<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
. . . . . . . . . . . . . . . . . . . . .
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event report): March 18, 1997
. . . . . . . . . . . . . . . . . . . . .
VENCOR, INC.
(Exact name of registrant as specified in its charter)
Delaware 1-10989 61-1055020
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification No.)
3300 Providian Center
400 West Market Street
Louisville, KY 40202
(Address of principal executive offices) (ZIP CODE)
Registrant's telephone number, including area code: (502) 596-7300
Not applicable
(Former name of former address, if changed since last report)
<PAGE>
The undersigned Registrant hereby amends Item 7 of its Current Report on
Form 8-K, filed April 1, 1997, relating to the March 18, 1997 completion of the
tender offer for the shares of common stock, par value $0.001 per share, of
TheraTx, Incorporated ("TheraTx") (the "TheraTx Merger").
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The audited financial statements of TheraTx as described below are filed
herewith.
TheraTx, Incorporated
Reports of Independent Auditors
Consolidated Statements of Income for the Years Ended December 31, 1994,
1995 and 1996
Consolidated Balance Sheets at December 31, 1995 and December 31, 1996
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996
Notes to Consolidated Financial Statements
(b) Pro Forma Financial Information.
Pro forma financial information for the Registrant and TheraTx, including
the Unaudited Pro Forma Condensed Combined Statements of Income for the periods
ended March 31, 1997 and December 31, 1996, and the Unaudited Condensed Combined
Balance Sheet at March 31, 1997 and the Notes to Unaudited Pro Forma Condensed
Combined Financial Statements, are filed herewith. No pro forma adjustments are
required for the Unaudited Condensed Combined Balance Sheet at March 31, 1997
because the acquisition of TheraTx occurred prior to that date.
(c) Exhibits.
Exhibit No. Description
2.1 Agreement and Plan of Merger, dated as of February 9, 1997,
among TheraTx, Incorporated, Vencor, Inc. and Peach
Acquisition Corp. Incorporated by reference to TheraTx's
Current Report on Form 8-K (File No. 0-24212) filed on
February 11, 1997.
2.2 Amendment No. 1 to Agreement and Plan of Merger, dated as
of February 28, 1997, among TheraTx, Incorporated, Vencor,
Inc. and Peach Acquisition Corp. Incorporated by reference
to Exhibit (c)(3) of Amendment No. 2 to Vencor's and
Peach's Statement on Schedule 14D-1, dated March 3, 1997.
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
TheraTx, Incorporated
We have audited the accompanying consolidated balance sheets of TheraTx,
Incorporated and Subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Helian Health Group,
Inc. and subsidiaries for the year ended November 30, 1994; which statements
reflect total net revenues constituting 22% in 1994 and total net income of 12%
in 1994 of the related consolidated totals. Those statements were audited by
other auditors whose report has been furnished to us, and our opinion, insofar
as it relates to data included for Helian Health Group, Inc. and subsidiaries
for the year ended November 30, 1994, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of TheraTx, Incorporated
and Subsidiaries at December 31, 1995 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Atlanta, Georgia ERNST & YOUNG LLP
March 21, 1997
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Helian Health Group, Inc.
We have audited the consolidated financial statements of Helian Health
Group, Inc. and subsidiaries as of November 30, 1994 and for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Helian Health
Group, Inc. and subsidiaries as of November 30, 1994, and the results of their
operations and their cash flows for the year ended November 30, 1994, in
conformity with generally accepted accounting principles.
COOPERS & LYBRAND LLP
San Jose, California
February 3, 1995
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1995 1996
------------- ------------ -----------
<S> <C> <C> <C>
Revenues:
Patient care revenues, net............. $ 168,829 $ 287,365 $ 359,949
Management services and other.......... 3,880 6,915 10,678
Sales of medical supplies and related
services.............................. 1,573 19,896 20,528
---------- ---------- ---------
Total net revenues.................. 174,282 314,176 391,155
Operating costs and expenses:
Costs of revenues:
Salaries, wages and benefits.......... 97,009 167,704 209,480
Other operating expenses.............. 24,303 44,753 54,707
Cost of medical supply sales and
related services..................... 611 16,173 16,613
Corporate, general and administrative.. 25,024 33,268 39,608
Depreciation and amortization.......... 5,745 9,274 11,022
Rent................................... 4,600 7,729 11,146
Merger costs........................... -- 4,600 --
---------- ---------- ---------
Total operating costs and expenses... 157,292 283,501 342,576
---------- ---------- ---------
Income from operations.................. 16,990 30,675 48,579
Interest and other expense, net......... 2,426 9,902 12,463
---------- ---------- ---------
Income before income taxes, minority
interest and extraordinary item........ 14,564 20,773 36,116
Provision for income taxes.............. 3,417 9,589 13,364
---------- ---------- ---------
Income before minority interest and
extraordinary item..................... 11,147 11,184 22,752
Minority interest....................... 446 73 (35)
---------- ---------- ---------
Income before extraordinary item........ 11,593 11,257 22,717
Extraordinary item, net of income taxes. -- (428) (1,134)
---------- ---------- ---------
Net income.............................. $ 11,593 $ 10,829 $ 21,583
========== ========== =========
Earnings per common share:
Income before extraordinary item....... $ 0.73 $ 0.55 $ 1.11
Extraordinary item..................... -- (0.02) (0.06)
---------- ---------- ---------
Net income............................. $ 0.73 $ 0.53 $ 1.05
========== ========== =========
Weighted average number of shares
outstanding............................ 15,972 20,407 20,544
</TABLE>
See accompanying notes.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
ASSETS 1995 1996
-------------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents.............. $ 10,530 $ 10,708
Short-term investments................. 1,023 --
Accounts receivable less allowances
for doubtful accounts and denials of
$8,024 and $12,221 at December 31, 1995
and 1996, respectively................ 76,766 103,225
Third-party settlements................ 7,084 11,822
Prepaid expenses and other current
assets................................ 3,942 9,851
Inventory.............................. 5,415 5,977
Current note receivable................ -- 10
Receivable from stockholder............ 379 --
Income taxes receivable................ 2,010 698
Deferred income taxes.................. 1,737 5,527
--------- ---------
Total current assets................. 108,886 147,818
Property and equipment, net............. 111,677 125,652
Intangible assets, net of accumulated
amortization of $5,276 and $9,137 at
December 31, 1995 and 1996, respectively 97,844 104,284
Long-term notes receivable.............. 8,404 4,910
Other assets............................ 2,987 2,658
---------- ----------
Total assets......................... $ 329,798 $ 385,322
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................... $ 9,560 $ 9,292
Accrued payroll and related expenses... 16,819 19,814
Accrued interest payable............... 3,679 3,863
Other accrued expenses................. 6,902 5,506
Long-term debt, current portion........ 656 792
---------- ----------
Total current liabilities............ 37,616 39,267
Long-term debt, net of current portion.. 51,741 77,474
Subordinated debt....................... 100,000 100,000
Other liabilities....................... 327 47
Deferred income taxes................... 213 6,020
Minority interests...................... 2 140
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value:
Authorized Shares -- 50,000; issued
and outstanding shares -- 20,437 and
20,614 at December 31, 1995 and 1996,
respectively......................... 20 20
Additional paid-in capital............. 121,403 122,691
Note receivable from stockholder....... (100) (100)
Retained earnings...................... 18,576 39,763
---------- ----------
Total stockholders' equity........... 139,899 162,374
---------- ----------
Total liabilities and stockholders'
equity.............................. $ 329,798 $ 385,322
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK NOTES
------------------ ----------------- ADDITIONAL RECEIVABLE TOTAL
PAR PAR PAID IN FROM RETAINED STOCKHOLDERS'
SHARES VALUE SHARES VALUE CAPITAL STOCKHOLDERS EARNINGS EQUITY
------ ----- ------ ----- -------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994.... 16,465 $ 17 5,963 $ 6 $ 28,679 $(290) $(3,471) $ 24,941
Issuance of common stock
upon exercise of stock
options and other............ -- -- 294 -- 648 -- -- 648
Issuance of common and
preferred stock in
connection with
PersonaCare acquisition..... 2,421 2 811 1 29,997 -- -- 30,000
Issuance of common stock
in initial public
offering.................... -- -- 4,010 4 43,323 -- -- 43,327
Conversion of preferred
stock....................... (18,886) (19) 7,909 8 11 -- -- --
Repayment of officer note
receivable.................. -- -- -- -- -- 8 -- 8
Issuance of stock options.... -- -- -- -- 90 -- -- 90
Purchase of common stock..... -- -- (57) -- (140) -- -- (140)
Cash dividends paid.......... -- -- -- -- -- -- (223) (223)
Net income................... -- -- -- -- -- -- 11,593 11,593
------- ---- ------ --- -------- ----- ------- --------
Balance at December 31,
1994......................... -- -- 18,930 19 102,608 (282) 7,899 110,244
Issuance of common stock
upon exercise of stock
options and other........... -- -- 298 -- 652 -- -- 652
Repayment of officer note
receivable.................. -- -- -- -- -- 182 -- 182
Issuance of common stock
in connection with
mergers and acquisitions.... -- -- 1,209 1 18,043 -- -- 18,044
Merger costs paid by
former shareholders of
acquired company............ -- -- -- -- 100 -- -- 100
Cash dividends paid.......... -- -- -- -- -- -- (152) (152)
Net income................... -- -- -- -- -- -- 10,829 10,829
------- ---- ------ --- -------- ----- ------- --------
Balance at December 31,
1995......................... -- -- 20,437 20 121,403 (100) 18,576 139,899
Issuance of common stock
upon exercise of stock
options and other........... -- -- 177 -- 1,288 -- -- 1,288
Net loss for Helian
Health Group, Inc. for
the month ended
December 31, 1995........... -- -- -- -- -- -- (378) (378)
Cash dividends paid.......... -- -- -- -- -- -- (18) (18)
Net income................... -- -- -- -- -- -- 21,583 21,583
------- ---- ------ --- -------- ----- ------- --------
Balance at December 31,
1996......................... -- $ -- 20,614 $20 $122,691 $(100) $39,763 $162,374
======= ==== ====== === ======== ===== ======= ========
</TABLE>
See accompanying notes.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
--------- ---------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income.............................. $ 11,593 $ 10,829 $ 21,583
Net loss for Helian Health Group, Inc.
for the month ended December 31, 1995.. -- -- (378)
Adjustments to reconcile net income to
net cash provided by (used in)
operating activities:
Write-off of deferred financing costs.. -- 612 --
Disposal of business................... -- -- 1,800
Depreciation and amortization.......... 5,745 9,274 11,022
Amortization of deferred financing
costs................................. -- 652 646
Provisions for bad debts and denials... 5,496 4,627 5,324
Deferred income taxes.................. 479 807 1,816
Net (gain) loss on sale of assets...... -- 1,032 (299)
Minority interest in consolidated (446) (73) 35
subsidiaries..........................
Other, net............................. (88) 27 445
Changes in operating assets and
liabilities:
Accounts receivable and third-party
settlements.......................... (22,587) (37,413) (33,636)
Prepaid expenses and other current
assets............................... (198) (147) (5,895)
Inventory............................. -- (2,084) (606)
Income taxes receivable or payable.... (1,064) (2,305) 1,294
Other assets.......................... (5) -- --
Accounts payable and accrued
liabilities.......................... 2,489 9,882 (2,329)
Net cash provided by (used in) -------- -------- --------
operating activities................... 1,414 (4,280) 822
-------- -------- --------
INVESTING ACTIVITIES:
Acquisition of companies and payments
related to acquisitions................ (1,828) (88,636) (9,903)
Purchases of property and equipment..... (4,711) (8,800) (18,056)
Proceeds from sales of assets........... -- -- 647
Purchases of short-term investments..... (1,539) (1,000) --
Sales of short-term investments......... 258 1,595 1,023
Issuance of notes receivable............ (4,080) (25) --
Repayment of notes receivable........... 1,298 177 --
Cash acquired in acquisitions........... 1,749 77 470
Other, net.............................. (235) (1,379) (1,221)
-------- -------- --------
Net cash used in investing activities... (9,088) (97,991) (27,040)
-------- -------- --------
FINANCING ACTIVITIES:
Payments on line of credit.............. (6,800) -- --
Proceeds from convertible debt.......... -- 100,000 --
Proceeds from long-term debt............ 37,210 18,105 27,000
Payments on long-term debt.............. (56,702) (11,334) (2,231)
Retirement of put warrants.............. (1,350) -- --
Capitalized financing costs............. (669) (5,000) --
Payments on notes receivable from
stockholders........................... -- -- 379
Proceeds from notes payable to
stockholders........................... 2,070 -- --
Payments on notes payable to
stockholders........................... (3,641) -- --
Payments on capital lease obligations... (434) (1,212) (22)
Proceeds from issuance of common stock.. 43,974 652 1,288
Other, net.............................. (162) 30 (18)
-------- -------- --------
Net cash provided by financing
activities............................. 13,496 101,241 26,396
-------- -------- --------
Increase (decrease) in cash and cash
equivalents............................ 5,822 (1,030) 178
Cash and cash equivalents, beginning of
year................................... 5,738 11,560 10,530
-------- -------- --------
Cash and cash equivalents, end of year.. $ 11,560 $ 10,530 $ 10,708
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for interest.................. $ 3,593 $ 8,001 $ 12,732
Cash paid for income taxes.............. 2,554 11,442 9,637
</TABLE>
See accompanying notes.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
TheraTx, Incorporated and its subsidiaries ("TheraTx" or the "Company")
provide outcomes-oriented healthcare services with a focus in two specialized
practice areas: postacute care and occupational health.
TheraTx provides subacute rehabilitation and respiratory therapy management
services to skilled nursing facilities, operates owned, leased and managed
inpatient facilities that provide a broad range of subacute, specialty and basic
medical and other geriatric services and provides occupational healthcare and
related services in outpatient clinics. In addition to its primary practice
areas, TheraTx operates outpatient surgery centers, owns and operates an acute-
care specialty hospital, provides respiratory therapy and related services to
hospitals and provides medical supply distribution and related services to the
long-term care industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of TheraTx have been prepared to give
effect to the May 1, 1995 merger with Respiratory Care Services, Inc. and its
majority-owned subsidiaries ("RCS") and the December 28, 1995 merger with Helian
Health Group, Inc. and its majority-owned subsidiaries ("Helian"). These
transactions have been accounted for as poolings of interests and, accordingly,
the consolidated financial statements have been restated for all periods prior
to the acquisitions to give effect to the accounts of RCS and Helian. (See Note
4.)
Helian's financial results prior to 1996 have been prepared on a fiscal
year ending November 30. Accordingly, Helian financial results for the fiscal
year ending November 30 have been combined with TheraTx's results for the fiscal
year ending December 31 for all periods presented prior to 1996.
Effective January 1, 1996, Helian's fiscal year-end was changed from
November 30 to December 31 to conform to the Company's year-end. Accordingly,
Helian's operations for the one month ended December 31, 1995, including net
sales of $2,791,000 and a net loss of $378,000, have been excluded from combined
results and reported as an adjustment to consolidated retained earnings as of
January 1, 1996.
All material intercompany accounts and transactions have been eliminated in
consolidation. Certain amounts in prior year periods have been reclassified to
conform to current year presentation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company classifies short-term highly liquid investments with original
maturities of ninety days or less as cash equivalents.
The cash balances at December 31, 1995 and 1996 include $750,000 that is
restricted under the Senior Credit Facility. (See Note 7.) These funds are in
an interest-bearing account and will be released upon the occurrence of
specified events.
SHORT-TERM INVESTMENTS
Investments consist of certificates of deposit and are carried at cost that
approximates market.
PATIENT CARE REVENUES, NET AND RELATED RECEIVABLES
Patient care revenues include amounts reimbursable by third-party payors
under contractual arrangements. These contractual arrangements provide for
payments based on prospective payment, cost reimbursement and other payment
formulas. The difference between established billing rates and amounts
estimated to be received are accounted for as contractual allowances. Final
determination of amounts earned under certain contractual arrangements is
subject to audit or adjustment by third-party payors. The financial statements
include provisions for estimated adjustments resulting from such audits or other
changes in circumstances during the year.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The Company is reimbursed by Medicare for medical and rehabilitation
services provided in the Company's skilled nursing facilities at an interim rate
with final settlement determined after submission of annual cost reports by the
Company and audits thereof by the government fiscal intermediary. Differences
between amounts accrued and final settlements, if any, are recorded in
operations in the year of settlement.
The Company bills third-party skilled nursing facility customers directly
for services provided in its programs at such third-party facilities.
Substantially all of such customers are subject to federal and state
regulations. A significant portion of the cost of the Company's services is
ultimately reimbursed to the Company's customers by Medicare. Although Medicare
accepts charges by the Company's customers for usual, customary and reasonable
charges at market rates, such charges are subject to audit and retroactive
adjustment. The Company reimburses its customers for any charges that are
denied by Medicare in accordance with its customer contracts. The financial
statements include provisions for estimated future denials.
INVENTORY
Inventory, which is comprised primarily of medical supplies held for sale
and durable medical equipment, is valued at the lower of cost (determined by the
first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property includes the cost of
acquiring and renovating facilities and equipment. The cost of repairs and
maintenance is charged to operations as incurred. Depreciation is provided
using the straight-line method over the estimated useful life (forty years for
buildings; three to ten years for equipment and furniture; and the lesser of the
lease term or ten years for leasehold improvements). Depreciation expense of
$4,232,000, $6,915,000 and $7,481,000 includes amortization of assets recorded
under capital leases for years ended December 31, 1994, 1995 and 1996,
respectively.
Property and equipment consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1996
-------- ----------
<S> <C> <C>
Land and improvements................... $ 9,945 $ 10,958
Buildings and improvements.............. 79,886 83,921
Construction-in-progress................ 1,334 5,325
Furniture, fixtures and equipment....... 31,240 38,771
Leasehold improvements.................. 3,510 7,738
-------- --------
125,915 146,713
Accumulated depreciation and (14,238) (21,061)
-------- --------
amortization........................... $111,677 $125,652
======== ========
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and deferred financing
costs. Goodwill represents the excess of cost over the market value of assets
acquired and is amortized using the straight-line method over forty years.
Deferred financing costs are amortized using the straight-line method over
the term of the related debt.
CARRYING VALUE OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with FASB Statement No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long Lived Assets to be Disposed Of, the Company
records impairment losses on long-lived assets when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets. Based on the Company's estimate of future undiscounted cash
flows, the Company expects to recover the carrying amounts of its long-lived
assets. Nonetheless, it is reasonably possible that the estimate of
undiscounted cash flows may change in the near term resulting in the need to
write-down those assets to fair value.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
EMPLOYEE STOCK OPTIONS
The Company grants stock options for a fixed number of shares to employees
and directors with an exercise price at least equal to the fair value of the
shares at the date of grant. The company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognizes no compensation expense for the stock option
grants. Pro forma information regarding net income as required by SFAS No. 123,
Accounting for Stock-Based Compensation, is included in Note 13.
NET INCOME PER SHARE
Net income per common share is calculated using the weighted average number
of common and common equivalent shares outstanding during the respective
periods. Common stock equivalents consist of (i) the number of common shares
issuable upon conversion of preferred stock and (ii) the number of shares
issuable upon exercise of warrants and stock options.
Pursuant to the requirements of the Securities and Exchange Commission,
common shares and common equivalent shares issued at prices below the public
offering price of $12.00 per share during the twelve months immediately
preceding the date of the initial filing of the registration statement,
excluding common shares and common equivalent shares issued in connection with
the acquisition of PersonaCare, have been included in the calculation of common
shares and common equivalent shares, using the treasury stock method, as if
they were outstanding for all periods prior to the date of the initial public
offering.
In 1994 and 1995, the number of shares issuable upon the exercise of
warrants and stock options was calculated using the treasury stock method.
In 1996, the weighted average common equivalent shares outstanding were
computed using the "modified treasury stock method" in accordance with
Accounting Principles Board Opinion No. 15 ("APB 15"). The modified treasury
stock method is used when the number of shares obtainable upon exercise of
outstanding options, warrants and their equivalents, in the aggregate, exceeds
20% of the Company's outstanding common stock. Under this method, all options,
warrants and their equivalents are assumed to have been exercised, whether or
not dilutive and the aggregate proceeds used to repurchase up to 20% of the
outstanding shares. Excess proceeds not utilized for the purchase of such
shares are assumed to be utilized to reduce outstanding debt with any remainder
invested in interest bearing securities. Net earnings is increased for the
assumed interest savings or interest income, net of taxes. For the fiscal year
ending December 31, 1996, the effects of the application of the modified
treasury stock method were anti-dilutive; thus, as prescribed by APB 15, common
equivalent shares were excluded in determining net income per common share.
3. FINANCIAL INSTRUMENTS
CARRYING VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for cash and cash
equivalents, accounts receivable and accounts payable and borrowings under the
Company's Senior Credit Facility approximates fair value.
The fair value of the Company's subordinated debt at December 31, 1996 is
$94,000,000 and is based on quoted market prices.
CONCENTRATION OF CREDIT RISK
At December 31, 1995 and 1996, approximately 12.2% and 11.1%, respectively,
of the Company's accounts receivable and 100% of the Company's third-party
settlements are due from Medicare and Medicaid programs for services provided in
the Company's owned or leased inpatient facilities. Additionally, at December
31, 1995 and 1996, approximately 53.3% and 58.0%, respectively, of the Company's
accounts receivable are from third-party long-term care facilities for services
provided by the Company at such facilities. A significant portion of the cost
of these services is ultimately reimbursed to the third-party long-term care
facilities by Medicare. Should the related government agencies suspend or
significantly reduce contributions to the Medicare and Medicaid programs, the
Company's ability to collect on its receivables would be adversely affected. At
December 31, 1996, the Company had recorded receivables of $20,786,000 and
$4,288,000 due directly from Medicare intermediaries
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. FINANCIAL INSTRUMENTS -- (CONTINUED)
and Medicaid programs, respectively. The Medicaid receivables primarily relate
to the states of Texas, Rhode Island, Connecticut, Georgia, Florida,
Pennsylvania, Ohio and Alabama.
Management believes the remaining receivable balances due from various
payors subject to differing economic conditions do not represent any
concentrated credit risks to the Company. Management continually monitors and
adjusts its reserves and allowances associated with these receivables.
4. MERGERS AND ACQUISITIONS
RCS MERGER. Effective May 5, 1995, THERATX issued approximately 724,000
shares of common stock in exchange for all of the outstanding common stock of
RCS. RCS provides respiratory therapy services, cardio-pulmonary services and
sleep diagnostic services in hospitals and subacute facilities. RCS also sells
and rents home durable medical equipment. This transaction has been accounted
for as a pooling of interests. (See Note 2.)
HELIAN MERGER. Effective December 28, 1995, TheraTx issued approximately
2,456,000 shares of TheraTx common stock in exchange for all outstanding shares
of common stock of Helian. Helian operates eleven occupational medical
facilities, three ambulatory surgery centers and one surgical specialty
hospital. This transaction has been accounted for as a pooling of interests.
(See Note 2.)
Net revenues and net income (loss) for the merged companies for 1994 and
1995 through the dates of mergers are as follows (in thousands):
<TABLE>
<CAPTION>
NET
NET INCOME
REVENUES (LOSS)
---------- ----------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
The Company.................. $ 126,787 $ 9,607
Helian....................... 38,205 1,395
RCS.......................... 9,290 591
---------- ---------
Combined.................... $ 174,282 $ 11,593
========== =========
YEAR ENDED DECEMBER 31, 1995
The Company.................. $ 275,853 $ 11,856
Helian....................... 35,397 (1,091)
RCS.......................... 2,926 64
---------- ---------
Combined.................... $ 314,176 $ 10,829
========== =========
</TABLE>
ACQUISITION OF PERSONACARE, INC. On May 31, 1994, TheraTx acquired
PersonaCare, Inc. ("PersonaCare"), a company that owns and operates inpatient
facilities. In conjunction with the acquisition, TheraTx issued an aggregate of
3,232,221 shares of stock, comprised of 811,416 shares of common stock and
2,420,805 shares of Series E preferred stock in exchange for all outstanding
common and preferred stock of PersonaCare. Each share of preferred stock
converted into one share of common stock upon consummation of the initial public
offering. (see Note 5.) The holders of shares received in the merger have
certain registration rights.
The acquisition was recorded using the purchase method of accounting and
the results of PersonaCare's operations subsequent to May 31, 1994, have been
included in the accompanying financial statements. The PersonaCare stock
received by TheraTx was valued at $30,000,000 and the Company recorded costs of
approximately $1,200,000 in connection with the merger. The assets and
liabilities of PersonaCare have been recorded at fair market value. The
purchase price in excess of the net identifiable assets acquired of $25,886,000
was recorded as goodwill. In conjunction with the acquisition, the Company
assumed certain subordinated notes payable that were repaid during July 1994
from the net proceeds received in the Company's initial public offering.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. MERGERS AND ACQUISITIONS -- (CONTINUED)
ACQUISITION OF SMS BUSINESS. Effective April 1, 1995, the Company acquired
certain of the assets and assumed certain liabilities from eight companies
managed by Southern Management Services, Inc. ("SMS"), including five skilled
nursing facilities, an adult congregate living facility, a medical products
distribution company and a Medicare Part B billing and supply service company
(collectively, the "SMS Business"). The purchase price paid by the Company for
the SMS Business included (i) approximately $34,180,000 in cash paid at closing
by the Company to certain lenders of the SMS Business in connection with the
retirement of bank debt and mortgage debt and (ii) $43,250,000 in cash and
1,097,407 shares of the Company's common stock. In addition, 888,889 shares of
the Company's common stock were issued into escrow (the "Escrow Shares"). The
escrow shares were to be released if certain financial goals for the SMS
Business were achieved during the period commencing April 1, 1995 and ending
February 29, 1996 ("the Earn-Out Period"), and the purchase price was to be
further increased by as much as $20,000,000 payable in either shares of the
Company's stock or cash, at the option of the sellers, if certain financial
goals were exceeded during the Earn-Out Period. The Company has concluded that
the sellers of the SMS Business are not entitled to the escrow shares and are
not entitled to any earn-out payment as the financial performance of the SMS
Business was, as a whole, significantly below the threshold entitling the
sellers to any payment under the earn-out. As a result, none of the escrow
shares are included as outstanding as of December 31, 1996 for financial
reporting purposes. The holders of shares received in the acquisition have
certain registration rights.
The acquisition was recorded April 1, 1995 using the purchase method of
accounting. The common stock issued in the transaction was valued at $16.75 per
share based on the last reported sale price of the Company's common stock on
March 31, 1995. The assets and liabilities of SMS have been recorded at fair
market value. Intangible assets of approximately $64,306,000, representing the
cost of the acquisition in excess of the identifiable assets acquired and
liabilities assumed, consist primarily of goodwill that is being amortized over
forty years using the straight-line method.
PRO FORMA RESULTS. The following unaudited pro forma results were
developed assuming PersonaCare and the SMS Business had been acquired on January
1, 1994 (in thousands, except per share data):
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995
----------- ----------
<S> <C> <C>
Net revenues.................... $ 259,362 $ 329,521
Net income...................... 10,445 10,891
Pro forma net income per share.. 0.57 0.53
</TABLE>
The unaudited pro forma sales and earnings information is not necessarily
indicative of the combined results that would have occurred had the acquisition
taken place on January 1, 1994, nor are they necessarily indicative of results
that may occur in the future.
5. INITIAL PUBLIC OFFERING
On June 24, 1994, the Company's initial public offering was declared
effective by the Securities and Exchange Commission. The Company issued
4,010,000 shares of common stock at an offering price of $12.00 per share and
received net proceeds of approximately $43,327,000 (after deducting underwriting
discounts and offering costs of $4,793,000).
6. LONG-TERM NOTES RECEIVABLE
The long-term notes receivable at December 31, 1995 and 1996 include a
wrap-around third mortgage note receivable from the lessor of the Wisconsin
facility for $4,222,000. The note is collateralized by the lessor's property
and equipment. Additionally, the note serves as collateral for certain long-
term debt. (See Note 7.) The note bears interest at a rate designated to
approximate the Company's required lease payment to the lessor. Interest only
is receivable monthly on the note that becomes due at the end of the lease term.
Interest income of $545,000 related to this note has been recorded for each of
the years ended December 31, 1995 and 1996.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
----------------------
1995 1996
----------- ---------
<S> <C> <C>
Senior Credit Facility.................. $ 48,000 $ 75,000
Notes payable, Wisconsin facility,
payable in monthly installments of
principal plus fixed interest (8.9%
average interest rate) through the end
of the
lease term............................. 2,518 2,300
Note payable to bank, interest at
bank's prime rate plus 1.75%, (11.0%
at November 30, 1995) collateralized
by a building with principal and
interest payable in monthly
installments........................... 651 -
Notes payable to a financial
institution, interest at 7.82% and
7.56%, collateralized by property and
equipment, with principal and interest
payable in monthly installments through
November 1997 and August 1998,
respectively........................... 454 279
Note payable to a financial
institution, interest at 7.66%,
collateralized by property and
equipment, with principal and interest
payable in monthly installments
through December 1998.................. 727 491
Other................................... 47 196
--------- --------
52,397 78,266
Less current portion.................... (656) (792)
--------- --------
$ 51,741 $ 77,474
========= ========
</TABLE>
In September 1994, the Company entered into a $65,000,000 Revolving Credit
Facility (the "Revolving Credit Facility"). In conjunction with the Revolving
Credit Facility, during 1994, the Company restructured $33,000,000 of mortgage
debt assumed in the acquisition of PersonaCare and repaid $13,375,000 of
PersonaCare debt and accrued interest out of the net proceeds received from the
Company's initial public offering.
On May 8, 1995, TheraTx entered into a $125,000,000 Senior Credit Facility
("Senior Credit Facility") with a group of lenders. The Senior Credit Facility
was used to refinance the Company's Revolving Credit Facility. Borrowings under
the Senior Credit Facility bear interest at a maximum rate of LIBOR plus 1.5%,
adjusted for certain leverage ratios. The Senior Credit Facility provides for a
$5,000,000 swing line to accommodate same-day borrowings and a $5,000,000 stand-
by letter of credit facility. Future borrowings under the Senior Credit
Facility will be used to fund working capital requirements, purchases of
property and equipment, acquisitions, and general corporate requirements.
Borrowings under the Senior Credit Facility are secured by substantially all of
the assets of the Company and its subsidiaries, including all of the capital
stock of each subsidiary. The Senior Credit Facility contains various financial
covenants, including, but not limited to, requirements for minimum net worth,
maximum funded debt and other financial ratios, and restrictions on payments of
dividends, capital expenditures and acquisitions. Subsequent to December 31,
1996, all borrowings under the Senior Credit Facility were repaid in conjunction
with the merger with Vencor, Inc. (See Note 17.)
In 1995, the Company recorded charges in connection with the write-off of
certain deferred financing costs related to the Company's Revolving Credit
Facility. Additionally, the Company incurred costs in conjunction with the
early extinguishment of certain capital lease obligations. These items,
totaling $701,000, have been reported as an extraordinary item, net of income
taxes of $273,000 during the year ended December 31, 1995.
Certain letters of credit totaling $1,989,500 have been issued under the
Senior Credit Facility and are outstanding as of December 31, 1996. These
letters of credit, which mature throughout 1997, reduce the amount available to
be borrowed under the Senior Credit Facility.
The notes payable, Wisconsin facility, pertain to a facility that the
Company leases. The notes are collateralized by notes receivable from the
lessor. In connection with the notes payable, Wisconsin facility, the Company
has agreed to pay the debt service on the notes during the five-year term of the
lease and any subsequent renewal periods as a part of the rental agreement. At
the end of the lease term, any remaining balance on the notes payable becomes
the obligation of the lessor and the note receivable, serving as collateral, is
reduced by a like amount.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT -- (CONTINUED)
At December 31, 1996, the aggregate maturities of long-term debt for the
five years ending December 31, 2001 and thereafter are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
1997................................ $ 792
1998................................ 592
1999................................ 131
2000................................ 75,087
2001................................ 49
Thereafter.......................... 1,615
--------
$ 78,266
========
</TABLE>
8. CONVERTIBLE SUBORDINATED NOTES
On February 16, 1995, the Company completed a private placement of
$100,000,000 of seven-year convertible subordinated notes due 2002, with a
coupon rate of 8%. The notes are redeemable at the option of the Company after
February 3, 1998. The proceeds primarily have been used to finance the
acquisition and assumption by the Company of certain assets and liabilities of
the SMS Business. (See Note 4.) As a result of the merger with Vencor
subsequent to December 31, 1996, the Company is required to offer to repurchase
the Notes for 100% of the principal amount, together with accrued interest.
(See Note 17.)
9. LEASES
The Company operates facilities pursuant to the terms of long-term
operating leases. The operating leases have initial terms ranging from five to
fifteen years. The leases provide for renewals, at the Company's option,
ranging from two to three periods of five years each. Generally, the leases
contain options for the Company to purchase the facilities at the end of the
lease terms at an amount related to the fair market value of the facility at the
time the option is exercised.
The Company also rents office space and office equipment under non-
cancelable operating leases.
On April 25, 1995, the Company entered into a twenty-year operating lease
relating to the construction and lease of approximately 107,000 square feet of
corporate office space. The lease agreement provides for an annual base lease
rate of approximately $1,800,000, adjusted annually for inflation. In addition
to the base lease rate, the Company will pay certain building operating costs.
The lease term began in July 1996 upon completion of the office building.
Future minimum lease commitments for all non-cancelable operating leases as
of December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997 $ 11,944
1998 11,499
1999 10,179
2000 9,665
2001 9,414
Thereafter..................... 53,932
----------
Total minimum lease payments... $ 106,633
==========
</TABLE>
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Current income tax expense:
Federal............................ $ 2,629 $ 7,382 $ 10,425
State.............................. 295 1,053 457
-------- -------- --------
Total current income tax expense.. 2,924 8,435 10,882
Deferred income tax expense......... 493 1,154 2,482
-------- -------- --------
Total provision for income taxes.. $ 3,417 $ 9,589 $ 13,364
======== ======== ========
</TABLE>
A reconciliation of the provision for income taxes to the federal statutory
rate of 35% in 1994, 1995 and 1996, is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
--------- --------- ----------
<S> <C> <C> <C>
Tax at statutory rate................ $ 5,085 $ 7,275 $ 12,640
Surtax exemption..................... (100) -- --
State taxes, net of federal benefit.. 609 793 410
Goodwill amortization................ 224 262 423
Merger costs......................... -- 1,561 --
Other................................ 211 425 100
Change in valuation reserve.......... (2,612) (727) (209)
-------- -------- ---------
$ 3,417 $ 9,589 $ 13,364
======== ======== =========
</TABLE>
The tax effects of temporary differences and carryforwards that give rise
to significant portions of deferred tax assets (liabilities) consist of the
following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
----------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.. $ 1,311 $ 458
Asset valuation allowances........ 2,985 4,610
Intangible assets................. 998 816
Accrued liabilities............... 6,009 5,041
Other............................. 78 776
----------- ----------
Gross deferred assets............. 11,381 11,701
Valuation allowance............... (2,090) (1,881)
----------- ----------
9,291 9,820
Deferred tax liabilities:
Depreciation...................... (5,672) (5,964)
Deferred revenue.................. (710) (2,125)
Intangible asset.................. (794) (1,833)
Cash-to-accrual................... (431) (168)
Other............................. (160) (223)
----------- ----------
$ 1,524 $ (493)
=========== ==========
</TABLE>
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $1,206,000 for income tax purposes. The net
operating loss carryforwards expire beginning in 2005 through 2008. Because of
changes in ownership of the Company, the annual utilization of these losses in
the future may be limited.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY
On May 25, 1994, the Company effected a one-for-three reverse stock split
on the Company's outstanding common stock. All share and per share amounts have
been restated to reflect the reverse stock split for all periods presented.
Upon consummation of the initial public offering, each outstanding share of
Series A, B, C, and D preferred stock converted into .333333 shares of common
stock and each share of Series E preferred stock converted into one share of
common stock. (See Note 5.) In addition, upon conversion of the preferred
stock into common stock, outstanding warrants to purchase preferred stock
converted into warrants to purchase common stock exercisable over the remaining
term of the preferred stock warrant at an exercise price equal to the exercise
price per share under the preferred stock warrant, as adjusted for the reverse
stock split.
The Board of Directors has the authority to issue up to 5,000,000 shares of
preferred stock in one or more series and to fix the rights, qualifications,
preferences, privileges, limitations or restrictions of each such series.
The Company has reserved a total of 5,522,000 common shares for future
issuance upon exercise of stock warrants and stock options.
The Company has issued warrants to purchase 190,450 shares of its common
stock at prices ranging from $4.90 to $12.00 per share, which in management's
opinion, equaled or exceeded the fair market value of the stock at the date of
issuance. At December 31, 1996, warrants to purchase 78,925 shares of common
stock were outstanding. The warrants expire through July 2004.
On April 25, 1996, the Board of Directors adopted an Employee Stock
Purchase Plan (the "Purchase Plan") and reserved 1,000,000 shares of common
stock for future issuance. As of December 31, 1996, the company has not
implemented the Purchase Plan.
12. STOCKHOLDERS' RIGHTS PLAN
On July 27, 1995, the Company's Board of Directors adopted a Stockholders'
Rights Plan (the "Rights Plan"). In conjunction with the Rights Plan, the Board
of Directors declared a dividend of one right ("Right") to purchase one one-
hundredth of a share of Series A Junior Participating Preferred Stock on each
share of common stock. Under the terms of the Rights Plan, the Rights become
exercisable only if a person or group acquires 15% or more of the Company's
common stock or announces a Tender Offer that would result in ownership by a
person or group of 15% or more of the Company's common stock (an "Acquiring
Person"), subject to certain exceptions. Each Right has an exercise price of
$60.00 and, in certain circumstances, may become exercisable or exchangeable for
consideration. Each Right, following the time the Rights become exercisable,
may be redeemed for $0.01 at the option of the Board of Directors. Subsequent
to December 31, 1996, the Company amended the Rights Agreement to provide that
Vencor, Inc. and its affiliates shall not be deemed to be an Acquiring Person.
(See Note 17.)
13. STOCK OPTION PLANS
On April 25, 1996, the Board of Directors adopted the 1996 Stock
Option/Stock Issuance Plan (the "1996 Plan") and reserved 2,000,000 shares of
common stock for issuance over the ten-year term of the 1996 Plan. This share
reserve will automatically increase on the first trading day of each calendar
year, beginning with the 1997 calendar year, by an amount equal to 2% of the
total number of shares of common stock outstanding on the last trading day of
the immediately preceding calendar year. In no event may any one participant in
the 1996 Plan be granted stock options, separately exercisable stock
appreciation rights or direct stock issuances for more than 750,000 shares in
the aggregate under the 1996 Plan per calendar year.
The 1996 Plan contains three separate equity incentive programs: (i) a
Discretionary Option Grant Program (the "Discretionary Program"); (ii) a Stock
Issuance Program; and (iii) an Automatic Option Grant Program. The
Discretionary Program and the Stock Issuance Program are administered by the
Compensation Committee of the Board (the "Committee"). The Committee has
complete discretion (subject to the provisions of the 1996 Plan) to determine
the terms of each grant. However, all grants under the Automatic Option Grant
Program are made in strict compliance with the provisions of that program.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLANS -- (CONTINUED)
The exercise price per share of options granted under the Discretionary
Program may not be less than 100% of the fair market value of such shares at the
date of grant and the term of the options may not exceed ten years.
The purchase price of shares issued under the Stock Issuance Program may
not be less than 100% of the fair market value of such shares at the time of
issuance. Shares issued as a bonus for past services are vested upon issuance.
All other shares issued under the program are subject to a vesting schedule tied
to the performance of service or the attainment of performance goals.
During 1996, the Committee has generally granted options with service-based
options to vest over four years.
On March 3, 1994, the Board of Directors adopted the 1994 Stock
Option/Stock Issuance Plan (the "1994 Plan"). The 1994 Plan replaced the 1990
Stock Option Plan and became effective upon registration of the Company's
outstanding common stock under the Securities Exchange Act of 1933. All
outstanding options under the 1990 Stock Option Plan have been incorporated into
the 1994 Plan as of its effective date. Under the 1994 Plan, the Company is
authorized to issue up to 4,495,467 Shares of common stock to employees,
consultants and independent contractors. The purchase price of the shares
subject to incentive options granted will not be less than 100% of the fair
market value of such shares at the date of grant. The purchase price of shares
subject to non-qualified options granted will not be less than 85% of the fair
market value of such shares at the date of grant. The Plan is administered by
the Committee, which has the authority to determine the terms of each grant.
The Committee generally has granted options with either service-based vesting or
performance-based vesting. Service-based options generally vest over four
years. The performance-based options provide for vesting at the end of seven
years, with accelerated vesting over a five-year period if certain earnings
targets are achieved. The options have a term of ten years.
In connection with the acquisition of PersonaCare, the Company assumed the
PersonaCare, Inc. 1992 Stock Option Plan (the "PersonaCare Plan"). Immediately
following the acquisition, 54,863 Shares of the Company's common stock were
subject to the outstanding options assumed under the PersonaCare Plan. In
connection with the merger with Helian, TheraTx assumed the Helian Health Group,
Inc. 1989 Stock Option Plan (the "Helian Plan"). Immediately following the
acquisition, 237,683 shares of the Company's common stock were subject to the
outstanding options assumed under the Helian Plan. All of the assumed options
under the PersonaCare and Helian Plans accelerated automatically upon
consummation of the respective mergers and are now fully exercisable for vested
shares of the Company's common stock. No further option grants will be made
under either plan other than in connection with any regrant or repricing
programs that the Compensation Committee of the Company's Board of Directors may
authorize.
Effective May 30, 1996, the Committee approved a plan to reprice certain
options granted to employees pursuant to the 1994 Stock Option Plan. The
options were repriced effective May 30, 1996. Options originally priced from
$16.25 to $21.50 per share were repriced at $14.38 per share, the closing market
price of the common stock on May 30, 1996. Each of the repriced options,
whether vested or not vested, cannot be exercised for a period of one year
ending May 30, 1997, unless certain events defined under the 1994 Plan occurred.
At May 30, 1996, options to purchase a total of 242,000 shares of common stock
were repriced, of which approximately 58,000 were fully vested prior to
repricing.
Also, on May 30, 1996, the Committee approved a change to the 1994 Plan
providing for performance-based options to become service-based options at that
date, with vesting to occur over a period of four years. At May 30, 1996,
1,200,000 performance-based options were exchanged for service-based options.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLANS -- (CONTINUED)
Following is a summary of stock option plan activity:
<TABLE>
<CAPTION>
SHARES UNDER WEIGHTED
OPTION EXERCISE PRICES AVERAGE PRICE
------------ --------------- -------------
<S> <C> <C> <C>
Outstanding at January 1,
1994...................... 717,055 .09 - 18.95 6.36
Granted................... 1,419,170 4.50 - 21.50 14.42
Exercised................. (148,568) .09 - 7.50 0.85
Forfeited................. (205,362) .12 - 18.95 13.49
------------
Outstanding at December
31, 1994.................. 1,782,295 .09 - 21.50 12.16
Granted.... 2,087,639 8.36 - 18.25 16.69
Exercised.. (183,340) .09 - 12.13 1.82
Forfeited.. (173,762) .15 - 18.26 14.73
------------
Outstanding at December
31, 1995.................. 3,512,832 .09 - 21.50 14.45
Granted................... 1,224,434 10.00 - 16.69 13.84
Exercised................. (133,493) .15 - 16.25 9.47
Forfeited................. (200,246) .15 - 21.50 14.91
------------
Outstanding at December
31, 1996.................. 4,403,527 .09 - 21.50 14.83
============
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ---------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
.09 - .48 75,221 5.8 .43 70,559 .42
3.75 - 8.92 253,725 7.5 6.22 159,588 5.69
11.00 - 16.69 2,337,077 8.5 13.66 594,878 13.15
18.25 - 21.50 1,737,504 8.0 18.26 201,515 18.31
---------- ---- ------ --------- ------
4,403,527 8.2 14.83 1,026,540 12.12
========== ==== ====== ========= ======
</TABLE>
In January 1996, the Company adopted FASB Statement No. 123, Accounting for
Stock-Based Compensation. Under Statement No. 123, the Company may continue
following existing accounting rules or adopt a new fair value method of valuing
stock-based awards. The Company has elected to continue to follow APB Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and related
Interpretations in accounting for its employee stock options and not adopt the
alternative fair value method of accounting provided under Statement No. 123.
Under APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for both 1995 and 1996: risk free interest rates of 5.36% to 7.05%
depending on the date of grant; a dividend yield of 0%; volatility factors of
the expected market price of the Company's common stock of 0.507; and a
weighted-average expected life of the option of five years.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLANS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (in thousands, except for earnings per share
information):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------
1995 1996
---------- ---------
<S> <C> <C>
Pro forma net income.......... $ 7,758 $ 16,148
Pro forma earnings per share.. 0.38 0.79
</TABLE>
The weighted-average fair value of options granted during 1995 and 1996 is
$8.86 and $6.33, respectively. Because Statement 123 is applicable only to
options granted subsequent to December 31, 1994, its pro forma effect will not
be fully reflected until 1999.
14. RETIREMENT PLAN
The Company has a defined contribution 401(k) plan. The plan is for the
benefit of generally all employees and permits voluntary employee contributions
and Company profit sharing contributions. The Company contributed $104,000,
$355,000, and $522,000 to the plan for the years ended December 31, 1994, 1995
and 1996, respectively.
15. COMMITMENTS AND CONTINGENCIES
The Company maintains professional liability coverage on an occurrence
basis. The policy covers claims made up to $1,000,000 per incident, subject to
an aggregate limit of $3,000,000. In addition, the Company maintains claims-
made basis professional liability coverage for certain physicians and
facilities. The claims-made basis policies cover claims up to $1,000,000 per
incident, subject to an aggregate limit of $3,000,000. Management intends to
renew the existing or similar policies annually and expects to be able to obtain
reasonable coverage.
16. MAJOR CUSTOMERS
The Company had one major customer representing 12.5% of net revenues in
1994. In 1995 and 1996, the Company had no major customers that represented 10%
or more of net revenues.
17. SUBSEQUENT EVENTS
Effective January 31, 1997, the Company closed an ambulatory surgery center
located in Northridge, California. The surgery center was owned by a limited
partnership in which the Company holds a 48.8% ownership interest and serves as
the general partner. The Company also served as the manager of the surgery
center under a management agreement. The Company recorded charges in connection
with the write-off of certain assets and the direct costs related to the closure
of the facility. The surgery center was acquired in the Helian merger dated
December 28, 1995, which was accounted for as a pooling of interests. As
required by APB 16, Business Combinations, the loss on the closure totaling $1.8
million has been reported as an extraordinary item, net of income taxes of
$666,000, in 1996 based on the following; (i) the 1995 operating loss incurred
by the surgery center is significant to the 1995 operating results of the former
Helian business, (ii) the loss on the closure is material in relation to the
1996 operating performance of the former Helian business and (iii) the surgery
center operations were discontinued within two years of the effective date of
the Helian merger.
On February 9, 1997, the Company entered into an Agreement and Plan of
Merger with Vencor, Inc. ("Vencor") and Peach Acquisition Corp., a wholly owned
subsidiary of Vencor ("Peach"), pursuant to which Peach commenced a tender offer
on February 14, 1997 to purchase all of the outstanding shares of the Company's
common stock and the associated rights to purchase Series A Junior Participating
Stock at a cash price of $17.10 per share (the "Tender Offer"). The Tender
Offer expired on March 18, 1997 and Vencor purchased approximately 99% of the
outstanding shares of the Company's common stock at that time. Following the
merger which was effective March 21, 1997, the Company became a wholly-owned
subsidiary of Vencor. The shares of common stock that were not acquired in the
Tender Offer have been converted into the right to receive $17.10 per share in
cash.
As a result of the merger with Vencor, pursuant to the terms of the
convertible subordinated notes, the Company is required to offer to repurchase
the notes for 100% of the principal amount, together with accrued interest,
within fifteen days after the expiration of the Tender Offer.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SUBSEQUENT EVENTS -- (CONTINUED)
Additionally, in conjunction with the merger with Vencor, the Company
entered into a note payable to Vencor upon demand (the "Vencor Note"). Advances
under the Vencor Note are to be used to repay existing debt and to fund working
capital requirements, purchases of property and equipment, acquisitions and
general corporate requirements. On March 18, 1997, all borrowings under the
Senior Credit Facility were repaid and the Senior Credit Facility was
terminated. The Company also repaid approximately $1.3 million in debt
outstanding. As of March 21, 1997, approximately $95 million was outstanding
under the Vencor Note.
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1995 and 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996
THREE MONTHS ENDED THREE MONTHS ENDED
------------------------------------------ -------------------------------------------
MAR. 31 JUN. 30 SEPT. 30 DEC. 31 MAR. 31 JUN. 30 SEPT. 30 DEC. 31
--------- --------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............................ $ 59,500 $ 81,466 $ 84,609 $ 88,601 $ 93,324 $ 95,859 $ 99,417 $ 102,555
Income from operations.................. 5,995 8,064 11,002 5,614 11,663 11,844 12,822 12,250
Income before income taxes, minority
interest, and extraordinary item....... 4,931 5,324 8,288 2,230 8,634 9,137 9,560 8,785
Income before extraordinary item........ 2,926 2,908 5,108 315 5,324 5,807 6,066 5,520
Net income.............................. 2,926 2,480 5,108 315 5,324 5,807 6,066 4,386
Earnings per common share:
Income, before extraordinary
item................................. 0.15 0.14 0.25 0.02 0.26 0.28 0.29 0.27
Net income............................ $ 0.15 $ 0.12 $ 0.25 $ 0.02 $ 0.26 $ 0.28 $ 0.29 $ 0.21
Weighted average shares
outstanding............................. 19,598 20,708 20,651 20,711 20,689 20,963 21,222 20,600
</TABLE>
Amounts for the quarter ended March 31, 1995 have been restated to include
Helian and RCS. The quarters ending June 30 and September 30, 1995 include the
operations of RCS as reported and have been restated to include Helian. The
five quarters ended December 31, 1996 include RCS and Helian as reported.
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The TheraTx Merger was completed on March 21, 1997 and was recorded using
the purchase method of accounting. The accompanying unaudited pro forma
condensed combined statements of income for the three months ended March 31,
1997 and the year ended December 31, 1996 reflect the combination of the
historical consolidated financial data of Vencor and TheraTx and all material
pro forma adjustments and are presented as if the TheraTx Merger occurred on
January 1, 1996. The unaudited condensed consolidated balance sheet of the
combined entity as of March 31, 1997 is also included herein.
These financial statements are for informational purposes only and are not
necessarily indicative of the results that would have been obtained had the
TheraTx Merger occurred on January 1, 1996. The pro forma financial statements
should be read in conjunction with the respective historical audited
consolidated financial statements of both Vencor and TheraTx for the year ended
December 31, 1996.
<PAGE>
VENCOR, INC. AND THERATX, INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
VENCOR THERATX PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues.................................... $ 680,696 $ 94,028 $ - $ 774,724
---------- ---------- ----------- ---------
Salaries, wages and benefits................ 396,573 56,926 - 453,499
Supplies.................................... 66,033 7,783 - 73,816
Rent........................................ 18,948 2,759 - 21,707
Other operating expenses.................... 109,786 13,073 - 122,859
Depreciation and amortization............... 24,372 2,645 1,162(a) 28,179
Interest expense............................ 10,660 3,108 4,461(b) 18,229
Investment income........................... (1,567) - - (1,567)
---------- ---------- ----------- ---------
624,805 86,294 5,623 716,722
---------- ---------- ----------- ---------
Income from continuing operations
before income taxes ....................... 55,891 7,734 (5,623) 58,002
Provision for income taxes.................. 21,909 2,862 (2,033)(c) 22,738
---------- ---------- ----------- ---------
Income from continuing operations........... $ 33,982 $ 4,872 $ (3,590) $ 35,264
========== ========== =========== =========
Earnings per common and common equivalent
share:
Income from continuing operations:
Primary................................... $ 0.48 $ 0.50
Fully diluted............................. $ 0.48 $ 0.50
Shares used in computing earnings per common
and common equivalent share:
Primary.................................... 70,207 70,207
Fully diluted.............................. 70,621 70,621
</TABLE>
See notes to unaudited pro forma
condensed combined financial statements.
<PAGE>
VENCOR, INC. AND THERATX, INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
VENCOR THERATX PRO FORMA PRO FORMA
HISTORICAL HISTORICAL ADJUSTMENTS COMBINED
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues......................................... $2,577,783 $ 391,155 $ (915)(d) $2,968,023
---------- ---------- ----------- ----------
Salaries, wages and benefits..................... 1,490,938 233,530 - 1,724,468
Supplies......................................... 261,621 28,329 - 289,950
Rent............................................. 77,795 11,146 - 88,941
Other operating expenses......................... 405,797 58,033 (915)(d) 462,915
Depreciation and amortization.................... 99,533 11,324 5,396 (a) 116,253
Interest expense................................. 45,922 13,024 21,954 (b) 80,900
Investment income................................ (12,203) (312) - (12,515)
Non-recurring transactions....................... 125,200 - - 125,200
---------- ---------- ----------- ----------
2,494,603 355,074 26,435 2,876,112
---------- ---------- ----------- ----------
Income from continuing operations before income
taxes.......................................... 83,180 36,081 (27,350) 91,911
Provision for income taxes....................... 35,175 13,364 (8,606)(c) 39,933
---------- ---------- ----------- ----------
Income from continuing operations................ $ 48,005 $ 22,717 $ (18,744) $ 51,978
========== ========== =========== ==========
Earnings per common and common equivalent share:
Income from continuing operations:
Primary........................................ $ 0.68 $ 0.73
Fully diluted.................................. $ 0.68 $ 0.73
Shares used in computing earnings per common
and common equivalent share:
Primary........................................ 70,702 64 (e) 70,766
Fully diluted.................................. 70,702 64 (e) 70,766
</TABLE>
See notes to unaudited pro forma
condensed combined financial statements.
<PAGE>
VENCOR, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31,
1997
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 111,315
Accounts and notes receivable less allowance for loss of $40,218............... 584,253
Inventories.................................................................... 32,848
Income taxes................................................................... 70,596
Other.......................................................................... 41,997
----------
841,009
Property and equipment, at cost................................................. 1,792,342
Accumulated depreciation........................................................ (438,460)
----------
1,353,882
Intangible assets less accumulated amortization of $25,245...................... 374,573
Other........................................................................... 91,242
----------
$2,660,706
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................... $ 130,157
Salaries, wages and other compensation......................................... 176,957
Other accrued liabilities...................................................... 85,690
Long-term debt due within one year............................................. 20,515
----------
413,319
Long-term debt.................................................................. 1,286,843
Deferred credits and other liabilities.......................................... 89,790
Minority interests in equity of consolidated entities........................... 37,271
Stockholders' equity:
Common stock, $.25 par value; authorized 180,000 shares; issued 72,727 shares.. 18,182
Capital in excess of par value................................................. 717,808
Retained earnings.............................................................. 182,593
----------
918,583
Common treasury stock, 3,701 shares............................................ (85,100)
----------
833,483
----------
$2,660,706
==========
</TABLE>
See notes to unaudited pro forma
condensed combined financial statements.
<PAGE>
VENCOR, INC. AND THERATX, INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The purchase method of accounting has been used in the preparation of the pro
forma condensed combined financial statements. Under this method of accounting,
the aggregate purchase price is allocated to assets acquired and liabilities
assumed based on their estimated fair values. Accordingly, the excess of the
purchase price over the fair value of net assets acquired has been reflected as
goodwill.
For purposes of the pro forma condensed combined financial statements, the
excess of the purchase price for TheraTx over fair value of the net assets
acquired is being amortized over 40 years using the straight-line method.
Income from continuing operations before income taxes at March 31, 1997 excludes
$3.7 million ($2.3 million net of tax) of costs incurred by TheraTx in
connection with the TheraTx Merger.
Certain prior year historical TheraTx amounts have been reclassified to conform
to the Vencor presentation.
NOTE 2 - PRO FORMA ADJUSTMENTS
The adjustments included in the pro forma condensed combined financial
statements follow (dollars in thousands):
(a) To adjust amortization expense:
<TABLE>
<CAPTION>
For the Three For the Year
Months Ended Ended
March 31, 1997 December 31, 1996
--------------- ------------------
<S> <C> <C>
Record amortization related to the excess of the
purchase price for TheraTx over net assets acquired................... $2,075 $ 8,300
Eliminate TheraTx historical amortization of the excess
of purchase price over net assets acquired............................ (738) (2,904)
Actual amortization recorded for the period March 21 through March 31.. (175) -
------ -------
$1,162 $ 5,396
====== =======
</TABLE>
(b) To record additional interest expense related to borrowings of $352 million
used to acquire TheraTx and recognize interest savings from refinancing the
TheraTx bank credit facility:
<TABLE>
<CAPTION>
For the Three For the Year
Months Ended Ended
March 31, 1997 December 31, 1996
--------------- ------------------
<S> <C> <C>
Interest expense related to acquisition debt.......................... $ 4,606 $22,528
Eliminate interest expense related to TheraTx bank credit facility.... (1,497) (4,510)
Interest on Vencor bank credit facility replacing TheraTx bank
credit facility...................................................... 1,352 3,936
------- -------
$ 4,461 $21,954
======= =======
</TABLE>
(c) To adjust the provision for income taxes for the increase in Vencor's
historical effective tax rate as a result of the TheraTx acquisition.
(d) To eliminate transactions between Vencor and TheraTx.
(e) To adjust common equivalent shares to reflect the conversion of TheraTx
stock options into Vencor stock options.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
VENCOR, INC.
Dated: May 23, 1997 /s/ W. Bruce Lunsford
- -------------------- ------------------------
W. Bruce Lunsford
Chairman of the Board, President
and Chief Executive Officer
