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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For The Fiscal Year Ended December 31, 2002

Commission File Number 333-100750

ROTECH HEALTHCARE INC.

(Exact Name of Registrant as Specified in Its Charter)

(407) 822-4600

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ¨  No x

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).    Yes ¨  No x

The aggregate market value of the common equity held by non-affiliates of the registrant on July 12, 2002 was approximately $288,800,000. The determination of stock ownership by non-affiliates is based upon stock ownership as of March 26, 2002, the date that the registrant’s predecessor emerged from bankruptcy, and is made solely for purposes of responding to the requirements of the form and the registrant is not bound by this determination for any other purpose. The aggregate market value is based upon the closing sales price of the registrant’s common stock, as reported by the Pink Sheets LLC on July 12, 2002, the date that the registrant’s common stock was distributed by its predecessor to the former creditors of such predecessor.

As of March 27, 2003, the registrant had 25,000,000 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: None.

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ROTECH HEALTHCARE INC.

Form 10-K

For the Fiscal Year Ended December 31, 2002

Index

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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

This report 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 report (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 report. 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 “Factors that may affect future results of operations.” 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 report, 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.

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PART I

Our predecessor emerged from bankruptcy on March 26, 2002 and subsequently transferred all of its assets to us in a restructuring transaction. The financial statements included herein reflect these transactions effective as of March 31, 2002. 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 subsequent to March 31, 2002 and the business and operations of our predecessor, Rotech Medical Corporation, a Florida corporation, and its subsidiaries for all periods prior to March 31, 2002. Financial data have been presented for the three months ended March 31, 2002 and the nine months ended December 31, 2002, rather than for the year-ended December 31, 2002, because we have had only nine months of operating results since our predecessor emerged from bankruptcy. In connection with our predecessor’s emergence from bankruptcy, we reflected the terms of the plan of reorganization in our consolidated financial statements by adopting the fresh-start reporting provisions of the American Institute of Certified Public Accountants Statement of Position (“SOP”) 90-7, “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”). Under fresh-start reporting, a new reporting entity is deemed to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values. For accounting purposes, the fresh-start adjustments have been reflected in the operating results of our predecessor for the three months ended March 31, 2002.

ITEM 1.     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 500 operating centers located primarily in non-urban markets. We provide our equipment and services to 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 (77.9% and 79.9% of net revenues for the three months ended March 31, 2002 and the nine months ended December 31, 2002, respectively), 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 revenues through the rental and sale of durable medical equipment (19.9% and 18.1% of net revenues for the three months ended March 31, 2002 and the nine months ended December 31, 2002, respectively), 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 (VA) and private insurers.

For the three months ended March 31, 2002, we generated net revenues of $154.8 million and a net loss of $133.3 million. Included in the operating results for this time period were reorganization items of $182.3 million, the majority of which related to fresh-start reporting adjustments (See “—The bankruptcy case—Other Information”). For the same time period, net cash provided by operating activities was $33.3 million, net cash provided by operating activities and reorganization items was $24.5 million and net cash used in investing activities and net cash used in financing activities were $22.2 million and $5.5 million, respectively. 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), which, unless otherwise noted, we refer to as EBITDA, was $43.6 million for the three months ended March 31, 2002.

For the nine months ended December 31, 2002, we generated net revenues of $463.0 million and net earnings of $13.9 million. For the same period, net cash provided by operating activities was $100.1 million, net cash provided by operating activities and reorganization items was $98.4 million and net cash used in investing

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activities and net cash used in financing activities were $50.5 million and $21.5 million, respectively. EBITDA for the nine months ended December 31, 2002 was $109.7 million. See “Selected Historical Consolidated Financial Data,” footnote (6) on page 38 for a detailed definition of EBITDA.

Our business strategy

Our strategy is to enhance our 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 focus primarily on non-urban markets, with a particular emphasis on Medicare respiratory patients. We also intend to pursue managed care contracts on a selective basis in these rural markets. We believe that this model provides certain advantages, including less competition from national providers and lower operating costs. We offer our patients a range of complementary equipment and services which we believe is broader than that offered by many of our smaller competitors.

Focus on Reducing Costs and Improving Margins

We intend to focus on reducing costs by continuing to exit product lines, business units and contracts that are inconsistent with our profit objectives or strategic direction. In connection with our reduction in field operation costs, we continue to work to more efficiently allocate our employees by reducing headcount in under-performing regions, creating a corporate approval process for new and replacement hires and implementing standard operating procedures. In addition, we have streamlined our reporting structure, which has improved communication among our operating centers and our corporate management. We also intend to strengthen our balance sheet by reducing debt, increasing inventory turns and improving capital expenditure control.

Increase Operating Efficiencies

We intend to continue to improve our operating efficiencies in order to position ourselves for future growth by continuing to reduce the number of our billing and purchasing centers and field offices and by utilizing our proprietary information technology platform, as well as third-party software products, to centralize our billing, compliance, inventory and purchasing systems. Since we began these initiatives, we have reduced the number of billing centers from 62 to 22 and the number of purchasing centers from 94 to 4. We expect to further reduce the number of billing centers in 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. In addition, we are continuing to develop our information technology platform with the goal of creating a comprehensive technology infrastructure that can track inventory and purchasing on a store-by-store basis. We believe that this may help to analyze whether our inventory is being used at its most efficient levels by tracking the useful life, maintenance and location of the equipment at all times.

Continue To Emphasize Respiratory Therapy with New Efforts in Durable Medical Equipment Rental Business

We intend to continue to focus primarily on our home respiratory therapy equipment and related services business. However, we are also initiating new efforts to grow our durable medical equipment rental business. As part of our program to increase revenues from our respiratory therapy business, we have an oxygen patient growth and retention program. Through this program, we seek to identify additional referral sources for new respiratory patients, as well as improve our retention rate with respect to existing respiratory patients by training our divisional personnel in ways to improve patient compliance with recommended treatment plans thereby reducing the number of patients that discontinue our service. We also have a nebulizer medication program, through which we seek to educate physicians, encourage compliance with physician prescriptions, and convey to our patients the benefits of the nebulizer medications that we offer.

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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

Historically, we have supplemented our internal growth with selective acquisitions. Although we do not intend to return to our historic rate of acquisitions, we intend to resume making selective acquisitions after our operating model has been sufficiently improved. 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. When we resume making acquisitions, we plan to target selected, 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. We further 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 service lines

Respiratory Therapy

We provide a 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 generally will 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 600 respiratory therapists. Respiratory therapy equipment rental and related services represented 77.9% and 79.9% of our net revenues for the three months ended March 31, 2002 and the nine months ended December 31, 2002, respectively.

Our home respiratory care equipment includes three types of oxygen systems:

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.

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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.

Our operations

Organization

We have over 500 operating centers, which now operate through four divisions. Each of these divisions is managed by a team of division managers who provide management services to our operating centers in three service categories: operations, sales, and billing and collection. These managers provide key support services to our operating centers, including billing, purchasing and equipment maintenance, repair and warehousing. Each operating center delivers equipment and services to patients in their homes and other care sites through the operating center’s delivery fleet and qualified personnel. Financial control, purchasing and operating policies for our four divisions are administered centrally at our principal offices in Orlando, Florida through our Chief Operating Officer, while sales functions are administered through our Chief Sales Officer, and billing and collection services are provided through our Chief Financial Officer. We believe that this management structure provides control and consistency among our divisions and operating centers and allows us to implement standard policies and procedures across a large number of geographically remote operating centers.

Operating Systems and Controls

Our operating systems provide management with information to measure and evaluate 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, 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.

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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:

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.

Our company history

Rotech Healthcare Inc. was incorporated in the state of Delaware on March 15, 2002. 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.

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.

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.

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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 $9 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 below in “—Restructuring transaction and related transactions” and for our entry into senior secured credit facilities comprised of (i) a five-year $75 million senior secured revolving credit facility and (ii) a six-year $200 million senior secured term loan. For a more detailed description of some of the components of the plan of reorganization, see “—Senior Secured 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:

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:

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Other Information

Senior secured 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

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syndication agent, UBS AG, Stamford Branch, as administrative agent, and a syndicate of other financial institutions. The senior secured credit facilities consist of:

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 our 9 ¹/2% senior subordinated notes due 2012. 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. As of December 31, 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.

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 2.00% 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.

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.

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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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 our 9½% senior subordinated notes due 2012 and the net proceeds of the $200 million term loan, which have been used to fund a portion of the cash distributions made by Rotech Medical 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 “—Senior secured 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 “Security ownership of certain beneficial owners and management—Employee profit sharing plan” for a detailed description of the profit sharing plan.

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. None of our executive officers or directors currently serve on the board of directors of Rotech Medical Corporation.

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 United States federal 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 federal government in order that the federal government will waive its right to permissively exclude them from participating in federal health care programs.

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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.

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 levels. 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 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

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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 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.

In December 2000, federal legislators enacted the SCHIP Benefits Improvement and Protection Act of 2000 or BIPA. Among other items, this legislation provides the home health care services industry with some relief from the effects of the BBA 97. 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 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.

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. On February 11, 2003, CMS made effective an interim final rule implementing the inherent reasonableness authority, which allows the agency and carriers to adjust payment amounts by up to 15% per year for certain items and services covered by Part B when the existing payment amount is determined to be grossly excessive or grossly deficient. The regulation lists factors that may be used by CMS and the carriers to determine whether an existing reimbursement rate is grossly excessive or grossly deficient and to determine what is a realistic and equitable payment amount. Also, under the regulation, CMS and the carriers will not consider a payment amount to be grossly excessive or grossly deficient and make an adjustment if they determine that an overall payment adjustment of less than 15% is necessary to produce a realistic and equitable payment amount. Using this authority, CMS and the carriers may reduce reimbursement levels for certain items and services covered by Part B.

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.

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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 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 light of the results of these demonstrations, federal lawmakers are now considering expanding competitive bidding to the national level, which could reduce the number of suppliers providing items and services to Medicare beneficiaries and the amounts paid for such items and services. If such a competitive bidding system were implemented, it could result in lower reimbursement rates and/or the loss of our ability to provide services in certain regions, 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 or certification laws.

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 and that companies delivering pharmaceuticals into a particular state be licensed to do so 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 in one or more states, or if such states place burdensome restrictions or limitations on pharmacies, our ability to operate in such 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. The Federal 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 periodically conduct pre-payment and post-payment reviews and

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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 federal 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 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

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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 became effective on 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 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:

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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 three standards. One governing health care transactions, 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 and the third standard governs the security of health information. 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, by April 14, 2003 for the privacy standards, and by April 21, 2005 for the security standards which has an effective date of April 21, 2003. 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 substantially comply with the rules when they go into effect.

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:

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 which are designed to minimize the likelihood that we would engage in conduct or enter into

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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 bankruptcy restructuring, we made several improvements to our compliance department including:

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 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. 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.

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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 a high level of quality assurance and convenience to the patient and the referring physician. Licensed respiratory therapists and registered nurses provide professional health care support.

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 may also provide us with a competitive advantage over our competitors who do not seek or have not received accreditation. Currently, 98% of our operating centers are accredited by JCAHO, and the remainder are scheduled for an accreditation survey during 2003.

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. 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, 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:

We believe that it is 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 range of complementary home medical equipment and services.

Insurance

Our business is subject to general liability, products liability, workers’ compensation, personal injury, medical malpractice 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.

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Employees

Currently, we have approximately 5,200 full time employees. Our employees are not currently represented by a labor union or other labor organization.

Principal executive office and website access to information

Our principal executive offices are located at 2600 Technology Drive, Suite 300, Orlando, Florida, 32804 and our telephone number there is (407) 822-4600. Our internet address is www.rotech.com. Information contained on the website is not a part of this annual report.

We will make available free of charge on or through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the “Commission”).

Factors that may affect future results of operations

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% and 67.0% of our revenues for fiscal 2000 and 2001, respectively, 67.9% of our revenues for three months ended March 31, 2002 and 69.1% of revenues for the nine months ended December 31, 2002.

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, renewal of Veterans Administration contracts, 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.

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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 light of the results of these demonstrations, federal lawmakers are now considering expanding competitive bidding to the national level, which could reduce the number of suppliers providing items and services to Medicare beneficiaries and the amounts paid for such items and services. If such a competitive bidding system were implemented, it could result in lower reimbursement rates and/or the loss of our ability to provide services in certain regions, 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.

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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:

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.

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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 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. Among other things, the Corporate Integrity Agreement requires us to conduct internal claims reviews relating to our Medicare billing, which are audited by an Independent Review Organization (currently KPMG LLP). Both we and the Independent Review Organization must file reports of the reviews with the Office of Inspector General of the Department of Health and Human Services. As a result of these audits we may be required to refund certain payments to the federal government and/or be subject to penalties resulting from such overpayments. In addition, 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

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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—goodwill.” 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. Within the implementation of fresh-start reporting, 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:

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 “Legal Proceedings—Restatement of financial results” on page 32 of this report.

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.

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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 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.

We are engaged in a series of restructuring activities to strengthen our organizational structure.

Prior to and during its bankruptcy proceeding, our predecessor, Rotech Medical Corporation, initiated 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, and enhancement of regulatory compliance programs. These restructuring activities are not yet complete and, as the successor to Rotech Medical Corporation, we are continuing to implement certain of these restructuring activities. Although we have been successful in implementing many of these measures, if we are unable to complete the contemplated restructuring on satisfactory terms or at all, our ability to attain our business strategy and goals will be adversely affected.

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

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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 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. Some of our competitors may now or in the future have greater financial or marketing resources than

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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.

We have substantial outstanding indebtedness, which could adversely affect our financial condition.

As of March 27, 2003, 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, because:

Our ability to make payments on and to refinance our debt, 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, or to fund our other liquidity needs. We may need to refinance all or a portion of our debt, 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.

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, 2002, our capital expenditures were $62.6 million, representing 10.1% of our net 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 additional 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.

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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 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, a number of whom are newly appointed.

Our performance is substantially dependent on the performance and continued efforts of our senior management team, certain members of which have only recently joined our company. In particular, our Chief Executive Officer, Philip L. Carter, joined our company in December 2002, our Chief Operating Officer, Michael R. Dobbs, joined us in January 2003 and we have recently hired new senior managers in sales and purchasing. Because of these recent changes in management, our new senior managers, although experienced in the management of businesses in our industry, have no prior history managing our particular business and operations. Our future success is dependent on the ability of our managers and sales personnel to manage and promote our business, operations and growth. Any inability to manage our operations effectively could have a material adverse effect on our business, sales, results of operations and financial condition. In addition, 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. We do not carry key person life insurance on any of our personnel.

If we are not able to hire qualified 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 5,200 full time employees. We face significant competition in the recruitment of qualified employees, which has caused

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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 $668.9 million as of December 31, 2002. Any future acquisitions by us will likely result in the recognition of additional intangible assets.

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 and professional liability coverage. The policies contain various

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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 broker 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.

The lack of an established trading market for our common stock is likely to make it more difficult to dispose of or to obtain accurate quotations as to the market value of our common stock and may increase volatility.

There is no established trading market for our common stock and there can be no assurance that a public market for our common stock will develop or be sustained. Our common stock currently trades in interdealer and over-the-counter transactions and price quotations are provided in the “pink sheets.” Our common stock is not listed on any securities exchange or a qualifying interdealer quotation system. Accordingly, it is likely that an investor will find it more difficult to dispose of or to obtain accurate quotations as to the market value of our common stock and the price of our common stock may experience additional volatility.

Our common stock has not been registered under Section 12 of the Securities Exchange Act of 1934 and we are not required to file reports with the Securities and Exchange Commission pursuant to Section 13 of such Act.

Our common stock has not been registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Accordingly, we are not required to file reports with the Commission pursuant to Section 13 of the Exchange Act. Nevertheless, as a result of the registration of our 9 ¹/2% senior subordinated notes due 2012, we are required, pursuant to Section 15(d) of the Exchange Act, to file with the Commission the periodic information, documents and reports that are required pursuant to Section 13 of the Exchange Act in respect of a security registered pursuant to Section 12 thereof. The duty to file under Section 15(d), however, can be suspended as to any fiscal year, other than the fiscal year within which such registration statement became effective, if, at the beginning of such fiscal year, the securities of each class to which the registration statement relates are held of record by less than three hundred persons. As of March 12, 2003, there were approximately 85 holders of record of our common stock. Thus, there can be no assurance that we will continue to file periodic reports with the Commission after this year. In addition, we are not subject to the proxy rules in Section 14 of the Exchange Act, and stockholders holding our stock may not be subject to Section 13(d) of the Exchange Act or Section 16 of the Exchange Act which govern the reporting of beneficial ownership and certain transactions in our stock.

ITEM 2.    PROPERTIES

We lease our offices and facilities. Our corporate headquarters currently consists of 31,223 square feet in an 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 500 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 $7.85 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.

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ITEM 3.    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.

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:

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.

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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:

ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of our stockholders during the fourth quarter of the fiscal year covered by this report.

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PART II

There is no established trading market for our common stock. Our common stock currently trades in interdealer and over-the-counter transactions and price quotations are provided in the “pink sheets” by Pink Sheets LLC under the symbol “ROHI,” which can be found on their website at www.pinksheets.com. Upon effectiveness of our predecessor’s plan of reorganization on March 26, 2002, all of our outstanding common stock was distributed to our predecessor for further distribution to its senior creditors as contemplated by the plan of reorganization. Our common stock was issued pursuant to an exemption from the registration requirements of the Securities Act provided by Section 1145 of the Bankruptcy Code and has not been registered under Section 12 of the Exchange Act. Although we received no cash proceeds from the initial distribution of our common stock pursuant to the plan of reorganization, we received substantially all of the assets of our predecessor in consideration of the issuance of such stock as described under the caption “Business—Restructuring transaction and related transactions.” We have been informed by the transfer agent for our common stock that our common stock was distributed to the senior creditors of our predecessor on July 12, 2002. Prior to such distribution, we believe that our common stock may have traded on a “when-issued and distributed” basis.

The following table sets forth the high and low sale prices of our common stock as reported by the Pink Sheets LLC for all periods during 2002 after the distribution of our common stock to the senior creditors of our predecessor on July 12, 2002:

The above quotations reported by Pink Sheets LLC reflect interdealer prices, which may not include retail mark-ups, mark-downs or commissions and may not necessarily represent actual transactions.

As of March 12, 2003, there were 25,000,000 shares of common stock outstanding and approximately 85 holders of record of common stock. This number was derived from our stockholder records and does not include beneficial owners of our common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries.

We did not pay any cash dividends on our common stock for the fiscal year ended December 31, 2002, and it is unlikely that we will pay any cash dividends on our common stock in the forseeable future. The payment of cash dividends on our common stock will depend on, among other things, our earnings, capital requirements and financial condition, and general business conditions. We are restricted from paying dividends on our common stock or from acquiring our capital stock by certain debt covenants contained in our senior secured credit facilities and the indenture governing our 9½% senior subordinated notes due 2012.

Each share of our 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.

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ITEM 6.    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 the related notes included in this report. The consolidated statement of operations data and consolidated balance sheet data for the three months ended March 31, 2002 for our predecessor and the nine months ended December 31, 2002 for us, as the successor company, have been derived from our audited financial statements included in this report. The consolidated statement of operations data and consolidated balance sheet data for the years ended December 31, 2000 and December 31, 2001 have been derived from the audited financial statements of our predecessor included in this report. The statement of operations data and balance sheet data for the years ended December 31, 1998 and December 31, 1999 have been derived from the audited financial statements of our predecessor not included in this report. Data have been presented for the three months ended March 31, 2002 and nine months ended December 31, 2002, rather than for the year ended on such date, because we have had only nine 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.”

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In connection with our adoption of fresh-start reporting, 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. Prior to March 31, 2002, all such assets were depreciated over an average life of seven years. The effect of this change in estimate for the nine months ended December 31, 2002 was to increase depreciation by $1,271.

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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.

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For further information, see note 3 to the audited financial statements for the years ended December 31, 2000 and 2001 and the three months ended March 31, 2002 and the nine months ended December 31, 2002.

Reconciliation of Net Earnings to EBITDA

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The following discussion should be read in conjunction with the financial statements, related notes and other financial information appearing elsewhere in this report. Our predecessor, Rotech Medical Corporation emerged from bankruptcy on March 26, 2002 as described above in the section captioned “Business—The bankruptcy case” and subsequently transferred substantially all of its assets to us in a restructuring transaction described above in the section captioned “Business—Restructuring transaction and related transactions.” In addition, see “Forward-looking statements” and “Business—Factors that may affect future results of operations.” The financial statements included herein reflect these transactions effective as of March 31, 2002. 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 subsequent to March 31, 2002 and to the business and operations of Rotech Medical Corporation and its subsidiaries for all periods prior to March 31, 2002. All financial data included in this report for each of the fiscal years ended December 31, 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 “Legal Proceedings—Restatement of financial results” on page 32 of this report.

Overview

Background.  We provide 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 500 operating centers located primarily in non-urban markets.

Our revenues are principally derived from respiratory equipment rental and related services (77.9% and 79.9% of net revenues for the three months ended March 31, 2002 and the nine months ended December 31, 2002, respectively), 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 (19.9% and 18.1% of net revenues for the three months ended March 31, 2002 and the nine months ended December 31, 2002, respectively), 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 completed several small acquisitions in 2002.

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 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

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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. 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 are continuing to implement certain of these restructuring activities.

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—goodwill.” 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. See “Business—Factors that may affect future results of operations—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. 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.

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.

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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 when 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.

Our rental arrangements generally provide for fixed monthly payments established by fee schedules (subject to capped rentals in some instances) 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. We have no lease with the patient or third-party payor, no continuing service obligation (other than oxygen refills and servicing equipment based on manufacturers’ recommendations) after the initial setup, and no refund obligation for the return of equipment after the monthly billing date. However, we defer revenue for the rental of equipment until such time that the rental period has expired and such revenue is earned.

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 our pharmacies and shipped directly to the patient’s home, are also recognized at the time of shipment.

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.

Reorganization Value in Excess of Value of Identifiable Assets—Goodwill and Intangible Assets

Reorganization value in excess of value of identifiable assets—goodwill, represents the portion of our reorganization value at March 26, 2002 that could not be attributable to specific tangible or identified intangible assets recorded in connection with the implementation of fresh-start reporting.

Goodwill and intangible assets prior to March 26, 2002, represent the excess of cost over the fair value of assets acquired and liabilities assumed in business combinations. Prior to January 1, 2002, such assets were amortized on a straight-line basis over an estimated life of approximately 20 years.

Effective January 1, 2002, we adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) 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. Management has determined that branch locations have similar

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economic characteristics and should be aggregated into one reporting unit for assessing fair value. If the carrying amount of the goodwill and intangible asset exceeds its fair value, an impairment loss is recognized. Fair values for goodwill and intangible assets are determined based upon discounted cash flows, market multiples or appraised values as appropriate. As a result of adopting SFAS 142, goodwill and a substantial amount of our intangible assets are no longer amortized.

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.

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The following table shows our results of operations for the years ended December 31, 2000 and 2001, the three months ended March 31, 2002, the nine months ended December 31, 2002, and combined results for the predecessor company and the successor company for the year ended December 31, 2002.