that:
. DTC has received an express acknowledgment from a participant in its
automated tender offer program that the participant is tendering old
notes that are the subject of book-entry confirmation;
. the participant has received and agrees to be bound by the terms of the
letter of transmittal or, in the case of an agent's message relating to
guaranteed delivery, that the participant has received and agrees to be
bound by the applicable notice of guaranteed delivery; and
. the agreement may be enforced against the participant.
How To Tender If You Are a Beneficial Owner
If you beneficially own old notes that are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and you wish to
tender those notes, you should contact the registered holder promptly
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and instruct it to tender on your behalf. If you are a beneficial owner and
wish to tender on your own behalf, you must, before completing and executing
the letter of transmittal and delivering your old notes, either:
. make appropriate arrangements to register ownership of the old notes in
your name; or
. obtain a properly completed bond power from the registered holder of old
notes.
The transfer of registered ownership may take considerable time and may not
be completed before the expiration date.
Signatures and Signature Guarantees
Except as described below, you must have signatures on a letter of
transmittal or a notice of withdrawal described below guaranteed by:
. a member firm of a registered national securities exchange;
. a member of the National Association of Securities Dealers, Inc.;
. a commercial bank or trust company having an office or correspondent in
the United States; or
. an "eligible guarantor institution" within the meaning of Rule 17Ad-15
under the Exchange Act.
The above must be a member of one of the recognized signature guarantee
programs identified in the letter of transmittal. No signature guarantee is
required if the old notes are tendered:
. by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the letter
of transmittal and the new notes are being issued directly to the
registered holder of the old notes tendered in the exchange for those new
notes; or
. for the account of a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the
United States, or an eligible guarantor institution.
When endorsements or bond powers are needed
If the letter of transmittal is signed by a person other than the registered
holder of any old notes, the old notes must be endorsed or accompanied by a
properly completed bond power. The bond power must be signed by the registered
holder as the registered holder's name appears on the old notes and a member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an eligible guarantor
institution must guarantee the signature on the bond power.
If the letter of transmittal or any old notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, those
persons should so indicate when signing. They should also submit evidence of
their authority to deliver the letter of transmittal satisfactory to us unless
we waive this requirement.
Determinations under the exchange offer
We will determine in our sole discretion all questions as to the validity,
form, eligibility, time of receipt, acceptance of tendered old notes and
withdrawal of tendered old notes. Our determination will be final and binding.
We reserve the absolute right to reject any old notes not properly tendered or
any old notes our acceptance of which would, in the opinion of our counsel, be
unlawful. We also reserve the right to waive any defects, irregularities or
conditions of tender as to particular old notes. Our interpretation of the
terms and conditions of the exchange offer, including the instructions in the
letter of transmittal, will be final and binding
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on all parties. Unless waived, any defects or irregularities in connection with
tenders of old notes must be cured within the time we shall determine. Neither
we, the exchange agent nor any other person will be under any duty to give
notification of defects or irregularities with respect to tenders of old notes,
and none of the aforementioned will incur liability for failure to give
notification. Tenders of old notes will not be deemed made until any defects or
irregularities have been cured or waived. Any old notes received by the
exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned to the tendering
holder, unless otherwise provided in the letter of transmittal, as soon as
practicable following the expiration date.
When we will issue new notes
In all cases, we will not issue new notes for old notes that we have
accepted for exchange under the exchange offer until the exchange agent has
received:
. old notes or a timely book-entry confirmation of the old notes into the
exchange agent's account at DTC; and
. a properly completed and duly executed letter of transmittal and all
other required documents or properly transmitted agent's message.
With respect to persons who have made these required deliveries, the new
notes will be issued promptly upon consummation of the exchange offer.
Return of old notes not accepted or exchanged
If we do not accept any tendered old notes for exchange for any reason
described in the terms and conditions of the exchange offer or if old notes are
submitted for a greater principal amount than the holder desires to exchange,
the unaccepted or nonexchanged old notes will be returned without expense to
their tendering holder. In the case of old notes tendered by book-entry
transfer into the exchange agent's account at DTC according to the procedures
described below, the nonexchanged old notes will be credited to an account
maintained with DTC. These actions will occur as promptly as practicable after
the expiration or termination of the exchange offer.
Your representations to us
By signing or agreeing to be bound by the letter of transmittal, you will
represent that, among other things:
. you are not our "affiliate" as defined in Rule 144 of the Securities Act
or a broker-dealer tendering old notes acquired directly from us for your
own account;
. you have no arrangement or understanding with any person to participate
in a distribution of the old notes or the new notes within the meaning of
the Securities Act;
. you are acquiring the new notes in the ordinary course of your business;
and
. if you are not a broker-dealer or are a broker-dealer but will not
receive new notes for your own account in exchange for old notes, you are
not engaged in and do not intend to participate in a distribution of the
new notes.
If you are a broker-dealer that will receive new notes for your own account
in exchange for old notes, you will be required to further represent that the
old notes to be exchanged for new notes were acquired by you as a result of
market-making activities or other trading activities and you will be required
to acknowledge that you will deliver a prospectus meeting the requirements of
the Securities Act in connection with the resale of any new notes. It is
understood that you are not admitting that you are an "underwriter" within the
meaning of the Securities Act by acknowledging that you will deliver, and by
delivery of, a prospectus.
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Guaranteed delivery procedures
If you wish to tender your old notes but your old notes are not immediately
available or you cannot deliver your old notes, the letter of transmittal or
any other required documents to the exchange agent or comply with the
applicable procedures under DTC's automated tender offer program before the
expiration date, you may tender if:
. the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or
correspondent in the United States or an eligible guarantor institution;
. before the expiration date, the exchange agent receives from the member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., commercial bank or trust company
having an office or correspondent in the United States, or eligible
guarantor institution either a properly completed and duly executed
notice of guaranteed delivery by facsimile transmission, mail or hand
delivery or a properly transmitted agent's message and notice of
guaranteed delivery:
. stating your name and address, the registered number(s) of your old
notes and the principal amount of old notes tendered;
. stating that the tender is being made;
. guaranteeing that, within three business days after the expiration
date, the letter of transmittal or facsimile thereof, together with
the old notes or a book-entry confirmation and any other documents
required by the letter of transmittal will be deposited by the
eligible guarantor institution with the exchange agent; and
. the exchange agent receives the properly completed and executed letter
of transmittal or facsimile thereof, as well as all tendered old notes
in proper form for transfer or a book-entry confirmation, and all
other documents required by the letter of transmittal, within three
business days after the expiration date.
Upon request to the exchange agent, the exchange agent will send you a
notice of guaranteed delivery if you wish to tender your old notes using the
guaranteed delivery procedures described above.
Withdrawal of tenders
Except as otherwise provided in this prospectus, you may withdraw your
tender at any time before midnight, New York City time, on the expiration date
unless previously accepted for exchange. For a withdrawal to be effective:
. the exchange agent must receive a written notice of withdrawal at one of
the addresses listed above under "Summary--The exchange agent"; or
. the withdrawing holder must comply with the appropriate procedures of
DTC's automated tender offer program system.
Any notice of withdrawal must:
. specify the name of the person who tendered the old notes to be withdrawn
(the "Depositor");
. identify the old notes to be withdrawn, including the registration number
or numbers and the principal amount of the old notes;
. be signed by the Depositor in the same manner as the original signature
on the letter of transmittal used to deposit those old notes or be
accompanied by documents of transfer sufficient to permit the trustee for
the old notes to register the transfer into the name of the Depositor
withdrawing the tender; and
. specify the name in which the old notes are to be registered, if
different from that of the Depositor.
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If old notes have been tendered under the procedure for book-entry transfer
described above, any notice of withdrawal must specify the name and number of
the account at DTC to be credited with the withdrawn old notes and otherwise
comply with the procedures of DTC.
We will determine all questions as to the validity, form, eligibility and
time of receipt of notice of withdrawal, and our determination shall be final
and binding on all parties. We will deem any old notes so withdrawn not to have
been validly tendered for exchange for purposes of the exchange offer.
Any old notes that have been tendered for exchange but that are not
exchanged for any reason will be returned to their holder without cost to the
holder or, in the case of old notes tendered by book-entry transfer into the
exchange agent's account at DTC according to the procedures described above,
the old notes will be credited to an account maintained with DTC for the old
notes. This return or crediting will take place as soon as practicable after
withdrawal, rejection of tender or termination of the exchange offer. Holders
may retender properly withdrawn old notes by following one of the procedures
described under "--Procedures for tendering" above at any time on or before the
expiration date.
Fees and expenses
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail. We may, however, make additional solicitation by
telegraph, telephone or in person by our officers and regular employees and
those of our affiliates.
We have not retained any dealer-manager in connection with the exchange
offer and will not make any payments to broker-dealers or others soliciting
acceptances of the exchange offer. We will, however, pay the exchange agent
reasonable and customary fees for its services and reimburse it for its related
reasonable out-of-pocket expenses. We may also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this prospectus, letters of
transmittal and related documents to the beneficial owners of the old notes and
in handling or forwarding tenders for exchange.
We will pay the cash expenses to be incurred in connection with the exchange
offer, including:
. SEC registration fees;
. fees and expenses of the exchange agent and trustee;
. accounting and legal fees and printing costs; and
. related fees and expenses.
Transfer taxes
We will pay all transfer taxes, if any, applicable to the exchange of old
notes under the exchange offer. The tendering holder, however, will be required
to pay any transfer taxes, whether imposed on the registered holder or any
other person, if:
. certificates representing old notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the
name of, any person other than the registered holder of old notes
tendered;
. tendered old notes are registered in the name of any person other than
the person signing the letter of transmittal; or
. a transfer tax is imposed for any reason other than the exchange of old
notes under the exchange offer.
If satisfactory evidence of payment of any transfer taxes payable by a note
holder is not submitted with the letter of transmittal, the amount of the
transfer taxes will be billed directly to that tendering holder.
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Consequences of failure to exchange
If you do not exchange your old notes for new notes in the exchange offer,
your old notes will remain subject to the existing restrictions on transfer. In
general, you may not offer or sell the old notes unless they are registered
under the Securities Act or the offer or sale is exempt from registration under
the Securities Act and applicable state securities laws. Except as required by
the registration rights agreement, we do not intend to register resales of the
old notes under the Securities Act. Based on interpretations of the SEC staff,
you may offer for resale, resell or otherwise transfer new notes issued in the
exchange offer without compliance with the registration and prospectus delivery
provisions of the Securities Act, if:
. you are not our "affiliate" within the meaning of Rule 144 under the
Securities Act;
. you acquired the new notes in the ordinary course of your business; and
. you have no arrangement or understanding with respect to the distribution
of the new notes to be acquired in the exchange offer.
If you tender your old notes in the exchange offer for the purpose of
participating in a distribution of the new notes:
. you cannot rely on the applicable interpretations of the SEC; and
. you must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction.
Accounting treatment
We will not recognize a gain or loss for accounting purposes upon the
consummation of the exchange offer. We will amortize expenses of the exchange
offer over the term of the new notes under accounting principles generally
accepted in the United States of America.
Other
Participation in the exchange offer is voluntary, and you should carefully
consider whether to accept. You are urged to consult your financial and tax
advisors in making your own decision on what action to take.
We may, in the future, seek to acquire untendered old notes in open market
or privately negotiated transactions, through subsequent exchange offers or
otherwise. We have no present plans to acquire any old notes that are not
tendered in the exchange offer or to file a registration statement to permit
resales of any untendered old notes.
65
BUSINESS
Our predecessor emerged from bankruptcy on March 26, 2002 and subsequently
transferred all of its assets to us in a restructuring transaction. As a
result, references to "we", "our", and "us" refer to the operations of Rotech
Healthcare Inc., a Delaware corporation, and its subsidiaries for all periods
beginning on March 26, 2002 and the business and operations of our predecessor,
Rotech Medical Corporation, a Florida corporation, and its subsidiaries for all
periods prior to March 26, 2002.
Our business
We are one of the largest providers of home medical equipment and related
products and services in the United States, with a comprehensive offering of
respiratory therapy and durable home medical equipment and related services. We
provide equipment and services in 48 states through over 600 operating centers
located primarily in non-urban markets. We believe that these markets provide
certain advantages, including less competition from national providers and
lower operating costs. We provide our equipment and services to the expanding
population of principally older patients with breathing disorders such as
chronic obstructive pulmonary diseases, or COPD (which include chronic
bronchitis and emphysema), obstructive sleep apnea and other cardiopulmonary
disorders.
Our revenues are principally derived from respiratory equipment rental and
related services (75.2% of revenues for the year ended December 31, 2001),
which include rental of oxygen concentrators, liquid oxygen systems, portable
oxygen systems, ventilator therapy systems, nebulizer equipment and sleep
disorder breathing therapy systems, and the sale of nebulizer medications. We
also generate significant revenues through the rental and sale of durable
medical equipment (21.5% of revenues for the year ended December 31, 2001),
including hospital beds, wheelchairs, walkers, patient aids and ancillary
supplies. We derive a majority of our revenues from reimbursement by
third-party payors, including Medicare, Medicaid, the Veterans Administration
and private insurers. For the year ended December 31, 2001, we generated net
revenues of $614.5 million and net earnings of $9.7 million. For the same
period, net cash provided by operating activities was $116.1 million, net cash
provided by operating activities and reorganization items was $114.0 million
and net cash used in investing activities and net cash used in financing
activities were $85.0 million and $39.1 million, respectively. EBITDA for the
year ended December 31, 2001 was $166.9 million. For the six months ended
September 30, 2002, we generated net revenues of $308.1 million and net
earnings of $11.8 million. For the same period, net cash provided by operating
activities was $58.7 million, net cash provided by operating activities and
reorganization items was $57.2 million and net cash used in investing
activities and net cash used in financing activities were $34.2 million and
$6.0 million, respectively. EBITDA for the six months ended September 30, 2002
was $74.5 million. During the six months ended September 30, 2002, we incurred
one-time charges of $4.9 million for special investigation and severance costs.
Had these one-time charges not been incurred, EBITDA for the six months ended
September 30, 2002 would have been $79.3 million. See "Summary Consolidated
Financial Data," footnote (6) on page 15 for a detailed definition of EBITDA.
Industry overview
According to the Centers for Medicare and Medicaid Services, or CMS, the
home health care market was estimated to be $41.3 billion in the United States
in 2001, and is projected by CMS to grow at a rate of approximately 8% annually
through 2005. The home health care services industry consists of home nursing
and related services, infusion and nutrition therapies and home medical
equipment. The market segment in which we compete is the home medical equipment
market, which forms a part of the overall home health care market and primarily
consists of respiratory therapy and durable home medical equipment and related
services. The home medical equipment market is highly fragmented, with an
estimated 2,000 providers. Most of these providers are smaller local service
providers, very few of which have national scale and scope.
We believe the home medical equipment market is benefiting from a number of
favorable trends which we expect will continue to support the growth of our
business, including the following:
. according to an April 2000 industry report by Frost and Sullivan,
respiratory therapy equipment and related services, which primarily
consists of the rental and sale of oxygen equipment and related
medication, is projected to grow at a rate of 7% to 9% annually through
2006;
66
. according to the same industry report, durable medical equipment, which
consists of the rental and sale of a broad range of medical equipment for
use in the home, is projected to grow at a rate of 7% to 8% annually
through 2006;
. the United States Census Bureau predicts that the aging of the "baby
boomers" will increase the number of persons over 65 from approximately
34.9 million in 2000 to over 39.7 million by 2010. This group, which
comprised just over 12% of the total population in 2000, has historically
been the most frequent user of home health care services; and
. spending on home health care has increased, with the continued trend
towards treatment of patients in the home as a lower cost alternative to
the acute care setting. We believe this trend towards care at home will
continue as patients typically prefer the convenience and freedom of
treatment at home over hospitalization.
Our service lines
Respiratory Therapy
We provide a wide range of respiratory therapy equipment, including oxygen
concentrators, liquid oxygen systems, portable oxygen systems, ventilator
therapy systems, nebulizer equipment, and sleep disorder breathing therapy
systems, for rental or sale. Patients in need of respiratory equipment and
services suffer from breathing disorders such as COPD, obstructive sleep apnea
and other cardiopulmonary disorders. Individuals diagnosed with COPD or similar
diseases are often elderly, and will generally require treatment for the rest
of their lives. The majority of our respiratory therapy equipment is rented and
reimbursed on a monthly basis. We also generate revenue from the sale of
nebulizer medications, including albuterol and ipratropium. We provide driver
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. Respiratory
therapy is monitored by licensed respiratory therapists and other clinical
staff as prescribed by physicians. We currently employ approximately 750
respiratory therapists. Respiratory therapy equipment rental and related
services represented 75.2% of our revenues for the year ended December 31, 2001.
Our home respiratory care equipment includes three types of oxygen systems:
. stationary concentrators, which 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, which store oxygen under pressure in a liquid form
and act as both stationary and portable systems; and
. high pressure oxygen cylinders, which are typically portable systems that
permit greatly enhanced patient mobility.
Other home respiratory care equipment includes non-invasive positive
pressure ventilators (NPPV), nebulizer devices and continuous positive airway
pressure (CPAP) devices. NPPVs are used by individuals who suffer from certain
other respiratory conditions by mechanically assisting the individual to
breathe. Nebulizer devices aerosolize our nebulizer medications and allow the
medications to be inhaled directly into the patient's lungs. CPAP devices
deliver air into a patient's airway through a specially designed nasal mask or
pillow.
Below are some specific details regarding the primary respiratory diseases
and ailments that we treat:
Chronic Obstructive Pulmonary Disease. Many of our patients suffer from
COPD and therefore require supplemental oxygen or other respiratory therapy
equipment and services to alleviate the symptoms and discomfort they experience
from respiratory dysfunction. COPD is a progressive disease best treated by
early intervention. By starting treatment earlier in the life cycle of the
disease, the progression of COPD is slowed and
67
patients benefit from a higher quality of life. COPD is a chronic, incurable
disease for which patients may eventually need supplemental oxygen for the rest
of their lives. Prior to 1980, COPD was treated primarily in hospitals. During
the 1980s, outpatient treatment involving respiratory therapy was developed and
Medicare guidelines were implemented to cover it. According to the American
Lung Association:
. there are currently over 16 million people diagnosed with COPD in the
United States and over 100,000 die from COPD each year. It is estimated
that there is a large undiagnosed population and the total number of
people suffering from COPD in the United States is approximately 30
million;
. approximately 80% to 90% of COPD cases are caused by smoking, with other
known causes being frequent lung infections and exposure to air
pollutants;
. an estimated 1.8 million Americans have emphysema (which is one
manifestation of COPD). Emphysema causes the walls between the air sacs
within the lungs to lose their ability to stretch and recoil, causing air
to be trapped in the air sacs and impairing the exchange of oxygen and
carbon dioxide; and
. approximately 9 million people are diagnosed with chronic bronchitis
(which is one manifestation of COPD) annually. Bronchitis is an
inflammation of the lining of the bronchial tubes, which connect the
windpipe with the lungs. If these tubes are inflamed, less air is able to
flow to and from the lungs.
Obstructive Sleep Apnea. Some of our patients suffer from obstructive sleep
apnea, which is a condition characterized by repeated episodes of disrupted
breathing during sleep. Such patients also require respiratory therapy
equipment and services. Researchers estimate that there are currently
approximately 30 million people suffering from obstructive sleep apnea in the
United States, of which only 5% are diagnosed and treated.
Other. Other cardiopulmonary diseases such as stroke (affecting
approximately 4 million people in the United States) and lung cancer also
frequently require home respiratory equipment and services, as do pneumonias
associated with HIV/AIDS. Our services are also frequently required by persons
suffering from non-pulmonary disorders, including neuromuscular diseases such
as motor neuron disease, muscular dystrophy/atrophy, spinal cord injury,
myasthenia gravis and diaphragmatic paralysis, where respiratory insufficiency
or failure is often a factor.
Durable Medical Equipment
We provide a comprehensive line of durable medical equipment, such as
hospital beds, wheelchairs, walkers, patient aids and other ancillary supplies,
for rental or sale, to serve the specific needs of our patients. Typically,
lower cost items, such as patient aids and walkers, are sold and higher cost
items, such as hospital beds and wheelchairs, are rented. We consider durable
medical equipment to be a complementary offering to respiratory therapy
equipment and related services.
Other Services
We also provide other services to our patients, including nutrition therapy
and pharmacy services. These services are provided on a limited basis and are
intended to complement our core respiratory business.
Competitive strengths
We believe the following are our key competitive strengths:
Leader in Non-Urban Markets
We are a leading provider of respiratory therapy and durable medical
equipment and related services in non-urban markets. We primarily compete in
these markets against smaller local and regional service providers. We offer
our patients a broad range of complementary equipment and services on a scale
which is not typically
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matched by many of our smaller competitors. We encourage our operating centers
to maintain their local identity and community presence and to strengthen their
relationships with local physicians and patients, while benefiting from the
size and scope of our national operations.
Stable and Diversified Patient Demand
The patient demand for our equipment and services is stable and is not
materially impacted by changes in general economic conditions. Our patients
will typically require medical care and respiratory equipment and services for
the rest of their lives. The stability of our business is further enhanced by
the geographic diversity of our operations, with no individual operating center
or payor contract contributing a significant portion of our revenues.
Economies of Scale
The scale of our operations allows us to achieve cost efficiencies which we
believe gives us an advantage over our smaller competitors in negotiating
contracts with suppliers, vendors, commercial insurers and other third parties.
In addition, due to our size, we have been able to centralize various
administrative services and spread the costs of these services over our entire
operation. Additionally, our technology platform allows us to achieve cost
efficiencies and acquisition integration capabilities which we believe provide
us with a competitive advantage, and allow us to provide a consistent level of
patient service and support.
Relationships with Referring General Health Care Practitioners
We rely on our extensive network of relationships with general health care
practitioners to secure permitted referrals to new patients and for the
provision of additional equipment and medications to meet the medical needs of
existing patients. We have historically retained many of the former owners
and/or employees of operating centers we have acquired to serve as our regional
managers, which we believe has allowed us to retain valuable community-based
physician and patient relationships across our national network. In addition,
we employ individuals who are responsible for maintaining existing
relationships and developing new relationships with referring physicians. We
focus on relationships with general health care practitioners, because we
believe that they play a greater role in non-urban areas than specialists and
can help involve us in the identification and early treatment of a patient's
disease, which often enables us to retain patients for a longer period of time.
Proprietary Technology and Systems Capabilities
Our proprietary billing system is used for substantially all of our billing
sources, including Medicare, Medicaid and other third-party payors. Our
proprietary system is operated from a centralized data center and uses the same
software for each of our billing classes of products and payors. Our system is
designed to help facilitate regulatory compliance by our employees in our
billing practices. The system is scalable and capable of accommodating our
planned growth for the foreseeable future.
Our business strategy
Our strategy is to enhance our leadership position in the home medical
equipment market and to increase our sales and profitability. The following are
the key elements of our strategy:
Continue to Concentrate on Non-Urban Markets
We intend to continue to differentiate ourselves from our two largest
competitors by focusing primarily on non-urban markets. Recent data by the
United States Census Bureau and American Medical Association reports that
approximately 55 million people live in non-urban areas (the United States
census refers to non-urban areas as "non-metropolitan" areas) in the United
States. We believe that these markets provide certain advantages, including
less competition from national providers and lower operating costs.
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Our focus includes marketing to primary care/family physicians to a greater
extent than pulmonary specialists. These general practitioners, who play a
larger role in patient care in non-urban areas, help us become involved in the
identification and early treatment of a patient's disease, which often permits
us to retain patients for a longer period of time.
Increased Emphasis on Respiratory Therapy
We have historically experienced greater profitability in respiratory
therapy than durable medical equipment and we expect that trend to continue. As
a result, our goal is to continue to increase the percentage of our revenues
generated from home respiratory therapy equipment and related services. To
achieve this objective we will continue to train our staff on ways to increase
the utilization of our services by existing patients through physician
education and improved patient compliance and to secure additional referral
sources to increase the number of new respiratory patients. Our initiatives to
increase revenues from our respiratory therapy business include the following:
. Oxygen Patient Growth and Retention: We focus on oxygen patient growth
through additional physician referrals and an oxygen retention program.
We emphasize to our employees the importance of patient base growth and
retention by providing quality service to general health care
practitioners and their patients. Our employees, which include
respiratory therapists, pharmacists and nurses, market all of our
equipment and services. They are responsible for maintaining and
expanding our relationships with physicians, with an emphasis on primary
care physicians and general practitioners in non-urban areas. We provide
marketing, training, product and service information to all of our
technical personnel through our intranet and through seminars conducted
on a company-wide basis so that they can communicate effectively with
physicians about our equipment and services and counsel them on new
procedures and medical technologies. We emphasize the cross-marketing of
all our equipment and services to physicians with which we have already
developed professional relationships. The goal of our oxygen retention
program is to improve patient compliance and reduce the number of
patients that discontinue service. We aim to retain our patients through
the rest of their lives.
. Nebulizer Medication Program: The goal of our nebulizer medication
program is to educate physicians, concentrate on re-orders to ensure
compliance with physician prescriptions, and emphasize major quality of
life benefits for patients. In addition to supporting patient compliance,
the program communicates to physicians the benefits of identifying the
disease in its early stages and the benefits of the relationship between
medication dosage and oxygen.
Focus on Operating Efficiencies and Improving Margins
We intend to complete a series of recent initiatives designed to improve our
operating efficiencies and strengthen us for future growth. These initiatives,
which began in April 2000, include reducing the number of billing and
purchasing centers and field offices and utilizing our proprietary information
technology platform to continue to centralize billing, compliance, inventory
and purchasing systems. These initiatives have been important factors in
improving our EBITDA margins from 19.4% for the year ended December 31, 2000 to
27.2% for the year ended December 31, 2001. See "Summary of Consolidated
Financial Data," Footnote (6) on page 15 for a detailed definition for EBITDA.
Since April 2000, we have reduced the number of billing centers from 62 to
27. We expect to further reduce the number of billing centers in 2002 and 2003.
The reduction of billing centers allows for increased control with fewer
individuals administering the process, reduces our lease costs and facilitates
the further implementation of compliance controls.
We are developing our information technology platform to create a
comprehensive technology infrastructure that can track inventory and purchasing
on a store-by-store basis. We believe that this will help us ensure that our
inventory is being used at its most efficient levels by tracking the useful
life, maintenance and location of the equipment at all times. We believe that
this will also allow us to monitor our purchasing levels, and only keep the
necessary amount of inventory on hand and in the appropriate place. Full
implementation is expected in 2002.
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We also are centralizing our purchasing approval process and reducing the
number of our purchasing centers. Since April 2000 we have reduced the number
of purchasing centers from 94 to 8. We expect to further reduce the number of
purchasing centers.
In connection with our reduction in field operation costs, we have worked to
more efficiently allocate our employees by reducing headcount in
under-performing regions and creating a corporate approval process for new and
replacement hires. In addition, we have streamlined our reporting structure,
which has significantly improved communication not only between our operating
centers, but also with corporate management. Overall, the cost cutting
initiatives have resulted in the reduction of key cost items which, coupled
with improvements in revenues, contributed to improved operating results.
Expand our Relationships with Patients
We seek to build relationships with our patients by providing consistent,
high-quality care and by continuing to communicate closely with them. We
believe that these actions will not only promote patient loyalty and patient
satisfaction, but also improve our patients' quality of life.
Supplement Internal Growth with Selective Acquisitions
We intend to continue to expand through internal growth and to supplement
this growth through selective acquisitions primarily in non-urban markets. We
believe that we have a well-developed platform for acquisitions, including a
significant national presence, a management team with extensive acquisition and
business integration experience and the corporate infrastructure to effectively
manage the integration process. Although we do not intend to return to our
historic rate of acquisitions, we do intend to resume making selected
acquisitions to achieve disciplined, steady growth. We plan to target small
home medical equipment providers in non-urban markets, where we can integrate
newly acquired referral sources and patients with our existing local operating
centers or gain entry to a market where we do not already have a presence. In
many cases, these providers have higher operating costs than we do and can
benefit from our economies of scale.
We are focused on the integration and improvement of the companies we
acquire. Our integration policy encourages our operating centers to operate
independently and maintain the entrepreneurial nature of our business, while we
work with acquired companies to create and maintain a consistent corporate
culture and integrate best practices and systems. We convert each acquisition
to our proprietary information systems as soon as is practicable, and implement
most other systems and procedural changes immediately, all under the direction
of a dedicated integration team.
Non-urban markets are more fragmented than urban markets and therefore we
believe represent an opportunity for further consolidation. Further, we believe
that changes in reimbursement rates tend to disproportionately affect the small
regional and local service providers, challenging their viability and creating
more attractive acquisition opportunities for us. We expect the consolidation
in the number of home medical equipment providers to continue. We believe that
we are well positioned to acquire small home medical equipment and service
providers as the industry matures and becomes more competitive. We believe that
our large number of operating centers compares favorably with our largest
competitors and will facilitate integration and cost savings and allow us to
pursue acquisitions with relatively minimal incremental costs and capital
expenditures.
Our operations
Organization
Our over 600 operating centers are divided into 6 divisions. Divisional
management provides its operating centers with key support services such as
billing, purchasing and equipment maintenance, repair and warehousing. Each
operating center delivers equipment and services to patients in their homes and
other care
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sites through the operating center's delivery fleet and qualified personnel.
This structure is designed to create operating efficiencies associated with
centralized services while promoting responsiveness to local market needs. We
believe that this structure provides control and consistency among our regions
and operating centers and helps to develop standard policies and procedures.
Operating Systems and Controls
Our operating systems provide management with a critical asset in measuring
and evaluating key components of our operations. We have a proprietary billing
system that is scalable and is used for substantially all of our billing
sources, including Medicare, our largest source of revenues. All Medicare
claims are aggregated at a data center where they are processed, archived, and
transmitted to Medicare on a daily basis. The process is highly automated and
has proven to be reliable and cost-effective.
Our billing and collection departments work closely with personnel at
operating center 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. We
communicate with our operating centers through an intranet-based system that
provides our managers with detailed information that allows us to address
operating efficiencies. We believe this reporting capability allows our
managers to operate their businesses more effectively and more appropriately
allocate their resources.
Payors
We derive the majority of our revenues from reimbursement by third party
payors. We accept assignment of insurance benefits from patients and, in most
instances, invoice and collect payments directly from Medicare, Medicaid and
private insurance carriers, as well as directly from patients under
co-insurance provisions. The following table sets forth our payor mix:
[Download Table]
Year Ended December 31,
----------------------
1998 1999 2000 2001
---- ---- ---- ----
Medicare, Medicaid and other federally funded
programs (primarily Veterans Administration
contracts)(1)................................... 61.7% 61.7% 64.7% 66.9%
Commercial payors(2).............................. 28.0% 29.0% 27.3% 25.9%
Private Pay....................................... 10.3% 9.3% 8.0% 7.2%
--------
(1) We generated no revenues from the Veterans Administration in 1998.
(2) Commercial payors include indemnity plans and HMOs.
We contract with insurers and HMOs on a local and regional basis. We
generally contract with those insurers and HMOs having a significant patient
population in the areas served by us, typically on a fee-for-service basis. We
have not historically contracted with insurers or HMOs on a national basis.
Pursuant to our contracts with the Veterans Administration (VA), we provide
equipment and services to persons eligible for VA benefits in the regions
covered by the contracts. The VA contracts typically provide for an annual
term, subject to four or five one-year renewal periods unless terminated or not
renewed by the VA. The reimbursement rates under the VA contracts are generally
comparable to Medicare reimbursement rates.
The bankruptcy case
On February 2, 2000, our predecessor, Rotech Medical Corporation, and its
parent company, IHS, filed voluntary petitions for relief under Chapter 11 of
the United States Bankruptcy Code with the United States Bankruptcy Court in
the District of Delaware. Rotech Medical Corporation's plan of reorganization
was confirmed on February 13, 2002 and became effective on March 26, 2002.
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Events Leading to the Commencement of the Chapter 11 Cases
The principal reason for the commencement of Rotech Medical Corporation's
Chapter 11 case was that Rotech Medical Corporation had jointly guaranteed
approximately $2.3 billion of obligations of IHS, under credit agreements with
IHS' senior creditors. IHS defaulted on its obligations under those agreements
in 1999. As a result, IHS and substantially all of its subsidiaries, including
Rotech Medical Corporation, filed voluntary bankruptcy petitions under Chapter
11 on February 2, 2000.
The Rotech Plan of Reorganization
On February 13, 2002, the Bankruptcy Court issued an order confirming Rotech
Medical Corporation's plan of reorganization, which became final on February
25, 2002. The plan of reorganization became effective on March 26, 2002. As a
result of the reorganization, we are no longer a subsidiary of IHS.
Pursuant to the plan of reorganization, Rotech Medical Corporation's
creditors received all of our outstanding common stock and Rotech Medical
Corporation has agreed to pay approximately $532 million in cash (including a
$14 million priority tax claim that will be paid out over six years at an
interest rate of 6% per year) to creditors and claimants in full satisfaction,
release and discharge of claims asserted against Rotech Medical Corporation
with respect to the period prior to February 2, 2000 plus certain claims which
arose during the bankruptcy case. They also received all of the common stock of
Rotech Medical Corporation. The plan of reorganization also provided for
payment of certain expenses related to Rotech Medical Corporation's operations
during the pendency of its bankruptcy case, for expenses incurred in connection
with the restructuring described in "--Restructuring transaction and related
transactions" and for our entry into (i) a five-year $75 million senior secured
revolving credit facility and (ii) a six-year $200 million senior secured term
loan (together, the "Senior Secured Credit Facilities"). For a more detailed
description of some of the components of the plan of reorganization, see
"Description of credit facilities" and "Management's discussion and analysis of
financial condition and results of operations."
The plan of reorganization effected a recapitalization and it did not result
in a reduction in the scope of our operations. As a result of the plan of
reorganization becoming effective:
. substantially all of Rotech Medical Corporation's assets, business and
operations were transferred to us;
. certain claims and expenses were satisfied, including the guarantee
claims against Rotech Medical Corporation by the senior creditors of IHS
of approximately $2.3 billion, unsecured trade debt of which our
liability is capped at $10 million, government claims arising out of
Medicare billings asserted to be $48 million (plus claims in unliquidated
amounts), subordinated debt claims of approximately $2 million, tax
claims of approximately $14 million and other expenses related to the
bankruptcy case; and
. the old notes were issued, the Senior Secured Credit Facilities were
established and the net proceeds thereof were applied as described in the
section captioned "Use of Proceeds" above.
As of September 30, 2002:
. our total consolidated debt is approximately $500 million, including the
old notes and approximately $194 million of senior debt;
. stockholders' equity is approximately $500 million;
. any liabilities of Rotech Medical Corporation existing on the date it
filed for bankruptcy protection have been substantially eliminated; and
. we have up to $70 million of available borrowings under a five-year $75
million senior secured revolving credit facility. We have issued letters
of credit totaling $5 million under this facility.
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Major Settlements and Other Motions Approved by the Bankruptcy Court
Subsequent to the filing of the bankruptcy case on February 2, 2000, Rotech
Medical Corporation was required to seek approval of the Bankruptcy Court for
certain material decisions regarding its continued operations. The following
summarizes the major matters approved during the bankruptcy case:
. Settlement with the United States Government. The United States
Government filed a $48 million claim against Rotech Medical Corporation
claiming trebled damages with respect to an underlying $16 million claim
relating to, among other things, claims arising from Medicare billings as
well as claims in unliquidated amounts. Although Rotech Medical
Corporation disputed the validity of the claims and the allowability of a
trebled damage claim, in an effort to compromise this and other issues,
Rotech Medical Corporation and the Department of Justice, or DOJ, entered
into a settlement agreement dated on or about February 11, 2002. Pursuant
to the terms of the settlement agreement, which was approved by the
Bankruptcy Court on February 13, 2002, Rotech Medical Corporation has
paid the federal government $17 million in cash in full settlement and
satisfaction of the aforementioned claims and certain claims which arose
during the bankruptcy case.
The parties to the settlement agreement are Rotech Medical Corporation
and its subsidiaries and affiliates, the DOJ and the Office of Inspector
General for the Department of Health and Human Services, or DHHS. On
March 26, 2002, the effective date of the plan of reorganization, the DOJ
provided a release of all administrative and civil monetary claims under
the False Claims Act, Civil Monetary Penalties Law, Program Fraud Civil
Remedies Act, common law theories of payment by mistake, unjust
enrichment, breach of contract, and fraud for the covered conduct in the
agreement. The Office of Inspector General also provided Rotech Medical
Corporation with a release of its right to, with respect to covered
conduct in the agreement, permissively exclude us from participating in
federal health care programs.
In connection with the settlement agreement, Rotech Medical Corporation
entered into a Corporate Integrity Agreement with the Office of Inspector
General for the DHHS. As the successor to Rotech Medical Corporation, we
are subject to the terms of the Corporate Integrity Agreement.
See "--Corporate integrity agreement" for a description of the material
terms of the Corporate Integrity Agreement.
. Settlement with IHS. During the pendency of the Chapter 11 case, Rotech
Medical Corporation and IHS operated pursuant to an integrated cash
management system controlled by IHS. Pursuant to the settlement agreement
with IHS, Rotech Medical Corporation and IHS have fully and finally
satisfied the claims they have against each other by an allocation of $40
million in cash and a $5 million promissory note and the remainder of the
cash on hand (approximately $40 million) was retained by IHS. Rotech
Medical Corporation and IHS exchanged, effective as of the effective date
of the plan of reorganization, general releases, which cover all
intercompany claims against each other. As the successor to Rotech
Medical Corporation, we are subject to the terms of the settlement
agreement.
. Settlement with CMS. IHS and its subsidiaries, including Rotech Medical
Corporation, receive reimbursement under Part B of Medicare. The Centers
for Medicare and Medicaid Services, or CMS, had asserted that it overpaid
IHS Part B Providers, including Rotech Medical Corporation, approximately
$1.1 million in the aggregate for certain services and underpaid
approximately $2.5 million in the aggregate for certain services. CMS was
holding the underpayments in administrative freeze pending a resolution
of its right to set them off against the overpayments. As part of a
stipulation filed with the Bankruptcy Court, the parties agreed that CMS
is permitted to off-set the underpayments against the overpayments and
hold in administrative freeze the balance remaining after the off-set,
subject to (A) mutual agreement by the parties or (B) an order from the
Court concerning the disposition of said funds. Effective March 26, 2002,
all of (A) CMS's claims against IHS and its subsidiaries, including
Rotech Medical Corporation, and (B) all of IHS's and its subsidiaries',
including Rotech Medical Corporation's, claims against CMS for
underpayments arising under Medicare Part B before
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the February 13, 2002 settlement date have been released, subject to
limited exceptions, including insurance obligations retained by IHS. The
Bankruptcy Court signed the stipulation on April 12, 2002.
. Key Employee and Executive Retention Programs. To encourage certain key
employees to remain with Rotech Medical Corporation during the
reorganization process and after emergence from bankruptcy, Rotech
Medical Corporation proposed, and the Bankruptcy Court approved, key
employee and executive retention programs by orders dated June 21, 2000
and January 22, 2001, respectively. Under these programs, three
executives and 82 other key employees became entitled to quarterly
bonuses throughout the pendency of the bankruptcy proceeding, up to a
maximum aggregate of approximately $5 million annually in retention bonus
payments. Each key employee received annual bonuses generally ranging
from 25% to 100% of each such employee's salary. As a condition to
participation in the programs, each key employee agreed to a six-month
non-compete obligation. Payments under this bonus plan ceased upon our
predecessor's emergence from bankruptcy.
. Settlement Agreement with a Former Executive. On July 26, 2000, the
Bankruptcy Court approved a separation agreement with Stephen P. Griggs,
Rotech Medical Corporation's former president, under which IHS agreed to
pay to Mr. Griggs $3 million in the following manner: $1 million in
September 2000, which was paid, and $2 million payable in equal monthly
installments over a period of three years beginning in September 2000.
The agreement imposes upon Mr. Griggs various post-termination
obligations, including non-competition, non-solicitation and
confidentiality obligations. As part of the agreement, Mr. Griggs also
waived all claims against Rotech Medical Corporation and its subsidiaries
and relinquished certain equity rights he had in IHS.
. Rejection of Executory Contracts and Unexpired Leases. At the
commencement of the bankruptcy case, Rotech Medical Corporation was party
to numerous nonresidential real property leases, equipment leases and
other "executory" contracts. (Although there is no precise definition of
what constitutes an executory contract, the term generally includes
contracts with respect to which performance remains due to some extent on
both sides.) Rotech Medical Corporation rejected more than 425 leases and
contracts in connection with its bankruptcy proceedings, each of which it
believed would not be important to future operations. Under the
Bankruptcy Code, the other party to the lease or contract which has been
terminated has the right to receive damages arising from such
termination. These parties became unsecured creditors of Rotech Medical
Corporation with respect to their claims and their claims have been
satisfied under the plan of reorganization. All leases and contracts that
continued after emergence from bankruptcy were assigned to us in
connection with the restructuring described in "--Restructuring
transaction and related transactions."
Other Information
. Fresh-start Reporting. Upon emergence from bankruptcy, completion of the
restructuring and the transfer of substantially all of Rotech Medical
Corporation's assets to us, we implemented "fresh-start" reporting. Under
fresh-start reporting, assets have been revalued and certain accounting
adjustments have been made in accordance with generally accepted
accounting principles. As a result of adopting "fresh-start" reporting
and emerging from bankruptcy, historical financial information may not be
comparable with financial information for those periods after emergence
from bankruptcy. Not all of the valuations required to determine the fair
value of our assets have been performed and, accordingly, the fresh-start
adjustments are preliminary and subject to further revisions and
adjustments.
. Board of Directors. Our board of directors currently consists of the
following seven individuals, five of whom were selected by Rotech Medical
Corporation's senior creditors to serve as directors of our company:
William Wallace Abbott, Philip L. Carter, Guy P. Sansone, Edward L.
Kuntz, William J. Mercer, Arthur J. Reimers and Arthur Siegel. Stephen D.
Linehan resigned from our board of directors in August 2002 and John H.
Klein resigned from our board of directors in May 2002. In compliance
with our bylaws, Mr. Siegel and Mr. Carter were appointed by a unanimous
vote of our board of directors to fill the vacancies on our board in
October 2002 and December 2002, respectively.
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. Restructuring Transaction and Related Transactions. In connection with
its emergence from bankruptcy, Rotech Medical Corporation transferred
substantially all of its assets and liabilities to us in exchange for all
of the outstanding shares of our common stock, cash necessary to fund its
plan of reorganization, and a promissory note payable by IHS in the
principal amount of $5 million. As part of the restructuring transaction,
we issued 250,000 shares of Series A Convertible Redeemable Preferred
Stock, with an aggregate face value of $5 million, to a profit sharing
plan. See "--Restructuring transaction and related transactions" for a
more detailed description of the restructuring. See also
"Management--Employee profit sharing plan" for a detailed discussion of
the terms of the profit sharing plan.
. Agreement Related to Taxes. In connection with the plan of
reorganization, we entered into a Tax Sharing Agreement with Rotech
Medical Corporation and IHS which sets forth our respective rights and
obligations with respect to taxes arising from and in connection with the
implementation of the plan of reorganization. The Tax Sharing Agreement
sets forth that the parties to the agreement will, for tax purposes,
treat the transfer of Rotech Medical Corporation's assets to us as a
taxable event rather than as a tax-free reorganization. If it is decided
that an election should be made under Section 338(h)(10) of the Internal
Revenue Code of 1986, as amended, and under any analogous state and local
law, with respect to the transfer of Rotech Medical Corporation's assets
to us, it is expected that the parties to the Tax Sharing Agreement will
agree to jointly make, or cause to be made, such election on a timely
basis. If an election under Section 338(h)(10) is made, then we will be
able to account for the acquisition of the stock of all of the
subsidiaries as if we had acquired the assets of those subsidiaries for
income tax purposes. This deemed asset purchase agreement will result in
some increase in the immediate tax cost of the restructuring, but our tax
basis used in calculating depreciation and amortization deductions for
these assets will increase substantially, resulting in future tax
savings. We believe that the present value of such future tax savings
will be significantly greater than the increase in current tax costs.
The parties have agreed to provide assistance to each other in the
preparation and filing of tax returns, defending audits and related
matters. We have agreed to indemnify Rotech Medical Corporation and IHS
for all taxes attributable to us and incurred in connection with the
implementation of the plan of reorganization and will indemnify Rotech
Medical Corporation and IHS for all taxes that they incur as a result of
the Section 338(h)(10) and similar elections described above, other than
up to $2 million of certain specified taxes. Also, IHS has agreed to
indemnify us and Rotech Medical Corporation for all taxes attributable to
IHS and its subsidiaries that are not also subsidiaries of us or Rotech
Medical Corporation.
Restructuring transaction and related transactions
Pursuant to its plan of reorganization, on March 26, 2002, Rotech Medical
Corporation transferred to us substantially all of the assets it used in
connection with its businesses and operations (including stock of substantially
all of its subsidiaries). Rotech Medical Corporation has retained certain
assets that are not material to the continuation of the businesses and
operations as they were conducted immediately prior to the restructuring. The
assets transferred to us are subject to, and we assumed sole and exclusive
responsibility for, (a) all claims, liabilities and obligations of Rotech
Medical Corporation and its subsidiaries incurred after February 2, 2000 to the
extent not paid on or prior to the effective date of the plan of
reorganization, other than any claims, liabilities and obligations directly
relating to assets retained by Rotech Medical Corporation, and (b) any tax
liabilities of Rotech Medical Corporation and its subsidiaries for periods
ending on or before the effective date of the plan of reorganization to the
extent payable after such date (whether or not relating to the transferred
assets), including, without limitation, any taxes incurred in connection with
the transfer of the assets.
In consideration for the transfer of the assets from Rotech Medical
Corporation to us we transferred to Rotech Medical Corporation (a) 25,000,000
shares of our common stock which represents all of our outstanding shares of
common stock, (b) the net proceeds from the offering of the old notes and the
proceeds of the $200 million term loan, which have been used to fund a portion
of the cash distributions made by Rotech Medical
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Corporation on the effective date of its plan of reorganization and (c) a
promissory note payable by IHS in the principal amount of $5 million. See
"Description of credit facilities" for a description of the term loan.
Our certificate of incorporation authorizes us to issue up to 250,000 shares
of Series A Convertible Redeemable Preferred Stock with an aggregate face value
of $5 million. Concurrently with the effectiveness of the plan of
reorganization, we issued all of the shares of Series A Convertible Redeemable
Preferred Stock to our employee profit sharing plan. See "Management--Employee
profit sharing plan" for a detailed description of the profit sharing plan and
"Description of capital stock" for a description of certain provisions of our
certificate of incorporation and bylaws.
Pursuant to its plan of reorganization, Rotech Medical Corporation was
required to make distributions to its creditors, including our common stock
(which was to be distributed only to the senior bank creditors), the common
stock of Rotech Medical Corporation and the cash and term note transferred by
us to Rotech Medical Corporation in consideration for the assets transferred to
us. We have been informed by the transfer agent for our common stock that, our
common stock was distributed to the creditors of Rotech Medical Corporation on
or about July 12, 2002. Accordingly, all of the issued and outstanding shares
of our common stock were, upon distribution, owned by Rotech Medical
Corporation's senior bank creditors.
After giving effect to the restructuring, we have no continuing relationship
with Rotech Medical Corporation except that immediately after the restructuring
its board of directors consisted of certain of our executive officers and
immediately after the restructuring we were owned by the same shareholders.
Corporate integrity agreement
Rotech Medical Corporation and the Office of Inspector General of the DHHS
entered into a Corporate Integrity Agreement as part of the process of settling
the U.S. Government's fraud claims against Rotech Medical Corporation in the
bankruptcy proceeding. As the successor to the business and operations of
Rotech Medical Corporation, we are subject to the provisions of the Corporate
Integrity Agreement.
Providers and suppliers enter into corporate integrity agreements as part of
settlements with the United States Government in order that the United States
Government will waive its right to permissively exclude them from participating
in federal health care programs.
The Corporate Integrity Agreement is for a term of five years. It imposes
upon us (including in most instances our officers, directors, employees and
others) various training requirements, as well as the need to have certain
policies and procedures in place. It also requires that we have a Compliance
Officer, several "Compliance Liaisons," and a Compliance Committee.
The Corporate Integrity Agreement requires us to conduct internal claims
reviews relating to our billing of the federal Medicare program, as well as
systems reviews if warranted. It sets forth a role for an Independent Review
Organization in these reviews although, provided that we meet certain
conditions, the Independent Review Organization's role becomes more limited in
later years. Both we and the Independent Review Organization must file reports
of the reviews with the Office of Inspector General of the DHHS. KPMG LLP acts
as our Independent Review Organization under the Corporate Integrity Agreement.
The Corporate Integrity Agreement also mandates that we have certain
procedures in place with respect to our acquisition process. More specifically,
we are required to have an Acquisition Committee which approves all
acquisitions before they are consummated. As part of the acquisition process,
we will be required to conduct operational and file reviews of potential
entities in which we might acquire an interest. Assuming that we decide to
acquire an entity, we will be required to provide a report to the Office of
Inspector General of the DHHS indicating that we followed the acquisition
procedures set forth in the Corporate Integrity Agreement and specifying any
corrective action that might be necessary post acquisition.
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The Corporate Integrity Agreement restricts us from hiring any person or
contractor who is ineligible to participate in federal health care programs,
federal procurement or federal non-procurement programs or has been convicted
of a criminal offense related to the provision of health care items or
services. We are obligated to conduct ongoing reviews of the qualifications of
all of our employees and contractors. If a current employee or contractor is or
becomes an ineligible employee as contemplated by the Corporate Integrity
Agreement, such individual must be relieved of any responsibility for, and
removed from any involvement with, our business operations relating to federal
health care programs.
As part of the Corporate Integrity Agreement, we also have certain
obligations with respect to repayment of identified overpayments and reporting
of "Material Deficiencies" we may learn of with respect to our relationship
with federal health care programs. We also must submit annual reports to the
Office of Inspector General of the DHHS regarding our compliance with the
Corporate Integrity Agreement generally. To the extent that we violate the
terms of the Corporate Integrity Agreement, we may be subject to substantial
penalties, including stipulated cash penalties ranging from $1,000 per day to
$2,500 per day for each day we are in breach of the agreement, and, possibly,
exclusion from federal health care programs.
Government regulation
The health care industry is subject to extensive regulation by a number of
governmental entities at the federal, state and local level. The industry is
also subject to frequent regulatory change. Our business is impacted not only
by those laws and regulations that are directly applicable to us, but also by
certain laws and regulations that are applicable to our managed care and other
patients. If we fail to comply with the laws and regulations applicable to our
business, we could suffer civil and/or criminal penalties and we could be
excluded from participating in Medicare, Medicaid and other federal and state
health care programs.
Recently, the federal government has made a policy decision to significantly
increase the financial resources allocated to enforcing the health care fraud
and abuse laws. In addition, private insurers and various state enforcement
agencies have increased their level of scrutiny of health care claims in an
effort to identify and prosecute fraudulent and abusive practices in the health
care area.
Medicare and Medicaid Reimbursement. As part of the Social Security
Amendments of 1965, Congress enacted the Medicare program which provides for
hospital, physician and other statutorily-defined health benefits for qualified
individuals, including persons over 65 and the disabled. The Medicaid program,
also established by Congress in 1965, is a joint federal and state program that
provides certain statutorily-defined health benefits to financially needy
individuals who are blind, disabled, aged, or members of families with
dependent children. In addition, Medicaid may cover financially needy children,
refugees and pregnant women. A substantial portion of our revenue is
attributable to payments received from the Medicare and Medicaid programs.
Medicare Legislation. Our business was significantly impacted by the BBA
97, which reduced Medicare reimbursement rates for home oxygen therapy and
respiratory drugs by 25% and 5%, respectively, effective January 1, 1998. An
additional reimbursement reduction of 5% on home oxygen therapy became
effective on January 1, 1999. The BBA 97 also imposed a freeze on Consumer
Price Index based reimbursement rate increases for 1998 through 2002.
In December 2000, federal legislators enacted the BIPA. Among other items,
this legislation provides the home health care services industry with some
relief from the effects of the BBA 97. The Balanced Budget Act of 1997, or BBA
97 had frozen the full annual cost of living adjustment (based on Consumer
Price Index for certain equipment and services) for each of the years 1998
through 2002. The Medicare, Medicaid and SCHIP Benefits Improvement and
Protection Act of 2000, or BIPA provides reinstatement in 2001 of the full
annual cost of living adjustment (based on the Consumer Price Index) for
certain durable medical equipment. The Medicare Balanced Budget Refinement Act
of 1999, or BBRA also mitigated some of the effects of the BBA 97. However,
these measures did not restore reimbursement rates to their prior levels. In
addition, further reimbursement reductions may be made in the future.
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In May 2002, the United States General Accounting Office or GAO issued a
report which concluded that Medicare's payments for home health services were
significantly higher than the estimated costs of home health care and
recommended that the further reductions in payments to home care companies
should be generally implemented.
The BBA 97 granted authority to the Secretary of the DHHS to increase or
reduce the reimbursement for home medical equipment, including oxygen, by 15%
each year under an inherent reasonableness procedure. However, under the
provisions of the BBRA, reimbursement reductions proposed under the inherent
reasonableness procedure had been delayed pending (1) a study by the General
Accounting Office which was completed in July 2000 and which examined the use
of the authority granted under this procedure and (2) promulgation by CMS
(formerly, the Health Care Financing Administration, or HCFA) of a final rule
implementing the inherent reasonableness authority, which has not yet been
issued.
During 2000, DHHS wrote to the durable medical equipment regional carriers
and recommended, but did not mandate, that Medicare claims processors base
their payments for covered outpatient drugs and biologicals on pricing
schedules other than the Average Wholesale Price listing, which historically
has been the industry's basis for drug reimbursement. The suggested alternative
pricing methodology was offered in an effort to reduce reimbursement levels for
certain drugs to more closely approximate a provider's acquisition cost.
However, it would not have covered the costs of preparing, delivering or
administering the drugs to the patients. Under current reimbursement schedules,
these costs are implicitly covered in the reimbursement for the drug cost. The
health care services industry has objected to the DHHS' recommendation
primarily because it fails to consider the accompanying costs of delivering and
administering these types of drug therapies. If providers choose to discontinue
providing these drugs due to inadequate reimbursement, patient access may be
jeopardized.
In September 2001, the GAO issued a report which concluded that the price
paid by Medicare for drugs, including nebulizer medications, is significantly
in excess of the average cost paid for these medications by other participants
in the health care industry. The report recommended that CMS establish Medicare
payment levels for these drugs and related services that are more closely
related to their costs.
In addition, some states have adopted or are contemplating adopting some
form of the proposed alternate pricing methodology for certain drugs and
biologicals under the Medicaid program. These findings by the GAO and changes
in pricing methodology may reduce the level of reimbursement received by us and
may cause us to re-evaluate our participation in the Medicaid program in one or
more states.
The BBA 97 also mandated that CMS (formerly, HCFA) conduct competitive
bidding demonstrations for Medicare Part B items and services. The first
demonstration commenced October 1999 in Polk County, Florida. The second
demonstration commenced February 2001 in the San Antonio, Texas area and covers
the counties of Bexar, Comal and Guadalupe. The competitive bidding
demonstrations could provide the CMS and Congress with a model for implementing
competitive pricing in all Medicare programs. In June 2002, the House of
Representatives passed a bill that contained a Medicare reimbursement package.
The bill included a provision requiring certain Medicare programs, including
durable medical equipment suppliers, to compete for Medicare contracts. A
similar bill is currently pending in the Senate. If such a competitive bidding
system were implemented, it could result in lower reimbursement rates, exclude
certain items and services from coverage or impose limits on increases in
reimbursement rates.
Professional Licensure
Nurses, pharmacists and other health care professionals employed by us are
required to be individually licensed or certified under applicable state law.
We take steps to assure that our employees possess all necessary licenses and
certifications, and we believe that our employees comply in all material
respects with applicable licensure laws.
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Pharmacy Licensing and Registration
State laws require that each of our pharmacy locations be licensed as an
in-state pharmacy to dispense pharmaceuticals in that state. We believe that we
substantially comply with all state licensing laws applicable to our business.
If we are unable to maintain our licenses, or if states place burdensome
restrictions or limitations on pharmacies, our ability to operate in some
states would be limited, which could adversely impact our business and results
of operations.
Food, Drug and Cosmetic Act
Laws enforced by the Food and Drug Administration, as well as some similar
state agencies, require our pharmacy locations to individually register in
order to handle controlled substances, including prescription pharmaceuticals.
A separate registration is required at each principal place of business where
the applicant dispenses controlled substances. Federal and state laws also
require that we follow specific labeling, reporting and record-keeping
requirements for controlled substances. This law exempts many pharmaceuticals
and medical devices from federal labeling and packaging requirements as long as
they are not adulterated or misbranded and are dispensed in accordance with and
pursuant to a valid prescription. We maintain federal and state controlled
substance registrations for each of our operating centers that require such
registration and follow procedures intended to comply with all such
documentation, record-keeping and storage requirements.
Claims Audits
Durable medical equipment regional carriers are private organizations that
contract to serve as the government's agents for the processing of claims for
items and services provided under Part B of the Medicare program. These
carriers and Medicaid agencies also periodically conduct pre-payment and
post-payment reviews and other audits of claims submitted. Medicare and
Medicaid agents are under increasing pressure to scrutinize health care claims
more closely. In addition, the industry in which we operate is generally
characterized by long collection cycles for accounts receivable due to complex
and time-consuming requirements for obtaining reimbursement from private and
governmental third-party payors. Such protracted collection cycles can lead to
delays in obtaining reimbursement. Furthermore, reviews and/or similar audits
or investigations of our claims and related documentation could result in
denials of claims for payment submitted by us. Further, the government could
demand significant refunds or recoupments of amounts paid by the government for
claims which, upon subsequent investigation, are determined by the government
to be inadequately supported by the required documentation.
The Anti-Kickback Statute
As a provider of services under the Medicare and Medicaid programs, we are
subject to the Medicare and Medicaid fraud and abuse laws (sometimes referred
to as the "Anti-Kickback statute"). At the federal level, the Anti-Kickback
statute prohibits any bribe, kickback or rebate in return for the referral of
patients, products or services covered by federal health care programs. Federal
health care programs have been defined to include plans and programs that
provide health benefits funded by the United States Government, including
Medicare and Medicaid, among others. Violations of the Anti-Kickback statute
may result in civil and criminal penalties including fines of up to $25,000 per
violation, civil monetary penalties of up to $50,000 per violation, assessments
of up to three times the amount of the prohibited remuneration, imprisonment,
and exclusion from participation in the federal health care programs. The
Office of the Inspector General of the DHHS has published regulations that
identify a limited number of specific business practices that fall within safe
harbors which are deemed not to violate the Anti-Kickback statute. Although we
attempt to structure our business relationships to meet safe harbor
requirements, it is possible that not all of our business relationships comply
with the mandated elements of one or more safe harbors. Conformity with the
safe harbors is not mandatory and failure to meet all of the requirements of an
applicable safe harbor does not make conduct per se illegal. The Office of
Inspector
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General is authorized to issue advisory opinions regarding the interpretation
and applicability of the federal Anti-Kickback statute, including whether an
activity constitutes grounds for the imposition of civil or criminal sanctions.
We have not, however, sought such an opinion.
In addition, a number of states in which we operate have laws that prohibit
certain direct or indirect payments (similar to the Anti-Kickback statute) as
well as if such arrangements are designed to induce or encourage the referral
of patients to a particular provider. Some states' anti-fraud and anti-kickback
laws apply only to goods and services covered by Medicaid. Other states'
anti-fraud and anti-kickback laws apply to all health care goods and services,
regardless of whether the source of payment is governmental or private.
Further, many states prohibit revenue sharing or fee splitting arrangements
between physicians and other third parties. Possible sanctions for violation of
these restrictions include exclusion from state-funded health care programs,
loss of licensure and civil and criminal penalties. Such statutes vary from
state to state, are often vague and have seldom been interpreted by the courts
or regulatory agencies.
Physician Self-Referrals
Certain provisions of the Omnibus Budget Reconciliation Act of 1993,
commonly known as "Stark II," prohibit us, subject to certain exceptions, from
submitting claims to the Medicare and Medicaid programs for "designated health
services" if we have a financial relationship with the physician making the
referral for such services or with a member of such physician's immediate
family. The term "designated health services" includes several services
commonly performed or supplied by us, including durable medical equipment, home
health services and parenteral and enteral nutrition. In addition, "financial
relationship" is broadly defined to include any ownership or investment
interest or compensation arrangement pursuant to which a physician receives
remuneration from the provider at issue. Violations of Stark II may result in
loss of Medicare and Medicaid reimbursement, civil penalties and exclusion from
participation in the Medicare and Medicaid programs. On January 4, 2001, the
CMS issued the first of two phases of final regulations to clarify the meaning
and application of Stark II. The CMS has not stated when Phase II will be
issued; however, Phase I addresses the primary substantive aspects of the
prohibition and several key exceptions. Significantly, the final regulations
define previously undefined key terms, clarify prior definitions, and create
several new exceptions for certain "indirect compensation arrangements," "fair
market value" transactions, arrangements involving non-monetary compensation up
to $300, and risk-sharing arrangements, among others. The regulations also
create a new "knowledge" exception that permits providers to bill for items
provided in connection with an otherwise prohibited referral, if the provider
does not know, and does not act in reckless disregard or deliberate ignorance
of, the identity of the referring physician. Phase I of the final regulations
became effective on January 4, 2002, except with respect to physician pay
arrangements, which has been delayed until January 4, 2003. In addition, a
number of the states in which we operate have similar or broader prohibitions
on physician self-referrals. Finally, recent enforcement activity and resulting
case law developments have increased the legal risks of physician compensation
arrangements that do not satisfy the terms of an exception to Stark II,
especially in the area of joint venture arrangements with physicians.
False Claims
We are subject to state and federal laws that govern the submission of
claims for reimbursement. The federal False Claims Act imposes civil liability
on individuals or entities that submit false or fraudulent claims for payment
to the government. Violations of the False Claims Act may result in treble
damages, civil monetary penalties and exclusion from the Medicare and Medicaid
programs. In addition, we could be subject to criminal penalties under a
variety of federal statutes to the extent that we knowingly violate legal
requirements under federal health programs or otherwise present false or
fraudulent claims or documentation to the government.
The False Claims Act also allows a private individual to bring a qui tam
suit on behalf of the government against a health care provider for violations
of the False Claims Act. A qui tam suit may be brought by, with only a few
exceptions, any private citizen who has material information of a false claim
that has not yet been
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previously disclosed. Even if disclosed, the original source of the information
leading to the public disclosure may still pursue such a suit. Although a
corporate insider is often the plaintiff in such actions, an increasing number
of outsiders are pursuing such suits.
In a qui tam suit, the private plaintiff is responsible for initiating a
lawsuit that may eventually lead to the government recovering money of which it
was defrauded. After the private plaintiff has initiated the lawsuit, the
government must decide whether to intervene in the lawsuit and become the
primary prosecutor. In the event the government declines to join the lawsuit,
the private plaintiff may choose to pursue the case alone, in which case the
private plaintiff's counsel will have primary control over the prosecution
(although the government must be kept apprised of the progress of the lawsuit
and will still receive at least 70% of any recovered amounts). In return for
bringing the suit on the government's behalf, the statute provides that the
private plaintiff is to receive up to 30% of the recovered amount from the
litigation proceeds if the litigation is successful. Recently, the number of
qui tam suits brought against health care providers has increased dramatically.
In addition, at least five states--California, Illinois, Florida, Tennessee and
Texas--have enacted laws modeled after the False Claims Act that allow those
states to recover money which was fraudulently obtained by a health care
provider from the state (e.g., Medicaid funds provided by the state).
Health Insurance Portability and Accountability Act of 1996
Subtitle F of the Health Insurance Portability and Accountability Act of
1996 (HIPAA) was enacted to improve the efficiency and effectiveness of the
health care system through the establishment of standards and requirements for
the electronic transmission of certain health information. HIPAA requires the
Secretary of the DHHS to promulgate regulations establishing standards and
protections for health information systems, including standards for the
following:
. the development of electronic transactions and code sets to be used in
those transactions;
. the development of unique health identifiers for individuals, employers,
health plans, and health care providers;
. the security of individual health information;
. the transmission and authentication of electronic signatures; and
. the privacy of individually identifiable health information.
HIPAA requires us to comply with standards for the exchange of health
information within our company and with third parties, such as payors, business
associates, and patients. These include standards for common health care
transactions, such as claims information, plan eligibility, payment information
and the use of electronic signatures; unique identifiers for providers,
employers, health plans and individuals; security; privacy; and enforcement. To
date, the Department of Health and Human Services has released two standards,
one governing health care transactions and the second relating to the privacy
of individually identifiable health information pursuant to which all patient
identifiable health information must be maintained in confidence and may not be
disclosed without the consent or authorization of the patient except under
certain permitted circumstances. Rules governing the security of health
information have been proposed but not finalized. We generally have two years
from the effective date of these standards to comply. We have to comply by
October 16, 2003 for the transaction standards, and by April 14, 2003 for the
privacy standards. While the government intended this legislation to reduce
administrative expenses and burdens for the health care industry, the law may
require significant and costly changes for us. If we fail to comply with these
standards, we could be subject to criminal penalties and civil sanctions.
We have evaluated the rules as published to date to determine the effects of
the rules on our business, and we believe that we will have taken the
appropriate steps to ensure that we will be in compliance with the rules when
they go into effect.
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HIPAA also has created new health care related crimes, and granted authority
to the Secretary of the DHHS to impose certain civil penalties. Particularly,
the Secretary may now exclude from Medicare any individual with a direct or
indirect ownership interest in an entity convicted of health care fraud or
excluded from the program. HIPAA encourages the reporting of health care fraud
by allowing reporting individuals to share in any recovery made by the
government. HIPAA also requires new programs to control fraud and abuse, and
new investigations, audits and inspections.
New crimes under HIPAA include:
. knowingly and willfully committing a federal health care offense relating
to a health care benefit program; and
. knowingly and willfully falsifying, concealing, or covering up a material
fact or making any materially false or fraudulent statements in
connection with claims and payment for health care services by a health
care benefit plan.
These provisions of HIPAA create criminal sanctions for situations that were
previously handled exclusively through civil repayments of overpayments,
off-sets and fines. We believe that our business arrangements and practices
comply with HIPAA. However, a violation could subject us to penalties, fines or
possible exclusion from Medicare or Medicaid. Such sanctions could reduce our
revenue or profits.
Compliance Program
In addition to our Corporate Integrity Agreement with the Office of
Inspector General, we have voluntarily implemented several programs to monitor
compliance with federal and state laws and regulations applicable to health
care entities and to minimize the likelihood that we would engage in conduct or
enter into contracts in violation of the fraud and abuse laws. We have
appointed a compliance officer who is charged with implementing and supervising
our compliance program, which includes a code of ethical conduct for our
employees and affiliates and a process for reporting regulatory or ethical
concerns to our compliance officer, including a toll-free telephone hotline. We
believe that our compliance program meets the relevant guidance provided by the
Office of Inspector General of the DHHS. An important part of our compliance
program consists of conducting periodic reviews of various aspects of our
operations. It also includes mandatory education programs designed to keep our
employees updated and informed on developments with respect to the fraud and
abuse laws and other regulatory requirements and to remind all our employees of
our policy of strict compliance in this area. During our period of
restructuring, we made several improvements to our compliance department
including:
. increase in the size of the compliance department, with future growth
planned for 2002 and 2003;
. consolidation of billing centers and independently reviewing patient
files;
. development of a new compliance manual and mandatory nationwide training
program; and
. increased compliance communications, including mandatory viewing of a
compliance video as well as a new monthly compliance newsletter and
increased responsiveness to all inquires.
Health Care Reform Legislation
Economic, political and regulatory influences are subjecting the health care
industry in the United States to fundamental change. Health care reform
proposals have been formulated by the legislative and administrative branches
of the federal government. In addition, some of the states in which we operate
periodically consider various health care reform proposals. We anticipate that
federal and state government bodies will continue to review and assess
alternative health care delivery systems and payment methodologies and public
debate of these issues will continue in the future. Due to uncertainties
regarding the ultimate features of reform initiatives and their enactment and
implementation, we cannot predict, which, if any, of such reform proposals will
be adopted
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or when they may be adopted or that any such reforms will not have a material
adverse effect on our business and results of operations.
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 other third-party payors.
Suppliers
We purchase our supplies from a variety of independent suppliers. We are not
dependent upon any one supplier, and believe that our supplies can be provided
by several suppliers. However, we have firm purchase commitments with some of
our suppliers. We have long-standing relationships with most of our largest
national suppliers in each product category. We typically focus on one or two
suppliers in each product category in an effort to maximize delivery efficiency
and gross margins.
Sales
We believe that the sales and marketing skills of our employees have been
instrumental in our growth to date and are critical to our future success. Our
employees include respiratory therapists, pharmacists and nurses who market all
of our equipment and services and who are responsible for maintaining and
expanding our relationships with physicians. We provide marketing, training,
product and service information to all of our technical personnel through our
intranet and through seminars conducted on a company-wide basis so that they
can communicate effectively with physicians about our equipment and services.
We emphasize the cross-marketing of all our equipment and services to
physicians with which we have already developed professional relationships.
Quality control
We are committed to providing consistently high quality equipment and
services. Our quality control procedures and training programs are designed to
promote greater responsiveness and sensitivity to individual patient needs and
to provide the highest level of quality assurance and convenience to the
patient and the referring physician. Licensed respiratory therapists and
registered nurses provide professional health care support and assist in our
sales and marketing efforts.
The Joint Commission on Accreditation of Healthcare Organizations, or JCAHO,
is a nationally recognized organization which develops standards for various
health care industry segments and monitors compliance with those standards
through voluntary surveys of participating providers. Accreditation by JCAHO
entails a lengthy review process that is conducted at least every three years.
Since accreditation is expensive and time consuming, not all providers choose
to undergo the process. We believe that JCAHO accreditation not only is
indicative of our commitment to providing consistently high quality equipment
and services, but that it also provides us with a significant competitive
advantage over our competitors who do not seek or have not received
accreditation. Currently, 95% of our operating centers are accredited by JCAHO,
and the remainder are scheduled for an accreditation survey by the end of 2002.
Competition
The home medical equipment market is highly competitive and divided among a
large number of providers, some of which are national providers but most of
which are either regional or local providers. These markets are extremely
fragmented with approximately 2,000 providers. Our largest national home
medical equipment provider competitors are Apria Healthcare Group, Inc.,
Lincare Holdings, Inc. and American Home Patient, Inc. The rest of the market
consists of several medium-size competitors, as well as hundreds of small
(under $5 million in revenues) local operations. We also face competition from
other types of health care providers,
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including hospitals, home health agencies and health maintenance organizations.
We believe that the primary competitive factors most important in the regional
and local markets are:
. reputation with referral sources, including local physicians and
hospital-based professionals;
. access and responsiveness;
. overall ease of doing business;
. quality of care and service; and
. range of home medical equipment and services.
We believe that it is increasingly important to be able to offer a broad
range of complementary equipment and services to provide patients access
through a single source. We believe that we compete effectively with respect to
all of the above factors and that we have an established record as a quality
provider of a broad range of complementary home medical equipment and services.
We believe that our ability to compete effectively is enhanced by the JCAHO
accreditation of approximately 95% of our operating centers and the expected
accreditation of our remaining operating centers in 2002.
Insurance
Our business is subject to medical malpractice, personal injury and other
liability claims that are generally covered by insurance. Prior to emergence
from bankruptcy, Rotech Medical Corporation was covered by insurance policies
held by IHS. In connection with the plan of reorganization and separation from
IHS' operations, we obtained insurance policies which became effective upon
Rotech Medical Corporation's emergence from bankruptcy. These policies have
total coverage limits of approximately $50 million per occurrence and $50
million in the aggregate annually. The policies contain various levels of
deductibles and self-insured retentions and provide us with protection against
claims alleging bodily injury or property damage arising out of our operations.
These insurance policies are subject to annual renewal. We believe that
coverage in these amounts is appropriate based upon historical claims and the
nature and risks of our business.
Employees
As of September 30, 2002, we had approximately 5,700 full time employees.
Our employees are not currently represented by a labor union or other labor
organization.
Properties
We lease all of our offices and facilities. Our corporate headquarters is
currently located in a 31,223 square foot office building located at 2600
Technology Drive, Orlando, Florida, 32804. It is leased to us for a seven-year
period ending August 18, 2008 at a current base rate of $35,900 per month, plus
operating costs (which have historically been approximately $2,500 per month).
In addition to our corporate headquarters, we lease office facilities for
over 600 locations. These facilities are primarily used for general office work
and the dispatching of registered respiratory therapists, registered nurses,
registered pharmacists and delivery personnel.
Our office facilities vary in size from approximately 500 to 31,200 square
feet. The total space leased for these offices is approximately 2.5 million
square feet at an average price of $7.66 per square foot. All of such office
space is leased pursuant to operating leases.
We believe that our office and warehouse facilities are suitable and
adequate for our planned needs.
Legal proceedings
Due to the nature of our business, we are involved from time to time in
lawsuits that arise in the ordinary course of our business. We do not believe
that any lawsuit that we (or our predecessor) are a party to, if resolved
adversely, would have a material adverse effect on our financial condition or
results of operations.
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As noted above, on February 2, 2000, Integrated Health Services, Inc. and
substantially all of its subsidiaries, including our predecessor, Rotech
Medical Corporation, filed voluntary petitions in the Bankruptcy Court under
Chapter 11 of the United States Bankruptcy Code. By order of the Bankruptcy
Court, the last day on which claims could be filed, with certain exceptions,
was August 29, 2000. Claims were asserted against Rotech Medical Corporation
with respect to various obligations. On February 13, 2002, the Bankruptcy Court
confirmed Rotech Medical Corporation's plan of reorganization which became
effective on March 26, 2002. In connection with its emergence from bankruptcy,
claims made against Rotech Medical Corporation prior to the date it filed for
bankruptcy protection were satisfied in accordance with the terms of the plan
or pursuant to settlement agreements approved by the Bankruptcy Court prior to
emergence from bankruptcy. However, although we believe that all pre-petition
state claims have also been discharged or dealt with in the plan of
reorganization, states in other bankruptcy cases have challenged whether, as a
matter of law, their claims could be discharged in a federal bankruptcy
proceeding if they never made an appearance in the case. The issue has not been
finally settled by the United States Supreme Court. Therefore, we can give no
assurance that a court would find that emergence from bankruptcy would
discharge all such state claims against Rotech Medical Corporation or us, as
its successor, involving pre-petition claims.
Restatement of financial results
In late June 2002, we discovered that an independent contractor (who was
also a former employee) had falsified certain bulk sales to the VA by
fabricating documentation for nonexistent sales of medical equipment in bulk to
the VA. Upon learning of these falsified sales, we promptly:
. brought the matter to the attention of the relevant government
authorities;
. terminated the independent contractor;
. retained a nationally recognized law firm and a government contracts
consulting firm to conduct a comprehensive internal investigation; and
. commenced working with our independent certified public accountants to
determine the appropriate accounting treatment.
The investigation confirmed the existence of a pattern of falsified bulk
sales of equipment to the VA, as well as certain improperly recorded revenues
from non-bulk VA service contracts. The total of the falsified sales was
originally recorded to our books and records as net revenue of $30.4 million.
Of this amount, $14.8 million was recorded during the six-month period from
October 1, 2001 to March 31, 2002. In addition, $8.1 million of receivables
associated with non-bulk VA service contracts have been reversed. Based upon
the investigation by the law firm and the consulting firm, we do not believe
that any of our employees were involved in the falsified bulk sales or that we
are subject to any liability as a result thereof.
As a result of the investigation, we have restated our consolidated
financial statements for each of the years ended December 31, 1999, 2000 and
2001 and the three months ended March 31, 2002. The restatement reflects a net
after-tax charge of $14.1 million over a three-year period. The principal
adjustments comprising the restatements are summarized as follows:
[Download Table]
Years Ended December 31,
------------------------
Three Months
Ended March 31,
1999 2000 2001 2002 Total
---- ------ ------- --------------- -------
Total Revenue Reduction............ $555 $7,825 $24,689 $5,460 $38,529
Cost of Net Revenues Reduction..... 257 2,393 10,257 2,230 15,137
---- ------ ------- ------ -------
298 5,432 14,432 3,230 23,392
Provision for Inventory Losses..... 23 211 2,141 264 2,639
---- ------ ------- ------ -------
321 5,643 16,573 3,494 26,031
Incentive Bonuses Reduction........ -- -- 1,855 -- 1,855
---- ------ ------- ------ -------
321 5,643 14,718 3,494 24,176
Income Taxes Reduction............. 126 2,222 6,393 1,301 10,042
---- ------ ------- ------ -------
Net Earnings Reduction............. $195 $3,421 $ 8,325 $2,193 $14,134
==== ====== ======= ====== =======
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MANAGEMENT
Directors and executive officers
Our directors and executive officers and their respective ages and positions
are as follows:
[Download Table]
Name Age Position
---- --- --------
Philip L. Carter...... 54 President, Chief Executive Officer and Director
Janet L. Ziomek....... 46 Chief Financial Officer and Treasurer
Michael R. Dobbs...... 53 Chief Operating Officer
Albert A. Prast....... 42 Chief Information Officer
Rebecca L. Myers...... 39 Chief Legal Officer and Secretary
William Wallace Abbott 70 Chairman of the Board
Guy P. Sansone........ 38 Director
Edward L. Kuntz....... 57 Director
William J. Mercer..... 53 Director
Arthur J. Reimers..... 48 Director
Arthur Siegel......... 65 Director
Philip L. Carter became President, Chief Executive Officer and a director of
our company in December 2002. Mr. Carter also currently serves as a director of
Odd Job Stores, Inc. From March 2002 to November 2002, Mr. Carter was
self-employed. From May 1998 to February 2002, Mr. Carter was the Chief
Executive Officer and a director of Apria Healthcare Group Inc. Prior to
joining Apria Healthcare Group Inc., Mr. Carter had served as President and
Chief Executive Officer of Mac Frugal's Bargains Close-Outs Inc., a chain of
retail discount stores, since 1995.
Janet L. Ziomek, our Chief Financial Officer and Treasurer, joined us in
1996. From 1996 to 2000, Ms. Ziomek served as our Vice President of Finance.
From 1992 to 1996, Ms. Ziomek was the Chief Financial Officer for a privately
held office furniture distributor and from 1981 to 1992 was with the firm of
Ernst & Young, LLP in various audit department capacities including Senior
Audit Manager. Ms. Ziomek is a Certified Public Accountant licensed in the
State of Florida and received a Bachelor of Science in Business Administration
from West Virginia University.
Michael R. Dobbs became Chief Operating Officer of our company in January
2003. Prior to joining our company, Mr. Dobbs was an officer of Apria
Healthcare Group Inc., serving as Executive Vice President, Logistics from
January 1999 to January 2003 and as Senior Vice President, Logistics from June
1998 to January 1999. Prior to joining Apria Healthcare Group Inc., Mr. Dobbs
served as Senior Vice President of Distribution for Mac Frugal's Bargains
Close-Outs Inc. from 1991 to 1998.
Albert A. Prast, our Chief Information Officer, joined us in 1993.
Previously, Mr. Prast was with IBM for over 10 years. Mr. Prast has a Masters
of Information Systems from Massachusetts Institute of Technology, a Masters of
Business Administration from Rollins College, and a Bachelor of Science from
the University of Michigan.
Rebecca L. Myers, our Chief Legal Officer and Secretary, joined us in
January 2001. From 1998 to 2001, Ms. Myers was the Chief Executive Officer and
Chief Operating Officer, respectively, of two startup Internet health care
entities. From 1997 to 1998, Ms. Myers served as the General Counsel of Options
Healthcare and from 1994 to 1997 as the Chief Legal Officer for Value RX, Inc.
From 1993 to 1994, Ms. Myers served as the Assistant General Counsel for
Preferred Healthcare Ltd. Ms. Myers was the Senior Attorney for TransWorld
Airlines from 1991 to 1993 and an Assistant District Attorney in Bronx County,
New York from 1988 to 1991. Ms. Myers received her Bachelor of Science in
Psychology with a concentration in Philosophy from Fordham University and a
Juris Doctorate from St. John's University School of Law.
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William Wallace Abbott, the Chairman of our board of directors, joined us in
March 2002. Mr. Abbott also served as our co-Chief Executive Officer on an
interim basis from August 2002 to December 2002. Since 1995, Mr. Abbott has
been self-employed as a business consultant. From 1989 to 1995, Mr. Abbott was
a Senior Advisor to the United Nations on matters relating to the private
sector. Prior thereto, Mr. Abbott worked for Procter & Gamble for approximately
35 years in various capacities and rose to the position of Senior Vice
President in 1976. Mr. Abbott is a director of Horace Mann Educators
Corporation and Acorn Products, Inc. Mr. Abbott has a Masters of Business
Administration from Harvard University, and a Bachelor of Science from Davidson
College.
Guy P. Sansone has been a director of our company since March 2002. Mr.
Sansone served as our President and co-Chief Executive Officer on an interim
basis from August 2002 to December 2002. Since July 2000, Mr. Sansone has
served as a Senior Vice President of IHS. In this capacity he was primarily
responsible for overseeing all restructuring activities of Rotech Medical
Corporation and the sale of IHS' ancillary businesses. Mr. Sansone joined the
turnaround and crisis management firm of Alvarez & Marsal, Inc. in February
1999 and currently serves as a Managing Director of the firm. From 1999 to
2000, Mr. Sansone served as the Chief Financial Officer of Telegroup, Inc., a
multinational telecommunications provider, where he was responsible for all
financial aspects of the company's operations as well as all financial
restructuring activities associated with its Chapter 11 proceeding,
reorganization and sale. From 1997 to 1998, Mr. Sansone was Chief Financial
Officer of High View Capital Corp. From 1994 to 1997, Mr. Sansone worked for
Wexford Management LLC where he focused on distressed companies, private equity
investments and high yield and special situation investment management. During
this period he also served as vice president and controller in the
post-bankruptcy reorganization of Integrated Resources. From 1989 to 1994, Mr.
Sansone served as an accounting and auditing manager with Deloitte & Touche.
Mr. Sansone has a Bachelor of Science degree from the State University of New
York, Albany.
Edward L. Kuntz has been a director of our company since March 2002. Since
1999, Mr. Kuntz has been the Chairman of the Board and Chief Executive Officer
of Kindred Healthcare, Inc., a long term health care provider. From 1998 to
1999, Mr. Kuntz served in several other capacities at Kindred, including as
President, Chief Operating Officer and as a director. From 1992 to 1997, Mr.
Kuntz was Chairman and Chief Executive Officer of Living Centers of America,
Inc., a leading provider of long-term health care services. After leaving
Living Centers of America, Inc., he served as an advisor and consultant to a
number of health care services and investment companies and was affiliated with
Austin Ventures, a venture capital firm. During Mr. Kuntz's tenure as a
director of Kindred Healthcare, Inc., the passage and implementation of the
Balanced Budget Act caused the rates of Medicare and Medicaid reimbursements to
decrease. As a result, Kindred Healthcare, Inc. was unable to meet its rent and
debt service obligations. On September 13, 1999, it filed a voluntary petition
for protection under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware. Kindred emerged
from bankruptcy in April 2001. Mr. Kuntz has a Masters of Law, a Juris Doctor
and a Bachelor of Arts from Temple University.
William J. Mercer has been a director of our company since March 2002. Mr.
Mercer is the Founder and Managing Member of Avocet Ventures, LLC, a private
equity investment firm. Prior to his current position, Mr. Mercer served as
Managing Partner of Aberdeen Strategic Capital, LP, a private equity firm. From
1996 through 1999, Mr. Mercer was the President and Chief Executive Officer,
and director, of ALARIS Medical, Inc., a leading manufacturer of advanced
medical instruments and equipment. From 1995 through 1996, Mr. Mercer was the
President and Chief Executive Officer, and director, of IVAC Medical Systems,
Inc., an infusion therapy and patient monitoring company. Prior to that, Mr.
Mercer spent over 17 years, primarily in medical imaging, with Mallinckrodt,
Inc., a global health care company. Mr. Mercer serves on the boards of
Invitrogen Corporation, a molecular biology and tissue culture company, and R2
Technology, Inc., a privately held medical imaging software company. Mr. Mercer
received a Bachelor of Science in Zoology from North Carolina State University
and a certificate from the Advanced Management Program of Harvard Business
School.
Arthur J. Reimers has been a director of our company since March 2002. Mr.
Reimers joined Goldman, Sachs & Co. as an investment banker in 1981 and in 1990
became a partner of the firm. Upon Goldman, Sachs &
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Co.'s initial public offering in 1998, he became a Managing Director and served
in that capacity until his resignation in 2001. From 1996 through 1999, Mr.
Reimers served as a co-head of Goldman, Sachs & Co.'s Healthcare Group,
Investment Banking Division. Mr. Reimers has a Bachelor of Science from Miami
University and a Masters of Business Administration from Harvard University.
Arthur Siegel has been a director of our company since October 2002. He is
currently an independent consultant. From October 1997 to August 2001, he was
the executive director of the Independence Standards Board, a promulgator of
independence standards for auditors. In October 1997, he retired from Price
Waterhouse LLP (now PricewaterhouseCoopers LLP) after 37 years, including 25
years as a partner and seven years as vice chairman of accounting and auditing
services. Mr. Siegel holds Masters of Business Administration and Bachelor of
Arts degrees from Columbia University.
Recent changes in management
On November 7, 2002, we announced the appointment of Philip L. Carter as
President and Chief Executive Officer of our company, effective December 9,
2002. On January 13, 2003, we announced the appointment of Michael R. Dobbs as
Chief Operating Officer of our company.
Our former President and Chief Executive Officer, Stephen D. Linehan,
resigned his employment with us effective August 19, 2002. Mr. Linehan also
resigned as a member of our board of directors. In addition, our Chief
Operating Officer, N. Scott Novell resigned his employment with us effective
December 5, 2002.
William Wallace Abbott and Guy P. Sansone served as interim co-Chief
Executive Officers of our company, from August 2002 until the effective date of
Mr. Carter's appointment. Mr. Sansone also served as President of our company
during this period.
Upon his resignation as an officer of our company, we entered into a
separation agreement with Mr. Linehan pursuant to which we agreed to pay Mr.
Linehan a cash payment in the amount of $1.5 million, as well as the earned but
unpaid portion of his long-term incentive compensation. In addition, Mr.
Linehan is entitled until ninety days after the effective date of his
resignation to exercise the portion of all outstanding stock options granted to
him that became exercisable prior to his resignation.
Upon his resignation as an officer of our company, on December 5, 2002, we
entered into a separation agreement with Mr. Novell pursuant to which we agreed
to make bi-weekly payments to Mr. Novell in accordance with our normal payroll
practices during the remainder of 2002 and during 2003. The aggregate amount of
payments payable in 2003 will equal $200,000. We also agreed, among other
things, to pay Mr. Novell an aggregate cash payment of $600,000, payable in
three lump-sum payments of $100,000, $200,000 and $300,000, on December 5,
2002, January 10, 2003 and January 9, 2004, respectively. In addition, Mr.
Novell is entitled until ninety days after the effective date of his
resignation to exercise the portion of all outstanding stock options granted to
him that became exercisable prior to his resignation.
Board of directors
Our board of directors currently consists of the following seven
individuals, five of whom were selected by Rotech Medical Corporation's senior
creditors to serve as directors of our company: Philip L. Carter, William
Wallace Abbott, Guy P. Sansone, Edward L. Kuntz, William J. Mercer, Arthur J.
Reimers and Arthur Siegel. Each of our directors will hold office until the
next annual meeting of stockholders and until the director's successor is
elected and qualified, or until the director's earlier death, resignation or
removal. Our certificate of incorporation provides that directors may only be
removed for cause. Stephen D. Linehan resigned from our board of directors in
August 2002 and John H. Klein resigned from our board of directors in May 2002.
In compliance with our bylaws, Mr. Siegel and Mr. Carter were appointed by a
unanimous vote of our board of directors to fill the vacancies on our board in
October 2002 and December 2002, respectively.
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Board committees
In April 2002, we created an audit committee and a compensation committee.
The audit committee of the board of directors will review, act on and report
to the board of directors with respect to various auditing and accounting
matters, including the retention and, if necessary, the termination of our
auditors, the scope of the annual audits, fees to be paid to the auditors, the
performance of our independent auditors and our accounting practices.
Currently, Messrs. Siegel, Reimers and Mercer are the independent director
members of our audit committee. Mr. Siegel acts as the Chairman of our audit
committee.
The compensation committee of the board of directors, which is comprised of
Messrs. Kuntz and Mercer, will recommend, review and oversee the salaries,
benefits, and stock option plans for our employees, consultants, directors and
other individuals compensated by us.
Director compensation
Except for directors who are also our executive employees, each member of
our board of directors will receive a one-time retainer of $20,000, an
attendance fee of $1,000 per meeting, a participation fee of $500 per
telephonic meeting and a one-time grant of options to acquire 15,000 shares of
our common stock. Mr. Abbott, our Chairman of the board, receives an annual
retainer of $100,000 in exchange for his services as Chairman of the board. Mr.
Abbott was also granted options to acquire 100,000 shares of our common stock,
which options will vest 25% on each of the first four six-month anniversaries
of the date of grant. The options granted to the other non-employee directors
will vest 50% on the first two six-month anniversaries of the date of grant. In
addition, the Chairman of our audit committee receives an annual fee of $5,000
and each member of the audit committee receives an annual fee of $3,000.
Additionally, any director who serves as Chairman of any other board committee
will receive an annual fee of $3,000 and members of such other committees will
receive an annual fee of $1,500.
Stock option plan
3,025,000 shares of common stock have been reserved for issuance to
employees, officers, non-employee directors and consultants upon exercise of
incentive and non-statutory options under our stock option plan. As of the date
of this prospectus, there are options outstanding to purchase 2,360,000 shares
of Common Stock. Under the stock option plan, options may be granted to
employees, officers, non-employee directors, and consultants. Only employees
may receive "incentive stock options," which are intended to qualify for
certain tax treatment. Non-employee directors and consultants may receive
"nonqualified stock options," which do not qualify for such treatment. The
exercise price of incentive stock options under the stock option plan must be
at least equal to the fair market value of the common stock on the date of
grant; however, a holder of more than 10% of the outstanding voting shares may
only be granted incentive stock options with an exercise price of at least 110%
of the fair market value of the underlying common stock on the date of the
grant. The terms of the options, subject to the discretion of our board of
directors, will not exceed ten years from the date of grant or, in the case of
incentive stock options issued to a holder of 10% or more of the voting power
of all classes of our stock or the stock of any of our parent or subsidiary
corporations, no more than five years from the date of grant. The exercise
price of nonqualified stock options will be determined by our board of
directors. The stock option plan provides that options will vest (a) 25% on
each of the first four anniversaries of the date of grant, (b) subject to the
discretion of our board of directors, 50% to 100% upon a change of control and
(c) a one-year acceleration in vesting of the original grants upon the
consummation of an underwritten initial public offering. Under the stock option
plan our board of directors has the discretion to establish a more accelerated
vesting schedule. The plan also contains (i) limitations on the ability to
exercise vested options in the event of cessation of employment for reasons
other than death, retirement after 65 or disability, and (ii) provisions
providing that in the event of cessation of employment prior to an underwritten
initial public offering due to death or disability, for a period of one year
after such death or disability, the option holder or its estate will have the
right to sell to us all of its vested options and shares of common stock
previously issued upon exercise of options, and we must acquire such
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options and shares at their then-current fair market value unless it would
violate applicable law or would violate or result in a default or event of
default under the notes (or the indenture under which they were issued) or
under our senior secured credit facilities (in either case as they may be
amended) and (b) due to death, disability or termination of employment for any
reason, we have the right to compel the option holder or its estate to sell to
us all of its vested options and shares of common stock previously issued upon
exercise of options at their then current fair market value or, if the reason
for cessation of employment is termination for cause, the purchase price to be
paid by us is the lesser of the then current fair market value and the exercise
price. The stock option plan is administered by our board of directors, which
has the authority to amend the stock option plan at any time, or by a special
committee established by our board of directors. No options will be granted
under the stock option plan after March 26, 2012, the tenth anniversary of the
effective date of Rotech Medical Corporation's plan of reorganization, unless
sooner terminated by the board of directors.
Employee profit sharing plan
Our employee profit sharing plan became effective simultaneously with Rotech
Medical Corporation's emergence from bankruptcy and the consummation of the
restructuring described under "Business--Restructuring transaction and related
transactions." The plan is intended to be "qualified" under Section 401(a) of
the Internal Revenue Code of 1986. The plan is administered by our board of
directors, which has the authority to amend the plan at any time, or by a
special committee established by our board of directors. We contributed 250,000
shares of Series A Convertible Redeemable Preferred Stock to the plan on its
effective date. The profit sharing plan contains limitations on the amount of
additional contributions we can make in the future, including limitations on
annual contributions both in the aggregate and with respect to any individual
employee. Each plan participant's benefits shall be fully and immediately
vested.
Executive officer agreements
Philip L. Carter
On November 1, 2002, we entered into an employment agreement with Philip L.
Carter, pursuant to which Mr. Carter serves as our President and Chief
Executive Officer. Mr. Carter's employment with us commenced on December 9,
2002 and will continue, subject to certain termination rights, for an initial
term of four years. Absent timely notice from either party of its or his
intention to terminate the employment relationship at the conclusion of the
initial four year employment term, the employment term will automatically renew
for additional one year terms thereafter. Mr. Carter currently receives an
annual base salary of $700,000 and is eligible for a discretionary bonus with a
target amount of up to 100% of his base salary based upon certain goals and
criteria established by our board of directors and/or compensation committee.
Under certain circumstances, Mr. Carter's bonus may exceed 100% of his base
salary. In addition, Mr. Carter will be issued stock options to purchase
750,000 shares of common stock. The stock options will vest over a four year
period. Of these stock options, 150,000 may be cancelled by our board of
directors in its reasonable discretion on the first anniversary of Mr. Carter's
employment based upon performance.
In addition, in connection with his relocation to Orlando, Florida, Mr.
Carter will be reimbursed for all reasonable and customary expenses associated
with the sale of his home in California as well as one month's base salary to
cover additional miscellaneous costs and expenses related to his relocation
(including any and all tax liabilities resulting from such reimbursement by
us). Mr. Carter is entitled to participate in our life, medical and disability
benefits, 401(k) plan and other benefit plans and policies. He is also provided
with a company car.
Mr. Carter's employment may be terminated by us for cause (as defined in the
employment agreement) upon written notice. Either Mr. Carter or we may
terminate the employment agreement for no fault at any time, for any reason, by
providing no less than 30 days written notice to the other party. If Mr.
Carter's employment is terminated for any reason, we will pay him (a) any
accrued and unused vacation time; (b) any accrued and unpaid base salary; (c)
any accrued and unpaid bonus earned or awarded; (d) except in the case of
termination of his
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employment by us for cause or voluntary termination by Mr. Carter without good
reason (each as defined in the employment agreement), an amount equal to a pro
rata portion of his current year's bonus; and (e) unreimbursed business
expenses in accordance with our reimbursement policy.
If Mr. Carter's employment is terminated by us without cause or by Mr.
Carter with good reason, in addition to the payments set forth in the above
paragraph, we will (a) pay him three times the sum of his then base salary plus
the full amount of his bonus for the year in which the termination occurs; (b)
continue to provide benefits for a period of 24 months; and (c) pay the cost of
up to 12 months of executive-level outplacement services. In the event of Mr.
Carter's termination due to a change of control of our company, as defined in
the employment agreement, Mr. Carter will be entitled to the separation benefit
as set forth in (a), (b) and (c) in the prior sentence and all of the options
issued to Mr. Carter will immediately become fully vested and exercisable.
Pursuant to the terms of his employment agreement, Mr. Carter's receipt of such
separation benefit is in lieu of any severance, salary or income continuation
plan or similar program that we now or hereafter offer and is conditioned upon
Mr. Carter executing and delivering to us a general release of claims.
Throughout Mr. Carter's employment with us and thereafter, Mr. Carter has
agreed to keep confidential all of our non-public information, matters and
materials and adhere to all of our policies with regard to our confidential
information. Mr. Carter has also agreed not to, directly or indirectly, during
the period of his employment and for 18 months following the termination of his
employment, solicit any of our employees to join another company that competes
with us in any way. In addition, Mr. Carter has agreed not to, directly or
indirectly, during the period of his employment and for two years following the
termination of his employment, compete with us or solicit any of our customers.
Janet L. Ziomek
On October 30, 2002, we entered into a letter agreement with our Chief
Financial Officer, Janet L. Ziomek, pursuant to which, under certain
circumstances, Ms. Ziomek will have the right to receive certain benefits upon
termination of her employment with us. Upon termination of employment by Ms.
Ziomek for good reason or by us without cause (each as defined in the letter
agreement), we will (a) pay Ms. Ziomek, any base salary or bonus earned but not
yet paid as of the date of the termination and reimburse her for all
reimbursable expenses; (b) pay her in a lump sum no later than twenty (20) days
after the termination of her employment, an amount equal to the sum of (i) 150%
of her annual base salary (measured as of the time of the termination of her
employment and without mitigation due to any remuneration or other compensation
earned by her following such termination of employment), and (ii) an amount
equal to the bonus paid to her for performance in 2001 (excluding bankruptcy
retention related bonuses); and (c) continue her medical coverage under our
group health plan for a period of 18 months from the date of the termination.
Ms. Ziomek's entitlement to the severance pay and other termination benefits
are conditioned upon her providing a general release of claims in favor of us
and material compliance with the covenants included in the letter agreement.
Throughout Ms. Ziomek's employment with us and thereafter, Ms. Ziomek has
agreed to keep confidential all of our non-public information, matters and
materials and adhere to all of our policies with regard to our confidential
information. Ms. Ziomek has also agreed not to, directly, during the period of
her employment and for one year following the termination of her employment,
compete with us, solicit any of our employees or knowingly do anything that
would be adverse in any material way to our interests.
Albert A. Prast
On October 30, 2002, we entered into a letter agreement with our Chief
Information Officer, Albert A. Prast, pursuant to which, under certain
circumstances, Mr. Prast will have the right to receive certain benefits upon
termination of his employment with us. Upon termination of employment by Mr.
Prast for good reason or by us without cause (each as defined in the letter
agreement), we will (a) pay Mr. Prast, any base salary or bonus earned but not
yet paid as of the date of the termination and reimburse him for all
reimbursable expenses; (b) pay
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him in a lump sum no later than 20 days after the termination of his
employment, an amount equal to the sum of (i) 150% of his annual base salary
(measured as of the time of the termination of his employment and without
mitigation due to any remuneration or other compensation earned by him
following such termination of employment), and (ii) an amount equal to the
bonus paid to him for performance in 2001 (excluding bankruptcy retention
related bonuses); and (c) continue his medical coverage under our group health
plan for a period of 18 months from the date of the termination. Mr. Prast's
entitlement to the severance pay and other termination benefits are conditioned
upon his providing a general release of claims in favor of us and material
compliance with the confidentiality and invention rights agreement entered into
by Mr. Prast in connection with the letter agreement.
Throughout Mr. Prast's employment with us and thereafter, Mr. Prast has
agreed to keep confidential all of our non-public information, matters and
materials and adhere to all of our policies with regard to our confidential
information. Mr. Prast has also agreed not to, directly or indirectly, during
the period of his employment and for one year following the termination of his
employment, compete with us, solicit any of our employees or knowingly do
anything that would be adverse in any material way to our interests. Mr. Prast
has also agreed that all IT Resources (as defined in the letter agreement)
developed during his employment are our sole and exclusive property free of any
claim whatsoever by him and/or any person claiming any rights or interests
through him.
Rebecca L. Myers
On January 24, 2001, we entered into a letter of employment agreement with
Rebecca L. Myers, pursuant to which Ms. Myers serves as our chief legal officer
on a continuing basis, subject to certain termination rights. Under this
employment agreement, as amended to date, Ms. Myers currently receives an
annual base salary of $275,000, and is eligible for a discretionary bonus with
a target amount of 75% of her base salary if we achieve the goals agreed upon
by Ms. Myers and us. The agreement commenced as of January 15, 2001. We have
agreed that if we initiate equity incentives for our senior management, Ms.
Myers will be included in the equity allocation made available to our top
executives. In addition, Ms. Myers received a signing bonus in the amount of
$30,000 and a moving allowance in the amount of $170,000 for her relocation to
Orlando, Florida including payment for any and all tax liabilities resulting
from such bonuses. Ms. Myers is also entitled to participate in the life,
medical and disability benefits, 401(k) plan and other benefit plans and
policies and will be reimbursed for professional dues and continuing education
expenses. She is also provided with a company car.
Ms. Myers' employment may be terminated for cause (as defined in the
employment agreement) upon 30 days written notice by us. Either Ms. Myers or we
may terminate the employment agreement for no fault at any time, for any
reason, by providing written notice to the other party. If Ms. Myers'
employment is terminated for cause or by her for no fault, we will pay her any
accrued base salary or bonus not yet paid as of the date of her termination and
reimburse her for any reimbursable expenses.
Ms. Myers may terminate her employment if we breach the employment agreement
or for good reason (as defined in the employment agreement). If Ms. Myers'
employment is terminated by her due to a breach by us, by her for good reason,
by us without cause or by us for no fault, we will (a) pay her any accrued base
salary or bonus not yet paid as of the date of her termination and reimburse
her for any reimbursable expenses; (b) pay her a lump sum no later than twenty
(20) days after the termination of her employment, an amount equal to the sum
of (i) 150% of her annual base salary (measured as of the time of the
termination of her employment and without mitigation due to any remuneration or
other compensation earned by her following such termination of employment), and
(ii) an amount equal to the full amount of bonuses paid to her in 2001 and the
full amount of bonuses paid to her for performance in 2001; (c) pay her a
relocation allowance in the amount of $70,000 immediately upon her termination
and any income taxes thereon; and (d) continue all of her employee benefits as
specified in the employment agreement for a period of 18 months from the date
of termination of employment.
Throughout Ms. Myers' employment with us and thereafter, Ms. Myers has
agreed to keep confidential all of our non-public information, matters and
materials and adhere to all of our policies with regard to our confidential
information. Ms. Myers has also agreed not to, directly or indirectly, compete
with us or solicit any of our customers for as long as she is receiving base
salary or severance payments from us.
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Executive compensation
The compensation of Stephen D. Linehan, our former President and Chief
Executive Officer, and the four other most highly paid executive officers
serving at December 31, 2001 is discussed in the following table. The table
also includes Philip L. Carter, our current President and Chief Executive
Officer and Michael R. Dobbs, our current Chief Operating Officer. Except for
Mr. Carter and Mr. Dobbs, the identified positions reflect the positions held
by the individuals in Rotech Medical Corporation prior to its emergence from
bankruptcy. Except for Mr. Linehan and Mr. Novell, each also holds the same
position with us now.
Summary compensation table
The following table sets forth, for the fiscal year ended December 31, 2001
the compensation paid to (or earned by) the named executive officers.
[Enlarge/Download Table]
Annual Compensation Other
Name and ------------------- Annual Incentive All Other
Principal Position Salary Bonus Compensation Compensation Compensation
------------------ -------- -------- ------------ ------------ ------------
Philip L. Carter,................... $ -- $ -- $ -- $ -- $ --
Chief Executive Officer and
President(1)
Michael R. Dobbs.................... $ -- $ -- $ -- $ -- $ --
Chief Operating Officer(1)
Albert A. Prast,.................... $250,000 $110,000 $257,004(2) -- --
Chief Information Officer
Janet L. Ziomek,.................... $225,000 $110,000 $257,807(3) -- --
Chief Financial Officer
Rebecca L. Myers,................... $184,615 $210,000 -- -- $228,115(5)
Chief Legal Officer(4)
Stephen D. Linehan,................. $619,039 $275,000 $ 15,688(6) $3,057,000(7) $ 47,293(8)
Former Chief Executive Officer and
President(4)
N. Scott Novell,.................... $350,000 $ 70,000 $255,549(10) $1,064,000(11) --
Former Chief Operating Officer(9)
--------
(1) Philip L. Carter became President and Chief Executive Officer of our
company in December 2002 and Michael R. Dobbs became Chief Operating
Officer of our company in January 2003. Neither Mr. Carter nor Mr. Dobbs
received any compensation as an officer of our company during the fiscal
year ended December 31, 2001. We have entered into an employment agreement
with Mr. Carter, as described above under the section captioned
"--Executive officer agreements".
(2) Represents a retention bonus of $241,667 and payments related to 401(k)
contributions, automobile allowance, health insurance and disability
insurance.
(3) Represents a retention bonus of $243,333 and payments related to 401(k)
contributions, automobile allowance, health insurance, disability
insurance and supplemental life insurance.
(4) Rebecca L. Myers' employment with us commenced on January 15, 2001.
Stephen D. Linehan's employment with us commenced in May 2000 and
terminated effective August 19, 2002.
(5) Represents reimbursement of relocation and related expenses.
(6) Represents payments related to 401(k) contributions, automobile allowance,
health insurance, disability insurance and supplemental life insurance.
(7) Represents incentive compensation earned. An additional $168,000 is
accrued but unpaid related to the fiscal year ended December 31, 2000.
Total accrued and unpaid incentive compensation for 2000 and 2001 is
estimated at approximately $3,225,000. We are currently in discussions
with Mr. Linehan regarding the exact amount of his accrued long-term
incentive compensation.
(8) Represents reimbursement of relocation expenses.
(9) N. Scott Novell's employment with us commenced in January 1997 and
terminated effective December 5, 2002.
(10) Represents a retention bonus in the amount of $243,333 and payments
related to 401(k) contributions, automobile allowance, health insurance
and disability insurance.
(11) Represents incentive compensation earned.
94
Option Grants in Last Fiscal Year
We made no grants of stock options or stock appreciation rights to the named
executive officers during the fiscal year ended December 31, 2001.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-end Option
Values
None of the named executive officers exercised options to acquire shares of
our common stock during the fiscal year ended December 31, 2001, and none of
the named executive officers held any unexercised options on December 31, 2001.
Security ownership of certain beneficial owners and management
The following table sets forth estimated information about the beneficial
ownership of our common stock as of March 26, 2002. The information in the
table is based on information contained in the plan of reorganization of our
predecessor, Rotech Medical Corporation, which emerged from bankruptcy on that
date. Upon effectiveness of the plan of reorganization, all of our outstanding
common stock was distributed to our predecessor for further distribution to its
creditors as contemplated by the plan of reorganization. We have been informed
by the transfer agent for our common stock that our common stock has been
distributed to the creditors of our predecessor. Our common stock is currently
not listed on any exchange. However, due to possible over the counter or other
trading in the stock after its initial distribution, the actual beneficial
ownership of our common stock may differ substantially from the information set
forth below.
Beneficial ownership is calculated based upon SEC rules. In computing the
percentage ownership of that person, shares of common stock subject to options
or warrants held by that person that are currently exercisable or exercisable
within 60 days of the date of this prospectus are considered outstanding. These
shares, however, are not considered outstanding for the purposes of computing
the percentage ownership of any other person. Except as indicated in the notes
to this table or as a result of applicable community property laws, each
stockholder named in the table has sole voting and investment power to the
shares shown as beneficially owned by them.
Applicable percentage ownership range in the following table is based on
25,000,000 shares of our common stock outstanding.
Unless otherwise indicated, the address for those named in the table is:
Rotech Healthcare Inc., 2600 Technology Drive, Suite 300, Orlando, Florida
32804.
[Download Table]
Beneficial
Name of Beneficial Owners Owner
------------------------- ----------
Directors and Named Executive Officers:
Philip L. Carter(1)......................................... 0.0%
Michael R. Dobbs............................................ 0.0%
Albert A. Prast(2).......................................... 0.0%
Janet L. Ziomek(2).......................................... 0.0%
Rebecca L. Myers(2)......................................... 0.0%
William Wallace Abbott(3)................................... 0.0%
Guy P. Sansone(4)........................................... 0.0%
William J. Mercer(4)........................................ 0.0%
Edward L. Kuntz(4).......................................... 0.0%
Arthur J. Reimers(4)........................................ 0.0%
Arthur Siegel(5)............................................ 0.0%
Stephen D. Linehan(6)....................................... 0.0%
N. Scott Novell(7).......................................... 0.0%
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[Download Table]
Beneficial
Name of Beneficial Owners Owner
------------------------- ----------
Five Percent or Greater Holders:
Oaktree Capital
333 South Grand Avenue
28th Floor
Los Angeles, California 90071............................... 12.71%
Goldman, Sachs & Co.
85 Broad Street
New York, New York 10004.................................... 9.94%
General Electric Capital Corp.
60 Long Ridge Rd.
Stamford, Connecticut 06927................................. 8.48%
Van Kampen Funds
1 Parkview Plaza
5th Floor
Oakbrook Terrace, Illinois 60181............................ 6.08%
Franklin Mutual Advisors
1 Franklin Parkway
San Mateo, California 94403................................. 5.03%
--------
* less than 1%
(1) Does not include 750,000 shares of common stock which will be issuable upon
the exercise of stock options granted by our board of directors in November
2002. The stock options will vest over a four year period. Of these stock
options, 150,000 shares may be cancelled by our board of directors in its
reasonable discretion on the first anniversary of Mr. Carter's employment
based upon performance.
(2) Does not include 110,000 shares of common stock which will be issuable upon
the exercise of stock options granted by our board of directors on May 21,
2002. The stock options will vest over a period of four years from date of
grant in sixteen equal quarterly installments.
(3) Does not include 100,000 shares of common stock which will be issuable upon
the exercise of stock options granted by our board of directors on May 21,
2002. The stock options will vest 25% on each of the first four six-month
anniversaries of the date of grant.
(4) Does not include 15,000 shares of common stock which will be issuable upon
the exercise of stock options granted by our board of directors on May 21,
2002. The stock options will vest 50% on each of the first two six-month
anniversaries of the date of grant.
(5) Does not include 15,000 shares of common stock which will be issuable upon
the exercise of stock options granted by our board of directors on December
19, 2002. The stock options will vest 50% on each of the first two
six-month anniversaries of the date of grant.
(6) Does not include 600,000 shares of common stock underlying stock options
granted by our board of directors on May 21, 2002. Mr. Linehan resigned as
an officer and director of our company effective August 19, 2002. Under the
terms of his separation agreement, Mr. Linehan is entitled until ninety
days after the effective date of his resignation to exercise the portion of
these options that became exercisable prior to his resignation.
(7) Does not include 300,000 shares of common stock which will be issuable upon
the exercise of stock options granted by our board of directors on May 21,
2002. The stock options are currently scheduled to vest 25% on each of the
first four anniversaries of the date of grant. Mr. Novell resigned as an
officer of our company effective December 5, 2002. Under the terms of his
separation agreement, Mr. Novell is entitled until ninety days after the
effective date of his resignation to exercise the portion of these options
that became exercisable prior to his resignation.
96
Related Party Transactions
On August 19, 2002, we entered into an agreement with Alvarez & Marsal,
Inc., the turn-around and interim management firm that managed our operations
until we emerged from bankruptcy. Under this agreement, Alvarez & Marsal
provided us with the services of Guy P. Sansone, as interim President and
co-Chief Executive Officer from August 2002 to December 2002. Mr. Sansone is a
Managing Director of Alvarez & Marsal. Under the agreement, as of November 30,
2002, we paid Alvarez & Marsal approximately $461,075 for Mr. Sansone's
services as interim President and co-Chief Executive Officer. We have also
agreed to certain billing rates applicable to other personnel provided to us by
Alvarez & Marsal.
In June 2001, we entered into certain agreements with bConnected Software,
Inc. involving software licensing, hosting and third party hardware and
software procurement, related to a procurement program. The dollar amount of
these transactions was approximately $1,000,000. Our Chief Information Officer,
Albert A. Prast, together with a series of family trusts and limited
partnerships, the primary beneficiaries of which are certain members of Mr.
Prast's immediate family, may be deemed to collectively own up to 21% of the
issued and outstanding voting securities of bConnected. We believe the terms of
our agreements with bConnected were entered into on an arms-length basis.
Goldman, Sachs & Co., one of the initial purchasers of the old notes, also
acted as joint bookrunning manager with UBS Warburg in connection with the
offering of the old notes. On March 26, 2002, we entered into senior secured
credit facilities for up to $275 million, for which Goldman Sachs Credit
Partners L.P., an affiliate of Goldman, Sachs & Co., acted as arranger. Goldman
Sachs Credit Partners L.P. also currently acts as syndication agent for the
senior secured credit facilities. In connection with these services, Goldman,
Sachs & Co. and its affiliates received an aggregate of approximately $4.9
million in gross fees. Upon our predecessor's emergence from bankruptcy,
Goldman, Sachs & Co. became the beneficial owner of approximately 9.94% of our
common stock.
97
DESCRIPTION OF NOTES
The Company issued the old notes to the initial purchasers on March 26,
2002. The initial purchasers sold all of the outstanding notes to "qualified
institutional buyers," as defined in Rule 144A under the Securities Act, and to
persons outside the United States under Regulation S. The form and term of the
new notes are the same as the form and term of the old notes they will replace,
except that:
. the Company will register the new notes under the Securities Act;
. the new notes, once registered, will not bear legends restricting
transfer; and
. holders of the new notes will not be entitled to some rights under the
registration rights agreement, including our payment of additional
interest for failure to meet specified deadlines, which terminate when
the exchange offer is consummated.
The Company issued the old notes under the indenture among itself, the
Guarantors and The Bank of New York, as trustee, in a private transaction that
was not subject to the registration requirements of the Securities Act. The
terms of the indenture apply to the old notes and the new notes to be issued in
exchange for the old notes in this exchange offer (all such notes being
referred to herein collectively as the "notes"). The terms of the notes include
those stated in the indenture and those made part of the indenture by reference
to the Trust Indenture Act of 1939.
The following description is a summary of the material provisions of the
indenture and the registration rights agreement. It does not restate those
agreements in their entirety. We urge you to read the indenture and the
registration rights agreement because they, and not this description, define
your rights as holders of the notes. Copies of the indenture and the
registration rights agreement are available as set forth below under the
caption "--Additional information."
You will find the definitions of certain terms used in this description
under the caption "Certain Definitions." In this description, the word "Rotech"
refers only to Rotech Healthcare Inc. and not to any of its subsidiaries.
Certain defined terms used in this description but not defined below under
"--Certain definitions" have the meanings assigned to them in the indenture.
The registered Holder of a note will be treated as the owner of it for all
purposes. Only registered Holders will have rights under the indenture.
Brief description of the notes and the guarantees
The Notes
The notes:
. are general unsecured obligations of Rotech;
. are subordinated in right of payment to all existing and future Senior
Debt of Rotech;
. are pari passu in right of payment with any future senior subordinated
Indebtedness of Rotech; and
. are unconditionally guaranteed by the Guarantors.
The Guarantees
The notes are guaranteed by all of Rotech's Domestic Subsidiaries except the
Immaterial Subsidiaries.
98
Each guarantee of the notes:
. is a general unsecured obligation of the Guarantor;
. is subordinated in right of payment to all existing and future Senior
Debt of that Guarantor; and
. is pari passu in right of payment with any future senior subordinated
Indebtedness of that Guarantor.
As of March 31, 2002, Rotech and the Guarantors had total Senior Debt of
approximately $200 million and up to an additional $75 million is available for
borrowing under the new revolving credit facility. As indicated above and as
discussed in detail below under the caption "--Subordination," payments on the
notes and under the guarantees are subordinated to the payment of Senior Debt.
The indenture permits us and the Guarantors to incur additional Senior Debt.
As of the date hereof, all of our Subsidiaries were Restricted Subsidiaries,
except for the Immaterial Subsidiaries which were Unrestricted Subsidiaries.
Immaterial Subsidiaries do not and will not have any operations and have and
will continue to have only de minimus assets, if any. In addition, under the
circumstances described below under the caption "Certain covenants--Designation
of Restricted and Unrestricted Subsidiaries," we are permitted to designate
certain other of our Subsidiaries as "Unrestricted Subsidiaries." Unrestricted
Subsidiaries are not subject to many of the restrictive covenants in the
indenture. Unrestricted Subsidiaries do not guarantee the notes.
Principal, maturity and interest
Rotech has issued old notes in an aggregate principal amount of $300
million. The old notes and the new notes will be treated as a single class for
all purposes under the indenture, including, without limitation, waivers,
amendments, redemptions and offers to purchase. Rotech will issue new notes in
denominations of $1,000 and integral multiples of $1,000. The notes will mature
on April 1, 2012.
Interest on the notes will accrue at the rate of 9 1/2% per annum and will
be payable semi-annually in arrears on April 1 and October 1, commencing on
October 1, 2002. Rotech will make each interest payment to the Holders of
record on the immediately preceding March 15 and September 15.
Interest on the notes will accrue from the date of original issuance or, if
interest has already been paid, from the date it was most recently paid.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months.
Methods of receiving payments on the notes
If a Holder has given wire transfer instructions to Rotech, Rotech will pay
all principal, interest and premium and Liquidated Damages, if any, on that
Holder's notes in accordance with those instructions. All other payments on
notes will be made at the office or agency of the paying agent and registrar
within the City and State of New York unless Rotech elects to make interest
payments by check mailed to the Holders at their address set forth in the
register of Holders.
Paying agent and registrar for the notes
The trustee will initially act as paying agent and registrar. Rotech may
change the paying agent or registrar without prior notice to the Holders of the
notes, and Rotech or any of its Subsidiaries may act as paying agent or
registrar.
99
Transfer and exchange
A Holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a Holder to furnish appropriate
endorsements and transfer documents in connection with a transfer of notes.
Holders will be required to pay all taxes and other governmental charges due on
transfer. Rotech is not required to transfer or exchange any note selected for
redemption. Also, Rotech is not required to transfer or exchange any note for a
period of 15 days before a selection of notes to be redeemed.
Subsidiary guarantees
The notes are guaranteed by each of the Guarantors. These Subsidiary
Guarantees are joint and several obligations of the Guarantors. Each Subsidiary
Guarantee is subordinated to the prior payment in full of all Senior Debt of
that Guarantor. The obligations of each Guarantor under its Subsidiary
Guarantee will be limited as necessary to prevent that Subsidiary Guarantee
from constituting a fraudulent conveyance under applicable law. See "Risk
factors--Your ability to enforce the guarantees of the notes may be limited."
A Guarantor may not sell or otherwise dispose of all or substantially all of
its assets to, or consolidate with or merge with or into (whether or not such
Guarantor is the surviving Person), another Person, other than Rotech or
another Guarantor, unless:
(1) immediately after giving effect to that transaction, no Default or
Event of Default exists; and
(2) subject to the provisions of the following paragraph, the Person
acquiring the property in any such sale or disposition or the Person formed
by or surviving any such consolidation or merger assumes all the obligations
of that Guarantor under the indenture, its Subsidiary Guarantee and the
registration rights agreement pursuant to a supplemental indenture
reasonably satisfactory to the trustee.
The Subsidiary Guarantee of a Guarantor will be released, and any Person
acquiring assets (including by way of merger or consolidation) or Capital Stock
of a Guarantor shall not be required to assume the obligations of that
Guarantor:
(1) in connection with any sale or other disposition of all or
substantially all of the assets of that Guarantor (including by way of
merger or consolidation) to a Person that is not (either before or after
giving effect to such transaction) a Restricted Subsidiary of Rotech, if the
sale or other disposition complies with the "Asset Sale" provisions of the
indenture;
(2) in connection with any sale of all of the Capital Stock of a
Guarantor to a Person that is not (either before or after giving effect to
such transaction) a Restricted Subsidiary of Rotech, if the sale complies
with the "Asset Sale" provisions of the indenture; or
(3) if Rotech designates any Restricted Subsidiary that is a Guarantor as
an Unrestricted Subsidiary in accordance with the applicable provisions of
the indenture.
See "--Repurchase at the option of holders--Asset Sales."
Subordination
The payment of principal, interest and premium and Liquidated Damages, if
any, on the notes will be subordinated to the prior payment in full of all
Senior Debt of Rotech, including Senior Debt incurred after the date of the
indenture.
The holders of Senior Debt will be entitled to receive payment in full of
all Obligations due in respect of Senior Debt (including interest after the
commencement of any bankruptcy proceeding at the rate specified in the
applicable Senior Debt) before the Holders of notes will be entitled to receive
any payment with respect to the notes (except that Holders of notes may receive
and retain Permitted Junior Securities and payments made from
100
the trust described under "--Legal defeasance and covenant defeasance"), in the
event of any distribution to creditors of Rotech:
(1) in a liquidation or dissolution of Rotech;
(2) in a bankruptcy, reorganization, insolvency, receivership or similar
proceeding relating to Rotech or its property;
(3) in an assignment for the benefit of creditors; or
(4) in any marshaling of Rotech's assets and liabilities.
Rotech also may not make any payment in respect of the notes (except in
Permitted Junior Securities or from the trust described under the caption
"--Legal defeasance and covenant defeasance") if:
(1) a payment default on Designated Senior Debt occurs and is continuing
beyond any applicable grace period; or
(2) any other default occurs and is continuing on any series of
Designated Senior Debt that permits holders of that series of Designated
Senior Debt to accelerate its maturity and the trustee receives a notice of
such default (a "Payment Blockage Notice") from Rotech or the holders of any
Designated Senior Debt.
Payments on the notes may and will be resumed:
(1) in the case of a payment default, upon the date on which such default
is cured or waived; and
(2) in the case of a nonpayment default, upon the earlier of the date on
which such nonpayment default is cured or waived or 179 days after the date
on which the applicable Payment Blockage Notice is received, unless the
maturity of any Designated Senior Debt has been accelerated.
No new Payment Blockage Notice may be delivered unless and until:
(1) 360 days have elapsed since the delivery of the immediately prior
Payment Blockage Notice; and
(2) all scheduled payments of principal, interest and premium and
Liquidated Damages, if any, on the notes that have come due have been paid
in full in cash.
No nonpayment default that existed or was continuing on the date of delivery
of any Payment Blockage Notice to the trustee will be, or be made, the basis
for a subsequent Payment Blockage Notice unless such default has been cured or
waived for a period of not less than 90 days.
If the trustee or any Holder of the notes receives a payment in respect of
the notes (except in Permitted Junior Securities or from the trust described
under the caption "--Legal defeasance and covenant defeasance") when:
(1) the payment is prohibited by these subordination provisions; and
(2) the trustee or the Holder knows or has reason to know that the
payment is prohibited,
the trustee or the Holder, as the case may be, will hold the payment in trust
for the benefit of the holders of Senior Debt. Upon the proper written request
of the holders of Senior Debt, the trustee or the Holder, as the case may be,
will deliver the amounts in trust to the holders of Senior Debt or their proper
representative. Rotech must promptly notify holders of Senior Debt if payment
of the notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event of
a bankruptcy, liquidation or reorganization of Rotech, Holders of notes may
recover less ratably than creditors of Rotech who are holders of Senior Debt.
See "Risk factors--The notes and subsidiary guarantees are subordinated to
senior indebtedness."
101
Optional redemption
At any time prior to April 1, 2005, Rotech may, on any one or more
occasions, redeem up to 35% of the aggregate principal amount of notes issued
under the indenture at a redemption price of 109.5% of the principal amount,
plus accrued and unpaid interest and Liquidated Damages, if any, to the
redemption date, with the net cash proceeds of one or more Public Equity
Offerings, provided that:
(1) at least 65% of the aggregate principal amount of notes initially
issued under the indenture remains outstanding immediately after the
occurrence of such redemption (excluding notes held by Rotech and its
Subsidiaries); and
(2) the redemption occurs within 90 days of the date of the closing of
such Public Equity Offering.
Except pursuant to the preceding paragraph, Rotech will not have the option
to redeem the notes until April 1, 2007.
On or after April 1, 2007, Rotech may redeem all or a part of the notes upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest and Liquidated Damages, if any, on the notes redeemed, to the
applicable redemption date, if redeemed during the twelve-month period
beginning on April 1 of the years indicated below:
[Download Table]
Year Percentage
---- ----------
2007.......................... 104.750%
2008.......................... 103.166%
2009.......................... 101.583%
2010 and thereafter........... 100.000%
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as follows:
(1) if the notes are listed on any national securities exchange, in
compliance with the requirements of the principal national securities
exchange on which the notes are listed; or
(2) if the notes are not listed on any national securities exchange, on a
pro rata basis, by lot or by such method as the trustee deems fair and
appropriate.
No notes of $1,000 or less can be redeemed in part. Notices of redemption
will be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each Holder of notes to be redeemed at its registered
address, except that redemption notices may be mailed more than 60 days prior
to a redemption date if the notice is issued in connection with a defeasance of
the notes or a satisfaction and discharge of the indenture. Notices of
redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note will state the portion of the principal amount of that
note that is to be redeemed. A new note in the principal amount equal to the
unredeemed portion of the original note will be issued in the name of the
Holder of notes upon cancellation of the original note. Notes called for
redemption become due on the date fixed for redemption. On and after the
redemption date, interest ceases to accrue on notes or portions of them called
for redemption.
Mandatory redemption
Except as described below under "Repurchase at the option of holders,"
Rotech is not required to make mandatory redemption or sinking fund payments
with respect to the notes.
102
Repurchase at the option of holders
Change of Control
If a Change of Control occurs, each Holder of notes will have the right to
require Rotech to repurchase all or any part (equal to $1,000 or an integral
multiple of $1,000) of that Holder's notes pursuant to a Change of Control
Offer on the terms set forth in the indenture. In the Change of Control Offer,
Rotech will offer a Change of Control Payment in cash equal to 101% of the
aggregate principal amount of notes repurchased plus accrued and unpaid
interest and Liquidated Damages, if any, on the notes repurchased, to the date
of purchase. Within thirty days following any Change of Control, Rotech will
mail a notice to each Holder describing the transaction or transactions that
constitute the Change of Control and offering to repurchase notes on the Change
of Control Payment Date specified in the notice, which date will be no earlier
than 30 days and no later than 60 days from the date such notice is mailed,
pursuant to the procedures required by the indenture and described in such
notice. Rotech will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent those laws and regulations are applicable in connection with the
repurchase of the notes as a result of a Change of Control. To the extent that
the provisions of any securities laws or regulations conflict with the Change
of Control provisions of the indenture, Rotech will comply with the applicable
securities laws and regulations and will not be deemed to have breached its
obligations under the Change of Control provisions of the indenture by virtue
of such conflict.
On the Change of Control Payment Date, Rotech will, to the extent lawful:
(1) accept for payment all notes or portions of notes properly tendered
pursuant to the Change of Control Offer;
(2) deposit with the paying agent an amount equal to the Change of
Control Payment in respect of all notes or portions of notes properly
tendered; and
(3) deliver or cause to be delivered to the trustee the notes properly
accepted together with an officers' certificate stating the aggregate
principal amount of notes or portions of notes being purchased by Rotech.
The paying agent will promptly mail to each Holder of notes who properly
tendered the Change of Control Payment for such notes, and the trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new note equal in principal amount to any unpurchased portion of
the notes surrendered, if any; provided that each new note will be in a
principal amount of $1,000 or an integral multiple of $1,000.
Prior to complying with any of the provisions of this "Change of Control"
covenant, but in any event within 90 days following a Change of Control, Rotech
will either repay all outstanding Senior Debt or obtain the requisite consents,
if any, under all agreements governing outstanding Senior Debt to permit the
repurchase of notes required by this covenant. Rotech will publicly announce
the results of the Change of Control Offer on or as soon as practicable after
the Change of Control Payment Date.
The provisions described above that require Rotech to make a Change of
Control Offer following a Change of Control will be applicable whether or not
any other provisions of the indenture are applicable. Except as described above
with respect to a Change of Control, the indenture does not contain provisions
that permit the Holders of the notes to require that Rotech repurchase or
redeem the notes in the event of a takeover, recapitalization or similar
transaction.
Rotech will not be required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer in the manner, at
the times and otherwise in compliance with the requirements set forth in the
indenture applicable to a Change of Control Offer made by Rotech and purchases
all notes properly tendered and not withdrawn under the Change of Control Offer.
103
The definition of Change of Control includes a phrase relating to the direct
or indirect sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the properties or assets of Rotech and its Restricted
Subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
Holder of notes to require Rotech to repurchase its notes as a result of a
sale, lease, transfer, conveyance or other disposition of less than all of the
assets of Rotech and its Restricted Subsidiaries taken as a whole to another
Person or group may be uncertain.
The Credit Agreement currently prohibits Rotech from purchasing any notes
upon a Change in Control, and also provides that certain change of control
events with respect to Rotech would constitute a default under the Credit
Agreement. Any future credit agreements or other agreements relating to Senior
Debt to which Rotech becomes a party may contain similar restrictions and
provisions. In the event a Change of Control occurs at a time when Rotech is
prohibited from purchasing notes, Rotech could seek the consent of its senior
lenders to the purchase of notes or could attempt to refinance the borrowings
that contain such prohibition. If Rotech does not obtain such a consent or
repay such borrowings, Rotech will remain prohibited from purchasing notes. In
such case, Rotech's failure to purchase tendered notes would constitute an
Event of Default under the indenture which would, in turn, constitute a default
under such Senior Debt. In such circumstances, the subordination provisions in
the indenture would likely restrict payments to the Holders of notes.
Asset Sales
Rotech will not, and will not permit any of its Restricted Subsidiaries to,
consummate an Asset Sale unless:
(1) Rotech (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of the Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or otherwise
disposed of (as determined in good faith by Rotech's Board of Directors); and
(2) at least 75% of the consideration received in the Asset Sale by
Rotech or such Restricted Subsidiary is in the form of cash or Cash
Equivalents. For purposes of this provision, each of the following will be
deemed to be cash:
(a) any liabilities, as shown on Rotech's most recent consolidated
balance sheet (other than contingent liabilities and liabilities that
are by their terms subordinated to the notes or any Subsidiary
Guarantee) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases Rotech or such
Restricted Subsidiary from further liability with respect to such
liabilities; and
(b) any securities, notes or other obligations received by Rotech or
any such Restricted Subsidiary from such transferee that are, within 30
days of the related Asset Sale, converted by Rotech or such Restricted
Subsidiary into cash, to the extent of the cash received in that
conversion.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
Rotech may apply those Net Proceeds at its option:
(1) to repay Senior Debt and, if the Senior Debt repaid is revolving
credit Indebtedness, to correspondingly reduce commitments with respect
thereto;
(2) to acquire all or substantially all of the assets of, or a majority
of the Voting Stock of, another Permitted Business;
(3) to make a capital expenditure; or
(4) to acquire other long-term assets that are used or useful in a
Permitted Business.
Pending the final application of any Net Proceeds, Rotech may temporarily
reduce revolving credit borrowings or otherwise invest the Net Proceeds in any
manner that is not prohibited by the indenture.
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Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the preceding paragraph will constitute "Excess Proceeds." When the
aggregate amount of Excess Proceeds exceeds $10.0 million, Rotech will make an
Asset Sale Offer to all Holders of notes and all holders of other Indebtedness
that is pari passu with the notes containing provisions similar to those set
forth in the indenture with respect to offers to purchase or redeem with the
proceeds of sales of assets to purchase the maximum principal amount of notes
and such other pari passu Indebtedness that may be purchased out of the Excess
Proceeds. The offer price in any Asset Sale Offer will be equal to 100% of
principal amount plus accrued and unpaid interest and Liquidated Damages, if
any, to the date of purchase, and will be payable in cash. If any Excess
Proceeds remain after consummation of an Asset Sale Offer, Rotech may use those
Excess Proceeds for any purpose not otherwise prohibited by the indenture. If
the aggregate principal amount of notes and other pari passu Indebtedness
tendered into such Asset Sale Offer exceeds the amount of Excess Proceeds, the
trustee will select the notes and such other pari passu Indebtedness to be
purchased on a pro rata basis. Upon completion of each Asset Sale Offer, the
amount of Excess Proceeds will be reset at zero.
Rotech will comply with the requirements of Rule 14e-1 under the Exchange
Act and any other securities laws and regulations thereunder to the extent
those laws and regulations are applicable in connection with each repurchase of
notes pursuant to an Asset Sale Offer. To the extent that the provisions of any
securities laws or regulations conflict with the Asset Sale provisions of the
indenture, Rotech will comply with the applicable securities laws and
regulations and will not be deemed to have breached its obligations under the
Asset Sale provisions of the indenture by virtue of such conflict.
The Credit Agreement provides that certain asset sale events with respect to
Rotech may constitute a default under the Credit Agreement and may prohibit
Rotech from purchasing any notes in connection with an Asset Sale Offer. Any
future credit agreements or other agreements relating to Senior Debt to which
Rotech becomes a party may contain similar restrictions and provisions. In the
event an Asset Sale occurs at a time when Rotech is prohibited from purchasing
notes, Rotech could seek the consent of its senior lenders to the purchase of
notes or could attempt to refinance the borrowings that contain such
prohibition. If Rotech does not obtain such a consent or repay such borrowings,
Rotech will remain prohibited from purchasing notes. In such case, Rotech's
failure to purchase tendered notes would constitute an Event of Default under
the indenture which would, in turn, constitute a default under such Senior
Debt. In such circumstances, the subordination provisions in the indenture
would likely restrict payments to the Holders of notes.
Certain covenants
Restricted Payments
Rotech will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution
on account of Rotech's or any of its Restricted Subsidiaries' Equity
Interests (including, without limitation, any payment in connection with any
merger or consolidation involving Rotech or any of its Restricted
Subsidiaries) or to the direct or indirect holders of Rotech's or any of its
Restricted Subsidiaries' Equity Interests in their capacity as such (other
than dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of Rotech or to Rotech or a Restricted Subsidiary of
Rotech);
(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation involving
Rotech) any Equity Interests of Rotech or any of its Restricted Subsidiaries;
(3) make any payment on or with respect to, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness that is pari passu
with or subordinated to the notes or the Subsidiary Guarantees (other than
the notes or the Subsidiary Guarantees), except a payment of interest or
principal at the Stated Maturity thereof; or
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(4) make any Restricted Investment (all such payments and other actions
set forth in these clauses (1) through (4) above being collectively referred
to as "Restricted Payments"),
unless, at the time of and after giving effect to such Restricted Payment:
(1) no Default or Event of Default has occurred and is continuing or
would occur as a consequence of such Restricted Payment;
(2) Rotech would, at the time of such Restricted Payment and after giving
pro forma effect thereto as if such Restricted Payment had been made at the
beginning of the applicable four-quarter period, have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to the Consolidated
Coverage Ratio test set forth in the first paragraph of the covenant
described below under the caption "--Incurrence of Indebtedness and Issuance
of Disqualified Stock;" and
(3) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by Rotech and its Restricted Subsidiaries
after the date of the indenture (excluding Restricted Payments permitted by
clauses (2) and (3) of the next succeeding paragraph), is less than the sum,
without duplication, of:
(a) 50% of the Consolidated Net Income of Rotech for the period
(taken as one accounting period) from the beginning of the first fiscal
quarter commencing after the date of the indenture to the end of
Rotech's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus
(b) 100% of the aggregate net cash proceeds received by Rotech since
the date of the indenture as a contribution to its common equity capital
or from the issue or sale of Equity Interests of Rotech (other than
Disqualified Stock) or from the issue or sale of convertible or
exchangeable Disqualified Stock or convertible or exchangeable debt
securities of Rotech that have been converted into or exchanged for such
Equity Interests (other than Equity Interests (or Disqualified Stock or
debt securities) sold to a Subsidiary of Rotech), plus
(c) to the extent that any Restricted Investment that was made after
the date of the indenture is sold for cash or otherwise liquidated or
repaid for cash, the lesser of (i) the cash return of capital with
respect to such Restricted Investment (less the cost of disposition, if
any) and (ii) the initial amount of such Restricted Investment, plus
(d) the fair market value of the net assets of an Unrestricted
Subsidiary (in an amount proportionate to Rotech's direct or indirect
equity interest in such Subsidiary) at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; provided, however,
that the foregoing shall not exceed, in the case of any such
Unrestricted Subsidiary, the amount of Investments (other than Permitted
Investments) previously made (and treated as a Restricted Payment) by
Rotech and its Restricted Subsidiaries in such Unrestricted Subsidiary.
So long as no Default has occurred and is continuing or would be caused
thereby, the preceding provisions will not prohibit:
(1) the payment of any dividend within 60 days after the date of
declaration of the dividend, if at the date of declaration the dividend
payment would have complied with the provisions of the indenture;
(2) the redemption, repurchase, retirement, defeasance or other
acquisition of any pari passu or subordinated Indebtedness of Rotech or any
Guarantor or of any Equity Interests of Rotech or any Restricted Subsidiary
in exchange for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a Subsidiary of Rotech) of, Equity Interests
of Rotech (other than Disqualified Stock); provided that the amount of any
such net cash proceeds that are utilized for any such redemption,
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repurchase, retirement, defeasance or other acquisition will be excluded
from clause (3) (b) of the preceding paragraph;
(3) the defeasance, redemption, repurchase or other acquisition of pari
passu or subordinated Indebtedness of Rotech or any Guarantor with the net
cash proceeds from an incurrence of Permitted Refinancing Indebtedness;
(4) the payment of any dividend by a Restricted Subsidiary of Rotech to
the holders of its Equity Interests on a pro rata basis;
(5) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of Rotech or any Restricted Subsidiary of
Rotech held by any director, employee or member of Rotech's (or any of its
Subsidiaries') management pursuant to any employee benefit plan, management
equity subscription agreement, stock option agreement or similar agreement;
provided that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests may not exceed $5.0 million in any
twelve-month period (excluding, for purposes of calculating such amount, the
aggregate amount received by any Person in connection with such repurchase,
redemption or other acquisition or retirement for value of such Equity
Interests that is concurrently used to repay such Person pursuant to clause
(9) of the definition of Permitted Investments);
(6) the purchase of any subordinated Indebtedness at a purchase price not
greater than 101% of the principal amount of such subordinated Indebtedness
in the event of a change of control in accordance with provisions similar to
the "Change of Control" covenant contained in the indenture; provided that,
prior to or simultaneously with such repurchase, Rotech has made the Change
of Control Offer as provided in such covenant with respect to the notes and
has repurchased all notes validly tendered for payment in connection with
the Change of Control Offer;
(7) the payment of up to $450,000 in cash dividends per year, plus
dividends payable in kind, in respect of Rotech's Series A Convertible
Preferred Stock; and
(8) other Restricted Payments in an aggregate amount not to exceed $10.0
million since the date of the indenture.
The amount of all Restricted Payments (other than cash) will be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by Rotech or such Restricted
Subsidiary, as the case may be, pursuant to the Restricted Payment. The fair
market value of any assets or securities that are required to be valued by this
covenant will be determined by the Board of Directors in good faith. If the
fair market value of any Restricted Payment exceeds $1.0 million in the
aggregate, not later than the date of making such Restricted Payment, Rotech
will deliver to the trustee an officers' certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this "Restricted Payments" covenant were computed.
Incurrence of Indebtedness and Issuance of Disqualified Stock
Rotech will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect
to (collectively, "incur") any Indebtedness (including Acquired Debt) or issue
any Disqualified Stock. However, Rotech and the Guarantors may incur
Indebtedness (including Acquired Debt) or issue Disqualified Stock if the
Consolidated Coverage Ratio for Rotech's most recently ended four full fiscal
quarters for which internal financial statements are available immediately
preceding the date on which such additional Indebtedness is incurred or such
Disqualified Stock is issued would have been at least 2.5 to 1, determined on a
pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred or the
Disqualified Stock had been issued, as the case may be, at the beginning of
such four-quarter period.
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The first paragraph of this covenant will not prohibit any of the following
items of Indebtedness (collectively, "Permitted Debt"):
(1) the incurrence by Rotech of additional Indebtedness and letters of
credit under Credit Facilities in an aggregate principal amount at any one
time outstanding under this clause (1)(with letters of credit being deemed
to have a principal amount equal to the maximum potential liability of
Rotech and its Restricted Subsidiaries thereunder) not to exceed $275.0
million;
(2) Existing Indebtedness;
(3) the incurrence by Rotech and the Guarantors of Indebtedness
represented by the notes and the related Subsidiary Guarantees to be issued
on the date of the indenture and the exchange notes and the related
Subsidiary Guarantees to be issued pursuant to the registration rights
agreement;
(4) the incurrence by Rotech or any of its Restricted Subsidiaries of
Indebtedness represented by Capital Lease Obligations, mortgage financings
or purchase money obligations, in each case, incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property, plant or equipment used in the business of Rotech
or such Restricted Subsidiary, in an aggregate principal amount not to
exceed $15.0 million at any time outstanding;
(5) the incurrence by Rotech or any of its Restricted Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to refund, refinance or replace Indebtedness (other than
intercompany Indebtedness) that was permitted by the indenture to be
incurred under the first paragraph of this covenant or clause (3) of this
paragraph;
(6) the incurrence of Indebtedness of Rotech owed to a Guarantor and
Indebtedness of any Guarantor owed to Rotech or any other Guarantor;
provided, however, that:
(a) such Indebtedness must be expressly subordinated to the prior
payment in full in cash of all Obligations with respect to the notes, in
the case of Rotech, or the Subsidiary Guarantee, in the case of a
Guarantor; and
(b) (i) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than
Rotech or a Guarantor of Rotech and (ii) any sale or other transfer of
any such Indebtedness to a Person that is not either Rotech or a
Guarantor of Rotech; will be deemed, in each case, to constitute an
incurrence of such Indebtedness by Rotech or such Guarantor, as the case
may be, that was not permitted by this clause (6);
(7) the incurrence by Rotech or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or hedging
interest rate risk with respect to any floating rate Indebtedness that is
permitted by the terms of the indenture to be outstanding;
(8) the guarantee by Rotech or any of the Guarantors of Indebtedness of
Rotech or a Restricted Subsidiary of Rotech that was permitted to be
incurred by another provision of this covenant;
(9) the accrual of interest, the accretion or amortization of original
issue discount, the payment of interest on any Indebtedness in the form of
additional Indebtedness with the same terms, and the payment of dividends on
Disqualified Stock in the form of additional shares of the same class of
Disqualified Stock, will not be deemed to be an incurrence of Indebtedness
or an issuance of Disqualified Stock for purposes of this covenant;
provided, in each such case, that the amount thereof is included in
Consolidated Interest Expense of Rotech as accrued;
(10) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; provided, however, that such Indebtedness is
extinguished within five business days of incurrence;
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(11) the incurrence by Rotech or any of its Restricted Subsidiaries of
additional Indebtedness in an aggregate principal amount (or accreted value,
as applicable) at any time outstanding, including all Permitted Refinancing
Indebtedness incurred to refund, refinance or replace any Indebtedness
incurred pursuant to this clause (11), not to exceed $20.0 million;
(12) the issuance by Rotech of up to 250,000 shares of its Series A
Convertible Preferred Stock in connection with Rotech's reorganization, plus
any dividends paid in kind on its Series A Convertible Preferred Stock; and
(13) the incurrence by Restricted Subsidiaries that are not Guarantors of
up to $5.0 million of Indebtedness in the aggregate outstanding at any one
time.
For purposes of determining compliance with this "Incurrence of Indebtedness
and Issuance of Disqualified Stock" covenant, in the event that an item of
proposed Indebtedness meets the criteria of more than one of the categories of
Permitted Debt described in clauses (1) through (13) above, or is entitled to
be incurred pursuant to the first paragraph of this covenant, Rotech will be
permitted to classify such item of Indebtedness on the date of its incurrence
in any manner that complies with this covenant. Indebtedness under Credit
Facilities outstanding on the date on which notes are first issued and
authenticated under the indenture will be deemed to have been incurred on such
date in reliance on the exception provided by clause (1) above.
No Senior Subordinated Debt
Rotech will not incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment
to any Senior Debt of Rotech and senior in any respect in right of payment to
the notes. No Guarantor will incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is subordinate or junior in
right of payment to the Senior Debt of such Guarantor and senior in any respect
in right of payment to such Guarantor's Subsidiary Guarantee.
Liens
Rotech will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create, incur, assume or suffer to exist any Lien of
any kind securing Indebtedness or trade payables on any asset now owned or
hereafter acquired, except Permitted Liens.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
Rotech will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(1) pay dividends or make any other distributions on its Capital Stock to
Rotech or any of its Restricted Subsidiaries, or with respect to any other
interest or participation in, or measured by, its profits, or pay any
indebtedness owed to Rotech or any of its Restricted Subsidiaries;
(2) make loans or advances to Rotech or any of its Restricted
Subsidiaries; or
(3) transfer any of its properties or assets to Rotech or any of its
Restricted Subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) agreements governing Existing Indebtedness and Credit Facilities as
in effect on the date of the indenture and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings of those agreements, provided that the amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are no more
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restrictive, taken as a whole, with respect to such dividend and other
payment restrictions than those contained in those agreements on the date of
the indenture;
(2) the indenture, the notes and the Subsidiary Guarantees;
(3) applicable law;
(4) any instrument governing Indebtedness or Capital Stock of a Person
acquired by Rotech or any of its Restricted Subsidiaries as in effect at the
time of such acquisition (except to the extent such Indebtedness or Capital
Stock was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or
the property or assets of the Person, so acquired; provided that, in the
case of Indebtedness, such Indebtedness was permitted by the terms of the
indenture to be incurred;
(5) customary non-assignment provisions in contracts entered into in the
ordinary course of business;
(6) purchase money obligations for property acquired in the ordinary
course of business that impose restrictions on that property of the nature
described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a Restricted
Subsidiary or an asset that imposes restrictions on such Restricted
Subsidiary or asset of the nature described in clause (1) through clause (3)
of the preceding paragraph;
(8) Permitted Refinancing Indebtedness, provided that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those contained
in the agreements governing the Indebtedness being refinanced;
(9) Liens securing Indebtedness otherwise permitted to be incurred under
the provisions of the covenant described above under the caption "--Liens"
that limit the right of Rotech or any of its Restricted Subsidiaries to
dispose of the assets subject to such Liens;
(10) provisions with respect to the disposition or distribution of assets
or property in joint venture agreements (including joint ventures governed
by limited liability company operating agreements, partnership agreements
and stockholders agreements), asset sale agreements, stock sale agreements
and other similar agreements entered into in the ordinary course of
business; and
(11) restrictions on cash or other deposits or net worth imposed by
customers under contracts entered into in the ordinary course of business.
Merger, Consolidation or Sale of Assets
Rotech may not, directly or indirectly: (1) consolidate or merge with or
into another Person (whether or not Rotech is the surviving corporation); or
(2) sell, assign, transfer, convey or otherwise dispose of all or substantially
all of the properties or assets of Rotech and its Restricted Subsidiaries,
taken as a whole, in one or more related transactions, to another Person,
unless:
(1) either: (a) Rotech is the surviving corporation; or (b) the Person
formed by or surviving any such consolidation or merger (if other than
Rotech) or to which such sale, assignment, transfer, conveyance or other
disposition has been made is a corporation organized or existing under the
laws of the United States of America, any state of the United States of
America or the District of Columbia;
(2) the Person formed by or surviving any such consolidation or merger
(if other than Rotech) or the Person to which such sale, assignment,
transfer, conveyance or other disposition has been made assumes all the
obligations of Rotech under the notes, the indenture and the registration
rights agreement pursuant to agreements reasonably satisfactory to the
trustee;
(3) immediately after such transaction no Default or Event of Default
exists; and
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(4) Rotech or the Person formed by or surviving any such consolidation or
merger (if other than Rotech), or to which such sale, assignment, transfer,
conveyance or other disposition has been made:
(a) will have Consolidated Net Worth immediately after the
transaction equal to or greater than the Consolidated Net Worth of
Rotech immediately preceding the transaction; and
(b) will, on the date of such transaction after giving pro forma
effect thereto and any related financing transactions as if the same had
occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Consolidated Coverage Ratio test set forth in the first paragraph of
the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Disqualified Stock."
In addition, Rotech may not, directly or indirectly, lease all or
substantially all of the properties or assets of Rotech and its Restricted
Subsidiaries, taken as a whole, in one or more related transactions, to any
other Person. This "Merger, Consolidation or Sale of Assets" covenant will not
apply to a sale, assignment, transfer, conveyance or other disposition of
assets between or among Rotech and any of the Guarantors; provided, that with
respect to any transaction involving Rotech and in which Rotech is not the
surviving entity or the Person to which such disposition is made, the surviving
entity or the Person to which such disposition is made will comply with clause
(2) above.
Transactions with Affiliates
Rotech will not, and will not permit any of its Restricted Subsidiaries to,
make any payment to, or sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or purchase any property or assets from, or enter
into or make or amend any transaction, contract, agreement, understanding,
loan, advance or guarantee with, or for the benefit of, any Affiliate (each, an
"Affiliate Transaction"), unless:
(1) the Affiliate Transaction is on terms that are no less favorable to
Rotech or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by Rotech or such Restricted Subsidiary
with an unrelated Person; and
(2) Rotech delivers to the trustee:
(a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$5.0 million, a resolution of Rotech's Board of Directors set forth in
an officers' certificate certifying that such Affiliate Transaction
complies with this covenant and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of
Directors; and
(b) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of
$10.0 million, an opinion as to the fairness to the Holders of such
Affiliate Transaction from a financial point of view issued by an
accounting, appraisal or investment banking firm of national standing in
the United States of America.
The following items will not be deemed to be Affiliate Transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any employment agreement entered into by Rotech or any of its
Restricted Subsidiaries in the ordinary course of business;
(2) transactions between or among Rotech and/or its Restricted
Subsidiaries;
(3) loans and advances permitted by clause (9) of the definition of
"Permitted Investments;"
(4) payment of reasonable and customary regular compensation,
indemnification, reimbursement and other directors fees to Persons who are
not otherwise Affiliates of Rotech;
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(5) Restricted Payments that are permitted by the provisions of the
indenture described above under the caption "--Restricted Payments;"
(6) agreements in effect on the date of the Indenture or any amendment
thereto (so long as such amendment is not more disadvantageous to Rotech or
any of its Restricted Subsidiaries, taken as a whole) or any transaction
provided for thereby;
(7) transactions relating to a Permitted Receivables Financing;
(8) advances to employees for moving, entertainment and travel expenses
and similar expenditures in the ordinary course of business and consistent
with past practices; and
(9) sales of common stock of Rotech to Affiliates for cash or Cash
Equivalents paid contemporaneously therewith.
Additional Subsidiary Guarantees
If Rotech or any of its Restricted Subsidiaries acquires or creates another
Domestic Restricted Subsidiary after the date of the indenture that is required
to become a Guarantor with respect to the notes, then that newly acquired or
created Domestic Restricted Subsidiary will become a Guarantor and execute a
supplemental indenture within 10 Business Days of the date on which it was
acquired or created.
Designation of Restricted and Unrestricted Subsidiaries
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if that designation would not cause a Default. If a
Restricted Subsidiary is designated as an Unrestricted Subsidiary, all
outstanding Investments owned by Rotech and its Restricted Subsidiaries in the
Subsidiary so designated will be deemed to be an Investment made as of the time
of such designation and will reduce the amount available for Restricted
Payments under the first paragraph of the covenant described above under the
caption "--Restricted Payments" or Permitted Investments, as applicable. All
such outstanding Investments will be valued at their fair market value at the
time of such designation, determined by the Board of Directors of Rotech in
good faith. That designation will only be permitted if such Restricted Payment
would be permitted at that time and if such Restricted Subsidiary otherwise
meets the definition of an Unrestricted Subsidiary. The Board of Directors of
Rotech may redesignate any Unrestricted Subsidiary to be a Restricted
Subsidiary if the redesignation would not cause a Default.
Business Activities
Rotech will not, and will not permit any Restricted Subsidiary to, engage in
any business other than Permitted Businesses.
Payments for Consent
Rotech will not, and will not permit any of its Restricted Subsidiaries to,
directly or indirectly, pay or cause to be paid any consideration to or for the
benefit of any Holder of notes for or as an inducement to any consent, waiver
or amendment of any of the terms or provisions of the indenture or the notes
unless such consideration is offered to be paid to all Holders of the notes
that consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement and such
consideration is paid to all Holders who so consent, waive or agree.
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Reports
Whether or not required by the Commission, so long as any notes are
outstanding, Rotech will furnish to the Holders of notes, within the time
periods specified in the Commission's rules and regulations:
(1) all quarterly and annual financial information that would be required
to be contained in a filing with the Commission on Forms 10-Q and 10-K if
Rotech were required to file such Forms, including a "Management's
discussion and analysis of financial condition and results of operations"
and, with respect to the annual information only, a report on the annual
financial statements by Rotech's certified independent accountants; and
(2) all current reports that would be required to be filed with the
Commission on Form 8-K if Rotech were required to file such reports.
In addition, whether or not required by the Commission, Rotech will file a
copy of all of the information and reports referred to in clauses (1) and (2)
above with the Commission for public availability within the time periods
specified in the Commission's rules and regulations (unless the Commission will
not accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition, Rotech and the
Subsidiary Guarantors have agreed that, for so long as any notes remain
outstanding, they will furnish to the Holders and to prospective investors
designated by any Holder, upon their request, any information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
Events of default and remedies
Each of the following is an Event of Default:
(1) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the notes whether or not prohibited by
the subordination provisions of the indenture;
(2) default in payment when due of the principal of, or premium, if any,
on the notes, whether or not prohibited by the subordination provisions of
the indenture;
(3) failure by Rotech or any of its Restricted Subsidiaries to comply
with the provisions described under the captions "--Repurchase at the option
of holders--Change of Control," "--Repurchase at the option of
holders--Asset Sales," "--Certain covenants--Restricted Payments,"
"--Certain covenants--Incurrence of Indebtedness and Issuance of
Disqualified Stock" or "--Certain covenants--Merger, Consolidation or Sale
of Assets;"
(4) failure by Rotech or any of its Restricted Subsidiaries for 60 days
after written notice from the trustee or from the Holders of not less than
25% in aggregate principal amount of the notes then outstanding to comply
with any of the other agreements in the indenture;
(5) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness
for money borrowed by Rotech or any of its Restricted Subsidiaries (or the
payment of which is guaranteed by Rotech or any of its Restricted
Subsidiaries) whether such Indebtedness or guarantee now exists, or is
created after the date of the indenture, if that default:
(a) is caused by a failure to pay principal of, or interest or
premium, if any, on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default
(a "Payment Default"); or
(b) results in the acceleration of such Indebtedness prior to its
express maturity,
and, in each case, the principal amount of any such Indebtedness, together
with the principal amount of any other such Indebtedness under which there
has been a Payment Default or the maturity of which has been so accelerated,
aggregates $15.0 million or more;
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(6) failure by Rotech or any of its Restricted Subsidiaries to pay final
judgments, the uninsured portion of which aggregates in excess of $15.0
million, which judgments are not paid, discharged or stayed for a period of
60 days;
(7) except as permitted by the indenture, any Subsidiary Guarantee shall
be held in any judicial proceeding to be unenforceable or invalid or shall
cease for any reason to be in full force and effect or any Guarantor, or any
Person acting on behalf of any Guarantor, shall deny or disaffirm its
obligations under its Subsidiary Guarantee; and
(8) certain events of bankruptcy or insolvency described in the
indenture with respect to Rotech, any of its Significant Subsidiaries or any
group of Subsidiaries that, taken together, would constitute a Significant
Subsidiary.
In the case of an Event of Default arising from certain events of bankruptcy
or insolvency, with respect to Rotech, any Restricted Subsidiary that is a
Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding notes will
become due and payable immediately without further action or notice. If any
other Event of Default occurs and is continuing, the trustee or the Holders of
at least 25% in principal amount of the then outstanding notes may declare all
the notes to be due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding notes may direct the
trustee in its exercise of any trust or power. The trustee may withhold from
Holders of the notes notice of any continuing Default or Event of Default if it
determines that withholding notes is in their interest, except a Default or
Event of Default relating to the payment of principal or interest or Liquidated
Damages.
The Holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the Holders of all of the
notes waive any existing Default or Event of Default and its consequences under
the indenture except a continuing Default or Event of Default in the payment of
interest or Liquidated Damages on, or the principal of, the notes.
In the case of any Event of Default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of Rotech with the
intention of avoiding payment of the premium that Rotech would have had to pay
if Rotech then had elected to redeem the notes pursuant to the optional
redemption provisions of the indenture, an equivalent premium will also become
and be immediately due and payable to the extent permitted by law upon the
acceleration of the notes. If an Event of Default occurs by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of Rotech
with the intention of avoiding the prohibition on redemption of the notes prior
to April 1, 2007, then the premium specified in the indenture will also become
immediately due and payable to the extent permitted by law upon the
acceleration of the notes.
Rotech is required to deliver to the trustee annually a statement regarding
compliance with the indenture. Upon becoming aware of any Default or Event of
Default, Rotech is required to deliver to the trustee a statement specifying
such Default or Event of Default.
No personal liability of directors, officers, employees and stockholders
No director, officer, employee, incorporator or stockholder of Rotech or any
Guarantor, as such, will have any liability for any obligations of Rotech or
the Guarantors under the notes, the indenture, the Subsidiary Guarantees, or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder of notes by accepting a note waives and releases
all such liability. The waiver and release are part of the consideration for
issuance of the notes. The waiver may not be effective to waive liabilities
under the federal securities laws.
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Legal defeasance and covenant defeasance
Rotech may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding notes and all
obligations of the Guarantors discharged with respect to their Subsidiary
Guarantees ("Legal Defeasance") except for:
(1) the rights of Holders of outstanding notes to receive payments in
respect of the principal of, or interest or premium and Liquidated Damages,
if any, on such notes when such payments are due from the trust referred to
below;
(2) Rotech's obligations with respect to the notes concerning issuing
temporary notes, registration of notes, mutilated, destroyed, lost or stolen
notes and the maintenance of an office or agency for payment and money for
security payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee, and
Rotech's and the Guarantor's obligations in connection therewith; and
(4) the Legal Defeasance provisions of the indenture.
In addition, Rotech may, at its option and at any time, elect to have the
obligations of Rotech and the Guarantors released with respect to certain
covenants that are described in the indenture ("Covenant Defeasance") and
thereafter any omission to comply with those covenants will not constitute a
Default or Event of Default with respect to the notes. In the event Covenant
Defeasance occurs, certain events (not including non-payment, bankruptcy,
receivership, rehabilitation and insolvency events) described under "--Events
of Default and Remedies" will no longer constitute an Event of Default with
respect to the notes.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(1) Rotech must irrevocably deposit with the trustee, in trust, for the
benefit of the Holders of the notes, cash in U.S. dollars, non-callable
Government Securities, or a combination of cash in U.S. dollars and
non-callable Government Securities, in amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, or interest and premium and Liquidated Damages, if
any, on the outstanding notes on the stated maturity or on the applicable
redemption date, as the case may be, and Rotech must specify whether the
notes are being defeased to maturity or to a particular redemption date;
(2) in the case of Legal Defeasance, Rotech has delivered to the trustee
an opinion of counsel reasonably acceptable to the trustee confirming that
(a) Rotech has received from, or there has been published by, the Internal
Revenue Service a ruling or (b) since the date of the indenture, there has
been a change in the applicable federal income tax law, in either case to
the effect that, and based thereon such opinion of counsel will confirm
that, the Holders of the outstanding notes will not recognize income, gain
or loss for federal income tax purposes as a result of such Legal Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Legal
Defeasance had not occurred;
(3) in the case of Covenant Defeasance, Rotech has delivered to the
trustee an opinion of counsel reasonably acceptable to the trustee
confirming that the Holders of the outstanding notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the
case if such Covenant Defeasance had not occurred;
(4) no Default or Event of Default has occurred and is continuing on the
date of such deposit (other than a Default or Event of Default resulting
from the borrowing of funds to be applied to such deposit);
(5) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under any material agreement
or instrument (other than the indenture) to which Rotech or any of its
Subsidiaries is a party or by which Rotech or any of its Subsidiaries is
bound;
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(6) Rotech must deliver to the trustee an officers' certificate stating
that the deposit was not made by Rotech with the intent of preferring the
Holders of notes over the other creditors of Rotech with the intent of
defeating, hindering, delaying or defrauding creditors of Rotech or others;
and
(7) Rotech must deliver to the trustee an officers' certificate and an
opinion of counsel, each stating that all conditions precedent relating to
the Legal Defeasance or the Covenant Defeasance have been complied with or
waived.
Amendment, supplement and waiver
Except as provided in the next three succeeding paragraphs, the indenture or
the notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the notes then outstanding (including,
without limitation, consents obtained in connection with a purchase of, or
tender offer or exchange offer for, notes), and any existing default or
compliance with any provision of the indenture or the notes may be waived with
the consent of the Holders of a majority in principal amount of the then
outstanding notes (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting Holder):
(1) reduce the principal amount of notes whose Holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or
alter the provisions with respect to the redemption of the notes (other than
provisions relating to the covenants described above under the caption
"--Repurchase at the option of holders");
(3) reduce the rate of or change the time for payment of interest on any
note;
(4) waive a Default or Event of Default in the payment of principal of,
or interest or premium, or Liquidated Damages, if any, on the notes (except
a rescission of acceleration of the notes by the Holders of at least a
majority in aggregate principal amount of the notes and a waiver of the
payment default that resulted from such acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to
waivers of past Defaults or the rights of Holders of notes to receive
payments of principal of, or interest or premium or Liquidated Damages, if
any, on the notes;
(7) waive a redemption payment with respect to any note (other than a
payment required by one of the covenants described above under the caption
"--Repurchase at the option of holders");
(8) release any Guarantor from any of its obligations under its
Subsidiary Guarantee or the indenture, except in accordance with the terms
of the indenture; or
(9) make any change in the preceding amendment and waiver provisions.
In addition, any amendment to, or waiver of, the provisions of the indenture
relating to subordination that adversely affects the rights of the Holders of
the notes will require the consent of the Holders of at least 75% in aggregate
principal amount of notes then outstanding.
Notwithstanding the preceding, without the consent of any Holder of notes,
Rotech, the Guarantors and the trustee may amend or supplement the indenture or
the notes:
(1) to cure any ambiguity, defect or inconsistency;
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(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of Rotech's or a Guarantor's
obligations to Holders of notes in the case of a merger or consolidation or
sale of all or substantially all of Rotech's assets;
(4) to make any change that would provide any additional rights or
benefits to the Holders of notes or that does not adversely affect the legal
rights under the indenture of any such Holder;
(5) to comply with requirements of the Commission in order to effect or
maintain the qualification of the indenture under the Trust Indenture Act; or
(6) to allow any Guarantor to execute a supplemental indenture and/or a
Subsidiary Guarantee if Rotech or any of its Restricted Subsidiaries
acquires or creates another Domestic Subsidiary after the date of the
indenture.
Satisfaction and discharge
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated, except lost, stolen or
destroyed notes that have been replaced or paid and notes for whose
payment money has been deposited in trust and thereafter repaid to
Rotech, have been delivered to the trustee for cancellation; or
(b) all notes that have not been delivered to the trustee for
cancellation have become due and payable by reason of the mailing of a
notice of redemption or otherwise or will become due and payable within
one year and Rotech or any Guarantor has irrevocably deposited or caused
to be deposited with the trustee as trust funds in trust solely for the
benefit of the Holders, cash in U.S. dollars, non-callable Government
Securities, or a combination of cash in U.S. dollars and non-callable
Government Securities, in amounts as will be sufficient without
consideration of any reinvestment of interest, to pay and discharge the
entire indebtedness on the notes not delivered to the trustee for
cancellation for principal, premium and Liquidated Damages, if any, and
accrued interest to the date of maturity or redemption;
(2) no Default or Event of Default has occurred and is continuing on the
date of the deposit or will occur as a result of the deposit and the deposit
will not result in a breach or violation of, or constitute a default under,
any other instrument to which Rotech or any Guarantor is a party or by which
Rotech or any Guarantor is bound;
(3) Rotech or any Guarantor has paid or caused to be paid all sums
payable by it under the indenture; and
(4) Rotech has delivered irrevocable instructions to the trustee under
the indenture to apply the deposited money toward the payment of the notes
at maturity or the redemption date, as the case may be.
In addition, Rotech must deliver an officers' certificate and an opinion of
counsel to the trustee stating that all conditions precedent to satisfaction
and discharge have been satisfied or waived.
Concerning the trustee
If the trustee becomes a creditor of Rotech or any Guarantor, the indenture
limits its right to obtain payment of claims in certain cases, or to realize on
certain property received in respect of any such claim as security or
otherwise. The trustee will be permitted to engage in other transactions;
however, if it acquires any conflicting interest it must eliminate such
conflict within 90 days, apply to the Commission for permission to continue or
resign.
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The Holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an Event of Default
occurs and is continuing, the trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
Holder of notes, unless such Holder has offered to the trustee security and
indemnity satisfactory to it against any loss, liability or expense.
Additional information
Anyone who receives this prospectus may obtain a copy of the indenture
without charge by writing to Rotech Healthcare Inc., 2600 Technology Drive,
Suite 300, Orlando, FL 32804, Attention: Legal Department.
Book-entry, delivery and form
General
The old notes were, and the new notes will be issued in the form of one or
more registered notes in global form, without interest coupons (the "Global
Notes"). The Global Notes will be deposited upon issuance with the trustee as
custodian for The Depository Trust Company ("DTC"), in New York, New York, and
registered in the name of DTC or its nominee, in each case for credit to an
account of a direct or indirect participant in DTC as described below.
Except as set forth below, the Global Notes may be transferred, in whole and
not in part, only to another nominee of DTC or to a successor of DTC or its
nominee. Beneficial interests in the Global Notes may not be exchanged for
notes in certificated form except in the limited circumstances described below.
See "--Exchange of global notes for certificated notes." Except in the limited
circumstances described below, owners of beneficial interests in the Global
Notes will not be entitled to receive physical delivery of notes in
certificated form.
Transfers of beneficial interests in the Global Notes will be subject to the
applicable rules and procedures of DTC and its direct or indirect participants
(including, if applicable, those of Euroclear Bank S.A./N.V. ("Euroclear") and
Clearstream Banking, S.A. ("Clearstream"), which may change from time to time.
Depository Procedures
The following description of the operations and procedures of DTC, Euroclear
and Clearstream are provided solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them. Rotech takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised Rotech that DTC is a limited-purpose trust company created
to hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers
and dealers (including the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations. Access to DTC's system
is also available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own
securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interests in, and transfers of ownership
interests in, each security held by or on behalf of DTC are recorded on the
records of the Participants and Indirect Participants.
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DTC has also advised Rotech that, pursuant to procedures established by it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the Initial Purchaser with portions of the
principal amount of the Global Notes; and
(2) ownership of these interests in the Global Notes will be shown on,
and the transfer of ownership of these interests will be effected only
through, records maintained by DTC (with respect to the Participants) or by
the Participants and the Indirect Participants (with respect to other owners
of beneficial interest in the Global Notes).
The laws of some states require that certain Persons take physical delivery
in definitive form of securities that they own. Consequently, the ability to
transfer beneficial interests in a Global Note to such Persons will be limited
to that extent. Because DTC can act only on behalf of Participants, which in
turn act on behalf of Indirect Participants, the ability of a Person having
beneficial interests in a Global Note to pledge such interests to Persons that
do not participate in the DTC system, or otherwise take actions in respect of
such interests, may be affected by the lack of a physical certificate
evidencing such interests.
Except as described below, owners of interests in the Global Notes will not
have notes registered in their names, will not receive physical delivery of
notes in certificated form and will not be considered the registered owners or
"Holders" thereof under the indenture for any purpose.
Payments in respect of the principal of, and interest and premium and
Liquidated Damages, if any, on a Global Note registered in the name of DTC or
its nominee will be payable to DTC in its capacity as the registered Holder
under the indenture. Under the terms of the indenture, Rotech and the trustee
will treat the Persons in whose names the notes, including the Global Notes,
are registered as the owners of the notes for the purpose of receiving payments
and for all other purposes. Consequently, neither Rotech, the trustee nor any
agent of Rotech or the trustee has or will have any responsibility or liability
for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments made on account of beneficial
ownership interest in the Global Notes or for maintaining, supervising or
reviewing any of DTC's records or any Participant's or Indirect
Participant's records relating to the beneficial ownership interests in the
Global Notes; or
(2) any other matter relating to the actions and practices of DTC or any
of its Participants or Indirect Participants.
DTC has advised Rotech that its current practice, upon receipt of any
payment in respect of securities such as the notes (including principal and
interest), is to credit the accounts of the relevant Participants with the
payment on the payment date unless DTC has reason to believe it will not
receive payment on such payment date. Each relevant Participant is credited
with an amount proportionate to its beneficial ownership of an interest in the
principal amount of the relevant security as shown on the records of DTC.
Payments by the Participants and the Indirect Participants to the beneficial
owners of notes will be governed by standing instructions and customary
practices and will be the responsibility of the Participants or the Indirect
Participants and will not be the responsibility of DTC, the trustee or Rotech.
Neither Rotech nor the trustee will be liable for any delay by DTC or any of
its Participants in identifying the beneficial owners of the notes, and Rotech
and the trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Subject to the transfer restrictions set forth under "Notice to investors,"
transfers between Participants in DTC will be effected in accordance with DTC's
procedures, and will be settled in same-day funds, and transfers between
participants in Euroclear and Clearstream will be effected in accordance with
their respective rules and operating procedures.
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Cross-market transfers between the Participants in DTC, on the one hand, and
Euroclear or Clearstream participants, on the other hand, will be effected
through DTC in accordance with DTC's rules on behalf of Euroclear or
Clearstream, as the case may be, by its respective depositary. However, such
cross-market transactions will require delivery of instructions to Euroclear or
Clearstream, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Clearstream, as the case may be,
will, if the transaction meets its settlement requirements, deliver
instructions to its respective depositary to take action to effect final
settlement on its behalf by delivering or receiving interests in the Global
Notes in DTC, and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to DTC. Euroclear
participants and Clearstream participants may not deliver instructions directly
to the depositories for Euroclear or Clearstream.
DTC has advised Rotech that it will take any action permitted to be taken by
a Holder of notes only at the direction of one or more Participants to whose
account DTC has credited the interests in the Global Notes and only in respect
of such portion of the aggregate principal amount of the notes as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default under the notes, DTC reserves the right to exchange the
Global Notes for notes in certificated form, and to distribute such notes to
its Participants.
Although DTC, Euroclear and Clearstream have agreed to the foregoing
procedures to facilitate transfers of interests in the Global Notes among
participants in DTC, Euroclear and Clearstream, they are under no obligation to
perform or to continue to perform such procedures, and may discontinue such
procedures at any time. Neither Rotech nor the trustee nor any of their
respective agents will have any responsibility for the performance by DTC,
Euroclear or Clearstream or their respective participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Exchange of Global Notes for Certificated Notes
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certificated Notes") if:
(1) DTC (a) notifies Rotech that it is unwilling or unable to continue as
depositary for the Global Notes and Rotech fails to appoint a successor
depositary or (b) has ceased to be a clearing agency registered under the
Exchange Act;
(2) Rotech, at its option, notifies the trustee in writing that it elects
to cause the issuance of the Certificated Notes; or
(3) there has occurred and is continuing a Default or Event of Default
with respect to the notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon prior written notice given to the trustee by or on
behalf of DTC in accordance with the indenture. In all cases, Certificated
Notes delivered in exchange for any Global Note or beneficial interests in
Global Notes will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures).
Exchange of Certificated Notes for Global Notes
Certificated Notes may not be exchanged for beneficial interests in any
Global Note unless the transferor first delivers to the trustee a written
certificate (in the form provided in the indenture) to the effect that such
transfer will comply with the appropriate transfer restrictions applicable to
such notes. See "Notice to investors."
Same Day Settlement and Payment
Rotech will make payments in respect of the notes represented by the Global
Notes (including principal, premium, if any, interest and Liquidated Damages,
if any) by wire transfer of immediately available funds to the accounts
specified by the Global Note Holder. Rotech will make all payments of
principal, interest and premium
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and Liquidated Damages, if any, with respect to Certificated Notes by wire
transfer of immediately available funds to the accounts specified by the
Holders of the Certificated Notes or, if no such account is specified, by
mailing a check to each such Holder's registered address. The notes represented
by the Global Notes are eligible to trade in DTC's Same-Day Funds Settlement
System, and any permitted secondary market trading activity in such notes will,
therefore, be required by DTC to be settled in immediately available funds.
Rotech expects that secondary trading in any Certificated Notes will also be
settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Clearstream participant purchasing an interest in a Global Note from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Clearstream participant, during the securities
settlement processing day (which must be a business day for Euroclear and
Clearstream) immediately following the settlement date of DTC. DTC has advised
Rotech that cash received in Euroclear or Clearstream as a result of sales of
interests in a Global Note by or through a Euroclear or Clearstream participant
to a Participant in DTC will be received with value on the settlement date of
DTC but will be available in the relevant Euroclear or Clearstream cash account
only as of the business day for Euroclear or Clearstream following DTC's
settlement date.
Registration rights; liquidated damages
The following description is a summary of the material provisions of the
registration rights agreement. It does not restate that agreement in its
entirety. We urge you to read the proposed form of registration rights
agreement in its entirety because it, and not this description, defines your
registration rights as holders of these notes. See "--Additional information."
In connection with the issuance of the old notes, Rotech, the Guarantors and
the initial purchasers entered into a registration rights agreement dated as of
March 26, 2002. Pursuant to the registration rights agreement, Rotech and the
Guarantors agreed to file with the Commission the registration statement to
which this prospectus relates. Upon the effectiveness of the exchange offer
registration statement, Rotech and the Guarantors will offer to the holders of
Transfer Restricted Securities who are able to make certain representations the
opportunity to exchange their Transfer Restricted Securities for new notes
pursuant to the exchange offer described in this prospectus.
In addition to the exchange offer registration statement to which this
prospectus relates, we have also agreed to file a shelf registration statement
to cover resales of the old notes under limited circumstances. We will file a
registration statement with the SEC if:
. we are not required to file the exchange offer registration statement;
. we are not permitted to consummate the exchange offer because the
exchange offer is not permitted by applicable law or Commission
policy; or
. any holder of Transfer Restricted Securities notifies Rotech prior to
the 20th day following consummation of the exchange offer that:
. it is prohibited by law or Commission policy from participating in
the exchange offer; or
. it may not resell the new notes acquired by it in the exchange
offer to the public without delivering a prospectus and the
prospectus contained in the exchange offer registration statement
is not appropriate or available for such resales; or
. it is a broker-dealer and owns old notes acquired directly from
Rotech or an affiliate of Rotech,
See "--Registration rights; liquidated damages."
Rotech and the Guarantors will file with the Commission a shelf registration
statement to cover resales of the old notes by the Holders of the old notes who
satisfy certain conditions relating to the provision of information in
connection with the shelf registration statement.
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Rotech and the Guarantors will use their best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Commission.
For purposes of the preceding, "Transfer Restricted Securities" means each
old note until:
. the date on which such old note has been exchanged by a Person other than
a broker-dealer for a new note in the exchange offer;
. following the exchange by a broker-dealer in the exchange offer of an old
note for a new note, the date on which such new note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of
such sale a copy of the prospectus contained in the exchange offer
registration statement;
. the date on which such old note has been effectively registered under the
Securities Act and disposed of in accordance with the shelf registration
statement; or
. the date on which such old note is distributed to the public pursuant to
Rule 144 under the Securities Act.
In the registration rights agreement Rotech and the Guarantors agreed:
. to file an exchange offer registration statement with the Commission on
or prior to June 24, 2002;
. to use commercially reasonable efforts to have the exchange offer
registration statement declared effective by the Commission on or prior
to September 22, 2002;
. unless the exchange offer would not be permitted by applicable law or
Commission policy,
. to commence the exchange offer; and
. to use commercially reasonable efforts to complete the exchange offer
on or prior to October 22, 2002, provided that, in any event, the
exchange offer will be completed within 45 days after the exchange
offer registration statement is declared effective by the Commission;
and
. if obligated to file the shelf registration statement, to use
commercially reasonable efforts to file the shelf registration statement
with the Commission on or prior to 45 days after such filing obligation
arises and to cause the shelf registration to be declared effective by
the Commission on or prior to 120 days after such obligation arises.
If:
(1) Rotech and the Guarantors fail to file any of the registration
statements required by the registration rights agreement on or before the
date specified for such filing; or
(2) any of such registration statements is not declared effective by the
Commission on or prior to the date specified for such effectiveness; or
(3) Rotech and the Guarantors fail to consummate the exchange offer on or
prior to the date required for completion of the exchange offer; or
(4) the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of Transfer Restricted Securities during
the periods specified in the registration rights agreement (each such event
referred to in clauses (1) through (4) above (subject to limited
exceptions), a "Registration Default"),
then Rotech and the Guarantors will pay liquidated damages to each Holder of
old notes, with respect to the first 90-day period immediately following the
occurrence of the first Registration Default in an amount equal to $.05 per
week per $1,000 principal amount of notes held by such Holder ("Liquidated
Damages").
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The amount of the Liquidated Damages will increase by an additional $.05 per
week per $1,000 principal amount of old notes with respect to each subsequent
90-day period until all Registration Defaults have been cured, up to a maximum
amount of Liquidated Damages for all Registration Defaults of $.30 per week per
$1,000 principal amount of notes.
All accrued Liquidated Damages will be paid by Rotech and the Guarantors on
each Damages Payment Date to the Global Note Holder by wire transfer of
immediately available funds or by federal funds check and to Holders of
Certificated notes by wire transfer to the accounts specified by them or by
mailing checks to their registered addresses if no such accounts have been
specified.
Following the cure of all Registration Defaults, the accrual of Liquidated
Damages will cease.
Holders of notes will be required to make certain representations to Rotech
(as described in the registration rights agreement) in order to participate in
the exchange offer and will be required to deliver certain information to be
used in connection with the shelf registration statement and to provide
comments on the shelf registration statement within the time periods set forth
in the registration rights agreement in order to have their notes included in
the shelf registration statement and benefit from the provisions regarding
Liquidated Damages set forth above. By acquiring old notes, a Holder is deemed
to have agreed to indemnify Rotech and the Guarantors against certain losses
arising out of information furnished by such Holder in writing for inclusion in
any shelf registration statement. Holders of notes will also be required to
suspend their use of the prospectus included in the shelf registration
statement under certain circumstances upon receipt of written notice to that
effect from Rotech.
Due to the internal investigation conducted in connection with the discovery
of falsified bulk sales to the VA, we were delayed in filing with the
Commission the registration statement to which this prospectus relates. Under
the terms of the registration rights agreement described above, we have
incurred Liquidated Damages in connection with the delayed filing of the
registration statement. In addition, the registration rights agreement sets
forth a deadline by which the registration statement was to have been declared
effective by the Commission. We did not meet that deadline. As a result, under
the terms of the registration rights agreement, we will incur additional
Liquidated Damages until such time as the registration statement is declared
effective by the Commission. As of December 31, 2002, we have incurred
Liquidated Damages of approximately $525,000.
Certain definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person:
(1) Indebtedness of any other Person existing at the time such other
Person is merged with or into or became a Restricted Subsidiary of such
specified Person, whether or not such Indebtedness is incurred in connection
with, or in contemplation of, such other Person merging with or into, or
becoming a Restricted Subsidiary of, such specified Person; and
(2) Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control,"
as used with respect to any Person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management or
policies of such Person, whether through the ownership of voting securities, by
agreement or otherwise; provided that beneficial ownership of 10% or more of
the Voting Stock of a Person will be deemed to be control. For purposes of this
definition, the terms "controlling," "controlled by" and "under common control
with" have correlative meanings.
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"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition by the Company or
any of its Restricted Subsidiaries of any assets, other than sales of
inventory, equipment and services in the ordinary course of business;
provided that any transaction subject to the provisions of the indenture
described above under the caption "--Repurchase at the option of
holders--Change of Control" and/or the provisions described above under the
caption "--Certain covenants--Merger, Consolidation or Sale of Assets" shall
be governed by the provisions described under such applicable caption(s) and
not by the provisions of the Asset Sale covenant; and
(2) the issuance of Equity Interests by any of Rotech's Restricted
Subsidiaries or the sale of Equity Interests in any of its Restricted
Subsidiaries.
Notwithstanding the preceding, the following items will not be deemed to be
Asset Sales:
(1) any single transaction or series of related transactions that
involves assets having a fair market value of less than $1.0 million;
(2) a transfer of assets between or among Rotech and its Restricted
Subsidiaries;
(3) an issuance of Equity Interests by a Restricted Subsidiary to Rotech
or to another Restricted Subsidiary or the issuance of Equity Interests by a
Restricted Subsidiary in which Rotech's percentage interest (direct and
indirect) in the Equity Interests of such Restricted Subsidiary, after
giving effect to such issuance, is at least equal to its percentage interest
prior thereto;
(4) any sale or transfer of assets by Rotech or any Restricted Subsidiary
that, in the good faith judgment of the management of Rotech, have become
worn out, obsolete or damaged or otherwise unsuitable for use in connection
with the business of Rotech or any Restricted Subsidiary, as the case may be;
(5) a sale of Receivables and Related Assets to or by a Securitization
Subsidiary in connection with a Permitted Receivables Financing;
(6) any exchange by Rotech or any Restricted Subsidiary of assets for
assets of another Person (provided, that (a) all or substantially all of the
property received by Rotech or such Restricted Subsidiary in such exchange
is of a type used in a Permitted Business (or constitutes 100% of the Voting
Stock of a Person engaged in a Permitted Business), (b) no Default or Event
of Default shall have occurred and be continuing as a result of such
exchange, (c) a majority of the disinterested members of the Board of
Directors of Rotech shall have determined in their good faith judgment that
such exchange is fair to Rotech or the applicable Restricted Subsidiary, as
the case may be, (d) the fair market value of the property so exchanged,
when taken together with the fair market value of all other property
exchanged in transactions pursuant to this clause (6) (in each case valued
at the time of the applicable exchange), does not exceed ten percent of
consolidated Tangible Net Property and Equipment of Rotech and its
Restricted Subsidiaries on a consolidated basis, (e) in the event Rotech or
a Restricted Subsidiary, as the case may be, receives any Voting Stock of a
Person pursuant to such exchange, such Person shall become a Restricted
Subsidiary, and (f) in the event Rotech or a Restricted Subsidiary, as the
case may be, receives any cash pursuant to such exchange, such cash received
shall be applied in the manner applicable to Net Proceeds from Asset Sales
pursuant to the Asset Sale covenant;
(7) the leasing or licensing of computer software related to the health
care related industries to third parties for fair value;
(8) transfers of cash or Cash Equivalents by Rotech or a Restricted
Subsidiary for equivalent value; and
(9) a Restricted Payment or Permitted Investment that is permitted by the
covenant described above under the caption "--Certain covenants--Restricted
Payments."
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"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" will be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"Beneficially Owns" and "Beneficially Owned" have a corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the
corporation; and
(2) with respect to any other Person, the board or committee or Person
serving a similar function with respect to such other Person.
"Capital Lease Obligation" means, at the time any determination is to be
made, the amount of the liability in respect of a capital lease that would at
that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of a partnership or limited liability company,
partnership or membership interests (whether general or limited); and
(3) any other interest or participation that confers on a Person the
right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"Cash Equivalents" means:
(1) United States dollars (including such dollars as are held as
overnight bank deposits and demand deposits with banks);
(2) securities issued or directly and fully guaranteed or insured by the
United States government or any agency or instrumentality of the United
States government (provided that the full faith and credit of the United
States is pledged in support of those securities) having maturities of not
more than 360 days from the date of acquisition;
(3) securities constituting direct obligations of any state or
municipality within the United States of America maturing within 360 days
from the date of acquisition thereof and at the time of acquisition by
Rotech or its Restricted Subsidiary having the highest long-term or short
term, as applicable, debt ratings obtainable from Moody's Investors
Services, Inc. or Standard & Poor's Rating Services;
(4) time deposit accounts, term deposit accounts, money market deposit
accounts, certificates of deposit, time deposits and bankers' acceptances
with maturities of six months or less from the date of acquisition with any
lender party to the Credit Agreement or with any domestic commercial bank
having capital and surplus in excess of $500.0 million and a Thomson Bank
Watch Rating of "B" or better;
(5) repurchase obligations with a term of not more than ten days for
underlying securities of the types described in clauses (2), (3) and (4)
above entered into with any financial institution meeting the qualifications
specified in clause (4) above;
(6) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Services and in each
case maturing within six months after the date of acquisition; and
(7) money market funds at least 95% of the assets of which constitute
Cash Equivalents of the kinds described in clauses (1) through (6) of this
definition.
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"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other
disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the
properties or assets of Rotech and its Restricted Subsidiaries taken as a
whole to any "person" (as that term is used in Section 13(d)(3) of the
Exchange Act);
(2) the adoption of a plan relating to the liquidation or dissolution of
Rotech;
(3) the consummation of any transaction (including, without limitation,
any merger or consolidation) the result of which is that any "person" (as
defined above) becomes the Beneficial Owner, directly or indirectly, of more
than 50% of the Voting Stock of Rotech, measured by voting power rather than
number of shares;
(4) the first day on which a majority of the members of the Board of
Directors of Rotech are not Continuing Directors; or
(5) Rotech consolidates with, or merges with or into, any Person, or any
Person consolidates with, or merges with or into, Rotech, in any such event
pursuant to a transaction in which any of the outstanding Voting Stock of
Rotech or such other Person is converted into or exchanged for cash,
securities or other property, other than any such transaction where the
Voting Stock of Rotech outstanding immediately prior to such transaction is
converted into or exchanged for Voting Stock (other than Disqualified Stock)
of the surviving or transferee Person constituting a majority of the
outstanding shares of such Voting Stock of such surviving or transferee
Person (immediately after giving effect to such issuance).
"Consolidated Cash Flow" means, with respect to any specified Person for any
period, the Consolidated Net Income of such Person for such period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized
by such Person or any of its Restricted Subsidiaries in connection with an
Asset Sale, to the extent such losses were deducted in computing such
Consolidated Net Income; plus
(2) provision for taxes based on income or profits of such Person and its
Restricted Subsidiaries for such period, to the extent that such provision
for taxes was deducted in computing such Consolidated Net Income; plus
(3) Consolidated Interest Expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of debt issuance
costs and original issue discount, non-cash interest payments, the interest
component of any deferred payment obligations, the interest component of all
payments associated with Capital Lease Obligations, commissions, discounts
and other fees and charges incurred in respect of letter of credit or
bankers' acceptance financings, and net of the effect of all payments made
or received pursuant to Hedging Obligations), to the extent that any such
expense was deducted in computing such Consolidated Net Income; plus
(4) depreciation, amortization (including amortization of goodwill and
other intangibles but excluding amortization of prepaid cash expenses that
were paid in a prior period) and other non-cash expenses (excluding any such
non-cash expense to the extent that it represents an accrual of or reserve
for cash expenses in any future period or amortization of a prepaid cash
expense that was paid in a prior period) of such Person and its Restricted
Subsidiaries for such period to the extent that such depreciation,
amortization and other non-cash expenses were deducted in computing such
Consolidated Net Income; minus
(5) non-cash items increasing such Consolidated Net Income for such
period, other than the accrual of revenue in the ordinary course of
business, in each case, on a consolidated basis and determined in accordance
with GAAP.
Notwithstanding the preceding, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other non-cash
expenses of, a Restricted Subsidiary of Rotech will be added to
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Consolidated Net Income to compute Consolidated Cash Flow of Rotech only to the
extent that a corresponding amount would be permitted at the date of
determination to be dividended to Rotech by such Restricted Subsidiary without
prior governmental approval (that has not been obtained), and without
restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its stockholders.
"Consolidated Coverage Ratio" means with respect to any specified Person for
any period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Consolidated Interest Expense of such Person for such period. In
the event that the specified Person or any of its Restricted Subsidiaries
incurs, assumes, Guarantees, repays, repurchases or redeems any Indebtedness
(other than ordinary working capital borrowings) or issues, repurchases or
redeems preferred stock subsequent to the commencement of the period for which
the Consolidated Coverage Ratio is being calculated and on or prior to the date
on which the event for which the calculation of the Consolidated Coverage Ratio
is made (the "Calculation Date"), then the Consolidated Coverage Ratio will be
calculated giving pro forma effect to such incurrence, assumption, Guarantee,
repayment, repurchase or redemption of Indebtedness, or such issuance,
repurchase or redemption of preferred stock, and the use of the proceeds
therefrom as if the same had occurred at the beginning of the applicable
four-quarter reference period.
In addition, for purposes of calculating the Consolidated Coverage Ratio:
(1) acquisitions that have been made by the specified Person or any of
its Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to
the Calculation Date will be given pro forma effect as if they had occurred
on the first day of the four-quarter reference period and Consolidated Cash
Flow for such reference period will be calculated on a pro forma basis in
accordance with Regulation S-X under the Securities Act, but without giving
effect to clause (3) of the proviso set forth in the definition of
Consolidated Net Income;
(2) the Consolidated Cash Flow attributable to discontinued operations,
as determined in accordance with GAAP, and operations or businesses disposed
of prior to the Calculation Date, will be excluded; and
(3) the Consolidated Interest Expense attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, will be excluded, but
only to the extent that the obligations giving rise to such Consolidated
Interest Expense will not be obligations of the specified Person or any of
its Restricted Subsidiaries following the Calculation Date.
"Consolidated Interest Expense" means, with respect to any specified Person
for any period, the sum, without duplication, of:
(1) the consolidated interest expense of such Person and its Restricted
Subsidiaries for such period, whether paid or accrued, including, without
limitation, amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net of the effect of all payments made or received pursuant to Hedging
Obligations; plus
(2) the consolidated interest of such Person and its Restricted
Subsidiaries that was capitalized during such period; plus
(3) any interest expense on Indebtedness of another Person that is
Guaranteed by such Person or one of its Restricted Subsidiaries or secured
by a Lien on assets of such Person or one of its Restricted Subsidiaries,
whether or not such Guarantee or Lien is called upon; plus
(4) the product of (a) all dividends, whether paid or accrued and whether
or not in cash, on any series of preferred stock of such Person or any of
its Restricted Subsidiaries, other than dividends on Equity
127
Interests payable solely in Equity Interests of Rotech (other than
Disqualified Stock) or to Rotech or a Restricted Subsidiary of Rotech, times
(b) a fraction, the numerator of which is one and the denominator of which
is one minus the then current combined federal, state and local statutory
tax rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"Consolidated Net Income" means, with respect to any specified Person for
any period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the Net Income (but not loss) of any Person that is not a Restricted
Subsidiary or that is accounted for by the equity method of accounting will
be included only to the extent of the amount of dividends or distributions
paid in cash to the specified Person or a Restricted Subsidiary which is a
Wholly-Owned Subsidiary of the Person;
(2) the Net Income of any Restricted Subsidiary will be excluded to the
extent that the declaration or payment of dividends or similar distributions
by that Restricted Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval (that has
not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that Restricted Subsidiary or
its stockholders;
(3) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition will be
excluded;
(4) the Net Income (but not loss) of any Unrestricted Subsidiary shall be
excluded, except to the extent distributed to the specified Person or one of
its Restricted Subsidiaries; and
(5) the cumulative effect of a change in accounting principles will be
excluded.
"Consolidated Net Worth" means, with respect to any specified Person as of
any date, the sum of:
(1) the consolidated equity of the common stockholders of such Person and
its Restricted Subsidiaries on a consolidated basis as of such date, as
determined in accordance with GAAP; plus
(2) the respective amounts reported on such Person's balance sheet as of
such date with respect to any series of preferred stock (other than
Disqualified Stock) that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only to
the extent of any cash received by such Person upon issuance of such
preferred stock.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of Rotech who:
(1) was a member of such Board of Directors on the date of the indenture;
or
(2) was nominated for election or elected to such Board of Directors with
the approval of a majority of the Continuing Directors who were members of
such Board at the time of such nomination or election.
"Credit Agreement" means, collectively, the five-year revolving credit
facility in an aggregate principal amount of $75 million and the six-year term
loan facility in an aggregate principal amount of $200 million, each dated as
of March 26, 2002, by and among us, as borrower, and UBS Warburg LLC and
Goldman Sachs Credit Partners L.P., as arrangers, Goldman Sachs Credit
Partners, L.P., as syndication agent, UBS AG, Stamford Branch, as
administrative agent, and the banks identified therein, which facilities
together provide for up to $275.0 million of credit borrowings, including any
related notes, guarantees, collateral documents, instruments and agreements
executed in connection therewith, and in each case as amended, modified,
renewed, refunded, replaced or refinanced from time to time.
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"Credit Facilities" means, one or more debt facilities (including, without
limitation, the Credit Agreement) or commercial paper facilities, in each case
with banks or other institutional lenders providing for revolving credit loans,
term loans, receivables financing (including through a Permitted Receivables
Financing) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"Designated Senior Debt" means:
(1) any Indebtedness outstanding under the Credit Agreement; and
(2) any other Senior Debt permitted under the indenture the principal
amount of which is $25.0 million or more and that has been designated by
Rotech as "Designated Senior Debt."
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder of the Capital Stock),
or upon the happening of any event, matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or redeemable at the option
of the holder thereof, in whole or in part, on or prior to the date that is 91
days after the date on which the notes mature. Notwithstanding the preceding
sentence, any Capital Stock that would constitute Disqualified Stock solely
because the holders of the Capital Stock have the right to require Rotech to
repurchase such Capital Stock upon the occurrence of a change of control or an
asset sale will not constitute Disqualified Stock if the terms of such Capital
Stock provide that Rotech may not repurchase or redeem any such Capital Stock
pursuant to such provisions unless such repurchase or redemption complies with
the covenant described above under the caption "--Certain covenants--Restricted
Payments."
"Domestic Subsidiary" means any Subsidiary of Rotech that was formed under
the laws of the United States of America or any state of the United States of
America or the District of Columbia or that guarantees or otherwise provides
direct credit support for any Indebtedness of Rotech.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of Rotech and its Restricted
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the date of the initial issuance of the notes under the indenture, until
such amounts are repaid.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America, and the payment for which the
United States of America pledges its full faith and credit.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner, including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any Indebtedness.
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"Guarantors" means each of:
(1) Rotech's Domestic Subsidiaries as of the indenture date other than
Immaterial Subsidiaries; and
(2) any other Subsidiary that executes a Subsidiary Guarantee in
accordance with the provisions of the indenture;
and their respective successors and assigns.
"Hedging Obligations" means, with respect to any specified Person, the
obligations of such Person under:
(1) interest rate swap agreements, interest rate cap agreements and
interest rate collar agreements; and
(2) other agreements or arrangements designed to protect such Person
against fluctuations in interest rates.
"Immaterial Subsidiaries" means those Domestic Subsidiaries that are
designated by Rotech in the indenture as Domestic Subsidiaries that will not be
Guarantors or Restricted Subsidiaries.
"Indebtedness" means (without duplication), with respect to any specified
Person, any indebtedness of such Person, whether or not contingent:
(1) in respect of borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof);
(3) in respect of banker's acceptances;
(4) representing Capital Lease Obligations;
(5) representing the balance deferred and unpaid of the purchase price of
any property, except any such balance that constitutes an accrued expense or
trade payable; or
(6) representing any Hedging Obligations,
if and to the extent any of the preceding items (other than letters of credit
and Hedging Obligations) would appear as a liability upon a balance sheet of
the specified Person prepared in accordance with GAAP. In addition, the term
"Indebtedness" includes all Indebtedness of others secured by a Lien on any
asset of the specified Person (whether or not such Indebtedness is assumed by
the specified Person) but only to the extent that the aggregate amount of such
Indebtedness does not exceed the fair market value of the asset and, to the
extent not otherwise included, the Guarantee by the specified Person of any
indebtedness of any other Person.
The amount of any Indebtedness outstanding as of any date will be:
(1) the accreted value of the Indebtedness, in the case of any
Indebtedness issued with original issue discount; and
(2) the principal amount of the Indebtedness, together with any interest
on the Indebtedness that is more than 30 days past due, in the case of any
other Indebtedness.
"Investments" means, with respect to any Person, all direct or indirect
investments by such Person in other Persons (including Affiliates) in the forms
of loans (including Guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers
and employees made in the ordinary course of business), purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If Rotech or
any Restricted Subsidiary of Rotech sells or otherwise disposes
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of any Equity Interests of any direct or indirect Restricted Subsidiary of
Rotech such that, after giving effect to any such sale or disposition, such
Person is no longer a Restricted Subsidiary of Rotech, Rotech will be deemed to
have made an Investment on the date of any such sale or disposition equal to
the fair market value of the Equity Interests of such Restricted Subsidiary not
sold or disposed of in an amount determined as provided in the final paragraph
of the covenant described above under the caption "--Certain
covenants--Restricted Payments." The acquisition by Rotech or any Restricted
Subsidiary of Rotech of a Person that holds an Investment in a third Person
will be deemed to be an Investment by Rotech or such Restricted Subsidiary in
such third Person in an amount equal to the fair market value of the Investment
held by the acquired Person in such third Person in an amount determined as
provided in the final paragraph of the covenant described above under the
caption "--Certain covenants--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law, including
any conditional sale or other title retention agreement or any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction;
provided, that in no event shall an operating lease that is not a Capital Lease
Obligation be deemed to constitute a Lien.
"Net Income" means, with respect to any specified Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however:
(1) any gain (but not loss), together with any related provision for
taxes on such gain (but not loss), realized in connection with: (a) any
Asset Sale; or (b) the disposition of any securities by such Person or any
of its Restricted Subsidiaries or the extinguishment of any Indebtedness of
such Person or any of its Restricted Subsidiaries; and
(2) any extraordinary gain (but not loss), together with any related
provision for taxes on such extraordinary gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by Rotech or any
of its Restricted Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of the direct costs
relating to such Asset Sale, including, without limitation, legal, accounting
and investment banking fees, and sales commissions, and any relocation expenses
incurred as a result of the Asset Sale, taxes paid or payable as a result of
the Asset Sale, in each case, after taking into account any available tax
credits or deductions and any tax sharing arrangements, and amounts required to
be applied to the repayment of Indebtedness secured by a Lien on the asset or
assets that were the subject of such Asset Sale.
"Non-Recourse Debt" means Indebtedness:
(1) as to which neither Rotech nor any of its Restricted Subsidiaries (a)
provides credit support of any kind (including any undertaking, agreement or
instrument that would constitute Indebtedness), (b) is directly or
indirectly liable as a guarantor or otherwise, or (c) constitutes the lender;
(2) no default with respect to which (including any rights that the
holders thereof may have to take enforcement action against an Unrestricted
Subsidiary) would permit upon notice, lapse of time or both any holder of
any other Indebtedness (other than the notes) of Rotech or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity; and
(3) as to which the lenders have been notified in writing that they will
not have any recourse to the stock or assets of Rotech or any of its
Restricted Subsidiaries.
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"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Business" means the business engaged in by Rotech and its
Restricted Subsidiaries as of the date of the indenture as described in this
prospectus and businesses that in the good faith judgment of the Board of
Directors of Rotech are reasonably related thereto or reasonable extensions
thereof within the health care industry or incidental thereto.
"Permitted Investments" means:
(1) any Investment in Rotech or in a Restricted Subsidiary of Rotech;
(2) any Investment in Cash Equivalents;
(3) any Investment by Rotech or any Restricted Subsidiary of Rotech in a
Person, if as a result of such Investment:
(a) such Person becomes a Restricted Subsidiary; or
(b) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is
liquidated into, Rotech or a Restricted Subsidiary;
(4) any Investment made as a result of the receipt of non-cash
consideration from an Asset Sale that was made pursuant to and in compliance
with the covenant described above under the caption "--Repurchase at the
option of holders--Asset Sales;"
(5) any acquisition of assets solely in exchange for the issuance of
Equity Interests (other than Disqualified Stock) of Rotech;
(6) any Investments received in compromise of obligations of trade
creditors or customers that were incurred in the ordinary course of
business, including pursuant to any plan of reorganization or similar
arrangement upon the bankruptcy or insolvency of any trade creditor or
customer;
(7) Hedging Obligations otherwise permitted under the indenture;
(8) Investments in existence on the date of the initial issuance of the
notes under the indenture;
(9) loans or advances to officers, directors and employees of Rotech or
any of its Restricted Subsidiaries made for bona fide business purposes or
to purchase Equity Interests of Rotech, not in excess of $3.0 million in the
aggregate at any one time outstanding (excluding any amounts received by
Rotech or any of its Restricted Subsidiaries as a repayment of such loans or
advances in connection with the repurchase, redemption or other acquisition
or retirement for value of such Equity Interests);
(10) Investments represented by receivables owing to Rotech or any
Restricted Subsidiary created in the ordinary course of business;
(11) Investments in any notes or exchange notes;
(12) Investments in prepaid expenses, negotiable instruments held for
collection and lease, endorsements for deposit or collection in the ordinary
course of business, utility and workers compensation, performance and
similar deposits entered into as a result of the operations of the business
in the ordinary course of business;
(13) any Investment by Rotech or any Restricted Subsidiary in a
Securitization Subsidiary in connection with a Permitted Receivables
Financing; provided that the only assets transferred to such Securitization
Subsidiary consist of Receivables and Related Assets; and
(14) other Investments in any Person having an aggregate fair market
value (measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (14) since the date of the
indenture, not to exceed $20.0 million.
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"Permitted Junior Securities" means:
(1) Equity Interests in Rotech; or
(2) debt securities of Rotech or any Guarantor that are subordinated to
all Senior Debt and any debt securities issued in exchange for Senior Debt
to the same extent as, or to a greater extent than, the notes and the
Subsidiary Guarantees are subordinated to Senior Debt under the indenture.
"Permitted Liens" means:
(1) Liens on the assets of Rotech or any Guarantor securing Senior Debt
under Credit Facilities that was permitted by the terms of the indenture to
be incurred;
(2) Liens in favor of Rotech or its Restricted Subsidiaries;
(3) Liens on property of a Person existing at the time such Person is
merged with or into or consolidated with Rotech or any Restricted Subsidiary
of Rotech; provided that such Liens were not incurred in connection with or
in contemplation of such merger or consolidation and do not extend to any
assets other than those of the Person merged into or consolidated with
Rotech or the Restricted Subsidiary;
(4) Liens on property existing at the time of acquisition of the property
by Rotech or any Restricted Subsidiary of Rotech, provided that such Liens
were not incurred in connection with or in contemplation of such acquisition;
(5) Liens to secure the performance of statutory obligations, surety or
appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business;
(6) Liens to secure Indebtedness (including, without limitation, Capital
Lease Obligations) permitted by clause (4) of the second paragraph of the
covenant entitled "--Certain covenants--Incurrence of Indebtedness and
Issuance of Disqualified Stock" covering only the assets acquired with such
Indebtedness;
(7) Liens existing on the date of the indenture together with any Liens
securing Permitted Refinancing Indebtedness; provided that the Liens
securing the Permitted Refinancing Indebtedness shall not extend to property
other than that pledged under the Liens, if any, securing the Indebtedness
being refinanced;
(8) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent more than 30 days or that are being contested in good
faith by appropriate proceedings promptly instituted and diligently
concluded, provided that any reserve or other appropriate provision as is
required in conformity with GAAP has been made therefor;
(9) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by law
incurred in the ordinary course of business for sums not yet delinquent more
than 30 days or being contested in good faith, if such reserve or other
appropriate provision, if any, as shall be required by GAAP for financial
reporting purposes shall have been made in respect thereof;
(10) Liens to secure purchase money indebtedness that is otherwise
permitted under the indenture;
(11) Liens in favor of the trustee to secure Rotech's payment obligations
to the trustee;
(12) zoning restrictions, easements, licenses, covenants and other
similar restrictions and encumbrances affecting the use of real property not
interfering in any material respect with the ordinary conduct of the
business of Rotech and its Restricted Subsidiaries taken as a whole;
(13) judgment liens not giving rise to an Event of Default;
(14) Liens and rights of setoff in favor of a bank imposed by law and
incurred in the ordinary course of business on deposit accounts maintained
with such bank and Cash Equivalents in such accounts;
133
(15) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(16) Liens securing Hedging Obligations of Rotech or any Restricted
Subsidiary otherwise permitted under the indenture; and
(17) Liens incurred in the ordinary course of business of Rotech or any
Restricted Subsidiary of Rotech with respect to Obligations that do not
exceed $15.0 million in the aggregate at any one time outstanding.
"Permitted Receivables Financing" means a transaction or series of
transactions (including amendments, supplements, extensions, renewals,
replacements, refinancings or modifications thereof) pursuant to which a
Securitization Subsidiary purchases Receivables and Related Assets from Rotech
or any Restricted Subsidiary and finances such Receivables and Related Assets
or a fractional undivided interest in the Receivables and Related Assets;
provided that (i) the Board of Directors shall have determined in good faith
that such Permitted Receivables Financing is economically fair and reasonable
to Rotech and the Securitization Subsidiary, (ii) all sales of Receivables and
Related Assets to or by the Securitization Subsidiary are made at fair market
value (as determined in good faith by the Board of Directors), (iii) the
financing terms, covenants, termination events and other provisions thereof
shall be market terms (as determined in good faith by the Board of Directors),
(iv) no portion of the Indebtedness of the Securitization Subsidiary is
guaranteed by or is recourse to Rotech or any Restricted Subsidiary (other than
recourse for customary representations, warranties, covenants and indemnities,
none of which shall relate to the collectibility of the Receivables and Related
Assets) and (v) neither Rotech nor any Restricted Subsidiary has any obligation
to maintain or preserve the Securitization Subsidiary's financial condition.
"Permitted Refinancing Indebtedness" means any Indebtedness of Rotech or any
of its Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of Rotech or any of its Restricted Subsidiaries (other than
intercompany Indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such
Permitted Refinancing Indebtedness does not exceed the principal amount (or
accreted value, if applicable) of the Indebtedness extended, refinanced,
renewed, replaced, defeased or refunded (plus all accrued interest on the
Indebtedness and the amount of all reasonable expenses and premiums incurred
in connection therewith);
(2) such Permitted Refinancing Indebtedness has a final maturity date not
earlier than the final maturity date of, and has a Weighted Average Life to
Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded;
(3) if the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded is subordinated in right of payment to the notes, such
Permitted Refinancing Indebtedness has a final maturity date later than the
final maturity date of, and is subordinated in right of payment to, the
notes on terms at least as favorable to the Holders of notes, taken as a
whole, as those contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and
(4) such Indebtedness is incurred by either Rotech or by the Restricted
Subsidiary who is the obligor on the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Public Equity Offering" means an underwritten public offering by Rotech for
cash (in an amount resulting in not less than $25.0 million of gross proceeds)
of its common stock pursuant to a registration statement that has been declared
effective by the Commission pursuant to the Securities Act.
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"Receivables and Related Assets" means accounts receivable and instruments,
chattel paper, obligations, general intangibles and other similar assets, in
each case, relating to such receivables, including interests in merchandise or
goods, the sale or lease of which gave rise to such receivables, related
contractual rights, guarantees, insurance proceeds, collections, other related
assets and proceeds of all of the foregoing.
"Restricted Subsidiary" means any direct or indirect Subsidiary of Rotech
other than an Unrestricted Subsidiary.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Securitization Subsidiary" means any Unrestricted Subsidiary created for
the limited purpose of acquiring and financing Receivables and Related Assets
and engaging in activities ancillary thereto.
"Senior Debt" means:
(1) all Indebtedness of Rotech or any Guarantor outstanding under Credit
Facilities and all Hedging Obligations with respect thereto;
(2) any other Indebtedness of Rotech or any Guarantor permitted to be
incurred under the terms of the indenture, unless the instrument under which
such Indebtedness is incurred expressly provides that it is on a parity with
or subordinated in right of payment to the notes or any Subsidiary
Guarantee; and
(3) all Obligations with respect to the items listed in the preceding
clauses (1) and (2).
Notwithstanding anything to the contrary in the preceding, Senior Debt will
not include:
(1) any liability for federal, state, local or other taxes owed or owing
by Rotech;
(2) any Indebtedness of Rotech or any of its Subsidiaries to Rotech or
any of its Subsidiaries or other Affiliates;
(3) any trade payables; or
(4) any Indebtedness that is incurred in violation of the indenture (but
as to any such Indebtedness, no such violation shall be deemed to exist for
purposes of this clause (4) if the Holders(s) of such Indebtedness or their
representative shall have in good faith received a certificate from an
officer of Rotech or such Guarantor to the effect that the incurrence of
such Indebtedness does not and would not violate such provisions of the
Indenture).
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the date of
the indenture.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which the payment of
interest or principal was scheduled to be paid in the documentation governing
such Indebtedness, and will not include any contingent obligations to repay,
redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any specified Person:
(1) any corporation, association or other business entity of which more
than 50% of the total voting power of shares of Voting Stock entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees of the corporation, association
or other business entity is at the time owned or controlled, directly or
indirectly, by that Person or one or more of the other Subsidiaries of that
Person (or a combination thereof); and
135
(2) any partnership (a) the sole general partner or the managing general
partner of which is such Person or a Subsidiary of such Person or (b) the
only general partners of which are that Person or one or more Subsidiaries
of that Person (or any combination thereof).
"Tangible Net Property and Equipment" of any Person means, as of any date,
the tangible property and equipment of such Person, net of depreciation and
amortization, as determined in accordance with GAAP and reflected on the most
recently available balance sheet of such Person.
"Unrestricted Subsidiary" means any Subsidiary of Rotech that is designated
by the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary:
(1) has no Indebtedness other than Non-Recourse Debt;
(2) is not party to any agreement, contract, arrangement or understanding
with Rotech or any Restricted Subsidiary of Rotech unless the terms of any
such agreement, contract, arrangement or understanding are no less favorable
to Rotech or such Restricted Subsidiary than those that might be obtained at
the time from Persons who are not Affiliates of Rotech;
(3) is a Person with respect to which neither Rotech nor any of its
Restricted Subsidiaries has any direct or indirect obligation (a) to
subscribe for additional Equity Interests or (b) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results;
(4) has not guaranteed or otherwise directly or indirectly provided
credit support for any Indebtedness of Rotech or any of its Restricted
Subsidiaries; and
(5) has at least one director on its board of directors that is not a
director or executive officer of Rotech or any of its Restricted
Subsidiaries.
Any designation of a Subsidiary of Rotech as an Unrestricted Subsidiary
shall be evidenced to the trustee by filing with the trustee a certified copy
of the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the preceding
conditions and was permitted by the covenant described above under the caption
"Certain covenants--Restricted Payments." If, at any time, any Unrestricted
Subsidiary would fail to meet the preceding requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of the indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of Rotech as of such date and,
if such Indebtedness is not permitted to be incurred as of such date under the
covenant described under the caption "Incurrence of Indebtedness and Issuance
of Disqualified Stock," Rotech shall be in default of such covenant. The Board
of Directors of Rotech may at any time designate any Unrestricted Subsidiary to
be a Restricted Subsidiary; provided that such designation shall be deemed to
be an incurrence of Indebtedness by a Restricted Subsidiary of Rotech of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (1) such Indebtedness is permitted under the
covenant described under the caption "Certain covenants--Incurrence of
Indebtedness and Issuance of Disqualified Stock," calculated on a pro forma
basis as if such designation had occurred at the beginning of the four-quarter
reference period; and (2) no Default or Event of Default would be in existence
following such designation.
Notwithstanding anything to the contrary contained herein, each of the
Immaterial Subsidiaries shall constitute an Unrestricted Subsidiary.
"Voting Stock" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
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"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing:
(1) the sum of the products obtained by multiplying (a) the amount of
each then remaining installment, sinking fund, serial maturity or other
required payments of principal, including payment at final maturity, in
respect of the Indebtedness, by (b) the number of years (calculated to the
nearest one-twelfth) that will elapse between such date and the making of
such payment; by
(2) the then-outstanding principal amount of such Indebtedness.
"Wholly-Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Voting Stock of which (other than directors' qualifying
shares) shall at the time be owned by such Person and/or by one or more
Wholly-Owned Subsidiaries of such Person.
137
DESCRIPTION OF CREDIT FACILITIES
On March 26, 2002, we entered into senior secured credit facilities for up
to $275 million, with UBS Warburg LLC and Goldman Sachs Credit Partners L.P.,
as arrangers, Goldman Sachs Credit Partners, L.P., as syndication agent, UBS
AG, Stamford Branch, as administrative agent, and a syndicate of other
financial institutions. The senior secured credit facilities consist of:
. a $75 million five-year revolving credit facility; and
. a $200 million six-year term loan facility.
The amount available for borrowings under the revolving credit facility is
the lesser of (a) the total commitment amount of the revolving credit facility
minus the aggregate outstanding balance of revolving credit loans (including
obligations in respect of letters of credit) and (b) certain percentages of our
and our domestic subsidiaries' eligible accounts receivable, eligible inventory
and eligible property, plant and equipment, minus the aggregate outstanding
balance of revolving credit loans (including obligations in respect of letters
of credit) and the term loans.
The term loan was drawn in full on the consummation of our predecessor's
plan of reorganization, which occurred contemporaneously with the sale of the
old notes. The term loan is amortized with 1% of the term loan payable in each
of the first five years and 95% of the initial aggregate term loan to be
payable in year six.
Interest rates and fees
The interest rates per annum applicable to the senior secured credit
facilities is LIBOR or, at our option, the alternate base rate, which is the
higher of (a) the rate of interest publicly announced by UBS AG as its prime
rate in effect at its Stamford Branch, and (b) the federal funds effective rate
from time to time plus 0.50%, in each case, plus the applicable margin (as
defined below). The applicable margin (a) with respect to the revolving credit
facility, is determined in accordance with a performance grid based on our
consolidated leverage ratio and ranges from 3.25% to 2.25% in the case of
Eurodollar rate advances and from 2.25% to 1.25% in the case of alternate base
rate advances, and (b) with respect to the term loan facility, is 3.00% in the
case of Eurodollar rate advances and 2.00% in the case of alternate base rate
advances. The default rate on the senior secured credit facilities is 2% above
the otherwise applicable interest rate. We are also obligated to pay a
commitment fee ranging, depending on usage, from 0.75% to 0.50% on the unused
portion of our revolving credit facility.
Prepayments
Subject to certain exceptions, loans under the credit facilities are
required to be prepaid with:
. 50% of the net proceeds of any sale of equity by us or any of our
subsidiaries that are guaranteeing our obligations under the senior
secured credit facilities;
. 100% of the net proceeds of the incurrence of certain indebtedness (not
including the sale of the old notes) by us or any of our subsidiaries
that are guaranteeing our obligations under the senior secured credit
facilities;
. 100% of the net proceeds from the sale or other disposition of certain
assets by us or any of our subsidiaries that are guaranteeing our
obligations under the senior secured credit facilities; and
. 75% (if the leverage ratio is greater than 2.0 to 1.0) or 50% (if our and
our subsidiaries' leverage ratio is less than or equal to 2.0 to 1.0) of
excess cash flow.
If at any time (x) the sum of borrowings under the revolving credit facility
(including obligations in respect of letters of credit) and the term loan,
exceeds (y) the sum of certain percentages of our and our domestic
subsidiaries' eligible accounts receivable, eligible inventory and eligible
plant, property and equipment, loans under the credit facilities are required
to be prepaid an amount equal to such excess.
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Amounts prepaid in respect of the term loan may not be reborrowed and so
such prepayments may adversely affect our liquidity.
We may prepay the senior secured credit facilities at any time in whole or
in part without premium or penalty, except that any prepayment of LIBOR rate
advances other than at the end of the applicable interest periods therefore
must be made with reimbursement for any funding losses and redeployment costs
of the lenders resulting therefrom.
Covenants
The senior secured credit facilities contain customary affirmative and
negative covenants, including, without limitation, limitations on indebtedness;
limitations on liens; limitations on guarantee obligations; limitations on
mergers, consolidations, liquidations and dissolutions; limitations on sales of
assets; limitations on leases; limitations on dividends and other payments in
respect of capital stock; limitations on investments, loans and advances;
limitations on capital expenditures; limitations on optional payments and
modifications of subordinated and other debt instruments; limitations on
transactions with affiliates; limitations on granting negative pledges; and
limitations on changes in lines of business.
In addition, the credit agreement contains financial covenants including,
without limitation, the following:
. Consolidated Total Leverage Ratio. We have agreed not to permit the
ratio of Consolidated Total Debt to Consolidated EBITDA (each as defined
in the credit agreement related to the senior secured credit facilities),
calculated as of the end of any four consecutive fiscal quarters, to
exceed the ratios set forth below:
[Download Table]
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Fiscal Quarter Ending Consolidated Total Leverage Ratio
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March 31, 2002 through June 30, 2003 3.00x
September 30, 2003 through June 30, 2004 2.75x
September 30, 2004 through June 30, 2005 2.50x
September 30, 2005 through June 30, 2006 2.25x
September 30, 2006 and thereafter 2.00x
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. Consolidated Senior Leverage Ratio. We have agreed not to permit the
ratio of Consolidated Senior Debt to Consolidated EBITDA (each as defined
in the credit agreement related to the senior secured credit facilities),
calculated as of the end of any four consecutive fiscal quarters, to
exceed the ratios set forth below:
[Download Table]
---------------------------------------------------------------------------
Fiscal Quarter Ending Consolidated Senior Leverage Ratio
---------------------------------------------------------------------------
March 31, 2002 through June 30, 2003 1.50x
September 30, 2003 through June 30, 2004 1.25x
September 30, 2004 and thereafter 1.00x
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. Consolidated Interest Coverage Ratio. We have agreed not to permit the
ratio of Consolidated EBITDA to Consolidated Interest Expense (each as
defined in the credit agreement related to the senior secured credit
facilities), for any period of four consecutive fiscal quarters to be
less than the ratios set forth below:
[Download Table]
-----------------------------------------------------------------------------
Fiscal Quarter Ending Consolidated Interest Coverage Ratio
-----------------------------------------------------------------------------
March 31, 2002 through June 30, 2003 3.75x
September 30, 2003 through June 30, 2004 4.00x
September 30, 2004 and thereafter 4.25x
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. Consolidated Fixed Charge Coverage Ratio. We have agreed not to permit
the ratio of Consolidated EBITDA plus Consolidated Lease Expense to
Consolidated Fixed Charges (each as defined in the credit agreement
related to the senior secured credit facilities), for any period of four
consecutive fiscal quarters to be less than the ratios set forth below:
[Download Table]
-----------------------------------------------------------------------------
Fiscal Quarter Ending Consolidated Fixed Charge Coverage Ratio
-----------------------------------------------------------------------------
March 31, 2002 through June 30, 2004 1.10x
September 30, 2004 and thereafter 1.20x
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Events of default
Events of default under the credit facilities include, among others,
nonpayment of principal when due, nonpayment of interest, fees or other
amounts, a material inaccuracy of any of the representations and warranties,
covenant defaults, cross defaults, bankruptcy events, certain ERISA events,
material judgments, actual or asserted invalidity of any material guarantee or
security document or security interest and a change of control.
Security and guarantees
Our obligations under the credit facilities are guaranteed by each of our
direct and indirect domestic subsidiaries, excluding immaterial subsidiaries in
the process of dissolution and other specified immaterial subsidiaries.
All obligations under the credit facilities and the guarantees are secured
by a perfected first priority security interest in substantially all of our
tangible and intangible assets, including intellectual property, real property
and all of the capital stock of each of our direct and indirect subsidiaries,
excluding immaterial subsidiaries in the process of dissolution and other
specified immaterial subsidiaries and limited, in the case of each foreign
subsidiary, to 65% of the value stock of such entity.
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DESCRIPTION OF CAPITAL STOCK
General
We are a newly-formed Delaware holding company created under the plan of
reorganization of our predecessor, Rotech Medical Corporation, a Florida
corporation. Prior to the closing of the offering of the old notes, we adopted
a new certificate of incorporation. The following summarizes information from
our certificate of incorporation, which became effective on March 15, 2002.
Under our certificate of incorporation we are authorized to issue up to
fifty million (50,000,000) shares of common stock, par value $.0001 per share,
and one million (1,000,000) shares of preferred stock, which preferred stock
may contain, as described further below, special preferences as determined by
our board of directors including, but not limited to, the bearing of dividends
and convertibility into shares of our common stock.
After consummation of the plan of reorganization of Rotech Medical
Corporation in accordance with its terms, including the transfer of
substantially all of the assets of Rotech Medical Corporation to us, we had
25,000,000 shares of common stock and 250,000 shares of Series A Convertible
Redeemable Preferred Stock issued and outstanding.
The following summary of certain provisions of our certificate of
incorporation may not contain all of the information that is important to you
in deciding whether or not to participate in the exchange offer. Our complete
certificate of incorporation and bylaws are filed with the Commission as
Exhibits 3.1 and 3.2 to the registration statement on Form S-4 to which this
prospectus relates. See "Additional information" for a description of how to
obtain additional information about us.
Common stock
Holders of our common stock are entitled to one vote for each share held on
all matters submitted to a vote of shareholders and do not have cumulative
voting rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available therefor, subject to any preferential dividend rights
of outstanding preferred stock. Upon our liquidation, dissolution or winding
up, the holders of common stock are entitled to receive ratably our net assets
available after the payment of all debts and other liabilities and subject to
the prior rights of any outstanding preferred stock. Upon closing of the
offering of the old notes and the consummation of the exchange offer, holders
of our common stock will have no preemptive, subscription, redemption or
conversion rights. The common stock issued in connection with the
restructuring, when issued, was fully paid and nonassessable. The rights,
preferences and privileges of holders of common stock are subject to and may be
adversely affected by, the rights of the holders of shares of any series of
preferred stock which we have designated and issued or may designate and issue
in the future.
Preferred stock
Our board of directors is authorized, without shareholder approval, but
subject to any limitations prescribed by law, to issue up to one million
(1,000,000) shares of preferred stock, in one or more series. Each such series
will have such rights, preferences, privileges and restrictions, including
voting rights, dividend rights, conversion rights, redemption privileges and
liquidation preferences, as determined by the board of directors. Concurrently
with the closing of the offering of the old notes, we designated 250,000 shares
of preferred stock as Series A Convertible Redeemable Preferred Stock, all of
which was issued and outstanding upon the closing of the offering of the old
notes.
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Series A convertible redeemable preferred stock
We have outstanding 250,000 shares of our Series A Convertible Redeemable
Preferred Stock, all of which is held by our employee profit sharing plan.
Except as described below or otherwise provided by law, the Series A
Convertible Redeemable Preferred Stock is non-voting. Each share of Series A
Convertible Redeemable Preferred Stock has a stated value of $20 and entitles
the holder to an annual cumulative dividend equal to 9% of its stated value,
payable semi-annually at the discretion of our board of directors in cash or in
additional shares of Series A Convertible Redeemable Preferred Stock. In the
event the dividends are declared by our board of directors but not paid for six
(6) consecutive periods, the holders of the Series A Convertible Redeemable
Preferred Stock are entitled to vote as a separate class to elect one director
to serve on our board of directors. Upon our liquidation, dissolution or
winding up, the holders of the Series A Convertible Redeemable Preferred Stock
will have priority over the holders of our common stock to receive a
liquidation value of $20 per share, plus any accrued and unpaid dividends. The
Series A Convertible Redeemable Preferred Stock is convertible at any time at
the option of the holder after consummation of an underwritten initial public
offering of our common stock at a price per share of at least $20 and with
gross proceeds to us of at least $100 million. If we have not completed such an
underwritten public offering prior to the fifth anniversary of the date of
issuance, a holder may thereafter, at its option, convert each share of Series
A Convertible Redeemable Preferred Stock into shares of common stock based on
the conversion ratio for each share of Series A Convertible Redeemable
Preferred Stock at the time of conversion. Initially, each share of Series A
Convertible Redeemable Preferred Stock will be convertible into 0.8 shares of
our common stock. The Series A Convertible Redeemable Preferred Stock must be
redeemed by us on the 92nd day following the tenth anniversary of the first
issuance of the Series A Convertible Redeemable Preferred Stock at a redemption
price of $20 per share, plus any accrued and unpaid dividends.
Registration rights
Certain holders of our common stock or their transferees, representing
approximately 21% of our outstanding shares of common stock have the right to
request the registration of the resale of their shares under the Securities
Act. These rights were provided for under the terms of an agreement between us
and the holders of the registrable securities that we entered into on the
effective date of Rotech Medical Corporation's plan of reorganization. The
agreement was amended and restated, effective as of June 21, 2002. Under the
terms of the amended and restated agreement, at any time on or after September
1, 2002, holders may request that we file one shelf registration statement on
Form S-1 under the Securities Act. We are obligated to file such registration
statement with the SEC no later than 30 days after receipt of the request and
use our best efforts to have it declared effective within 60 days after it is
filed with the SEC. We also agreed to keep such registration statement
effective for 36 months from the date the registration statement is declared
effective or, if earlier, until such time as each participating holder is no
longer eligible to offer or sell registrable securities by means of the
registration statement. A holder may offer or sell such holder's registrable
securities by means of the shelf registration statement so long as such holder
(x) beneficially owns at least 71/2% of our outstanding common stock, (y) has
the right to nominate a member, or has a designee on, our board of directors or
(z) such holder is deemed to be our affiliate, as described in the agreement.
In addition, beginning March 26, 2003, subject to certain limitations, (i) a
holder or holders of at least 71/2% of the registrable securities may require
that we use our best efforts to register their registrable securities for
public resale (provided that at least 71/2% of our outstanding common stock are
included in the registration), and (ii) anytime after a demand for registration
described in (i) above has been made, holders of the greater of 5% of the then
outstanding registrable securities and registrable securities with a fair
market value of at least $25 million may require, no more than once in any
twelve month period, that we use our best efforts to register their registrable
securities for public resale. However, we will not be required to register any
registrable securities if the amount requested to be registered is less than 5%
of the then outstanding registrable securities or has a fair market value of
less than $25 million. We also will not be required to register registrable
shares for resale more than three times by an individual holder or five times
in the aggregate. Furthermore, subject to limited exceptions, in the event that
we elect to register any securities similar to the registrable securities,
whether or not for our own account, the holders of the registrable securities
are
142
entitled to include their registrable securities in the registration. We will
bear all expenses in connection with any registration, other than underwriting
discounts and commissions.
Anti-takeover provisions
Delaware Law
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware, which prohibits a Delaware corporation from engaging in any
business combination with an "interested stockholder" for a period of three
years after the date of the transaction in which the person became an
interested stockholder, unless the business combination is approved in a
prescribed manner. A business combination includes mergers, asset sales and
other transactions resulting in a financial benefit to the interested
stockholders. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three
years did own, 15% or more of the corporation's voting stock.
Certificate of Incorporation and Bylaw Provisions
Our board of directors has the authority to issue up to 1,000,000 shares of
preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of these shares without any further vote
or action by the holders of our common stock. The rights of the holders of any
preferred stock that may be issued in the future may adversely affect the
rights of the holders of the common stock. The issuance of the preferred stock,
while providing us with desirable flexibility in connection with possible
acquisitions and other corporate purposes, could have the effect of making it
more difficult for a third party to acquire a majority of our outstanding
voting stock, thereby delaying, deferring or preventing a change in control of
Rotech Healthcare Inc. Furthermore, such preferred stock may have other rights,
including economic rights senior to the common stock, and as a result, the
issuance of the preferred stock could have a material adverse effect on the
market value of the common stock. As discussed above, 250,000 shares of
preferred stock have been designated as Series A Convertible Redeemable
Preferred Stock and have been issued in connection with the implementation of
our profit sharing plan. See "Management--Employee profit sharing plan" for a
detailed description of our profit sharing plan.
In addition, certain other provisions of our certificate of incorporation
and bylaws relating to, without limitation, (a) actions required to be taken at
a meeting of shareholders rather than by written consent, (b) the inability of
shareholders to call a special meeting of shareholders, (c) a limitation on the
maximum number of directors, (d) removal of directors only for "cause," and (e)
the percentage of shareholders required to approve an amendment to the bylaws,
may have anti-takeover effects, which may delay, defer or prevent a takeover
attempt that a holder of common stock might consider in its best interest.
Furthermore, we may in the future adopt certain other measures that may have
the effect of delaying, deferring or preventing a change in control of Rotech
Healthcare Inc. Certain of such measures may be adopted without any further
vote or action by the holders of our common stock.
143
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
This section summarizes material U.S. federal income tax considerations
relating to the exchange offer and the ownership and disposition of the new
notes by U.S. holders and non-U.S. holders (as defined below). This discussion
is based on current provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), Treasury regulations thereunder, and administrative and judicial
interpretations thereof, all as in effect on the date hereof and all of which
are subject to change, possibly on a retroactive basis.
This discussion does not address all of the U.S. federal income tax
consequences that may be important to particular holders in light of their
individual circumstances. Such holders may include banks and other financial
institutions, insurance companies, tax-exempt entities, dealers in securities,
certain former citizens or former long-term residents of the United States,
hybrid entities, persons holding the notes as part of a hedging or conversion
transaction or a straddle or holders that have a functional currency other than
the U.S. dollar. This discussion does not include any description of the tax
laws of any state, local or foreign government that may be applicable to a
particular beneficial owner.
As used herein, the term "U.S. Holder" means a beneficial owner of a note
that is, for U.S. federal income tax purposes, a citizen or resident of the
United States, a corporation organized under the laws of the United States or
any state thereof, including the District of Columbia, or an estate or trust
that is a United States person as defined in the Code. The term "Non-U.S.
Holder" means a beneficial owner of a note that is not a U.S. Holder. This
discussion does not address the tax consequences to Non-U.S. Holders that are
subject to United States federal income tax on a net basis on income realized
with respect to a note because such income is effectively connected with the
conduct of a United States trade or business. Such holders generally are taxed
in a manner similar to the taxation of U.S. Holders.
You are urged to consult your own tax advisors as to the particular United
States federal income and other tax consequences to you of the acquisition,
ownership and disposition of the notes as well as any tax consequences under
state, local and foreign tax laws, and the possible effects of changes in tax
laws.
Exchange offer
The exchange of an old note for a new note in the exchange offer described
in "The Exchange Offer" will not constitute a taxable exchange of the old note.
Consequently, no gain or loss will be recognized by a holder upon receipt of a
new note, the holding period of the new note will include the holding period of
the old note and the basis of the new note will be the same as the basis of the
old note immediately before the exchange. The old note and the new note will be
treated as the same security for federal income tax purposes.
Federal income taxation of U.S. holders
In general, interest on the notes will be taxable to a U.S. Holder as
ordinary income at the time it accrues or is actually or constructively
received in accordance with the U.S. Holder's method of accounting for federal
income tax purposes. It is expected that the notes will be issued without
original issue discount and the following discussion so assumes. If, however,
the notes are purchased at original issuance for a purchase price that is less
than their face amount by more than one quarter of one percent times the number
of complete years to maturity, they could be treated as issued with original
issue discount and such discount would be accrued and included in the U.S.
Holder's income over the term of the notes.
Upon the sale, exchange, redemption, retirement at maturity or other taxable
disposition of a note, a U.S. Holder generally will recognize taxable gain or
loss equal to the difference between (1) the sum of cash and the fair market
value of other property received on such disposition, except to the extent such
cash or property is attributable to accrued but unpaid interest which will be
taxable as ordinary income, and (2) such U.S. Holder's adjusted tax basis in
the note. Such gain or loss generally will be capital gain or loss, and will be
long-term capital gain or loss if the notes were held for more than one year on
the date of disposition.
144
As described under "Description of notes--Registration rights; liquidated
damages," we may be required to pay additional interest to U.S. Holders of the
notes in certain circumstances. Although the matter is not entirely free from
doubt, we intend to take the position that a U.S. Holder of a note should treat
any such additional interest as ordinary interest income for United States
federal income tax purposes at the time it accrues or is received in accordance
with such U.S. Holder's method of tax accounting. The exchange of notes for
exchange notes pursuant to the exchange offer will not constitute a taxable
exchange for U.S. federal income tax purposes, and the tax basis in the
exchange notes will be the same as the U.S. Holder's tax basis in the notes
immediately before such exchange.
U.S. Holders will generally be required to supply a social security number
or other taxpayer identification number in order to avoid backup withholding
(currently at the rate of 30% but subject to periodic adjustment) on amounts
paid on a note, and the proceeds of a sale of a note. In addition, such
payments will generally be subject to information reporting. The amount of any
backup withholding from a payment will be allowed as a credit against the U.S.
Holder's federal income tax liability and may entitle such U.S. Holder to a
refund, provided that the required information is furnished to the IRS.
Federal income taxation of non-U.S. holders
General. Payments of interest on notes to a Non-U.S. Holder will not be
subject to federal income or withholding tax, except as described below under
"--Backup Withholding and Information Reporting," provided that (a) the
Non-U.S. Holder does not actually or constructively own 10% or more of the
total combined voting power of all classes of our stock entitled to vote, (b)
the Non-U.S. Holder is not a controlled foreign corporation that is related to
us, through stock ownership, (c) the Non-U.S. Holder is not a bank described in
Section 881(c)(3)(A) of the Code, and (d) either (i) the Non-U.S. Holder
certifies under penalties of perjury on IRS Form W-8BEN or a suitable
substitute form that it is not a "U.S. person," as defined in the Code, and
provides the name and address of the beneficial owner, or (ii) a securities
clearing organization, bank or other financial institution that holds
customers' securities in the ordinary course of its trade or business and holds
the notes on behalf of the Non-U.S. Holder certifies under penalties of perjury
that such a statement has been received from the Non-U.S. Holder and furnishes
a copy thereof. In the case of notes held by a foreign partnership, the
certification must be provided by the partners rather than the partnership. A
Non-U.S. Holder may also be entitled to the benefits of an income tax treaty
under which interest on notes would be subject to a reduced rate of or
exemption from withholding tax, provided a properly executed IRS Form W-8BEN is
furnished to the withholding agent.
A Non-U.S. Holder generally will not be subject to United States income or
withholding tax, except as described below under "Backup withholding and
information reporting," on gain realized on the sale, exchange, redemption,
retirement at maturity or other disposition of a note unless the Non-U.S.
Holder is an individual who is present in the United States for a period or
periods aggregating 183 or more days in the taxable year of disposition and
certain other conditions are met.
Notes held at the time of death, or previously transferred subject to
certain retained rights or powers, by an individual who at the time of death is
not a citizen or resident of the United States will not be included in such
holder's gross estate for United States federal estate tax purposes, provided
that the individual does not actually or constructively own 10% or more of the
total combined voting power of all classes of our stock entitled to vote and
the income on the notes is not effectively connected with the conduct of a
United States trade or business by the individual.
Backup withholding and information reporting. Backup withholding will not
apply to payments made by us or a paying agent to Non-U.S. Holders if the
certification described above is received, provided that the payor does not
have actual knowledge that the holder is a United States person. Backup
withholding and information reporting generally will not apply if payments on a
Note are made to a Non-U.S. Holder by or through the foreign office of a
custodian, nominee or other agent of such Non-U.S. Holder, or if the foreign
office of a broker
145
pays the proceeds of the sale of a note. Information reporting requirements,
but not backup withholding, will apply however to a payment by or through a
foreign office of a custodian, nominee, agent or broker that is, for United
States federal income tax purposes, a United States person, a controlled
foreign corporation, a foreign person that derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the
United States or a foreign partnership that at any time during its taxable year
is 50% or more owned by United States persons, unless such custodian, nominee,
agent or broker has documentary evidence in its records that the holder is a
non-United States person and certain other conditions are met, or the holder
otherwise establishes an exemption. Payment by a United States office of a
custodian, nominee, agent or broker is subject to both backup withholding
(currently at a rate of 30% but subject to future adjustment) and information
reporting unless the holder certifies, under penalties of perjury, that it is
not a United States person and the payor does not have actual knowledge to the
contrary, or the holder otherwise establishes an exemption. A Non-U.S. Holder
may obtain a refund or a credit against such Non-U.S. Holder's United States
federal income tax liability of any amounts withheld under the backup
withholding rules, provided the required information is furnished to the IRS.
146
PLAN OF DISTRIBUTION
Based on interpretations by the staff of the SEC in "no-action letters"
issued to third parties, we believe that you may transfer new notes issued
under the exchange offer in exchange for the old notes if:
. you acquire the new notes in the ordinary course of your business; and
. you are not engaged in, and do not intend to engage in, and have no
arrangement or understanding with any person to participate in, a
distribution of new notes.
Broker-dealers receiving new notes in the exchange offer will be subject to
a prospectus delivery requirement with respect to resales of the new notes.
We believe that you may not transfer new notes issued under the exchange
offer in exchange for the old notes if you are:
. our "affiliate" within the meaning of Rule 144 under the Securities Act;
. a broker-dealer that acquired old notes directly from us; or
. a broker-dealer that acquired old notes as a result of market-making or
other trading activities without compliance with the registration and
prospectus delivery provisions of the Securities Act.
To date, the SEC staff has taken the position that participating
broker-dealers may fulfill their prospectus delivery requirements with respect
to transactions involving an exchange of securities such as this exchange
offer, other than a resale of an unsold allotment from the original sale of the
old notes, with the prospectus contained in the exchange offer registration
statement. In the registration rights agreement, we have agreed to permit
participating broker-dealers use of this prospectus in connection with the
resale of new notes. We have agreed that this prospectus, as it may be amended
or supplemented from time to time, may be used by such broker-dealers in
connection with resales of the new notes for a period ending one year after the
expiration date of the exchange offer, or, if earlier, when all such new notes
have been disposed of by such broker-dealers.
If you wish to exchange your old notes for new notes in the exchange offer,
you will be required to make representations to us as described in "The
exchange offer--purpose and effect of the exchange offer" and "The exchange
offer--Your representations to us" of this prospectus and in the letter of
transmittal. In addition, if you are a broker-dealer who receives new notes for
your own account in exchange for old notes that were acquired by you as a
result of market-making activities or other trading activities, you will be
required to acknowledge that you will deliver a prospectus in connection with
any resale by you of new notes.
We will not receive any proceeds from any sale of new notes by
broker-dealers. Broker-dealers who receive new notes for their own account in
the exchange offer may sell them from time to time in one or more transactions
either:
. in the over-the-counter market;
. in negotiated transactions;
. through the writing of options on the new notes or a combination of
methods of resale; or
. at prices related to prevailing market prices or negotiated prices.
Any resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any broker-dealer or the purchasers of any new notes. Any broker-dealer
that resells new notes it received for its own account in the exchange offer
and any broker or dealer that participates in a distribution of new notes may
be deemed to be an "underwriter" within the meaning of the Securities Act. Any
profit on any resale of new notes and any commissions or concessions
147
received by any persons may be deemed to be underwriting compensation under the
Securities Act. The letter of transmittal states that, by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
We have agreed to pay all expenses incidental to the exchange offer other
than commissions and concessions of any broker or dealers. We will indemnify
holders of the old notes, including any broker-dealers, against some
liabilities, including liabilities under the Securities Act, as provided in the
registration rights agreement.
LEGAL MATTERS
The validity of the new notes and the guarantees offered hereby will be
passed upon for us by Brown Raysman Millstein Felder & Steiner LLP, New York,
New York.
EXPERTS
The consolidated financial statements of Rotech Medical Corporation and
subsidiaries (the "Company") as of December 31, 2000 and 2001 and for each of
the years in the three-year period ended December 31, 2001 included in this
prospectus, have been so included in reliance upon the report of KPMG LLP,
independent accountants, appearing elsewhere herein, and upon the authority of
said firm as experts in accounting and auditing.
The audit report covering the consolidated financial statements as of
December 31, 2000 and 2001 and for each of the years in the three-year period
ended December 31, 2001, included herein, contains an explanatory paragraph
that states that Rotech Medical Corporation and its subsidiaries filed separate
voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code on
February 2, 2000, and operated as debtors-in-possession under the protection of
the Chapter 11 proceeding, which raises substantial doubt about the Company's
ability to continue as a going concern. The consolidated financial statements
do not include any adjustments that might result from the outcome of that
uncertainty.
WHERE YOU CAN FIND MORE INFORMATION
Pursuant to Section 15(d) of the Securities Exchange Act of 1934, upon
effectiveness of this registration statement on Form S-4, we will be required
to file reports, proxy statements and other information with the Securities and
Exchange Commission. Reports, proxy statements and other information filed with
the Securities and Exchange Commission can be inspected and copied at the
public reference facilities of the Commission at 450 Fifth Street, NW,
Washington, D.C. 20549. For a fee, copies of this material can be obtained from
the Public Reference Section of the Commission at its principal office at 450
Fifth Street, NW, Washington, D.C. 20549. For more information on its public
reference facilities, you can call the Securities and Exchange Commission at
1-800-SEC-0330. The Securities and Exchange Commission also maintains a website
that contains reports, proxy and information statements and other information
regarding issuers that file electronically. The address of the site is
http://www.sec.gov.
We have filed with the Securities and Exchange Commission a registration
statement on Form S-4, including all amendments and exhibits to that
registration statement, for the shares being offered under the Securities Act
of 1933. This prospectus is only a part of the registration statement and does
not contain all of the information filed with the Securities and Exchange
Commission. While statements in this prospectus concerning the provisions of
contracts or other documents describe the material terms of the provisions
which are being described, they do not discuss all of the terms of those
contracts or other documents. In each instance, the complete details of each
contract or document are contained in the exhibits filed with the registration
statement. Refer to the exhibit of each contract or document to obtain
additional information. For additional information about our company and the
exchange offer, refer to the registration statement and the accompanying
exhibits and schedules. You may obtain this information in any of the ways set
forth above.
148
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
[Download Table]
Audited Financial Statements as of and for the three years ended December 31,
2001
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets as of December 31, 2000 and 2001 (As Restated). F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 2000 and 2001 (As Restated)........................... F-4
Consolidated Statements of Changes in Shareholder's Equity
for the years ended December 31, 1999, 2000 and 2001 (As Restated)....... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 2000 and 2001 (As Restated)........................... F-6
Notes to Consolidated Financial Statements................................. F-7
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Condensed Consolidated Financial Statements for the three months
ended March 31, 2001 and 2002 and six months ended September 30, 2001 and 2002
Condensed Consolidated Balance Sheets--December 31, 2001 and September 30,
2002..................................................................... F-27
Condensed Consolidated Statements of Operations--three months ended March
31, 2001 and 2002 and six months ended September 30, 2001 and 2002....... F-28
Condensed Consolidated Statements of Cash Flows--three months ended March
31, 2001 and 2002 and six months ended September 30, 2001 and 2002....... F-29
Notes to Condensed Consolidated Financial Statements....................... F-30
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholder
Rotech Medical Corporation:
We have audited the accompanying consolidated balance sheets of Rotech
Medical Corporation and subsidiaries (the Company) as of December 31, 2000 and
2001, and the related statements of operations, changes in shareholder's equity
and cash flows for each of the years in the three-year period ended December
31, 2001. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Rotech Medical Corporation and subsidiaries at December 31, 2000 and 2001,
and the results of their operations and their cash flows for each of the years
in the three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
The accompanying consolidated financial statements referred to above have
been restated as discussed in note 2.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
note 1 to the financial statements, the Company's parent and substantially all
of its subsidiaries, including the Company and its subsidiaries, filed separate
voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code on
February 2, 2000, and continue to operate as debtors-in-possession under the
protection of the Chapter 11 proceeding. This raises substantial doubt about
the Company's ability to continue as a going concern. On November 23, 2001, the
parent company filed a plan of reorganization for the Company and its
subsidiaries, which was confirmed by the U.S. Bankruptcy Court on February 13,
2002. Subject to the resolution of certain conditions, the plan of
reorganization is expected to become effective in March 2002. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty or the effects of applying the provisions of the
plan, the related financing transactions and the adoption of fresh-start
accounting.
KPMG LLP
Baltimore, Maryland
February 22, 2002, except for
note 2 which is as
of August 28, 2002
F-2
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 2001
(Dollars in thousands)
[Enlarge/Download Table]
2000 2001
(as restated) (as restated)
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents............................................... $ 15,111 $ 4,970
Accounts receivable, net (note 4)....................................... 109,516 117,405
Other accounts receivable............................................... 2,181 2,283
Inventories, net........................................................ 11,933 22,312
Prepaid expenses........................................................ 3,206 2,955
Deferred income taxes (note 10)......................................... 19,738 24,705
---------- ----------
Total current assets................................................ 161,685 174,630
Property and equipment, net (note 7)....................................... 232,069 257,338
Intangible assets (less accumulated amortization of $89,278 in 2000 and
$139,577 in 2001)........................................................ 836,207 783,429
Other assets............................................................... 8,682 13,299
---------- ----------
$1,238,643 $1,228,696
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
Current liabilities:
Accounts payable........................................................ $ 11,972 $ 20,659
Accrued expenses (note 8)............................................... 13,579 18,855
---------- ----------
Total current liabilities........................................... 25,551 39,514
Liabilities subject to compromise (note 1)................................. 50,038 48,373
Due to parent company, net (note 6)........................................ 430,977 394,354
Deferred income taxes (note 10)............................................ 53,687 58,359
Commitments and contingencies (notes 1, 9, 12, 13, and 14).................
Shareholder's equity:
Common stock, par value $.0002 per share, 50,000,000 shares authorized,
1,000 shares issued in 2000 and 2001.................................. 1 1
Additional paid-in capital.............................................. 565,893 565,893
Retained earnings....................................................... 112,496 122,202
---------- ----------
Total shareholder's equity.......................................... 678,390 688,096
---------- ----------
$1,238,643 $1,228,696
========== ==========
See accompanying notes to consolidated financial statements.
F-3
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1999, 2000 and 2001
(Dollars in thousands)
[Enlarge/Download Table]
1999 2000 2001
(as restated) (as restated) (as restated)
------------- ------------- -------------
Net revenues...................................... $586,809 $568,704 $614,487
Costs and expenses
Cost of net revenues:
Product and supply costs................... 126,092 116,063 97,167
Patient service equipment depreciation..... 27,939 36,723 44,679
--------- -------- --------
Total cost of net revenues.............. 154,031 152,786 141,846
Provision for doubtful accounts................ 26,791 27,352 20,917
Selling, general and administrative............ 292,601 315,106 329,516
Depreciation and amortization.................. 27,169 50,614 60,736
Interest expense (income)...................... 43 (46) (322)
Provision for settlement of government claims.. 15,000 2,176 2,516
Provision for inventory losses (note 2)........ 23 211 2,141
--------- -------- --------
Total costs and expenses................... 515,658 548,199 557,350
--------- -------- --------
Earnings before reorganization.............
items and income taxes..................... 71,151 20,505 57,137
Reorganization items (note 1)..................... -- 17,191 17,107
--------- -------- --------
Earnings before income taxes............... 71,151 3,314 40,030
Federal and state income taxes (note 10).......... 33,860 12,081 30,324
--------- -------- --------
Net earnings (loss)........................ $ 37,291 $ (8,767) $ 9,706
========= ======== ========
See accompanying notes to consolidated financial statements.
F-4
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
Years ended December 31, 1999, 2000 and 2001
(Dollars in thousands)
[Enlarge/Download Table]
Common stock Additional Total
------------- paid-in Retained shareholder's
Shares Amount capital earnings equity
------ ------ ---------- -------- -------------
Balance at January 1, 1999................... 1,000 $ 1 $565,893 $ 83,972 $649,866
Net earnings (as restated)................... -- -- -- 37,291 37,291
----- --- -------- -------- --------
Balance at December 31, 1999 (as restated)... 1,000 1 565,893 121,263 687,157
Net earnings (loss) (as restated)............ -- -- -- (8,767) (8,767)
----- --- -------- -------- --------
Balance at December 31, 2000 (as restated)... 1,000 1 565,893 112,496 678,390
Net earnings (as restated)................... -- -- -- 9,706 9,706
----- --- -------- -------- --------
Balance at December 31, 2001 (as restated)... 1,000 $ 1 $565,893 $122,202 $688,096
===== === ======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 2000 and 2001
(Dollars in thousands)
[Enlarge/Download Table]
1999 2000 2001
(as restated) (as restated) (as restated)
------------- ------------- -------------
Cash flows from operating activities:
Net earnings (loss)...................................................... $ 37,291 $ (8,767) $ 9,706
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities:
Reorganization items................................................. -- 17,191 17,107
Depreciation and amortization........................................ 55,108 87,337 105,415
Deferred income taxes................................................ 17,296 5,277 (295)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable........................ 1,975 32,930 (11,290)
Decrease (increase) in other receivables.......................... 969 (1,724) (782)
Decrease (increase) in inventories................................ 1,988 1,423 (10,696)
Decrease (increase) in prepaid expenses........................... (878) (984) 251
Increase (decrease) in accounts payable and accrued
expenses........................................................ 9,973 (12,827) 9,276
Increase (decrease) in liabilities subject to compromise.......... -- 41,781 (2,565)
-------- -------- --------
Net cash provided by operating activities..................... 123,722 161,637 116,127
Net cash used by discontinued operations (note 11).......................... (6,099) -- --
Net cash used by reorganization items....................................... -- (795) (2,158)
-------- -------- --------
Net cash provided by operating activities,
discontinued operations and reorganization items............ 117,623 160,842 113,969
-------- -------- --------
Cash flows from investing activities:
Purchases of property and equipment...................................... (60,976) (71,557) (79,765)
Business acquisitions (note 5)........................................... (13,748) -- (607)
Decrease (increase) in other assets...................................... 4,750 (261) (4,617)
-------- -------- --------
Net cash used in investing activities......................... (69,974) (71,818) (84,989)
-------- -------- --------
Cash flows from financing activities:
Repayments on long-term borrowings....................................... (210) -- --
Distributions to parent company, net..................................... (53,852) (74,982) (39,121)
-------- -------- --------
Net cash used in financing activities......................... (54,062) (74,982) (39,121)
-------- -------- --------
Increase (decrease) in cash and cash equivalents.............. (6,413) 14,042 (10,141)
Cash and cash equivalents, beginning of period.............................. 7,482 1,069 15,111
-------- -------- --------
Cash and cash equivalents, end of period.................................... $ 1,069 $ 15,111 $ 4,970
======== ======== ========
See accompanying notes to consolidated financial statements.
F-6
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
(1) Petitions for Reorganization under Chapter 11 and Other Information
Rotech Medical Corporation (the "Company" or "Rotech") was incorporated on
September 1, 1981. The Company, through its subsidiaries, provides respiratory
and other home medical equipment and services to patients in the home
throughout the United States through its over 600 branch locations. In 1997,
the Company entered into a definitive merger agreement pursuant to which Rotech
Medical Corporation merged with Integrated Health Services, Inc. ("IHS")
effective as of October 21, 1997.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern.
On February 2, 2000, IHS and substantially all of its subsidiaries,
including Rotech and its subsidiaries, filed separate voluntary petitions for
relief under Chapter 11 ("Chapter 11") of the United States Bankruptcy Code
(the "Bankruptcy Code") with the United States Bankruptcy Court in the District
of Delaware (the "Bankruptcy Court") and continue to operate as
debtors-in-possession under the Chapter 11 proceeding. This raises substantial
doubt about the Company's ability to continue as a going concern. On November
23, 2001, IHS filed a plan of reorganization for Rotech and its subsidiaries,
which was approved by the creditors and confirmed by the Bankruptcy Court on
February 13, 2002. Subject to the resolution of certain conditions, the plan of
reorganization is expected to become effective in late March of 2002. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classifications of liabilities that might result from the
outcome of these uncertainties, or the effects of applying the provisions of
the plan, the related financing transactions and the adoption of fresh-start
accounting (see note 18).
Except as may be otherwise determined by the Bankruptcy Court overseeing the
Chapter 11 filings, the automatic stay protection afforded by the Chapter 11
filings prevents any creditor or other third parties from taking any action in
connection with any defaults under prepetition obligations of the Company and
those of its subsidiaries which are debtors in the Chapter 11 filing.
For financial reporting purposes, the accompanying consolidated financial
statements for the years ended December 31, 2000 and 2001 have been prepared in
accordance with Statement of Position 90-7, Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code ("SOP 90-7").
The Company has received approval from the Bankruptcy Court to pay
pre-petition and post-petition employee wages, salaries, benefits and other
employee obligations. The Bankruptcy Court also approved orders granting
authority, among other things, to pay pre-petition claims of certain critical
vendors, utilities and patient obligations. All other unsecured pre-petition
liabilities (other than those paid pursuant to such authority) are classified
in the consolidated balance sheet as liabilities subject to compromise.
Claims classified as liabilities subject to compromise under the Chapter 11
filings as of December 31, 2001 consist of accounts payable to vendors of
$23,303, convertible subordinated debentures of $1,979, Medicare and other
government claims of $17,000, and notes payable to sellers of businesses
acquired by the Company of $6,091.
Additional claims may be or have been asserted with respect to various
obligations. The last day on which these claims could be filed against the
Company, with certain exceptions, was August 29, 2000. These claims, if
allowed, will ultimately be treated in accordance with the Company's plan of
reorganization.
F-7
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
In February 2002, Rotech settled all outstanding government litigation and
pre-petition and certain post-petition claims arising from Medicare payments
made to certain of the Company's operating centers as well as claims in
unliquidated amounts for a cash settlement of $17 million.
In addition, IHS and its subsidiaries, including the Company, entered into a
stipulation with the Centers for Medicare and Medicaid Services, or CMS,
whereby CMS was permitted to set off certain underpayments to IHS with certain
overpayments to the Company in exchange for a full release of all CMS claims
against IHS and its subsidiaries, including the Company, to the effective date
of the stipulation, which was February 13, 2002.
In 1999, the Company recorded a provision of $15,000 based on a preliminary
evaluation of the government's estimated claims. The Company revised this
estimate and recorded an additional provision of $2,000 in 2001; related legal
costs incurred were $2,176 in 2000 and $516 in 2001. The Department of Justice
had filed proofs of claim relating to alleged civil fraud claims concerning
Rotech in the approximate amount of $48 million, including proposed treble
damages.
While the Company believes it complies in all material respects with all
applicable regulatory requirements, an adverse determination in governmental
investigations, whether currently asserted or arising in the future, could have
a material adverse effect on the Company (see note 14).
During the years ended December 31, 2000 and 2001, the Company recorded the
following as reorganization items:
[Enlarge/Download Table]
2001
2000 (as restated)
------- -------------
Severance and terminations.......................................................................... $ 3,470 $ 753
Legal, accounting and consulting fees............................................................... 325 3,815
Loss on closure of discontinued branch operations and discontinued product lines, long-term
incentive compensation and other charges resulting from reorganization and restructuring.......... 13,396 12,539
------- -------
$17,191 $17,107
======= =======
During the fourth quarter of 2000, in connection with the reorganization,
management of Rotech finalized a plan of restructuring to eliminate and
discontinue certain product lines and branch locations used in the operations
of its business. The plan specifically identified products and branches that
would not be continued. The Company recorded a write-off for assets impaired in
connection with the product lines and branches discontinued. The write-off is
not associated with or does not benefit activities that will be continued.
Accordingly, the Company has recorded a loss of $13,396 in 2000 associated with
the discontinued activities under Emerging Issues Task Force Issue 94-3,
Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (Including Certain Costs Incurred in a Restructuring)
("EITF 94-3"). In 2001, the loss includes a provision for the closure and
consolidation of billing centers of $4,161, a provision for discontinued life
insurance on a former employee of Rotech of $1,055 and a provision for the sale
of pharmacies of $3,732 (all representing the write-down of assets).
Reorganization expense in 2001 also includes the long-term incentive portion
of the CEO's total compensation package provided in the employment agreement
approved by the Bankruptcy Court in May 2000.
F-8
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
Such portion ceases upon the effective date of Rotech's plan of reorganization.
The long-term incentive provision of the compensation package was negotiated
because Rotech was in Chapter 11 and unable to offer an equity incentive plan.
Therefore, Rotech considers this provision to be an expense resulting from the
reorganization of the business and directly associated with the Chapter 11
proceeding. Accordingly, the provision for long-term incentive bonus of $3,591
in 2001 has been accounted for as a reorganization item in the consolidated
statement of operations.
On July 26, 2000, the Bankruptcy Court approved the separation agreement
with Stephen P. Griggs, President of Rotech. IHS agreed to pay Mr. Griggs
$3,000 in the following manner: $1,000 which was paid in September 2000, and
$2,000 which will be paid in equal monthly installments over a period of three
years. The agreement imposes upon Mr. Griggs various post termination
obligations, including non-compete, non-solicitation and confidentiality
requirements. Mr. Griggs also waived all claims against IHS and relinquished
his restricted stock rights in IHS under his pre-petition agreements with IHS.
The restructuring plan to eliminate and discontinue certain product lines
and branch locations identified certain employees that would be terminated as a
result of the restructuring. Accordingly, the company terminated approximately
85 and 170 employees and recorded termination costs of $3,470 and $753 during
2000 and 2001, respectively. Accrued liabilities for employee severance and
termination costs, recognized in accordance with EITF 94-3, are summarized as
follows for the years ended December 31, 2000 and 2001:
[Download Table]
Balance at December 31, 1999................................ $ --
Charges during 2000......................................... 3,470
Payments charged against the liability...................... (1,637)
Adjustments recorded........................................ --
-------
Balance at December 31, 2000................................ 1,833
Charges during 2001......................................... 753
Payments charged against the liability...................... (1,420)
Adjustments recorded........................................ --
-------
Balance at December 31, 2001................................ $ 1,166
=======
(2) Restatement
In June 2002, the Company discovered that an independent contractor (a
former employee) had falsified sales to the Department of Veterans Affairs
(VA), and the Company commenced a comprehensive internal investigation by
special counsel and government contracting specialists. The investigation
confirmed the existence of a pattern of falsified sales of equipment (bulk
sales) to VA as well as other irregularities in reporting VA service revenues.
Accordingly, the Company has restated its consolidated financial statements for
each of the years ended December 31, 1999, 2000 and 2001.
The accompanying financial statements have been restated to reflect the
adjustments discussed above.
The principal adjustments comprising the restatements are as follows:
. Reduction of net revenues from VA of $555 in 1999, $7,825 in 2000 and
$24,689 in 2001.
F-9
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
. Reduction of cost of sales of equipment related to the falsified bulk
sales to VA of $257 in 1999, $2,393 in 2000 and $10,257 in 2001, and
provision for inventory losses related to the medical equipment on hand
which was purchased for bulk sales to VA of $23 in 1999, $211 in 2000 and
$2,141 in 2001.
. Reduction of incentive bonus accruals related to the adjustments
described above of $1,855 in 2001 (none in 1999 and 2000).
. Related adjustments to income tax provisions of $126 in 1999, $2,222 in
2000 and $6,393 in 2001.
The reduction of net revenues from VA reduced accounts receivable by
$8,380 at December 31, 2000 and $33,069 at December 31, 2001. The
adjustments for cost of sales, net of provisions for inventory losses,
increased inventory at December 31, 2000 and 2001 by $2,416 and $10,532,
respectively. In addition, cash balances of $3,688 at December 31, 2001 were
reclassified to accounts receivable and included in the reduction discussed
above.
The effects of these restatements on the consolidated financial
statements are set forth below:
[Download Table]
December 31,
---------------------
Consolidated Balance Sheets: 2000 2001
---------------------------- ---------- ----------
Cash and cash equivalents:
As previously reported.............................. $ 15,111 $ 8,658
As restated......................................... $ 15,111 $ 4,970
Accounts receivable, net:
As previously reported.............................. $ 117,896 $ 146,786
As restated......................................... $ 109,516 $ 117,405
Inventories, net:
As previously reported.............................. $ 9,517 $ 11,780
As restated......................................... $ 11,933 $ 22,312
Deferred income tax assets:
As previously reported.............................. $ 19,695 $ 24,522
As restated......................................... $ 19,738 $ 24,705
Total assets:
As previously reported.............................. $1,244,564 $1,251,050
As restated......................................... $1,238,643 $1,228,696
Accrued expenses:
As previously reported.............................. $ 13,579 $ 20,710
As restated......................................... $ 13,579 $ 18,855
Due to parent company:
As previously reported.............................. $ 433,282 $ 402,912
As restated......................................... $ 430,977 $ 394,354
Retained earnings:
As previously reported.............................. $ 116,112 $ 134,143
As restated......................................... $ 112,496 $ 122,202
Total shareholder's equity:
As previously reported.............................. $ 682,006 $ 700,037
As restated......................................... $ 678,390 $ 688,096
F-10
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
[Download Table]
Consolidated Statements of Operations: 1999 2000 2001
-------------------------------------- -------- -------- --------
Net revenues:
As previously reported............................. $587,364 $576,529 $639,176
As restated........................................ $586,809 $568,704 $614,487
Cost of net revenues:
As previously reported............................. $126,349 $118,456 $107,424
As restated........................................ $126,092 $116,063 $ 97,167
Selling, general and administrative expenses:
As previously reported............................. $292,601 $315,106 $329,814
As restated........................................ $292,601 $315,106 $329,516
Provision for inventory losses:
As previously reported............................. $ -- $ -- $ --
As restated........................................ $ 23 $ 211 $ 2,141
Earnings before reorganization items and income taxes:
As previously reported............................. $ 71,472 $ 26,148 $ 73,412
As restated........................................ $ 71,151 $ 20,505 $ 57,137
Reorganization items:
As previously reported............................. $ -- $ 17,191 $ 18,664
As restated........................................ $ -- $ 17,191 $ 17,107
Earnings before income taxes:
As previously reported............................. $ 71,472 $ 8,957 $ 54,748
As restated........................................ $ 71,151 $ 3,314 $ 40,030
Federal and state income taxes:
As previously reported............................. $ 33,986 $ 14,303 $ 36,717
As restated........................................ $ 33,860 $ 12,081 $ 30,324
Net earnings (loss):
As previously reported............................. $ 37,486 $ (5,346) $ 18,031
As restated........................................ $ 37,291 $ (8,767) $ 9,706
Consolidated Statements of Cash Flows:
--------------------------------------
Net cash provided by operating activities:
As previously reported............................. $123,600 $159,454 $113,562
As restated........................................ $123,722 $161,637 $116,127
Net cash used in financing activities:
As previously reported............................. $ 53,940 $ 72,799 $ 32,868
As restated........................................ $ 54,062 $ 74,982 $ 39,121
F-11
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
(3) Summary of Significant Accounting Policies
(a) 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.
The consolidated financial statements include allocations of selling,
general and administrative expenses from the IHS corporate office. Such
corporate office allocations represent expenses applicable to Rotech based on
determinations that management believes to be reasonable. The allocations are
for services provided by IHS to the Company, including financial, legal,
accounting, human resources, information systems and corporate compliance
services. Accordingly, expense allocations to the Company may not be
representative of costs of such services to be incurred in the future (see note
16).
(b) Revenue Recognition
Revenues are recognized on the date services and related products are
provided to patients and are recorded at amounts estimated to be received under
reimbursement arrangements with third-party payors. Revenues derived from
capitation arrangements are insignificant.
Consistent with home medical equipment industry practice and related
Medicare regulations, revenues under rental arrangements are recognized
beginning in the month the related products are provided to the patients. The
Company's rental arrangements provide for fixed monthly payments established by
fee schedules for as long as the patient is using the equipment and medical
necessity continues. Once initial delivery is made to the patient ("initial
setup"), a monthly billing is established based on the initial setup service
date. No separate revenue is earned from the initial setup process. The Company
has no lease with the patient or third-party payor, no continuing service
obligation after the initial setup, and no refund obligation for the return of
equipment after the monthly billing date.
Revenues for the sale of durable medical equipment and related supplies,
including oxygen equipment, ventilators, wheelchairs, hospital beds and
infusion pumps, are recognized at the time of delivery. Revenues for the sale
of nebulizer medications, which are generally dispensed by Company pharmacies
and shipped directly to the patient's home, are also recognized at the time of
shipment.
F-12
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
The Company's revenue recognition policy is consistent with the criteria set
forth in Staff Accounting Bulletin 101--Revenue Recognition in Financial
Statements ("SAB 101") for determining when revenue is realized or realizable
and earned. The Company recognizes revenue in accordance with the requirements
of SAB 101 that:
. persuasive evidence of an arrangement exists;
. delivery has occurred;
. the seller's price to the buyer is fixed or determinable; and
. collectibility is reasonably assured.
Due to the nature of the industry and the reimbursement environment in which
the Company operates, certain estimates are required to record net revenues and
accounts receivable at their net realizable values. Inherent in these estimates
is the risk that they will have to be revised or updated as additional
information becomes available. Specifically, the complexity of many third-party
billing arrangements and the uncertainty of reimbursement amounts for certain
services from certain payors may result in adjustments to amounts originally
recorded. Such adjustments are typically identified and recorded at the point
of cash application, claim denial or account review.
Management performs analyses to evaluate the net realizable value of
accounts receivable. Specifically, management considers historical realization
data, accounts receivable aging trends, other operating trends and relevant
business conditions. Because of continuing changes in the healthcare industry
and third-party reimbursement, it is possible that management's estimates could
change, which could have an impact on operations and cash flows.
The Company adopted Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements ("SAB 101"), in the fourth quarter of 2000. SAB 101
provides guidance on the proper timing of revenue recognition in accordance
with generally accepted accounting principles. The adoption of SAB 101 did not
have a material effect on the Company's consolidated results of operations or
financial position.
(c) Cash Equivalents
Cash equivalents consist of highly liquid debt instruments with original
maturities of three months or less at the date of investment by the Company.
Under a cash management facility provided by IHS, the Company's operating
cash balances are generally transferred to a centralized account and applied to
reduce balances due to the parent company. The Company's cash needs for
operating and other purposes are similarly provided through an increase in
balances due to the parent company.
F-13
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
(d) Concentrations of Credit Risk
The Company's revenue is generated through over 600 locations in 47 states.
The Company generally does not require collateral or other security in
extending credit to patients; however, the Company routinely obtains assignment
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). Revenues were derived
from the following payor sources for the years ended December 31:
[Download Table]
2000 2001
1999 (as restated) (as restated)
----- ------------- -------------
Medicare, Medicaid and other federally
funded programs (primarily
Veterans Administration)............ 61.7% 64.7% 66.9%
Private pay........................... 9.3% 8.0% 7.2%
Commercial payors..................... 29.0% 27.3% 25.9%
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
(e) Fair Value of Financial Instruments
The Company believes the carrying amounts of cash, patient accounts
receivable, other accounts receivable, accounts payable and accrued expenses
approximate fair value because of the short-term nature of these instruments.
It is not practicable to estimate the fair value of investments in
management agreements since they are not traded, no quoted values are readily
available for similar financial instruments and the Company believes it is not
cost-effective to have valuations performed. However, management believes that
there has been no permanent impairment in the value of such investments.
As a result of the Chapter 11 filing, fair value of long-term debt cannot be
determined. At December 31, 2000 and 2001, all of the Company's long-term debt
is classified as liabilities subject to compromise.
(f) Inventories
Inventories consist principally of medical supplies, medical equipment
related to bulk sales (see note 2) and pharmaceutical products and are stated
at the lower of cost (first-in, first-out method) or market.
(g) Property and Equipment
Property and equipment are stated at cost. Patient service equipment
represents medical equipment rented or held for rental to in-home patients.
Depreciation is provided on the straight-line method over the estimated useful
lives of the assets, seven years for patient service equipment, seven years for
furniture and office equipment, seven years for vehicles and the shorter of the
remaining lease term or the estimated useful life for leasehold improvements.
F-14
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
(h) Intangible Assets
Intangible assets represent the excess of cost over the fair value of assets
acquired and liabilities assumed in business combinations. Such assets are
amortized on a straight-line basis. Prior to the fourth quarter of 1999, the
Company used an estimated life of 40 years. However, as a result of an
evaluation of the impact of the Balanced Budget Act and other factors affecting
the industry, the Company changed the estimated life to 20 years. This change
has been treated as a change in accounting estimate and is being recognized
prospectively beginning October 1, 1999.
Management annually evaluates whether events or circumstances have occurred
that would indicate an impairment in the value or the life of goodwill. In
accordance with Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of ("SFAS No. 121"), if there is an indication that the carrying value
of an asset, including goodwill, is not recoverable, the Company estimates the
projected undiscounted cash flows, excluding interest, of the business to
determine if an impairment loss should be recognized. In this connection, 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 impairment loss is determined by comparing the
carrying amount of the asset to its estimated fair value. The Company performs
the impairment analysis at the business segment level.
(i) Investment in Management Agreement
The Company has an investment in a management agreement with a provider of
home health care products and services in the amount of $3,251 and $5,078 at
December 31, 2000 and 2001, respectively. The investment is accounted for using
the cost method of accounting and is included in other assets. The Company's
share of the operating results pursuant to the agreement is recorded as
management fee income, and classified as revenue in the Company's statement of
operations. Such management fee income was $1,942 in 1999, $2,664 in 2000 and
$1,828 in 2001.
(j) Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS 109"). Under
SFAS 109, the current and deferred tax expense has been allocated among the
members of the IHS controlled corporate group, including the Company.
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable 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 the taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under SFAS 109, the effect
on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period
F-15
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
that includes the enactment date. Valuation allowances are recorded for
deferred tax assets when it is more likely than not that such deferred tax
assets will not be realized.
(k) 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.
(l) Segment Information
Rotech operates in the home medical equipment segment of the healthcare
industry. Management measures operating results on a geographic basis and
therefore views each branch location as an operating unit. All branch locations
provide substantially the same services. For financial reporting purposes, all
of the Company's operating units are aggregated into one reportable segment.
(m) Comprehensive Income
For the years ended December 31, 1999, 2000 and 2001 there were no
differences between comprehensive income and net income.
(n) Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS No. 141"), and Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001. SFAS No. 141 also specifies the criteria
intangible assets acquired in a purchase method business combination must meet
in order to be recognized and reported apart from goodwill. SFAS No. 142 will
require that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of.
The Company is required to adopt the provisions of SFAS No. 141 effective
July 1, 2001, except with regard to business combinations initiated prior to
July 1, 2001, and SFAS No. 142 effective January 1, 2002. Furthermore, goodwill
and intangible assets determined to have an indefinite useful life acquired in
a purchase business combination completed after June 30, 2001, but before SFAS
No. 142 is adopted in full, will not be amortized, but will continue to be
evaluated for impairment in accordance with the appropriate pre-SFAS No. 142
accounting literature. Goodwill and intangible assets acquired in business
combinations completed before July 1, 2001 will continue to be amortized and
tested for impairment in accordance with the appropriate pre-SFAS No. 142
accounting requirements prior to the adoption of SFAS No. 142. Had SFAS No. 142
been in
F-16
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
effect for the years ended December 31, 1999, 2000 and 2001, earnings before
reorganization items and income taxes, earnings before income taxes, and net
earnings would have been as follows:
[Enlarge/Download Table]
1999 2000 2001
------- ------- --------
Earnings before reorganization items and income taxes as reported $71,151 $20,505 $ 57,137
Add back: Goodwill amortization............................... 21,988 44,069 50,916
Less: Amortization adjustment for other intangible assets..... (3,107) (3,105) (3,110)
------- ------- --------
Earnings before reorganization items and income taxes as adjusted $90,032 $61,469 $104,943
======= ======= ========
Earnings before income taxes as reported......................... $71,151 $ 3,314 $ 40,030
Add back: Goodwill amortization............................... 21,988 44,069 50,916
Less: Amortization adjustment for other intangible assets..... (3,107) (3,105) (3,110)
------- ------- --------
Earnings before income taxes as adjusted......................... $90,032 $44,278 $ 87,836
======= ======= ========
Net earnings (loss) as reported.................................. $37,291 $(8,767) $ 9,706
Add back: Goodwill amortization............................... 21,988 44,069 50,916
Less: Amortization adjustment for other intangible assets..... (3,107) (3,105) (3,110)
Less: Income tax effect....................................... (2,959) (5,520) (5,601)
------- ------- --------
Net earnings as adjusted......................................... $53,213 $26,677 $ 51,911
======= ======= ========
(o) Reclassifications
Certain amounts presented in 1999 and 2000 have been reclassified to conform
with the presentation for 2001.
(4) Accounts Receivable
Accounts receivable, net consist of the following at December 31:
[Download Table]
2000 2001
(as restated) (as restated)
------------- -------------
Patient accounts receivable............. $131,191 $142,030
Less allowance for doubtful accounts.... 21,675 24,625
-------- --------
$109,516 $117,405
======== ========
Patient accounts receivable at December 31, 2000 and 2001 include amounts
due from Medicare, Medicaid and other federally funded programs (primarily
Veterans Administration) of 51% and 49%, respectively.
Included in accounts receivable are earned but unbilled receivables of
$22,131 at December 31, 2000 and $24,950 at December 31, 2001. Billing delays,
ranging from a day to several weeks, can occur due to delays in obtaining
certain required payor-specific documentation from internal and external
sources. Earned but unbilled receivables are aged from date of service and are
considered in Rotech's analysis of historical performance and collectibility.
F-17
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
The Company experienced a deterioration in the aging of certain receivables
during 2000 due to a variety of factors including the operational effects of
the bankruptcy filing. Some of the factors that have negatively affected the
billing and collections process include increased loss of office and other
personnel, problems experienced in the closure and consolidation of billing
locations and systems, and personnel shortages and the competing time demands
required in normalizing relations with payors and addressing a variety of
vendor issues. In the fourth quarter of 2000, management performed a study and
analysis of these issues and their effect, and performed a re-evaluation of the
allowance for doubtful accounts and contractual adjustments. Accordingly, the
Company recorded an increase to the provision for bad debts of $5,000 and an
increase to contractual adjustments of $15,000 in the fourth quarter of 2000.
(5) Business Acquisitions
In the fourth quarter of 2001, the Company acquired two businesses for a
total cost of $1,228, of which $607 was paid in cash and $621 represented notes
payable to the sellers. The allocation of the total costs of the 2001
acquisitions to the assets acquired and liabilities assumed is summarized as
follows:
[Download Table]
Property
Current and Intangible Total
Transaction assets equipment Assets Liabilities cost
----------- ------- --------- ---------- ----------- ------
Two acquisitions.... $78 $230 $920 $-- $1,228
=== ==== ==== === ======
There were no acquisitions during the year ended December 31, 2000.
Acquisitions in 1999 and the manner of payment are summarized as follows:
[Enlarge/Download Table]
Notes payable
and other
Month Transaction description Cash paid accrued liabilities Total cost
----- ---------------------------------------------------------------- --------- ------------------- ----------
January Assets of Certified Medical Associates, Inc. $ 1,950 $ 810 $ 2,760
March Stock of Medicare Rental Supply, Inc. d/b/a Andy Boyd's InHome
Medical, Andy Boyd's InHome Medical/InHome Medical, Inc., and
Andy Boyd's InHome Medical, Inc., West......................... 3,314 1,583 4,897
Various 10 other acquisitions, each with total cost of less than $2,000.. 6,547 1,812 8,359
Various Cash payments of acquisition costs accrued in 1998 and 1999...... 1,937 (1,937) --
------- ------- -------
$13,748 $ 2,268 $16,016
======= ======= =======
F-18
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
The allocation of the total costs of the 1999 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
[Enlarge/Download Table]
Property
Current and Intangible Total
Transaction assets equipment assets Liabilities cost
----------- ------- --------- ---------- ----------- -------
Certified Medical Associates, Inc..................... $ 71 $ 77 $ 2,612 $ -- $ 2,760
Medicare Rental Supply, Inc. d/b/a Andy Boyd's InHome
Medical, Andy Boyd's InHome Medical/ InHome
Medical, Inc., and Andy Boyd's InHome Medical, Inc.,
West................................................ 270 374 4,253 -- 4,897
Other acquisitions.................................... 232 752 7,505 (130) 8,359
---- ------ ------- ----- -------
$573 $1,203 $14,370 $(130) $16,016
==== ====== ======= ===== =======
Pro forma results of operations reflecting the 2001 acquisitions as if they
had occurred at the beginning of 2000 and 2001 have not been presented since
the amounts are immaterial in relation to the Company.
In connection with its business acquisitions, the Company incurs transaction
costs, costs to exit certain activities and costs to terminate or relocate
certain employees of acquired companies. Liabilities accrued in the acquisition
cost allocations represent direct costs of acquisitions, which consist
primarily of transaction costs for legal, accounting and consulting fees, of
$510 in 1999 and $21 in 2001. Accrued acquisition liabilities for exit costs
and employee termination and relocation costs are recognized in accordance with
Emerging Issues Task Force Issue 95-3, Recognition Of Liabilities In Connection
With A Purchase Business Combination ("EITF 95-3") and are summarized as
follows for the years ended December 31, 1999, 2000 and 2001.
[Download Table]
Balance at December 31, 1998...................... $ 1,039
Acquired companies--1999.......................... 510
Payments charged against liability................ (1,435)
Adjustments recorded to cost of acquisitions...... (114)
-------
Balance at December 31, 1999 and 2000............. --
Acquired companies--2001.......................... 21
Payments charged against liability................ --
Adjustments recorded to cost of acquisitions...... --
-------
Balance at December 31, 2001................... $ 21
=======
The termination plans for the 1999 acquisitions were completed by December
31, 1999. The termination plans at December 31, 1998 related primarily to the
following employee groups with the indicated anticipated dates of completion of
termination/relocation: Arrowhealth Medical Supply by October 1999; Eastern
Home Care and Oxygen by May 1999, First Community Care by May 1999 and Valley
Oxygen and Medical Equipment by September 1999.
In addition to the accrued acquisition liabilities described above, the
Company allocates the cost of its business acquisitions to the respective
assets acquired and liabilities assumed, including pre-acquisition
F-19
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
contingencies, on the basis of estimated fair values at the date of
acquisition. Often the Company must await additional information for the
resolution or final measurement of contingencies and valuation estimates during
the allocation period, which usually does not exceed one year from the date of
acquisition. Accordingly, the effect of the resolution or final measurement of
such matters during the allocation period is treated as an acquisition
adjustment primarily to the amount of goodwill recorded. After the allocation
period, such resolution or final measurement is recognized in the determination
of net earnings. Pre-acquisition contingencies in connection with the Company's
business acquisitions primarily relate to Medicare and Medicaid regulatory
compliance matters, income tax matters and legal proceedings. During the three
years ended December 31, 2001, the Company resolved or completed the final
measurement of certain pre-acquisition contingencies related to business
acquisitions; however, the effect of such adjustments was immaterial.
(6) Due to Parent Company
Balances due to the parent company bear no interest and have no specified
repayment provisions.
(7) Property and Equipment
Property and equipment consist of the following at December 31:
[Download Table]
2000 2001
-------- --------
Patient service equipment......................... $279,703 $332,399
Furniture and office equipment.................... 33,315 46,297
Vehicles.......................................... 17,589 28,845
Leasehold improvements............................ 5,345 7,886
-------- --------
335,952 415,427
Less accumulated depreciation and amortization.... 103,883 158,089
-------- --------
$232,069 $257,338
======== ========
The net carrying value of patient service equipment was $191,248 in 2000
and $200,224 in 2001.
(8) Accrued Expenses
Accrued expenses consist of the following at December 31:
[Download Table]
2001
2000 (as restated)
------- -------------
Accrued salaries and wages........................ $ 5,684 $11,606
Accrued workers' compensation and other claims.... 3,330 4,158
Accrued sales tax................................. 1,467 1,455
Other............................................. 3,098 1,636
------- -------
$13,579 $18,855
======= =======
F-20
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
(9) Lease Commitments
The Company operates principally in leased offices and warehouse facilities.
In addition, delivery vehicles and office equipment are leased under operating
leases. Lease terms range from one to ten years with renewal options for
additional periods. Many leases provide that the Company pay taxes,
maintenance, insurance and other expenses. Rentals are generally increased
annually by the Consumer Price Index, subject to certain maximum amounts
defined within individual agreements.
Rental expense for building and vehicle leases approximated $23,859 in 1999,
$24,676 in 2000 and $23,508 in 2001. Future minimum rental commitments under
leases, primarily for branch locations, are as follows:
[Download Table]
For the years ending December 31:
2002..................................................... $ 8,488
2003..................................................... 5,875
2004..................................................... 2,942
2005..................................................... 1,827
2006..................................................... 1,001
Thereafter............................................... 915
-------
$21,048
=======
(10) Income Taxes
The Company is included in IHS's consolidated federal income tax return. The
allocated provision for current income taxes is applied to increase balances
due to the parent company. The allocated provision for income taxes on earnings
before income taxes is summarized below for the years ended December 31:
[Download Table]
1999 2000 2001
(as restated) (as restated) (as restated)
------------- ------------- -------------
Current:
Federal.......................... $14,346 $ 5,828 $26,253
State............................ 2,219 977 4,366
------- ------- -------
Total current provision...... 16,565 6,805 30,619
------- ------- -------
Deferred:
Federal.......................... 14,830 4,524 (253)
State............................ 2,465 752 (42)
------- ------- -------
Total deferred provision..... 17,295 5,276 (295)
------- ------- -------
$33,860 $12,081 $30,324
======= ======= =======
F-21
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
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. Significant components
of the Company's deferred tax liabilities and assets as of December 31 are as
follows:
[Enlarge/Download Table]
2000 2001
(as restated) (as restated)
------------- -------------
Deferred tax liabilities:
Excess of book over tax basis of property and equipment.. $ 39,442 $ 38,511
Excess of book over tax basis of intangible assets....... 14,245 16,446
Other.................................................... -- 3,402
-------- --------
Total deferred tax liabilities....................... 53,687 58,359
-------- --------
Deferred tax assets:
Restructuring costs...................................... (3,239) (5,957)
Bad debt reserves........................................ (7,755) (8,729)
Other accrued liabilities................................ (2,689) (3,000)
Other.................................................... (6,055) (7,019)
-------- --------
Total deferred tax assets............................ (19,738) (24,705)
-------- --------
Net deferred tax liabilities......................... $ 33,949 $ 33,654
======== ========
A reconciliation of tax expense computed at the statutory federal tax rate
on earnings before income taxes to the actual income tax expense is as follows
for the years ended December 31:
[Enlarge/Download Table]
1999 2000 2001
(as restated) (as restated) (as restated)
------------- ------------- -------------
Tax provision computed at the statutory rate................... $24,903 $ 1,161 $14,011
State income taxes, net of federal income tax benefit.......... 3,045 1,124 2,810
Intangibles amortization and other book expenses not deductible
for tax purposes............................................. 5,912 9,796 13,503
------- ------- -------
Total income tax expense.................................... $33,860 $12,081 $30,324
======= ======= =======
(11) Obligation Related to Discontinued Operations
In 1997 the Company sold the capital stock of two subsidiaries engaged in
the managed health care business to two corporations owned by the Company's
former Chief Executive Officer and entered into funding agreements pursuant to
which the Company was obligated to provide cash necessary to operate the
business until certain managed care contracts were terminated. Also, the
Company discontinued its physician practice operations in 1997. Amounts charged
against the obligation related to the discontinued operations were $6,099
in 1999.
(12) Other Commitments and Contingencies
The Company is subject to workers' compensation and employee health benefit
claims, which are primarily self-insured; however, the Company does maintain
certain stop-loss and other insurance coverage which
F-22
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
management believes to be appropriate. Provisions for estimated settlements
relating to the workers' compensation and health benefit plans are provided in
the period of the related claim on a case-by-case basis plus an amount for
incurred but not reported claims. Differences between the amounts accrued and
subsequent settlements are recorded in operations in the period of settlement.
From time to time, the Company and its subsidiaries have been parties to
various legal proceedings in the ordinary course of business. In the opinion of
management, except with respect to the Chapter 11 proceedings, there are
currently no proceedings which individually, after taking into account the
insurance coverage maintained by the Company, would have a material adverse
effect on the Company's financial position or results of operations.
(13) Insurance Coverages
The Company, through its parent IHS, currently purchases professional and
general liability insurance through a third party insurance company. The
Company currently maintains a $2,000 and $1,000 self-insured retention per
occurrence for professional and general liability insurance, respectively.
Provisions for estimated settlements, including incurred but not reported
losses, are provided on an undiscounted basis in the period of the related
coverage, subject to total policy aggregate. These provisions are based on
internal and external evaluations of the merits of the individual claims,
analysis of claims history and the estimated reserves assigned by the Company's
independent actuaries. The methods of making such estimates and establishing
the resulting accrued liabilities are reviewed frequently with any adjustments
resulting therefrom reflected in current earnings. Claims are paid over varying
periods that generally range from one to six years.
The Company's professional and general liability insurance includes
aggregated loss features limiting the Company's out-of-pocket exposure. The
total annual exposure for professional and general liability claims is limited
to $420 for 1999, 2000 and 2001. In addition, the Company has aggregate
stop-loss insurance for all policy years from 1991 through 2001.
In 1999, 2000 and 2001, the Company, through its parent IHS, purchased a
fully-insured workers' compensation policy with no deductible or retention,
except in a limited number of states, such as Texas, where the Company is a
non-subscriber to workers' compensation, but has in place an employee benefit
plan providing for employer-paid benefits comparable to those provided under
the Texas workers' compensation program, with an employer's liability policy
providing for catastrophic losses.
(14) Certain Significant Risks and Uncertainties
The Company and others in the healthcare business are subject to certain
inherent risks, including the following:
. Substantial dependence on revenues derived from reimbursement by the
Federal Medicare and state Medicaid programs which have been reduced in
recent years and which entail exposure to various healthcare fraud
statutes;
. Government regulations, government budgetary constraints and proposed
legislative and regulatory changes; and
. Lawsuits alleging malpractice and related claims.
F-23
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
Such inherent risks require the use of certain management estimates in the
preparation of the Company's financial statements and it is reasonably possible
that a change in such estimates may occur.
The Company receives payment for a significant portion of services rendered
to patients from the Federal government under Medicare and other federally
funded programs (primarily Veterans Administration) and from the states in
which its facilities and/or services are located under Medicaid. Revenue
derived from Medicare, Medicaid and other federally funded programs represented
61.7% of the Company's patient revenue for the year ended December 31, 1999,
64.7% of the Company's patient revenue for the year ended December 31, 2000,
and 66.9% of the Company's patient revenue for the year ended December 31,
2001. The Company's operations are subject to a variety of Federal, state and
local legal and regulatory risks, including without limitation the federal
Anti-Kickback statute and the federal Ethics in Patient Referral Act (so-called
"Stark Law"), many of which apply to virtually all companies engaged in the
healthcare services industry. The Anti-Kickback Statute prohibits, among other
things, the offer, payment, solicitation or receipt of any form of remuneration
in return for the referral of Medicare and Medicaid patients. The Stark Law
prohibits, with limited exceptions, financial relationships between ancillary
service providers and referring physicians. Other regulatory risks assumed by
the Company and other companies engaged in the health care industry are as
follows:
. False Claims--"Operation Restore Trust" is a major anti-fraud
demonstration project of the Office of the Inspector General. The primary
purpose for the project is to scrutinize the activities of healthcare
providers which are reimbursed under the Medicare and Medicaid programs.
False claims are prohibited pursuant to criminal and civil statutes and
are punishable by imprisonment and monetary penalties.
. Regulatory Requirement Deficiencies--In the ordinary course of business,
health care facilities receive notices of deficiencies for failure to
comply with various regulatory requirements. In some cases, the reviewing
agency may take adverse actions against a facility, including the
imposition of fines, temporary suspension or decertification from
participation in the Medicare and Medicaid programs and, in extreme
cases, revocation of a facility's license.
. Changes in laws and regulations--Changes in laws and regulations could
have a material adverse effect on licensure, eligibility for
participation in government programs, permissible activities, operating
costs and the levels of reimbursement from governmental and other sources.
In response to the aforementioned regulatory risks, the Company formed a
Corporate Compliance Department to help identify, prevent and deter instances
of Medicare, Medicaid and other noncompliance. Although the Company strives to
manage these regulatory risks, there can be no assurance that federal and/or
state regulatory agencies that currently have jurisdiction over matters
including, without limitation, Medicare, Medicaid and other government
reimbursement programs, will take the position that the Company's business and
operations are in compliance with applicable law or with the standards of such
regulatory agencies (see note 1).
The Company is also subject to malpractice and related claims, which arise
in the normal course of business and which could have a significant effect on
the Company. As a result, the Company maintains occurrence basis professional
and general liability insurance with coverage and deductibles which management
believes to be appropriate (see note 13).
The Company is also subject to certain inherent risks related to the
acquisition of businesses. Since its inception, the Company has grown through
acquisitions, and realization of acquisition costs, including intangible assets
of businesses acquired, is dependent initially upon the consummation of the
acquisitions and subsequently upon the Company's ability to successfully
integrate and manage acquired operations.
F-24
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
The Company believes that adequate provision for the aforementioned items
has been made in the accompanying consolidated financial statements and that
their ultimate resolution will not have a material effect on the consolidated
financial statements.
(15) 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 Company's contribution expense was approximately $790 in 1999, $930
in 2000, and $1,178 in 2001.
(16) Related Party Transactions
Selling, general and administrative expenses include allocations from the
IHS corporate office for certain services provided to the Company, including
financial, legal, accounting, human resources, information systems and
corporate compliance services. Such corporate office allocations, which apply
to all IHS divisions, represent expenses clearly applicable to Rotech based on
determinations that management believes to be reasonable. Such allocated
charges were approximately $1,200 in 1999, $1,300 in 2000 and $1,300 in 2001.
Management estimates that the Company's corporate administrative and general
expenses on a stand-alone basis would have approximated the amounts allocated.
(17) Subsequent Events (Unaudited)
The Company has entered into an assumption, sale-leaseback and amendment to
master lease agreement which became effective upon the Bankruptcy Court's final
order of approval in March 2002. Vehicles purchased by the Company as
debtor-in-possession were sold for $9,700 and leased back along with other
vehicles subject to the existing master operating lease. Among other things,
the lease provides financial covenants for the maintenance of indebtedness to
EBITDA (as defined) not to exceed 4.0 to 1.0. The lease is renewable annually.
The Company anticipates recording a loss of approximately $4,700 associated
with the sale/leaseback transaction, which will be classified as a
reorganization item.
As a subsidiary of IHS, the Company is provided with certain services,
including integrated cash management services and insurance coverage. Upon the
Company's emergence from bankruptcy, the Company will no longer be a subsidiary
of IHS. As a result, the Company will no longer have an integrated cash
management system with IHS and will obtain its own insurance policies. In
addition, in connection with a settlement agreement with IHS, among other
things, all intercompany claims will be discharged.
(18) Fresh-Start Reporting (Unaudited)
The Company will adopt fresh-start reporting upon its emergence from Chapter
11 (i.e. the effective date of the plan of reorganization). Although the plan
of reorganization was confirmed by the Bankruptcy Court on February 13, 2002,
under the terms of the confirmation order, the plan will become effective upon
the completion of related financing transactions anticipated to occur in March
2002. Under fresh-start reporting, the
F-25
ROTECH MEDICAL CORPORATION AND SUBSIDIARIES
(Wholly Owned by Integrated Health Services, Inc.)
(Debtor-in-Possession as of February 2, 2000)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands)
Years ended December 31, 1999, 2000 and 2001
reorganization value of the Company will be allocated to the Company's assets
based on their respective fair values in conformity with the purchase method of
accounting for business combinations; any portion not attributed to specific
tangible or identified intangible assets will be reported as an intangible
asset referred to as "reorganization value in excess of value of identifiable
assets." A pro forma condensed balance sheet which reflects the estimated
effect of the provisions of the plan, the related financing transactions and
the adoption of fresh-start reporting is summarized as follows (in millions)
(as restated--see note 2):
[Download Table]
Cash and equivalents............................................. $ 5.0
Accounts receivable.............................................. 117.4
Other current assets............................................. 27.6
-------
Total current assets.......................................... 150.0
Current liabilities.............................................. (39.5)
-------
Working capital............................................... 110.5
Property and equipment........................................... 257.3
Other assets..................................................... 24.8
Reorganization value in excess of value of identifiable assets... 621.4
Priority tax claim............................................... (14.0)
Long-term debt................................................... (500.0)
-------
Stockholders' equity.......................................... $ 500.0
=======
The valuations required to determine the fair value of the Company's assets
have not been performed and, accordingly, the adjustments reflected in the pro
forma data above are preliminary and subject to further revisions and
adjustments. For this purpose, the carrying value of property and equipment and
other assets was assumed to approximate fair value. The Company has arranged to
obtain valuations of significant assets and, upon completion of this process,
the reorganization value will be allocated to specific assets. It is
anticipated that there will be reductions in the carrying values of certain
assets, and the fair value of certain other assets may exceed the carrying
values. Accordingly, the final valuation could result in materially different
amounts and allocations of reorganization value from the amounts and
allocations presented in the pro forma data above, primarily between
"reorganization value in excess of value of identifiable assets" and property
and equipment. Such different amounts and allocations could result in
corresponding changes in depreciation and amortization amounts.
(19) Revenues
Net revenues are derived from the following principal service categories for
the years ended December 31:
[Download Table]
1999 2000 2001
-------- -------- --------
Oxygen and other respiratory therapy.............. $381,348 $400,919 $465,231
Home medical equipment............................ 171,514 142,351 131,464
Other............................................. 33,947 25,434 17,792
-------- -------- --------
$586,809 $568,704 $614,487
======== ======== ========
F-26
ROTECH HEALTHCARE INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
[Enlarge/Download Table]
Predecessor Company Successor Company
------------------- -----------------
December 31, September 30,
2001 2002
------------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................................... $ 4,970 $ 18,640
Accounts receivable, net...................................... 117,405 99,953
Other accounts receivable..................................... 2,283 1,677
Inventories................................................... 22,312 23,812
Prepaid expenses.............................................. 2,955 3,258
Deferred income taxes......................................... 24,705 --
---------- ----------
Total current assets...................................... 174,630 147,340
Property and equipment, net...................................... 257,338 217,180
Intangible assets................................................ 783,429 2,467
Reorganization value in excess of value of identifiable assets... -- 677,533
Other assets..................................................... 13,299 26,333
---------- ----------
$1,228,696 $1,070,853
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 20,659 $ 19,882
Accrued expenses.............................................. 18,855 16,246
Accrued interest.............................................. -- 3,207
Income taxes payable.......................................... -- 4,645
Current portion of long term debt (note 7).................... -- 2,000
---------- ----------
Total current liabilities................................. 39,514 45,980
Liabilities subject to compromise................................ 48,373 --
Due to parent company, net....................................... 394,354 --
Deferred income taxes............................................ 58,359 7,065
Priority tax claim............................................... -- 14,000
Long-term debt, less current portion (note 7).................... -- 492,000
Commitments and contingencies....................................
Series A Convertible Redeemable Preferred Stock (note 8)......... -- 5,233
Stockholders' equity:
Common Stock.................................................. 1 2
Additional paid-in capital.................................... 565,893 494,998
Retained earnings............................................. 122,202 11,575
---------- ----------
Total stockholders' equity................................ 688,096 506,575
---------- ----------
$1,228,696 $1,070,853
========== ==========
See accompanying notes to unaudited condensed consolidated financial statements.
F-27
ROTECH HEALTHCARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollars in Thousands)
[Enlarge/Download Table]
Successor
Predecessor Company Company
-------------------------------------- -------------
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
March 31, September 30, March 31, September 30,
2001 2001 2002 2002
------------ ------------- ------------ -------------
Net revenues....................................... $148,000 $310,475 $154,750 $308,133
Costs and expenses
Cost of net revenues:
Product and supply costs........................ 24,623 47,518 22,513 45,557
Patient service equipment depreciation.......... 10,292 22,006 12,147 25,736
-------- -------- -------- --------
Total cost of net revenues.................. 34,915 69,524 34,660 71,293
Provision for doubtful accounts................... 4,620 12,598 3,661 8,407
Selling, general and administrative............... 79,678 164,931 84,996 179,705
Depreciation and amortization..................... 14,699 30,174 2,839 5,087
Interest expense (income)......................... (16) (235) (17) 22,468
Provision for settlement of government claims..... -- 2,010 -- --
Provision for inventory losses (note 2)........... 434 605 264 --
-------- -------- -------- --------
Total costs and expenses.................... 134,330 279,607 126,403 286,960
-------- -------- -------- --------
Earnings before reorganization items,
income taxes and extraordinary items...... 13,670 30,868 28,347 21,173
Reorganization items (note 3)...................... 309 9,516 29,094 1,494
-------- -------- -------- --------
Earnings (loss) before income taxes and
extraordinary items....................... 13,361 21,352 (747) 19,679
Federal and state income taxes (benefit)........... 10,121 16,174 (203) 7,871
-------- -------- -------- --------
Earnings (loss) before extraordinary
items..................................... 3,240 5,178 (544) 11,808
Extraordinary gain on debt discharge............... -- -- 20,441 --
-------- -------- -------- --------
Net earnings................................ 3,240 5,178 19,897 11,808
Accrued dividends on redeemable preferred stock.... -- -- -- 233
-------- -------- -------- --------
Net earnings available for common
stockholders.............................. $ 3,240 $ 5,178 $ 19,897 $ 11,575
======== ======== ======== ========
See accompanying notes to unaudited condensed consolidated financial statements.
F-28
ROTECH HEALTHCARE INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in Thousands)
[Enlarge/Download Table]
Successor
Predecessor Company Company
-------------------------------------- -------------
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
March 31, September 30, March 31, September 30,
2001 2001 2002 2002
------------ ------------- ------------ -------------
Net earnings......................................... $ 3,240 $ 5,178 $ 19,897 $ 11,808
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Reorganization items.............................. 309 9,516 29,094 1,494
Depreciation and amortization..................... 24,991 52,180 14,986 30,823
Deferred income taxes............................. 1,995 -- (4,447)
Extraordinary gain on debt discharge.............. -- -- (20,441) --
Net change in operating assets and liabilities.... (16,088) (1,906) (10,198) 19,000
-------- -------- --------- --------
Net cash provided by operating activities..... $ 12,452 66,963 33,338 58,678
Net cash used by reorganization items................ (309) (959) (8,848) (1,494)
-------- -------- --------- --------
Net cash provided by operating activities
and reorganization items.................... 12,143 66,004 24,490 57,184
-------- -------- --------- --------
Cash flows from investing activities:
Purchases of property and equipment............... (18,448) (44,182) (15,299) (30,965)
Business acquisitions............................. 225 (225) (100) (2,903)
Decrease (increase) in other assets............... 2,654 (7,447) 10,131 (363)
-------- -------- --------- --------
Net cash used in investing activities......... (15,569) (51,854) (5,268) (34,231)
-------- -------- --------- --------
Cash flows from financing activities:
Net proceeds from long term borrowings............ -- -- 483,040 --
Payments of long term borrowings.................. -- -- (6,000)
Payments of liabilities subject to compromise..... -- -- (27,932) --
Net proceeds from sale/lease back of vehicles..... -- -- 10,191 --
Distributions to parent company, net.............. (2,479) (16,677) (487,804) --
-------- -------- --------- --------
Net cash used in financing activities......... (2,479) (16,677) (22,505) (6,000)
-------- -------- --------- --------
Increase (decrease) in cash and cash
equivalents................................. (5,905) (2,527) (3,283) 16,953
Cash and cash equivalents, beginning of period....... 15,111 9,206 4,970 1,687
-------- -------- --------- --------
Cash and cash equivalents, end of period............. $ 9,206 $ 6,679 $ 1,687 $ 18,640
======== ======== ========= ========
See accompanying notes to unaudited condensed consolidated financial statements.
F-29
ROTECH HEALTHCARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands)
(1) Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Rotech Healthcare Inc. and its subsidiaries, and its
predecessor, Rotech Medical Corporation and its subsidiaries, and have been
prepared in accordance with generally accepted accounting principles for
interim financial information as if the Company were a reporting company under
the Securities Exchange Act of 1934, as amended. Interim results are not
necessarily indicative of results to be expected for the full year.
Rotech Medical Corporation emerged from bankruptcy on March 26, 2002 and
transferred to Rotech Healthcare Inc. substantially all of its assets in a
restructuring transaction. As used in these notes, unless otherwise specified
or the context otherwise requires, references to the "Company" refer to the
business and operations of Rotech Healthcare Inc. and its subsidiaries for all
periods subsequent to March 26, 2002 and to the business and operations of
Rotech Medical Corporation and its subsidiaries for all periods prior to March
26, 2002. The financial statements included herein reflect these transactions
effective as of March 31, 2002. References to the "Predecessor" refer to Rotech
Medical Corporation and its subsidiaries. References to the "Successor" refer
to Rotech Healthcare Inc. and its subsidiaries.
Data have been presented for the six months ended September 30, 2002 rather
than for the nine months ended on such date because we have had only six months
of operating results since our Predecessor emerged from bankruptcy on March 26,
2002.
The unaudited condensed consolidated balance sheet of the Company as of
March 31, 2002, gives effect to the consummation of the Predecessor's plan of
reorganization discussed in Note 3 and the related restructuring transaction
referred to above.
For all periods presented herein, there were no differences between net
income and comprehensive income.
(2) Reclassifications, Accounting Estimates and Recent Accounting Pronouncements
Reclassifications: Certain amounts from prior periods have been
reclassified to conform to the current period presentation.
Use of Accounting Estimates: The preparation of financial statements in
conformity with generally accepted accounting principles in the United States
of America requires management to make assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
Recent Accounting Pronouncements: In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
142, Goodwill and Other Intangible Assets ("SFAS No. 142"). SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives no
longer be amortized, but instead be tested for impairment at least annually in
accordance with the provisions of SFAS No. 142. SFAS No. 142 will also require
that intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. The Company adopted the provisions of SFAS
No. 142 effective January 1, 2002. Had SFAS No. 142 been in effect for the
three months ended March 31, 2001 and the six months ended September 30, 2001,
amortization of goodwill would have been reduced by $11,952 and $23,903,
respectively, and net earnings for such periods would have increased by $10,551
and $21,103, respectively.
F-30
ROTECH HEALTHCARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Dollars in thousands)
(3) Petitions for Reorganization under Chapter 11 and Other Information
The Predecessor was incorporated on September 1, 1981. In 1997, the
Predecessor entered into a definitive merger agreement pursuant to which the
Predecessor became a wholly-owned subsidiary of Integrated Health Services,
Inc. ("IHS") effective as of October 21, 1997.
On February 2, 2000, IHS and substantially all of its subsidiaries,
including the Predecessor and its subsidiaries, filed separate voluntary
petitions for relief under Chapter 11 ("Chapter 11") of the United States
Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court
in the District of Delaware (the "Bankruptcy Court"). On November 23, 2001, IHS
filed a plan of reorganization (the "Plan") for the Predecessor and its
subsidiaries, which was approved by the creditors and confirmed by the
Bankruptcy Court on February 13, 2002. The Plan became effective on March 26,
2002. On the effective date, the Predecessor transferred to the Company
substantially all of the assets used by it in connection with its businesses
and operations (including the stock of substantially all of its subsidiaries).
In February 2002, the Predecessor settled all outstanding government
litigation and pre-petition and certain post-petition claims arising from
Medicare payments made to certain of the Company's operating centers as well as
claims in unliquidated amounts for a cash settlement of $17 million. The
settlement became effective on March 26, 2002, upon the effectiveness of the
Plan.
In addition, on February 13, 2002, IHS and its subsidiaries, including the
Predecessor, entered into a stipulation with the Centers for Medicare and
Medicaid Services, or CMS, whereby CMS was permitted to set off certain
underpayments to IHS with certain overpayments to the Predecessor in exchange
for a full release of all CMS claims against IHS and its subsidiaries,
including the Predecessor, to the effective date of the stipulation. The
Bankruptcy Court signed the stipulation on April 12, 2002.
The Company recorded the following as reorganization items:
[Enlarge/Download Table]
Successor
Predecessor Company Company
--------------------------------------- -------------
Three Months Six Months Three Months Six Months
Ended Ended Ended Ended
March 31, September 30, March 31, September 30,
2001 2001 2002 2002
------------ ------------- ------------ -------------
Severance and terminations........................ $215 $ 561 $ 837 $ --
Legal, accounting and consulting fees............. -- 981 175 497
Loss on sale/leaseback of vehicles................ -- -- 4,686 169
Priority tax claim allowed........................ -- -- 14,000 --
Administrative expense
claims allowed.................................. -- -- 7,800 --
Loss on closure of discontinued branch operations,
long term incentive compensation and other
charges resulting from reorganization and
restructuring................................... 94 7,974 1,596 828
---- ------ ------- ------
$309 $9,516 $29,094 $1,494
==== ====== ======= ======
During the fourth quarter of 2000, in connection with the reorganization,
management of Rotech finalized a plan of restructuring to eliminate and
discontinue certain product lines and branch locations used in the operations
of its business. The plan specifically identified products and branches that
would not be continued. The Company recorded a write-off for assets impaired in
connection with the product lines and branches discontinued. The write-off is
not associated with or does not benefit activities that will be continued.
Accordingly, the Company has recorded a loss of $94 for the three months ended
March 31, 2001 and a loss of
F-31
ROTECH HEALTHCARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Dollars in thousands)
$3,550 for the six months ended September 30, 2001 associated with the
discontinued activities under Emerging Issues Task Force 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (Including Certain Costs Incurred in a Restructuring) ("EITF
94-3"). The loss during the three months ended March 31, 2001 represents a
provision for the closure and consolidation of billing centers. The loss during
the six months ended September 30, 2001 represents a provision for discontinued
life insurance on a former employee of Rotech of $1,055 and an additional
provision for the closure and consolidation of billing centers of $2,495. The
loss during the three months ended March 31, 2001 and the six months ended
September 30, 2001 represent the write-down of assets.
Reorganization expense in 2001 and 2002 also includes the long-term
incentive portion of the CEO's total compensation package provided in the
employment agreement approved by the Bankruptcy Court in May 2000. Such portion
ceased upon the effective date of Rotech's plan of reorganization on March 26,
2002. The long-term incentive provision of the compensation package was
negotiated because Rotech was in Chapter 11 and unable to offer an equity
incentive plan. Therefore, Rotech considers this provision to be an expense
resulting from the reorganization of the business and directly associated with
the Chapter 11 proceeding. Accordingly, the provision for long-term incentive
bonus of $4,424 for the six months ended September 30, 2001, $562 for the three
months ended March 31, 2002 and $250 for the six months ended September 30,
2002, have been accounted for as a reorganization item in the consolidated
statement of operations.
The Company has entered into an assumption, sale/leaseback and amendment to
master lease agreement which became effective upon the Bankruptcy Court's final
order of approval in March 2002. Vehicles purchased by the Company as
debtor-in-possession were sold for $10,191 and leased back along with other
vehicles subject to the existing master operating lease. Among other things,
the lease provides financial covenants for the maintenance of indebtedness to
EBITDA (as defined in the agreement) not to exceed 4.0 to 1.0. The lease is
renewable annually. The Company recorded a loss of approximately $4,700
associated with the sale/leaseback transaction, which is classified as a
reorganization item.
Also effective upon the Bankruptcy Court's final order of approval in March
of 2002, was the payment of certain administrative expense claims to IHS of
$7,800 and the payment of certain priority tax claims of $14,000. The Company
recorded the amounts as reorganization items during the three months ended
March 31, 2002 in conjunction with fresh start reporting (see note 6). The
administrative expense claims were paid pursuant to the Settlement Agreement
between IHS and the Company, which fully and finally satisfied all claims
against one another.
The restructuring plan to eliminate and discontinue certain product lines
and branch locations identified certain employees that would be terminated as a
result of the restructuring. Accordingly, the Company terminated approximately
60, 115 and 25 employees and recorded termination costs of $215, $561 and $837
for the three months ended March 31, 2001, the six months ended September 30,
2001 and the three months ended March 31, 2002, respectively. Accrued
liabilities for employee severance and termination costs, recognized in
accordance with EITF 94-3 are summarized as follows for the year ended December
31, 2001 and nine months ended September 30, 2002, respectively:
[Download Table]
Balance at December 31, 2000........................... $ 1,833
Charges during the year ended December 31, 2001........ 753
Payments charged against the liability................. (1,420)
-------
Balance at December 31, 2001........................... 1,166
Charges during the nine months ended September 30, 2002 837
Payments charged against the liability................. (1,337)
-------
Balance at September 30, 2002.......................... $ 666
=======
F-32
ROTECH HEALTHCARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Dollars in thousands)
(4) Other Commitments and Contingencies
The Company is subject to workers' compensation and employee health benefit
claims, which are primarily self-insured. The Company does, however, maintain
certain stop-loss and other insurance coverage which management believes to be
appropriate. Provisions for estimated settlements relating to the workers'
compensation and health benefit plans are provided in the period of the related
claim on a case-by-case basis plus an amount for incurred but not reported
claims. Differences between the amounts accrued and subsequent settlements are
recorded in operations in the period of settlement.
From time to time, the Company and its subsidiaries have been parties to
various legal proceedings in the ordinary course of business. In the opinion of
management, except with respect to the Chapter 11 proceedings described above,
there are currently no proceedings which individually, after taking into
account the insurance coverage maintained by the Company, would have a material
adverse effect on the Company's financial position or results of operations.
(5) Certain Significant Risks and Uncertainties
The Company and others in the health care business are subject to certain
inherent risks, including the following:
. Substantial dependence on revenues derived from reimbursement by the
federal Medicare and state Medicaid programs which have been reduced in
recent years and which entail exposure to various health care fraud
statutes;
. Government regulations, government budgetary constraints and proposed
legislative and regulatory changes; and
. Lawsuits alleging malpractice and related claims.
Such inherent risks require the use of certain management estimates in the
preparation of the Company's financial statements and it is reasonably possible
that a change in such estimates may occur.
The Company receives payment for a significant portion of services rendered
to patients from the federal government under Medicare and other federally
funded programs (including the Veterans Administration) and from the states in
which its facilities and/or services are located under Medicaid. Revenue
derived from Medicare, Medicaid and other federally funded programs represented
65.7% and 67.9% of the Company's patient revenue for the three months ended
March 31, 2001 and 2002, respectively, and 67.0% and 68.8% of the Company's
patient revenue for the six months ended September 30, 2001 and 2002,
respectively. The Company's operations are subject to a variety of federal,
state and local legal and regulatory risks, including, without limitation,
federal Medicare and Medicaid fraud and abuse laws (sometimes referred to as
the "Anti-Kickback Statute") and the federal Ethics in Patient Referral Act of
1989 ("Stark I") as amended by the Omnibus Budget and Reconciliation Act of
1993 ("Stark II" and together with Stark I, "Stark") many of which apply to
virtually all companies engaged in the health care services industry. The
Anti-Kickback Statute prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare and Medicaid patients. Stark prohibits, with limited exceptions,
financial relationships between certain designated health service providers and
referring physicians. Many states in which the Company operates have laws and
regulations similar to Stark and the Anti-Kickback Statute with which the
Company must comply. Other regulatory risks assumed by the Company and other
companies engaged in the health care industry are as follows:
. False Claims--"Operation Restore Trust" is a major anti-fraud
demonstration project of the Office of the Inspector General. The primary
purpose for the project is to scrutinize the activities of health care
F-33
ROTECH HEALTHCARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Dollars in thousands)
providers which are reimbursed under the Medicare and Medicaid programs.
False claims are prohibited pursuant to criminal and civil statutes and
are punishable by imprisonment and monetary penalties.
. Regulatory Requirement Deficiencies--In the ordinary course of business,
health care facilities receive notices of deficiencies for failure to
comply with various regulatory requirements. In some cases, the reviewing
agency may take adverse actions against a facility, including the
imposition of fines, temporary suspension or decertification from
participation in the Medicare and Medicaid programs and, in extreme
cases, revocation of a facility's license.
. Changes in laws and regulations--Changes in laws and regulations could
have a material adverse effect on licensure, eligibility for
participation in government programs, permissible activities, operating
costs and the levels of reimbursement from governmental and other sources.
The Company has formed a Corporate Compliance Department to help identify,
prevent and deter instances of Medicare, Medicaid and other noncompliance.
Although the Company strives to manage these regulatory risks, there can be no
assurance that federal and/or state regulatory agencies that currently have
jurisdiction over matters including, without limitation, Medicare, Medicaid and
other government reimbursement programs, will take the position that the
Company's business and operations are in compliance with applicable law or with
the standards of such regulatory agencies.
While the Company believes it complies in all material respects with all
applicable regulatory requirements, an adverse determination in the
governmental investigations, whether currently asserted or arising in the
future, could have a material adverse effect on the Company.
The Company is also subject to malpractice and related claims, which arise
in the normal course of business and which could have a significant effect on
the Company. As a result, the Company maintains occurrence based professional
and general liability insurance with coverage and deductibles which management
believes to be appropriate.
The Company is also subject to certain inherent risks related to the
acquisition of businesses. Since its inception, the Company has grown through
acquisitions, and realization of acquisition costs, including intangible assets
of businesses acquired, is dependent initially upon the consummation of the
acquisitions and subsequently upon the Company's ability to successfully
integrate and manage acquired operations.
The Company believes that adequate provision for the aforementioned items
has been made in the accompanying consolidated financial statements and that
their ultimate resolution will not have a material effect on the consolidated
financial statements.
(6) Fresh-Start Reporting
The Company adopted fresh-start reporting upon its emergence from Chapter
11, effective March 26, 2002. Under fresh-start reporting, the reorganization
value of the Company is allocated to the Company's assets based on their
respective fair values in conformity with the purchase method of accounting for
business combinations; any portion not attributed to specific tangible or
identified intangible assets are reported as an intangible asset referred to as
"reorganization value in excess of value of identifiable assets." In adopting
fresh-start reporting, the Company engaged an independent financial advisor to
assist in the determination of the reorganization value or fair value of the
entity.
F-34
ROTECH HEALTHCARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Dollars in thousands)
Not all of the valuations required to determine the fair value of the
Company's assets have been performed and, accordingly, the adjustments
reflected in the data following are preliminary and subject to further
revisions and adjustments. The Company has arranged to obtain valuations of
significant assets and, upon completion of this process, the reorganization
value will be allocated to specific assets.
It is anticipated that there will be reductions in the carrying values of
certain assets, and the fair value of certain other assets may exceed the
carrying values. Accordingly, the final valuation could result in materially
different amounts and allocations of reorganization value from the amount and
allocations presented in the following data.
Subsequent to March 31, 2002, the following adjustments were made to
reorganization value in excess of value of identifiable assets:
[Enlarge/Download Table]
Reduction of property and equipment to estimated fair market value.............. $ 4,683
Payment of taxes related to Internal Revenue Code Section 338(h)(10) election... 16,036
-------
Adjustment to reorganization value.............................................. $20,719
=======
In connection with the Company's adoption of fresh-start accounting, the
Company has obtained valuations of the patient service equipment and has
reconsidered the estimated useful lives for this equipment and its other fixed
assets. The new basis of patient service equipment, furniture and office
equipment, and vehicles at March 31, 2002 are being depreciated over their
respective remaining useful lives at that date, using the weighted average life
of the asset groups, which approximates four years. Purchases of such property
and equipment since March 31, 2002 are being depreciated over five years for
patient service equipment, three years for computer equipment and five years
for vehicles; leasehold improvements and furniture and equipment are unchanged.
The effect of this change in estimate for the six months ended September 30,
2002 was to increase depreciation by $589.
F-35
ROTECH HEALTHCARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Dollars in thousands)
A reconciliation of fresh-start reporting recorded as of March 31, 2002
follows (in thousands):
[Enlarge/Download Table]
Predecessor Reorganization Fresh-Start Successor
Company Adjustments Adjustments Company
----------- -------------- ----------- ----------
ASSETS
Current assets:
Cash and cash equivalents................. $ 14,687 $ (13,000)(1) $ -- $ 1,687
Accounts receivable, net.................. 121,742 -- -- 121,742
Other accounts receivable................. 1,137 -- -- 1,137
Inventories, net.......................... 23,908 -- -- 23,908
Prepaid expenses.......................... 2,831 -- -- 2,831
Deferred income taxes..................... 24,705 (24,705)(2) -- --
---------- --------- --------- ----------
Total current assets.................. 189,010 (37,705) -- 151,305
Property and equipment, net.................. 242,774 -- (21,482)(7) 221,292
Intangible assets............................ 783,529 -- (783,529)(8) --
Reorganization value in excess of value of
identifiable assets........................ -- -- 656,814(10) 656,814
Other assets................................. 13,625 6,460(3) -- 20,085
---------- --------- --------- ----------
$1,228,938 $ (31,245) $(148,197) $1,049,496
========== ========= ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... $ 15,497 $ -- $ -- $ 15,497
Accrued expenses.......................... 19,999 -- -- 19,999
Current portion of long-term debt......... -- 2,000(5) -- 2,000
---------- --------- --------- ----------
Total current liabilities............. 35,496 2,000 -- 37,496
Liabilities subject to compromise............ 47,441 (47,441)(1) -- --
Due to parent company, net................... 378,287 (438,086)(4) 59,799(8) --
Deferred income taxes........................ 58,359 (58,359)(2) -- --
Priority tax claim........................... -- 14,000(1) -- 14,000
Long-term debt, less current portion......... -- 498,000(5) -- 498,000
Series A Convertible Redeemable Preferred
Stock...................................... -- -- 5,000(9) 5,000
Stockholders' equity:
Common Stock.............................. 1 -- 1(9) 2
Additional paid-in capital predecessor.... 565,893 -- (565,893)(8) --
Additional paid-in capital successor...... -- -- 494,998(9) 494,998
Retained earnings......................... 143,461 (1,359)(6) (142,102)(8) --
---------- --------- --------- ----------
Total stockholders' equity............ 709,355 (1,359) (212,996) 495,000
---------- --------- --------- ----------
$1,228,938 $ (31,245) $(148,197) $1,049,496
========== ========= ========= ==========
--------
(1) Represents estimated plan of reorganization claims allowed and paid.
(2) Represents estimated effect of Internal Revenue Code Section 338(h)(10)
election.
F-36
ROTECH HEALTHCARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Dollars in thousands)
(3) Represents the following:
[Download Table]
Estimated value of non-core assets retained by predecessor.. $(10,500)
Deferred debt issue costs................................... 16,960
--------
$ 6,460
========
(4) Represents settlement with IHS.
(5) Represents the sale of senior secured term loan and senior subordinated
notes.
(6) Represents priority tax claim allowed of $14,000, plus administrative
expense claims allowed of $7,800, less gain on debt discharge of $20,441.
(7) Represents reduction of property and equipment to estimated fair market
value under fresh-start reporting.
(8) Represents elimination of predecessor's intangible assets, equity accounts
and retained earnings under fresh-start reporting.
(9) Represents reorganization value of capital stock as follows:
[Download Table]
Series A Convertible Redeemable Preferred Stock............. $ 5,000
Common Stock................................................ 2
Additional paid-in capital.................................. 494,998
--------
$500,000
========
(10) Represents allocation of reorganization value under fresh-start reporting
as follows:
[Download Table]
Cash and cash equivalents........................................ $ 1,687
Accounts receivable.............................................. 121,742
Other current assets............................................. 27,876
Property and equipment........................................... 221,292
Other assets..................................................... 20,085
Accounts payable and accrued expenses............................ (35,496)
Priority tax claim............................................... (14,000)
----------
343,186
Reorganization value in excess of value of identifiable assets... 656,814
----------
$1,000,000
==========
(7) Long-Term Debt
The Company's long-term debt consists of the following:
[Enlarge/Download Table]
December 31, September
2001 30, 2002
------------ ---------
Senior Secured Term Loan; $487 payable quarterly through March 31, 2007
with remainder due quarterly through March 31, 2008, interest payable at
LIBOR rate plus 3%, payable quarterly................................... $ -- $194,000
9 1/2% Senior Subordinated Notes, due April 1, 2012, interest payable
semi-annually on April 1 and October 1.................................. -- 300,000
---- --------
Sub-total................................................................. -- 494,000
Less current portion...................................................... -- 2,000
---- --------
Total long-term debt...................................................... $ -- $492,000
==== ========
F-37
ROTECH HEALTHCARE INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(Dollars in thousands)
In addition to the above, as of September 30, 2002, the Company has a $75
million five-year revolving credit facility available. No debt is outstanding
under this facility at September 30, 2002, however, we have issued letters of
credit totaling $5 million under this facility.
The Company has no independent assets or operations, the guarantees are full
and unconditional and joint and several, and any subsidiaries of the Company
other than the subsidiary guarantors are minor.
(8) Series A Convertible Redeemable Preferred Stock
The Company issued 250,000 shares of Series A Convertible Redeemable
Preferred Stock pursuant to the plan of reorganization (see note 3). The Series
A Convertible Redeemable Preferred Stock is held by our employee profit sharing
plan. Each share of Series A Convertible Redeemable Preferred Stock has a
stated value of $20 and entitles the holder to an annual cumulative dividend
equal to 9% of its stated value, payable semi-annually at the discretion of our
board of directors in cash or in additional shares of Series A Convertible
Redeemable Preferred Stock. The Series A Convertible Redeemable Preferred Stock
is convertible at any time at the option of the holder after consummation of an
underwritten initial public offering of our common stock at a price per share
of at least $20 and with gross proceeds to us of at least $100 million. If we
have not completed such an underwritten public offering prior to the fifth
anniversary of the date of issuance, a holder may thereafter, at its option,
convert each share of Series A Convertible Redeemable Preferred Stock into
shares of common stock based on the conversion ratio for each share of Series A
Convertible Redeemable Preferred Stock at the time of conversion. Initially,
each share of Series A Convertible Redeemable Preferred Stock will be
convertible into .8 shares of our common stock. Series A Convertible Redeemable
Preferred Stock must be redeemed by the Company on the 92nd day following the
tenth anniversary of the first issuance of the Series A Convertible Redeemable
Preferred Stock at a redemption price of $20 per share, plus any accrued and
unpaid dividends. The amount of the mandatory redemption of the outstanding
250,000 shares of Series A Convertible Redeemable Preferred Stock would be $5
million plus any accrued unpaid dividends.
F-38
PART II INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 20. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law, inter alia, empowers a
Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (other than an action by or in the right of the corporation)
by reason of the fact that such person is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
other enterprise, against expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by him in
connection with such action, suit or proceeding if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Similar indemnity is authorized for such persons against expenses (including
attorneys' fees) actually and reasonably incurred in connection with the
defense or settlement of any such threatened, pending or completed action or
suit if such person acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, and provided
further that (unless a court of competent jurisdiction otherwise provides) such
person shall not have been adjudged liable to the corporation. Any such
indemnification may be made only as authorized in each specific case upon a
determination by the shareholders or disinterested directors or by independent
legal counsel in a written opinion that indemnification is proper because the
indemnitee has met the applicable standard of conduct.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation or
enterprise, against any liability asserted against him and incurred by him in
any such capacity, or arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
The Company maintains policies insuring its and its subsidiaries' officers and
directors against certain liabilities for actions taken in such capacities,
including liabilities under the Securities Act of 1933, as amended.
Article IX of the Company's Certificate of Incorporation eliminates in
certain circumstances the monetary liability of directors of the Company for a
breach of their fiduciary duty as directors. These provisions do not eliminate
the liability of a director (1) for a breach of the director's duty of loyalty
to the corporation or its stockholders; (2) for acts or omissions not in good
faith or which involve intentional misconduct or knowing violation of law; (3)
under Section 174 of the Delaware General Corporation Law (relating to the
declaration of dividends and purchase or redemption of shares in violation of
the Delaware General Corporation Law); or (4) for transactions from which the
director derived an improper personal benefit.
Pursuant to Section 145 of the Delaware General Corporation Law a
corporation generally has the power to indemnify its present and former
directors, officers, employees and agents against expenses and liabilities
incurred by them in connection with any suit to which they are, or are
threatened to be made, a party by reason of their serving in such positions so
long as they acted in good faith and in a manner they reasonably believed to be
in, or not opposed to, the best interests of the corporation, and with respect
to any criminal action, they had no reasonable cause to believe their conduct
was unlawful. With respect to suits by or in the right of a corporation,
however, indemnification is generally limited to attorney's fees and other
expenses and is not available if such person is adjudged to be liable to the
corporation unless the court determines that indemnification is appropriate. In
addition, a corporation has the power to purchase and maintain insurance for
such persons.
On May 21, 2002, the Company's Board of Directors authorized the Company to
enter into indemnification agreements with each of its executive officers and
directors. These indemnification agreements grant the indemnitee a contractual
right to be indemnified by the Company, to the fullest extent permissible under
Delaware law, against any and all expenses, including attorneys' fees, incurred
in connection with any actual or threatened suit or other proceeding that may
be brought against the Company or its affiliates and to have expenses
reimbursed as they are incurred. Consistent with applicable law, however, there
are certain circumstances under which the Company is not required to provide
indemnification. In particular, the Company is not required to indemnify any
indemnitee where such person engaged in willful misconduct, when the indemnitee
violated Section 16(b) of the Securities Exchange Act of 1934, or where the
indemnitee has been made whole under an insurance policy or other agreement.
II-1
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
[Download Table]
Exhibit
Number Title
------ -----
2.1* Second Amended Joint Plan of Reorganization of Rotech Medical
Corporation and its subsidiaries under Chapter 11 of the Bankruptcy
Code dated February 7, 2002.
3.1* Certificate of Incorporation of Rotech Healthcare Inc.
3.2* Bylaws of Rotech Healthcare Inc.
3.3* Form of Articles of Incorporation of Subsidiary Guarantor of Rotech
Healthcare Inc.
3.4* Form of Bylaws of Subsidiary Guarantor of Rotech Healthcare Inc.
4.1* Form of specimen common stock certificate.
4.2* Indenture dated as of March 26, 2002 by and among Rotech Healthcare
Inc., each of the Guarantors named therein and The Bank of New York.
4.3* Form of 9 1/2% Senior Subordinated Notes due 2012 (included in
Exhibit 4.2).
5.1 Opinion of Brown Raysman Millstein Felder & Steiner LLP.
10.1* $275,000,000 Credit Agreement among Rotech Healthcare Inc., as
Borrower, The Several Lenders From Time to Time Parties hereto, UBS
Warburg LLC and Goldman Sachs Credit Partners L.P., as Joint Lead
Arrangers and Joint Bookrunners, Goldman Sachs Credit Partners L.P.,
as Syndication Agent, The Bank of Nova Scotia, Deutsche Banc Alex.
Brown Inc. and General Electric Capital Corporation, as
Co-Documentation Agents, General Electric Capital Corporation, as
Collateral Agent, and UBS AG, Stamford Branch, as Administrative
Agent, dated as of March 26, 2002.
10.2* Registration Rights Agreement dated as of March 26, 2002, by and
among Rotech Healthcare Inc., each of the entities listed on Schedule
A thereto, and UBS Warburg LLC, Goldman, Sachs & Co., Deutsche Banc
Alex. Brown Inc. and Scotia Capital (USA) Inc.
10.3* Amended and Restated Registration Rights Agreement dated June 21,
2002, between Rotech Healthcare Inc., and Oaktree Capital Management,
LLC and General Electric Capital Corporation.
10.4* Transfer Agreement between Rotech Healthcare Inc. and Rotech Medical
Corporation dated March 26, 2002.
10.5* Tax Sharing Agreement among Integrated Health Services, Inc., Rotech
Healthcare Inc. and Rotech Medical Corporation dated as of March 26,
2002.
10.6* Rotech Healthcare Inc. Employees Plan Trust dated March 26, 2002.
10.7* Amendment and Restatement of the Rotech Healthcare Inc. Employees
Plan effective January 1, 2003.
10.8* Rotech Healthcare Inc. Common Stock Option Plan.
10.9* Form of Rotech Healthcare Inc. Stock Option Agreement.
10.10* Letter Agreement regarding engagement of Alvarez & Marsal, Inc. dated
August 19, 2002.
10.11* Employment Agreement with Rebecca L. Myers dated January 24, 2001, as
amended.
10.12* Employment Agreement with Philip L. Carter dated November 1, 2002.
10.13* Corporate Integrity Agreement with the Office of Inspector General of
the United States Department of Health and Human Services dated
February 11, 2002.
10.14 Agreement with Respect to Rights Upon Termination of Employment with
Janet L. Ziomek dated October 30, 2002.
10.15 Agreement with Respect to Rights Upon Termination of Employment with
Albert A. Prast dated October 30, 2002.
12.1 Ratio of Earnings to Fixed Charges (included on page 31 of the
prospectus which forms part of this registration statement).
16.1 Letter from KPMG LLP regarding change in independent auditors.
21.1* List of Subsidiaries.
23.1 Consent of KPMG LLP.
23.2 Consent of Brown Raysman Millstein Felder & Steiner LLP (included in
Exhibit 5.1).
24.1* Power of Attorney.
25.1* Statement of Eligibility of Trustee relating to the 9 1/2% Senior
Subordinated Notes due 2012.
II-2
[Download Table]
Exhibit
Number Title
------ -----
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Letter to the Depository Trust Company Participants.
99.4* Form of Letter to Clients.
99.5* Form of Exchange Agent Agreement.
--------
* Previously filed.
(b) Financial Statement Schedule.
Schedule II-Valuation and Qualifying Accounts. See Page S-1.
Item 22. Undertakings
(a) The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof;
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering;
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to any arrangement, provision or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(d) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Rotech
Healthcare Inc. has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Orlando,
State of Florida on February 10, 2003.
ROTECH HEALTHCARE INC.
By: /S/ PHILIP L. CARTER
-----------------------------------
Name: Philip L. Carter
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons and in the
capacities and on the dates indicated.
/S/ PHILIP L. CARTER President, Chief Executive February 10, 2003
----------------------------- Officer and Director
Philip L. Carter (Principal Executive
Officer)
* Chief Financial Officer February 10, 2003
----------------------------- (Principal Financial and
Janet L. Ziomek Accounting Officer)
* Chairman of the Board February 10, 2003
-----------------------------
William Wallace Abbott
* Director February 10, 2003
-----------------------------
Guy P. Sansone
* Director February 10, 2003
-----------------------------
Edward L. Kuntz
* Director February 10, 2003
-----------------------------
William J. Mercer
* Director February 10, 2003
-----------------------------
Arthur J. Reimers
* Director February 10, 2003
-----------------------------
Arthur Siegel
*By: /S/ REBECCA L. MYERS
------------------------
Rebecca L. Myers
(Attorney-in-Fact)
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
subsidiaries of Rotech Healthcare Inc., listed on Schedule A hereto, has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Orlando, State of
Florida on February 10, 2003.
SUBSIDIARIES OF ROTECH HEALTHCARE INC.
(listed on Schedule A hereto)
By: /S/ PHILIP L. CARTER
-----------------------------------
Name: Philip L. Carter
Title: President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons and in the
capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/S/ PHILIP L. CARTER President, Chief Executive February 10, 2003
--------------------------- Officer and Director of
Philip L. Carter each of the Subsidiaries of
Rotech Healthcare Inc.
listed on Schedule A hereto
(Principal Executive
Officer)
/S/ JANET L. ZIOMEK Vice President and Chief February 10, 2003
--------------------------- Financial Officer of each
Janet L. Ziomek of the Subsidiaries of
Rotech Healthcare Inc.
listed on Schedule A hereto
(Principal Financial and
Accounting Officer)
/S/ REBECCA L. MYERS Chief Legal Officer, February 10, 2003
--------------------------- Secretary and Director of
Rebecca L. Myers each of the Subsidiaries of
Rotech Healthcare Inc.
listed on Schedule A hereto
II-5
Schedule A--Subsidiaries
A-1 Medical Equipment, Inc.
Abba Medical Equipment, Inc.
Acadia Home Care, Inc.
Allied Medical Supply, Inc.
Always Medical Equipment, Inc.
American Medical Rental, Inc.
Andy Boyd's InHome Medical, Inc., West
Andy Boyd's InHome Medical, Inc.
Anniston Health & Sickroom Supplies, Inc.
Baumann Pharmaceutical Services, Inc.
Berkeley Medical Equipment, Inc.
Best Care Medical Supply, Inc.
Beta Medical Equipment, Inc.
Cambria Medical Supply, Inc.
Camden Medical Supply, Inc.
Canyon State Medical Supply, Inc.
Care Medical Supplies, Inc.
Centennial Medical Equipment, Inc.
Charlotte Medical Supply, Inc.
Collins Rentals, Inc.
Community Home Oxygen, Inc.
Contour Medical Supply, Inc.
Corley Home Health Care, Inc.
CP02, Inc.
Cynthiana Home Medical Equipment, Inc.
Daniel Medical Systems, Inc.
Distinct Home Health Care, Inc.
Don Paul Respiratory Services, Inc.
DuMed, Inc.
East Tennessee Infusion & Respiratory, Inc.
Encore Home Health Care, Inc.
Epsilon Home Health Care, Inc.
Excel Medical of Ames, Inc.
Excel Medical of Fort Dodge, Inc.
Excel Medical of Marshalltown, Inc.
First Community Care of Niagara, Inc.
Firstcare, Inc.
Fischer Medical Equipment Co., Inc.
Four Rivers Home Healthcare, Inc.
G & G Medical, Inc.
Gate City Medical Equipment, Inc.
Georgia Medical Resources, Inc.
Gladwin Area Home Care, Inc.
Hamilton Medical Equipment Service, Inc.
Health at Home, Inc.
Health Care Services of Mississippi, Inc
Health-Med, Inc.
Holland Medical Services, Inc.
Home Care Oxygen Service, Inc.
II-6
Home Health Services Co., Inc.
Home Medical Systems, Inc.
IHS Acquisition XXVII, Inc.
Infusion Services, Inc.
Integrated Health Services at Jefferson Hospital, Inc.
Integrated of Garden Terrace, Inc.
Intensive Home Care Services, Inc.
IOTA Medical Equipment, Inc.
LAMBDA Medical Equipment, Inc.
LAMS, Inc.
Lawrence Medical Equipment, Inc.
Liberty Home Health Care, Inc.
Lovejoy Medical, Inc.
Major Medical Supply, Inc.
Medco Professional Services Corp.
MedCorp International, Inc.
Medic-Aire Medical Equipment, Inc.
Medical Electro-Therapeutics, Inc.
Medicare Rental Supply, Inc.
Michigan Medical Supply, Inc.
National Medical Equipment Centers, Inc.
Neumann's Home Medical Equipment, Inc.
Nightingale Home Health Care, Inc.
North Central Washington Respiratory Care Services, Inc.
Northeast Medical Equipment, Inc.
Northwest Home Medical, Inc.
Omega Medical Equipment, Inc.
OMICRON Medical Equipment, Inc.
Oxygen of Oklahoma, Inc.
Oxygen Plus Medical Equipment, Inc.
Oxygen Plus, Inc.
Oxygen Therapy Associates, Inc.
Peterson's Home Care, Inc.
PHI Medical Equipment, Inc.
Pioneer Medical Services, Inc.
Preferential Home Health Care, Inc.
Premier Medical, Inc.
Principal Medical Equipment, Inc.
Professional Breathing Associates, Inc.
Professional Respiratory Home Healthcare, Inc.
PSI Health Care, Inc.
Pulmo-Dose, Inc.
Pulmonary Homecare, Inc.
Quality Home Health Care, Inc.
R.C.P.S. Inc.
RCG Information Services Corporation
RCI Medical Corp.
Regency Medical Equipment, Inc.
Resp-A-Care, Inc.
II-7
Respiracare Medical Equipment, Inc.
Respiratory Medical Equipment of GA, Inc.
Respitech Home Health Care, Inc.
Responsive Home Health Care, Inc.
Rhema, Inc.
Ritt Medical Group, Inc.
RN Home Care Medical Equipment Company, Inc.
Roswell Home Medical, Inc.
Rotech Employee Benefits Corporation
Rotech Home Medical Care, Inc.
Rotech Oxygen and Medical Equipment, Inc.
Roth Medical, Inc.
Rothert's Hospital Equipment, Inc.
Sampson Convalescent Medical Supply, Inc.
Select Home Health Care, Inc.
SIGMA Medical Equipment, Inc.
Signature Home Care of Kansas, Inc.
Signature Home Care of New Jersey, Inc.
Southeastern Home Health, Inc.
Southern IV Therapy, Inc.
Stat Medical Equipment, Inc.
Sun Medical Supply, Inc.
Sunshine Home Health Care, Inc.
The Kilroy Company, Inc.
The Towne Pharmacy, Inc.
Theta Home Health Care, Inc.
Tupelo Home Health, Inc.
UPSILON Medical Equipment, Inc.
Valley Medical Equipment, Inc.
Value Care, Inc.
VitalCare Health Services, Inc.
VitalCare of America, Inc.
VitalCare of Pennsylvania, Inc.
VitalCare of Texas, Inc.
Vitech Medical, Inc.
Whites Medical Rentals, Inc.
Wichita Medical Care, Inc.
Wofford Pharmaceutical Services, Inc.
Zeta Home Health Care, Inc.
II-8
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1999, 2000 and 2001
(Dollars in thousands)
[Enlarge/Download Table]
Additions
-----------------------
Balance at Charged to Charged to Balance
Beginning Costs and Other at End of
of Period Expenses Accounts (1) Deductions (2) Period
---------- ---------- ------------ -------------- ---------
Deducted from asset accounts:
Allowance for Contractual Adjustments:
Predecessor Company:
Year ended December 31, 1999...... $ -- $101,372 $ -- $(101,372) $ --
Year ended December 31, 2000...... -- 99,498 -- (84,498) 15,000
Year ended December 31, 2001...... 15,000 75,423 -- (76,423) 14,000
Allowance for Doubtful Accounts:
Predecessor Company:
Year ended December 31, 1999...... $37,867 $ 26,791 $1,572 $ (43,603) $22,627
Year ended December 31, 2000...... 22,627 27,352 -- (28,304) 21,675
Year ended December 31, 2001...... 21,675 20,917 425 (18,392) 24,625
--------
(1) To record allowance on business combinations.
(2) To record write-offs.
S-1
DESCRIPTION OF EXHIBITS
[Enlarge/Download Table]
Exhibit
Number Title
------ -----
2.1* Second Amended Joint Plan of Reorganization of Rotech Medical Corporation and its subsidiaries
under Chapter 11 of the Bankruptcy Code dated February 7, 2002.
3.1* Certificate of Incorporation of Rotech Healthcare Inc.
3.2* Bylaws of Rotech Healthcare Inc.
3.3* Form of Articles of Incorporation of Subsidiary Guarantor of Rotech Healthcare Inc.
3.4* Form of Bylaws of Subsidiary Guarantor of Rotech Healthcare Inc.
4.1* Form of specimen common stock certificate.
4.2* Indenture dated as of March 26, 2002 by and among Rotech Healthcare Inc., each of the Guarantors
named therein and The Bank of New York.
4.3* Form of 9 1/2% Senior Subordinated Notes due 2012 (included in Exhibit 4.2).
5.1 Opinion of Brown Raysman Millstein Felder & Steiner LLP.
10.1* $275,000,000 Credit Agreement among Rotech Healthcare Inc., as Borrower, The Several Lenders
From Time to Time Parties hereto, UBS Warburg LLC and Goldman Sachs Credit Partners L.P., as
Joint Lead Arrangers and Joint Bookrunners, Goldman Sachs Credit Partners L.P., as Syndication
Agent, The Bank of Nova Scotia, Deutsche Banc Alex. Brown Inc. and General Electric Capital
Corporation, as Co-Documentation Agents, General Electric Capital Corporation, as Collateral
Agent, and UBS AG, Stamford Branch, as Administrative Agent, dated as of March 26, 2002.
10.2* Registration Rights Agreement dated as of March 26, 2002, by and among Rotech Healthcare Inc.,
each of the entities listed on Schedule A thereto, and UBS Warburg LLC, Goldman, Sachs & Co.,
Deutsche Banc Alex. Brown Inc. and Scotia Capital (USA) Inc.
10.3* Amended and Restated Registration Rights Agreement dated June 21, 2002, between Rotech
Healthcare Inc., and Oaktree Capital Management, LLC and General Electric Capital Corporation.
10.4* Transfer Agreement between Rotech Healthcare Inc. and Rotech Medical Corporation dated
March 26, 2002.
10.5* Tax Sharing Agreement among Integrated Health Services, Inc., Rotech Healthcare Inc. and Rotech
Medical Corporation dated as of March 26, 2002.
10.6* Rotech Healthcare Inc. Employees Plan Trust dated January 1, 20023
10.7* Amendment and Restatement of the Rotech Healthcare Inc. Employees Plan effective January 1,
2003.
10.8* Rotech Healthcare Inc. Common Stock Option Plan.
10.9* Form of Rotech Healthcare Inc. Stock Option Agreement.
10.10* Letter Agreement regarding engagement of Alvarez & Marsal, Inc. dated August 19, 2002.
10.11* Employment Agreement with Rebecca L. Myers dated January 24, 2001, as amended.
10.12* Employment Agreement with Philip L. Carter dated November 1, 2002.
10.13* Corporate Integrity Agreement with the Office of Inspector General of the United States Department
of Health and Human Services dated February 11, 2002.
10.14 Agreement with Respect to Rights Upon Termination of Employment with Janet L. Ziomek dated October
30, 2002.
10.15 Agreement with Respect to Rights Upon Termination of Employment with Albert A. Prast dated October
30, 2002.
12.1 Ratio of Earnings to Fixed Charges (included on page 31 of the prospectus which forms part of this
registration statement).
16.1 Letter from KPMG LLP regarding change in independent auditors.
21.1* List of Subsidiaries.
23.1 Consent of KPMG LLP.
23.2 Consent of Brown Raysman Millstein Felder & Steiner LLP (included in Exhibit 5.1).
24.1* Power of Attorney.
25.1* Statement of Eligibility of Trustee relating to the 9 1/2% Senior Subordinated Notes due 2012.
99.1* Form of Letter of Transmittal.
99.2* Form of Notice of Guaranteed Delivery.
99.3* Form of Letter to the Depository Trust Company Participants.
99.4* Form of Letter to Clients.
99.5* Form of Exchange Agent Agreement.
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* Previously filed.
Dates Referenced Herein and Documents Incorporated by Reference
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