<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
/x/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended December 31, 1993 or
/ / Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission file number 1-9868
T2 MEDICAL, INC.
----------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 59-2405366
------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1121 Alderman Drive, Alpharetta, Georgia 30202
- ------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(404) 442-2160
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Registrant's Telephone Number, Including Area Code
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
The number of shares outstanding of the registrant's Common Stock, $.01 Par
Value, as of January 31, 1994 was 40,961,920 shares.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
T2 MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1993 1993
------------ -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 17,236,548 $ 16,258,297
Short-term investments 33,031,687 47,647,163
Receivables:
Patient billings (less allowance
for doubtful accounts of
$5,074,360 at December 31, 1993
and $5,525,840 at September 30,
1993 26,640,390 26,979,099
Other receivables:
Management fees 7,600,092 7,464,206
Lithotripsy 6,551,610 6,313,065
Other 4,965,812 6,955,650
Inventories 5,063,770 4,561,234
Prepaid expenses 902,721 986,329
------------ ------------
Total current assets 101,992,630 117,165,043
Property and equipment, net 24,809,769 24,248,211
Goodwill and other intangible assets
(net of accumulated
amortization of $14,298,696 at
December 31, 1993 and $13,104,727 at
September 30, 1993) 178,176,969 175,114,254
Other assets 13,494,133 12,419,546
------------ ------------
Total assets $318,473,501 $328,947,054
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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T2 MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, September 30,
1993 1993
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Short-term debt $ 5,993,000 $ 23,000,000
Current portion of long-term debt
and obligations under
capital leases 2,564,114 3,126,871
Accounts payable and accrued expenses 5,100,599 8,365,224
Income taxes payable 4,627,951 945,940
Deferred income taxes payable 1,552,908 1,080,085
Other current liability 273,000 273,000
------------ ------------
Total current liabilities 20,111,572 36,791,120
Long-term debt and obligations under
capital leases, exclusive of
current maturities 2,688,538 3,097,164
Deferred income taxes payable 137,020 328,266
Other long-term liability 1,365,002 1,433,252
Minority interests in subsidiaries 5,479,516 5,836,376
------------ ------------
Total liabilities and
minority interests 29,781,648 47,486,178
------------ ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value,
100,000,000 shares authorized; shares
issued and outstanding; 40,506,387 at
December 31, 1993 and 40,486,387 at
September 30, 1993 405,064 404,864
Additional paid-in capital 154,799,547 154,702,147
Retained earnings 133,487,242 126,353,865
------------ ------------
Total stockholders' equity 288,691,853 281,460,876
------------ ------------
Total liabilities and
stockholders' equity $318,473,501 $328,947,054
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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T2 MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31,
---------------------------------
1993 1992
----------- -----------
<S> <C> <C>
Revenues:
Home infusion therapy $38,929,154 $53,210,958
IntraCare 11,195,299 10,685,982
Lithotripsy 11,544,756 5,296,496
Other 1,994,359 2,579,435
----------- -----------
Total revenues 63,663,568 71,772,871
----------- -----------
Costs and expenses:
Cost of revenues 37,647,327 33,594,268
Selling, general and administrative 6,618,946 6,271,804
Provision for doubtful accounts 2,181,255 7,932,750
Amortization of intangibles 1,217,902 992,379
----------- -----------
Total costs and expenses 47,665,430 48,791,201
----------- -----------
Income from operations 15,998,138 22,981,670
Other income (expense):
Interest expense (145,467) (307,678)
Interest income 717,498 790,045
Equity in earnings of unconsolidated
subsidiaries 282,751 290,564
Other 68,120 342,671
----------- -----------
Income before income taxes
and minority interest 16,921,040 24,097,272
Provision for income taxes 6,249,550 8,428,022
Minority interest in income
of subsidiaries 2,525,700 1,559,475
----------- -----------
Net income $ 8,145,790 $14,109,775
=========== ===========
Net income per common and
common equivalent share $ .20 $ .35
=========== ===========
Cash dividends paid
per share of common stock $ .025 $ .025
=========== ===========
Weighted average common and common
equivalent shares outstanding 40,689,581 40,505,556
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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T2 MEDICAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended December 31,
------------------------------------
1993 1992
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income............................... $ 8,145,790 $14,109,775
Adjustments to reconcile net income to net
cash provided by operating activities:
Amortization of discount on notes..... --- ---
Depreciation and amortization......... 2,862,169 2,307,521
Provision for doubtful accounts....... 2,181,255 7,932,750
Tax benefit of stock options.......... --- 582,235
Equity in earnings of unconsolidated
subsidiaries......................... (282,751) (290,564)
Distributions from unconsolidated
subsidiaries......................... 127,379 125,000
Loss on sale of assets................ 15,147 13,150
Change in assets and liabilities net
of effects from purchased businesses:
Receivables......................... 197,907 (6,691,381)
Inventories......................... (502,536) 326,439
Prepaid expenses and other assets... (230,608) (524,343)
Accounts payable and accrued expenses (3,738,953) (3,558,253)
Income taxes payable................ 3,682,013 (1,644,158)
Deferred income taxes payable....... 281,577 922,225
Minority interests in subsidiaries.. (356,860) (439,738)
----------- -----------
Cash provided by operating
activities....................... 12,381,529 13,170,658
----------- -----------
Cash flows related to investing activities:
Payments for businesses acquired
(less cash acquired)................... (4,255,408) (10,076,382)
Additions to property and equipment, net. (2,219,407) (1,488,087)
Proceeds from sale of property and
equipment.............................. 22,507 59,300
Investment in unconsolidated
subsidiaries........................... (605,000) ---
Short-term investments................... 14,615,476 1,420,841
----------- -----------
Cash provided by (used in)
investing activities.......... 7,558,168 (10,084,328)
----------- -----------
Cash flows related to financing activities:
Proceeds from issuance of common stock... 97,600 879,463
Proceeds from issuance of short-term
notes and long-term debt............... --- ---
Payment of short-term notes and long-
term debt.............................. (18,046,633) (5,827,425)
Distributions of S Corporation earnings --- (1,576,040)
Cash dividends........................... (1,012,413) (941,358)
----------- -----------
Cash used in financing
activities..................... (18,961,446) (7,465,360)
----------- -----------
Increase (decrease) in cash and
cash equivalents............... 978,251 (4,379,030)
Cash and cash equivalents at
beginning of period............ 16,258,297 14,509,800
----------- -----------
Cash and cash equivalents at end
of period...................... $17,236,548 $10,130,770
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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<TABLE>
<CAPTION>
Supplemental disclosures of cash flow information:
<S> <C> <C>
Cash paid for interest $ 145,467 $ 307,678
Cash paid for income taxes 2,413,139 8,564,015
</TABLE>
On January 1, 1992, the Company acquired a 35% interest in Bay Area
Partners ("Bay Area"), a general partnership formed between the Company and
Bay Area Renal Stone Center, Ltd., for a purchase price of $13,025,655.
Effective October 1, 1992, the Company increased its ownership in Bay Area to
65% by acquiring an additional 30% of Bay Area for a cash purchase price of
$9,215,784. The total purchase price of $22,241,439 was funded by the
issuance of 104,250 shares of common stock (valued at $5,719,155) and cash of
$16,522,284. Liabilities assumed in connection with the acquisition were
$177,015. Substantially all of the purchase price was allocated to goodwill.
The acquisition was accounted for as a purchase and was consolidated in the
Company's operations after October 1, 1992.
Effective October 1, 1992, the Company acquired 51% of the outstanding
common stock of Pediatric Partners, Inc. ("Pediatric") for a total purchase
price of $2,250,000. The purchase was funded by the conversion of previously
purchased convertible debentures into common stock which represents a 51%
ownership interest in Pediatric. Liabilities assumed in connection with the
acquisition were $191,702. Substantially all of the purchase price was
allocated to goodwill. The acquisition was accounted for as a purchase and
was consolidated in the Company's operations after October 1, 1992.
On December 31, 1993, the Company invested cash of $2,082,800 which
resulted in the Company acquiring a 63.5% interest in Southwest Lithotripter
Joint Venture ("Southwest"). Liabilities assumed in connection with the
acquisition were immaterial. Substantially all of the purchase price was
allocated to goodwill and is being amortized on a straight-line basis over 40
years. The acquisition was accounted for as a purchase and will be included in
the Company's operations after December 31, 1993.
On December 31, 1993, the Company acquired 100% of the outstanding common
stock of Intracare of Atlanta, Inc. for a total cash purchase price of
$2,322,139. No liabilities were assumed in connection with the acquisition.
Substantially all of the purchase price was allocated to goodwill and is being
amortized on a straight-line basis over 40 years. The acquisition was accounted
for as a purchase and will be included in the Company's operations after
December 31, 1993.
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<PAGE> 7
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements contained in this
report are unaudited, but reflect all adjustments, which, in the opinion of
management, are necessary for a fair presentation of the financial position and
results of operations of the interim periods. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been omitted pursuant to
applicable rules and regulations of the Securities and Exchange Commission.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Annual Report on
Form 10-K for the year ended September 30, 1993. The results of operations for
the interim periods reported herein are not necessarily indicative of results
to be expected for the full year.
2. EARNINGS PER SHARE
Earnings per share for the three-month periods ended December 31, 1993
and December 31, 1992 is based on the weighted average number of common and
common equivalent shares outstanding. Common share equivalents include
dilutive stock options using the treasury stock method (computed at the average
market price during the periods indicated). Fully diluted earnings per share
do not differ significantly from primary earnings per share.
The weighted average number of common and common equivalent shares used
in the computation of net income per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1993 1992
---- ----
<S> <C> <C>
Weighted average number of
shares outstanding 40,496,713 40,084,263
Incremental shares from use of
treasury stock method 192,868 421,293
--------- ----------
Weighted average common and
common equivalent
shares outstanding 40,689,581 40,505,556
========== ==========
</TABLE>
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<PAGE> 8
3. BUSINESS COMBINATIONS
On December 31, 1993, the Company invested cash of $2,082,800 which
resulted in the Company owning a 63.5% interest in Southwest Lithotripter Joint
Venture ("Southwest"). Substantially all of the purchase price was allocated
to goodwill and is being amortized on a straight-line basis over 40 years. The
acquisition was accounted for as a purchase and will be included in the
Company's operations after December 31, 1993.
On December 31, 1993, the Company acquired 100% of the outstanding common
stock of Intracare of Atlanta, Inc. for a total cash purchase price of
$2,322,139. Substantially all of the purchase price was allocated to goodwill
and is being amortized on a straight-line basis over 40 years. The
acquisition was accounted for as a purchase and will be included in the
Company's operations after December 31, 1993.
Due to the insignificant operations of Southwest and Intracare of Atlanta,
Inc., pro forma data has not been included.
4. CONTINGENCIES AND LEGAL MATTERS
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<PAGE> 9
The Company in 1992 received a request for documents from a grand jury
sitting in Atlanta, Georgia at the request of the U.S. Department of Health and
Human Services, the focus of which appears to be the potential application of
the Medicare Fraud and Abuse Law as it relates to physician ownership. The
Company has complied with the request and believes that the documents submitted
will confirm that it has conducted its business affairs in a proper and lawful
manner, consistent with all applicable laws, regulations and professional codes
of conduct. Management believes that the ultimate resolution of this matter
will not have a material adverse effect on the Company's financial position and
results of operations.
The Company and certain of its officers and former officers are
defendants in civil suits filed in 1992 on behalf of individuals claiming to
have purchased Company stock during the time period from December 2, 1991
through June 24, 1992. The suits have been consolidated into one suit. The
complaint seeks certification of a plaintiff's class and damages in an
unspecified amount. The complaint alleges, among other things, that the
Company and the named individuals violated various provisions of the Securities
and Exchange Act of 1934 and violated certain other laws by failing to make
complete and accurate statements about the Company's business. On November 16,
1993, the proceeding was certified as a class action.
In 1993, the Company conducted an inquiry which resulted in the
restatement of the Company's interim financial statements for the periods
ended December 31, 1992 and March 31, 1993. Subsequently, the Company and
certain of its officers and directors and former officers and a former
director were named as defendants in civil suits filed on behalf of
individuals claiming to have purchased or sold Company stock during various
time periods in 1991, 1992 and 1993. The complaints, which were generally
similar, alleged in part that the Company made misleading public statements
concerning the Company's business, results of operations, future prospects,
revenues, and reimbursements from its payor sources. The complaints, which
have been filed in or transferred to the U.S. District Court for the Northern
District of Georgia, seek certification of a plaintiff's class and damages in
an unspecified amount. In September 1993, an amended consolidated complaint
was filed making substantially the same allegations and seeking substantially
the same relief as the earlier complaints. The consolidated complaint seeks
certification of a plaintiff's class for persons buying or selling Company
stock during the period from December 2, 1991 to August 12, 1993. While most
of the complaints filed in August 1993 were voluntarily dismissed following
the filing of the consolidated complaint, three actions remain pending.
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<PAGE> 10
The Company believes that it has meritorious defenses in these actions.
Nevertheless, the ultimate outcome of the litigation described in the
preceding two paragraphs cannot presently be determined. Accordingly, no
provision for any loss that may result upon resolution of the suits has been
made in the consolidated financial statements.
The Company has agreed to indemnify, in certain circumstances, the
directors, officers and former officers named as defendants in the civil suits
described above for certain legal fees and expenses incurred, and judgments,
fines and settlement amounts paid in connection with such suits.
The Securities and Exchange Commission is conducting an inquiry into the
events that required the restatement of the Company's financial statements for
the periods ended December 31, 1992 and March 31, 1993, and certain other
matters. The Securities and Exchange Commission has requested certain
documents relating to such inquiry, and the Company is responding to the
request.
5. DEBENTURE PURCHASE AGREEMENT AND SUBSEQUENT EVENTS
In connection with the Company's Debenture Purchase Agreement with
Surgex, Inc., the Company has increased its loan to Surgex as of December 31,
1993 to $10,359,000.
On February 7, 1994, the Company announced that it had entered into an
agreement and plan of merger dated February 6, 1994 providing for the merger of
the Company with three other companies. The operations of the three other
companies consist primarily of providing infusion therapy services. Under the
terms of the agreement, each outstanding common share of the Company prior to
the merger is expected to be exchanged for .63 shares of common stock of the
newly-formed company. The merger is expected to be accounted for as a pooling
of interests and to be consummated by June 30, 1994.
As of February 8, 1994, the Company has agreed in principle to acquire a
majority interest in one lithotripsy company for cash of approximately
$2,000,000. This acquisition is expected to be accounted for as a purchase
and to be consummated during the second quarter of fiscal 1994.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
Total revenues for the three-month period ended December 31, 1993
decreased 11.3% to $63,663,568, compared to the corresponding period in the
prior year. Home infusion therapy revenues, including management fees from
managed home infusion therapy companies, decreased 26.8 % to $38,929,154 for
the three month period ended December 31, 1993, from $53,210,958 for the
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<PAGE> 11
corresponding period in 1992. Although the Company had an increase in
infusion therapy patients served, a significant reduction in per patient
revenue resulting from changes in reimbursement patterns has resulted in an
overall decrease in infusion therapy revenue. These changes include increased
case management and larger discounts demanded by third party payors.
IntraCare revenues, including management fees from managed IntraCare
companies, increased 4.8% to $11,195,299 for the three month period ended
December 31, 1993, from $10,685,982 for the corresponding period in the prior
year. This increase resulted primarily from the acquisition of and increase in
operations of seven acquired Intracare companies and the increase in management
fees resulting from the growth in number of patients served by the 41 IntraCare
facilities developed since February 1990. The increase was partially offset by
lower reimbursement rates paid to the Company by third party payors.
Lithotripsy revenues for the three month period ended December 31, 1993
increased by 118% over the corresponding period in the prior year. This
increase in lithotripsy revenues was attributable to an increase in patients
served and the acquisition since December 31, 1992 of an additional interest
in one lithotripsy company and majority interests in seven lithotripsy
companies in which the Company had no prior interest.
Continued cost reduction initiatives by third party payors, significant
reductions in coverage and rates of third party payors, or significant
reductions in the percentage of the Company's services delivered to privately-
insured patients could have a continuing negative effect on the Company's home
infusion therapy and IntraCare revenues. During the fiscal year ended
September 30, 1993, reimbursement patterns in the infusion therapy industry
changed dramatically, including (i) the retroactive implementation of case
management discounts, (ii) demands for larger discounts by indemnity insurance
carriers, and (iii) demands for other price discounts. In the first quarter
of fiscal 1994, reimbursement patterns continued to change, and there can be no
assurance that reimbursement patterns will not continue to change. However,
as larger numbers of the Company's patients are treated in accordance with
agreements that establish reimbursement rates in advance, reimbursement
patterns should become more predictable.
While pricing pressures have been primarily related to the Company's
infusion therapy operations, there can be no assurance that similar pricing
pressures will not be applied to the Company's lithotripsy operations.
The Health Care Finance Administration ("HCFA") has issued a proposed
rule that would, if implemented, significantly reduce the amount Medicare
would reimburse its beneficiaries for the cost of lithotripsy procedures
performed in an ambulatory surgery center or on an outpatient basis at a
hospital. Further, a decrease in the
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Medicare reimbursement rate for lithotripsy may trigger demands for similar
reductions by other third party payors.
Costs of revenues for the three month period ended December 31, 1993
increased 12.1% to $37,647,327 versus the comparable period in the prior year.
This increase was attributable to an increase in infusion therapy patients
served, increased depreciation and the acquisitions and development mentioned
above.
Selling, general and administrative expenses as a percentage of total
revenues increased from 8.7% to 10.4% for the three month period ended
December 31, 1993, versus the comparable period in the prior year. The
increase in the percentage of selling, general and administrative expenses to
total revenues is primarily due to the fixed components of certain selling,
general and administrative expenses and the relative decrease in per patient
revenues.
The provision for doubtful accounts expressed as a percentage of total
revenues decreased to 3.4% from 11.1% for the three month period ended December
31, 1993, versus the corresponding period in the prior year. The decrease in
the provision for doubtful accounts is the result of management's assessment of
the allowance needed to absorb the doubtful accounts included in accounts
receivable. Net write-offs of doubtful accounts during the three months ended
December 31, 1993, as compared to the corresponding period in the period year
decreased $5,751,495. Management regularly reviews the collectability of the
Company's accounts receivable and makes adjustments to the allowance for
doubtful accounts as needed to reflect prevailing conditions. As case
management discounts have become more prevalent and larger numbers of the
Company's patients are treated in accordance with agreements that establish
reimbursement rates in advance, reimbursement patterns have become more
predictable. Consequently, the Company has reduced its allowance for doubtful
accounts to 16% of accounts receivable at December 31, 1993 from 17% at
September 30, 1993.
The increase in amortization of intangibles for the three month period
ended December 31, 1993 versus the comparable period in the prior year is
primarily attributable to the additional goodwill associated with acquisitions
consummated since December 31, 1992 which were accounted for as purchases.
Income from operations as a percentage of total revenues decreased from
32.0% to 25.1% for the three month period ended December 31, 1993 versus the
comparable period in the prior year. The decrease in income from operations
percentages resulted primarily from an increase in the number and amount of
discounts given to third party payers, including case management adjustments,
managed care pricing and other price discounts. Because of the current
pressures on pricing in the health care industry generally, the Company
expects that, in the foreseeable future, there will continue to be pressures
on income from operations. In addition, continued cost reduction initiatives
by third party payors, significant reductions in coverage and rates of third
party payors, or significant reductions in the percentage of the Company's
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<PAGE> 13
services delivered to privately-insured patients could also have a negative
effect on the Company's income from operations.
The effective income tax rate increased from 37.4% to 43.4% for the three
month period ended December 31, 1993 versus the comparable period in the prior
year. The effective income tax rate was calculated by dividing the provision
for income taxes by income before income taxes less minority interests in the
income of partnerships. Such increases were primarily attributable to the
increase in the amortization of intangibles resulting from acquisitions of
entities since December 30, 1992 which were accounted for as purchases and
income for the three month period ended December 31, 1992 included S
Corporation income for which no income tax provision was required. This
income resulted from the acquisitions of S Corporations which were accounted
for as poolings of interests.
Minority interest in income of subsidiaries for the three month period
ended December 31, 1993 increased by 62.0% over the corresponding period in the
prior year. This increase resulted primarily from the Company's acquisition of
majority interests in seven entities since December 31, 1992 in which minority
ownership interests exist.
Inflation
The Company has not experienced significant increases in either the cost
of supplies or operating expenses due to inflation. Nonetheless, although
inflation has not been a significant factor to date, there can be no assurance
that it will not be in the future.
Financial Condition as of December 31, 1993
Since its inception, the Company has financed its current operations
through internally generated funds and equity placements. The cash
provided by operating activities was $12,381,529 for the three month period
ended December 31, 1993 and $13,170,658 for the three month period ended
December 31, 1992. As of December 31, 1993, the Company had cash and short
term investments net of short term investments pledged to short-term debt
totaling approximately $38,368,000.
The Company believes that its presently anticipated short term needs
for operating capital, debt repayments, capital expenditures and cash dividends
will be satisfied by its present funds, internally-generated funds and its line
of credit of $10,000,000. The Company is, however, currently reviewing all of
its relationships with the infusion therapy companies it manages and may
acquire such companies or restructure the management agreements it has with
such companies. The Company anticipates borrowing additional funds to finance
the acquisitions of those of its managed companies that it
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<PAGE> 14
elects to acquire. In addition, if the Company is required to acquire the
minority interests in its lithotripsy ventures, or resolves its material
pending litigation, the Company may need to seek additional sources of
capital.
Omnibus Budget Reconciliation Act of 1993
On August 10, 1993, the Omnibus Budget Reconciliation Act of 1993 (the
"Omnibus Act") was signed into law by the President. The Omnibus Act
increased the corporate tax rate of 34% to 35% as well as made certain other
changes to the corporate tax law, including the deductibility of the
amortization of certain intangible assets. The tax provisions of the Omnibus
Act did not have a significant effect on the financial statements of the
Company.
In addition, the Omnibus Act included provisions that prohibit
physicians, beginning on January 1, 1995, from referring their patients, who
receive benefits under the Medicare or Medicaid programs, to entities in which
they have financial interests for certain designated health services. The
Omnibus Act is worded broadly and contains numerous exceptions and technical
terms that are not fully defined and empowers the Secretary of the Department
of Health and Human Services to adopt regulations interpreting and
implementing the Omnibus Act. The Company cannot predict what effect, if any,
the application of such regulations and the Omnibus Act may have on its future
business activities.
Accounting Pronouncement
The Financial Accounting Standards Board has issued Statement No. 115
entitled "Accounting for Certain Investments in Debt and Equity Securities"
which is effective for fiscal years beginning after December 15, 1993. This
Statement is not expected to have any significant effect on the financial
statements of the Company.
Future Health Care Proposals and Legislation
The current Presidential administration has the stated goal of improving
the national health care system. Its proposals include steps to contain
health care costs and cutback the Medicare and Medicaid programs. It is
uncertain what legislation, if any, will be approved, and whether any such
proposals will be implemented or what effect they would have on the Company.
There can be no assurance that any such proposals or other changes in the
health care system will not have an adverse effect on the Company.
Recent Developments
On February 7, 1994, the Company announced that it had signed a
definitive agreement providing for the merger of the Company with Curaflex
Health Services, Inc. ("Curaflex"), HealthInfusion, Inc. ("HealthInfusion") and
Medisys, Inc. ("Medisys"). Curaflex, HealthInfusion and Medisys are companies
that primarily provide infusion therapy services. The proposed name for the
resulting entity is Coram Healthcare Corporation ("Coram"). The resulting
entity could provide certain advantages with respect to size, economies of
scale, managed care relationships and economic synergies that the Company,
acting alone, may not be able to develop. However, no assurance can be given
that such advantages will materialize. Consummation of the proposed merger is,
however, subject to customary conditions, including approval by the
shareholders of each of the four companies, receipt of opinions relating to
the "pooling of interests" and tax-free status of the merger, appropriate
regulatory approvals, including clearance under the Hart-Scott-Rodino Act and
certain other conditions.
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<PAGE> 15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
In June 1992, the Company and certain of its officers were named as
defendants in four civil suits filed on behalf of individuals claiming to have
purchased or sold Company common stock during the time period from December 2,
1991 through June 24, 1992. The suits were filed in the United States
District Court for the Northern District of Georgia and have been consolidated
into one suit captioned: In Re: T2 Medical, Inc. Stockholder Litigation,
Matter File No. 1:92-CV-1564-RLV. The complaint sought certification of a
plaintiff's class, and on November 16, 1993, the proceeding was certified as a
class action. The complaint seeks damages in an unspecified amount and
alleges, among other things, that the Company and the named officers defrauded
the market and violated various provisions of the federal securities laws by
failing to make complete and accurate statements about, among other things,
the Company's business, results of operations, acquisitions, future prospects,
revenues, outstanding shares and compliance with Medicare laws regarding
physician referrals and the related grand jury document request and by failing
to disclose sales of "Restricted Shares" of T2 common stock prior to the
expiration of the applicable holding periods and by trading shares of common
stock while in possession of material, non-public information related to the
failure to make complete and accurate statements. In September 1993, the
plaintiffs moved to amend their complaint, and on January 14, 1994, the court
granted the plaintiffs leave to amend their complaint, to include allegations
that the Company and certain of its officers made misleading statements or
omissions about certain accounting issues and the Company's prospects and
to allege a class of purchasers for the period December 2, 1991 to
August 12, 1993.
In 1993, the Company conducted an inquiry which resulted in the
restatement of the Company's interim financial statements for the periods
ended December 31, 1992 and March 31, 1993. Subsequently, the Company and
certain of its officers and directors and former officers and a former
director were named as defendants in sixteen civil suits filed in the United
States District Court for the Northern District of Georgia on behalf of
individuals claiming to have purchased or sold Company common stock during
various time periods in 1991, 1992 and 1993. One similar civil suit was filed
in the United States District Court for the Northern District of Illinois.
The complaints, which were generally similar, alleged in part that the Company
made misleading public statements concerning the Company's business, results
of operations, future prospects, revenues and reimbursements from its payor
sources. In September 1993, many of the complaints were dismissed and a new
class action complaint was filed.
The consolidated complaint captioned Bender, et al v. T2 Medical, Inc.,
Joseph C. Allegra, David Hersh and Thomas E. Haire and Stanley S. Trotman
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<PAGE> 16
Civil Action No. 93-CV-2201-RCF (the "Bender Action") and filed on
September 28, 1993, alleges, among other things, that the Company and the
named officers defrauded the market in violation of various provisions of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), by making
false and misleading statements or by failing to make complete and accurate
statements about the Company's business, results of operations, revenues,
reimbursement patterns of its payor sources and future prospects and a
proposed management led buy out of the Company and seeks certification of a
plaintiff's class for persons who bought Company common stock during the
period from December 2, 1991 to August 12, 1993. Three other actions remain
pending and the pending actions are described in further detail below.
On August 16, 1993, a suit captioned Laura Lewis, M.D. v. T2 Medical,
Inc., Joseph C. Allegra and David Hersh, Civil Action No. 93-CV-1852-RCF was
filed seeking relief substantially similar and making substantially similar
allegations as the plaintiff in the Bender Action, in addition to alleging
common law fraud. The Lewis Action, however, also seeks certification of a
subclass of plaintiffs who received shares of Company common stock in
connection with certain acquisitions made by the Company during the 1993
fiscal year and includes allegations relating to violations of the Securities
Act of 1933 related to the issuances of stock in connection with such
acquisitions. The putative class consists of purchasers of the Company's
stock for the period August 17, 1992 through August 12, 1993.
On August 19, 1993, a suit captioned Dr. Russell James v. T2 Medical,
Inc., Joseph C. Allegra, David Hersh, J. Lee Ledbetter and Stanley S. Trotman,
Civil Action No. 93-CV-1886-RLV, was filed asserting substantially similar
allegations and seeking substantially similar relief as the Bender Action, in
addition to alleging common law fraud and common law negligent
misrepresentation. The putative class consists of purchasers of the Company's
stock for the period January 21, 1993 through August 11, 1993.
On November 2, 1993, a suit captioned Julius Levine v. T2 Medical, Inc.
Joseph C. Allegra, David Hersh, J. Lee Ledbetter and Stanley S. Trotman, Civil
Action No. 93-CV-2353-RLV was transferred to the Northern District of Georgia
from the Northern District of Illinois. The class and other allegations are
similar to the allegations in the James action.
The Company believes that it has meritorious defenses in these actions.
Nevertheless, the ultimate outcome of the litigation described in the
preceding paragraphs cannot presently be determined. Accordingly, no
provision for any loss that may result upon resolution of the suits has been
made in the consolidated financial statements.
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<PAGE> 17
The Securities and Exchange Commission is conducting an inquiry into the
events that required the restatement of the Company's financial statements for
the periods ended December 31, 1992 and March 31, 1993, and certain other
matters. The Securities and Exchange Commission has requested certain
documents relating to such inquiry, and the Company is responding to the
request.
Furthermore, the Company is a party in various legal actions arising out
of the normal course of its business. Management believes that the ultimate
resolution of such actions will not have a material adverse effect on the
Company's financial position and results of operations.
Item 5. Other Information
On February 7, 1994, the Company issued a press release announcing that
it had signed a definitive agreement providing for the merger of the Company
with Curaflex Health Services, Inc., HealthInfusion, Inc. and Medisys, Inc. A
copy of such press release is attached to this Quarterly Report as Exhibit
99(a) and is incorporated herein by reference.
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits.
99(a) Press Release dated February 7, 1994.
(b) Reports on Form 8-K. There were no Current Reports on Securities and
Exchange Commission Form 8-K filed during the three-month period ended
December 31, 1993.
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<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
T2 MEDICAL, INC.
By:/s/ Tommy H. Carter
-----------------------------
Tommy H. Carter
President and Chief
Executive Officer
By:/s/ Bruce A. Kolleda
-----------------------------
Bruce A. Kolleda
Principal Accounting Officer
Date: February 14, 1994
-18-
<PAGE> 19
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------------ ----------- ----------
<S> <C>
99(a) Press release dated
February 7, 1994
</TABLE>
-19-
<PAGE> 1
EXHIBIT 99(A)
CONTACT: Charles A. laverty
Curaflex Health Services, Inc.
(909) 460-2400
Thomas E. Haire/Tommy H. Carter
T2 Medical, Inc.
(404) 442-2160
FOR IMMEDIATE RELEASE
Naomi E. Rosenfeld/Betsy Brod
(212) 850-5600
Media Contact: Miriam Adler
(415) 296-7383
Morgen-Walke Associates, Inc.
T2 MEDICAL, INC., CURAFLEX HEALTH SERVICES, INC., HEALTHINFUSION, INC.
AND MEDISYS, INC. AGREE TO FORM CORAM HEALTHCARE CORPORATION,
CREATING $500 MILLION COMPANY
Alpharetta, GA, Ontario, Calif., Miami, FL, and Minneapolis, MN, February
7, 1994 -- T2 Medical, Inc. (NYSE:TSQ), Curaflex Health Services, Inc.
(NASDAQ:CFLX), HealthInfusion, Inc. (NASDAQ:HINF) and Medisys, Inc.
(NASDAQ:MEDS) today announced the signing of a definitive agreement providing
for the merger of the four publicly-traded companies. The name of the new
company will be Coram Healthcare Corporation. Coram Healthcare will be the
second-largest infusion therapy company in the United States.
The name Coram was chosen because its Latin meaning, "together,
face-to-face, publicly, openly," succinctly captures the characteristics that
the new company embodies. Coram Healthcare will have combined revenues of
approximately $500 million and, as of the close of business on February 3,
1994, a combined market valuation of approximately $550 million.
Under the terms of the definitive agreement, all shares of common stock of
T2 Medical issued and outstanding prior to the merger will be exchanged for .63
shares of common stock of the newly-formed company that resulted from the
December 1, 1993 merger agreement among Curaflex, HealthInfusion, and Medisys.
The exchange ratios have been revised to reflect T2 Medical's inclusion in the
merger. Pro forma ownership of Coram Healthcare, calculated on a fully-diluted
basis, will be approximately 67% for T2 Medical shareholders, 13% for Curaflex
shareholders, 12% for HealthInfusion shareholders and 8% for Medisys
shareholders. The new company will apply for listing on the New York Stock
Exchange.
The merger will be accounted for as a "pooling-of-interests" for financial
reporting purposes and is intended to be treated as a tax-free reorganization
for federal income tax purposes. Prior period results of the previously
separate companies will be combined to reflect the merger.
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<PAGE> 2
-2-
Charles A. Laverty, Curaflex's Chairman, President and Chief Executive
Officer, will become President and Chief Executive Officer. Tommy Carter, T2's
President and CEO, will become Coram Healthcare's Vice Chairman of the Board
and will play an active role in Coram Healthcare's operations going forward.
The company anticipates naming a Chairman in the near future. Miles E. Gilman,
President and CEO of HealthInfusion, and William J. Brummond, CEO of Medisys,
will also retain active roles in the management of the new corporation. Coram
Healthcare intends to retain major regional operations in Ontario, California
and Alpharetta, Georgia and is exploring potential locations for a new
corporate headquarters.
The proposed merger is subject to customary conditions, including
approval by the shareholders of each of the four companies, receipt of opinions
relating to the "pooling-of-interests" and tax-free status of the merger,
appropriate regulatory approvals, including clearance under Hart-Scott-Rodino
and certain other conditions, and is expected to be completed by the end of the
second quarter of 1994.
T2 Medical Inc. is a leading provider of alternate-site treatment
services in the United States with sites of service in over 100 cities and 38
states. These services include home infusion therapy, ambulatory infusion
"Intracare" centers, outpatient lithotripsy, pediatric homecare, physician
practice management and ambulatory surgery centers.
Curaflex Health Services, Inc. is a national provider of comprehensive
infusion therapy and related services to patients in the home and alternate
site environments. Its home infusion therapy operations include 32 regional
centers and 4 satellite facilities strategically located in major U.S. markets.
The Company also provides infusion therapy as part of a broader program of
clinical care, at 7 disease-specific outpatient centers focusing on the
treatment of complex long-term diseases and operates a national prescription
benefit drug program.
HealthInfusion Inc. provides home infusion therapy services and
supplies to patients in their homes in 26 states from 34 regional facilities.
Medisys provides comprehensive home infusion therapy services and
products, which involve the intravenous or other administration of
physician-prescribed nutrients, antibiotics, chemotherapeutic agents or other
medications to patients in their homes. The company also provides
comprehensive pharmacy services to long-term care and retirement communities.
These services include prescription dispensing, pharmaceutical consulting, IV
therapy, enteral therapy and medical supplies. The company maintains
operations in Minnesota, Wisconsin, Texas, Ohio, Illinois, Arizona, Missouri,
Kansas and California.
