Rotech CEO's downfall stemmed from not growing rental DME

Monday, September 30, 2002

ORLANDO, Fla. - Steve Linehan's single-minded focus on boosting Rotech's home respiratory business - at the expense of growing its DME component - contributed to his demise as the national's CEO.

"Steve's focus was on growing oxygen exclusively and (branch managers) took their eye off the ball from continuing to pursue what we consider good business: the rental of beds and wheelchairs," acting CEO Guy Sansone said in a conference call with analysts last month.

Linehan resigned in August, following allegations that a consultant booked $30 million in phony business with the Department of Veteran's Affairs. The company also announced that it would not renew the contract of COO Scott Novel when it expires in December. Rotech has begun interviewing candidates to replace Linehan.

During the Sept. 12 conference call, Sansone reiterated the company's belief that Linehan and Novell had nothing to do with the VA debacle.

In short, Sansone said, "the board determined to seek executive leadership that would better provide for long-term growth, be more hands-on and have one common vision."

To clear the $30 million in bogus billing from its books, Rotech restated its financials for the years ended Dec. 31, 1999, 2000 and 2001, and the three months ended March 31, 2002. The VA was never billed for any of the nonexistent orders.

For the first six months of 2002, Rotech's concentrator business grew 7% and its nebulizer medication business grew 9%. On June 30, Rotech serviced 110,000 concentrator patients, compared to 104,000 a year earlier. The company's sleep business, however, had fallen off 7% during the first six months of 2002. Ditto for its DME component.

Linehan and Novell are not the only Rotech employees to lose their jobs because of the company's unsatisfactory financial results.

In an effort to reduce its SG&A as a percentage of revenue (it jumped from 53% during the second quarter last year to 56% this year), Rotech has begun reducing its head count.

"I don't like to use 'cutting of head count,'" Sansone said to an analyst during the conference call. "I like to use the term 'appropriate staffing levels.'"

To determine the appropriate staffing levels at each branch, Rotech looks at revenue type and business growth, Sansone said.

"I want good people, strong people in locations that are performing," he said. "If you are under performing, than we look at it in a different way." HME