<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1996
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File number 0-24292
---------------
THERATX, INCORPORATED
--------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0359338
- -------------------------------------- -------------------------------------
State of Jurisdiction of Incorporation I.R.S. Employer Identification Number
or Organization
1105 Sanctuary Parkway, Suite 100
Alpharetta, GA 30201
------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(770) 569-1840
------------------------------------------------------------------
(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, $0.001 Par
Value, as of November 4, 1996, was 20,729,566 shares.
<PAGE> 2
INDEX
THERATX, INCORPORATED
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements.......................................................................... 3
Condensed Consolidated Balance Sheets -- September 30, 1996 (Unaudited) and
December 31, 1995........................................................................... 3
Condensed Consolidated Statements of Income (Unaudited) -- Three months ended September 30,
1996 and 1995............................................................................... 4
Condensed Consolidated Statements of Income (Unaudited) -- Nine months ended September 30,
1996 and 1995............................................................................... 5
Condensed Consolidated Statements of Cash Flows (Unaudited) -- Nine months ended
September 30, 1996 and 1995................................................................. 6
Notes to Condensed Consolidated Financial Statements (Unaudited) -- September 30, 1996........ 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings............................................................................. 17
Item 2. Changes in Securities......................................................................... 17
Item 3. Defaults Upon Senior Securities............................................................... 17
Item 4. Submission of Matters to a Vote of Security Holders........................................... 17
Item 5. Other Information............................................................................. 17
Item 6. Exhibits and Reports on Form 8-K.............................................................. 26
</TABLE>
Page 2
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THERATX, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................. $ 9,943 $ 10,530
Short-term investments.................................................... -- 1,023
Accounts receivable, net of allowances for doubtful accounts and denials.. 94,964 76,766
Third-party settlements, net.............................................. 9,261 7,084
Inventory................................................................. 6,051 5,415
Prepaid expenses and other current assets................................. 9,277 3,942
Receivable from stockholder............................................... -- 379
Income taxes receivable................................................... 1,469 2,010
Deferred income taxes..................................................... 1,737 1,737
-------- --------
Total current assets..................................................... 132,702 108,886
Property and equipment..................................................... 141,657 125,915
Accumulated depreciation................................................... (19,560) (14,238)
-------- --------
122,097 111,677
Intangible assets, net..................................................... 104,584 97,844
Long-term notes receivable................................................. 4,546 8,404
Other assets............................................................... 3,106 2,987
-------- --------
Total assets............................................................. $367,035 $329,798
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses............................... $ 15,475 $ 16,462
Accrued payroll and related expenses...................................... 20,133 16,819
Accrued interest payable.................................................. 1,952 3,679
Long-term debt, current portion........................................... 629 656
-------- --------
Total current liabilities................................................ 38,189 37,616
Long-term debt, net of current portion..................................... 70,726 51,741
Subordinated debt.......................................................... 100,000 100,000
Other liabilities.......................................................... 60 327
Deferred income taxes...................................................... 213 213
Minority interests......................................................... 36 2
Commitments and contingencies
Stockholders' equity:
Common stock.............................................................. 20 20
Additional paid-in capital................................................ 122,514 121,403
Note receivable from stockholder........................................ (100) (100)
Retained earnings......................................................... 35,377 18,576
-------- --------
Total stockholders' equity............................................... 157,811 139,899
-------- --------
Total liabilities and stockholders' equity............................... $367,035 $329,798
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 3
<PAGE> 4
THERATX, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
---------------------
1996 1995
-------- --------
<S> <C> <C>
Revenues:
Patient care revenues, net.................................................. $91,594 $76,385
Management services and other............................................... 2,704 1,944
Sales of medical supplies and related services.............................. 5,119 6,280
------- -------
Total net revenues......................................................... 99,417 84,609
Operating costs and expenses:
Cost of revenues:
Salaries, wages and benefits............................................... 53,118 43,724
Other operating expenses................................................... 13,762 12,023
Cost of medical supply sales and related services 4,183 5,134
Corporate, general and administrative....................................... 9,569 8,244
Depreciation and amortization............................................... 2,774 2,428
Rent........................................................................ 3,189 2,055
------- -------
Total operating costs and expenses......................................... 86,595 73,608
------- -------
Income from operations....................................................... 12,822 11,001
Interest and other expense, net.............................................. 3,262 2,713
------- -------
Income before income taxes and minority interests............................ 9,560 8,288
Provision for income taxes................................................... 3,537 3,165
------- -------
Income before minority interests............................................. 6,023 5,123
Minority interests........................................................... 43 (15)
------- -------
Net income................................................................... $ 6,066 $ 5,108
======= =======
Net income per common share.................................................. $ 0.29 $ 0.25
======= =======
Weighted average number of shares outstanding................................ 21,122 20,651
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
Page 4
<PAGE> 5
THERATX, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------------
1996 1995
----------------------------------
ACTUAL ACTUAL PRO FORMA
---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Patient care revenues, net.......................................... $265,547 $207,042 $217,136
Management services and other....................................... 7,672 4,419 4,419
Sales of medical supplies and related services...................... 15,381 14,114 19,365
-------- -------- --------
Total net revenues................................................. 288,600 225,575 240,920
Operating costs and expenses:
Cost of revenues:
Salaries, wages and benefits....................................... 154,451 120,549 125,127
Other operating expenses........................................... 40,241 31,841 35,396
Cost of medical supply sales and related services.................. 12,375 10,751 15,243
Corporate, general and administrative............................... 29,133 24,458 25,049
Depreciation and amortization....................................... 8,085 6,739 7,463
Rent................................................................ 7,986 5,576 5,650
Merger costs........................................................ -- 600 600
-------- -------- --------
Total operating costs and expenses................................. 252,271 200,514 214,528
-------- -------- --------
Income from operations............................................... 36,329 25,061 26,392
Interest and other expense, net...................................... 8,998 6,518 7,745
-------- -------- --------
Income before income taxes, minority interests and
extraordinary item.................................................. 27,331 18,543 18,647
Provision for income taxes........................................... 10,112 7,663 7,705
-------- -------- --------
Income before minority interests and extraordinary item.............. 17,219 10,880 10,942
Minority interests................................................... (22) 62 62
-------- -------- --------
Income before extraordinary item..................................... 17,197 10,942 11,004
Extraordinary item, net of income taxes.............................. -- (428) (428)
-------- -------- --------
Net income........................................................... $ 17,197 $ 10,514 $ 10,576
======== ======== ========
Earnings per share:
Income before extraordinary item.................................... $ 0.82 $ 0.54 $ 0.53
Extraordinary item.................................................. -- (0.02) (0.02)
-------- -------- --------
Net income......................................................... $ 0.82 $ 0.52 $ 0.51
======== ======== ========
Weighted average number of shares outstanding........................ 20,871 20,292 20,658
======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 5
<PAGE> 6
THERATX, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------------
1996 1995
----------------- -----------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................................... $ 17,197 $ 10,514
Net loss for Helian Health Group, Inc. for the month ended December 31, 1995. (378) --
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization............................................... 8,085 6,739
Provision for bad debts and denials......................................... 3,624 3,563
Net (gain) loss on sale of assets........................................... (303) 137
Equity in net loss of affiliate............................................. 109 6
Write-off of deferred financing costs....................................... -- 612
Amortization of deferred financing costs.................................... 482 461
Deferred income taxes....................................................... -- (703)
Other, net.................................................................. 181 (82)
Changes in operating assets and liabilities:
Accounts receivable and third party settlements............................ (21,052) (28,655)
Prepaid expenses and other current assets.................................. (5,272) (2,700)
Inventory.................................................................. (622) (1,764)
Income taxes receivable or payable......................................... 541 800
Accounts payable and accrued liabilities................................... (2,644) 2,702
---------- ----------
Net cash used in operating activities........................................ (52) (8,370)
---------- ----------
INVESTING ACTIVITIES:
Purchases of property and equipment.......................................... (11,462) (5,928)
Proceeds from sales of assets................................................ 645 83
Purchases of short-term investments.......................................... -- (1,041)
Sales of short-term investments.............................................. 1,023 27
Acquisition of companies and payments related to acquisitions................ (9,903) (87,073)
Cash acquired in acquisitions................................................ 470 74
Other assets................................................................. (616) (1,335)
---------- ----------
Net cash used in investing activities........................................ (19,843) (95,193)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from convertible debt............................................... -- 100,000
Proceeds from long-term debt................................................. 19,000 11,499
Payments on long-term debt................................................... (1,142) (4,953)
Capitalized financing costs.................................................. -- (5,000)
Payments on notes receivable from stockholders............................... 379 182
Payments on capital lease obligations........................................ (22) (980)
Proceeds from issuance of common stock....................................... 1,111 625
Other........................................................................ (18) --
---------- ----------
Net cash provided by financing activities.................................... 19,308 101,373
---------- ----------
Decrease in cash and cash equivalents........................................ (587) (2,190)
Cash and cash equivalents, beginning of period............................... 10,530 11,560
---------- ----------
Cash and cash equivalents, end of period..................................... $ 9,943 $ 9,370
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest....................................................... $ 11,251 $ 6,342
========== ==========
Cash paid for income taxes................................................... $ 9,691 $ 11,126
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
Page 6
<PAGE> 7
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BASIS OF PRESENTATION
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 products distribution and
related services to the long-term care industry.
The balance sheet at December 31, 1995 has been derived from the audited
consolidated financial statements at that date, but does not include all of the
information and footnotes required for complete financial statements under
generally accepted accounting principles.
The accompanying condensed consolidated balance sheet at September 30,
1996, the condensed consolidated statements of income for the three-month and
nine-month periods ended September 30, 1996 and 1995, and the condensed
consolidated statements of cash flows for the nine months ended September 30,
1996 and 1995 are unaudited. These financial statements should be read in
conjunction with the Company's audited financial statements for the year ended
December 31, 1995 included in the Annual Report on Form 10-K. In the opinion
of Company management, the unaudited condensed consolidated financial
statements include all adjustments, consisting only of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position of the Company as of September 30, 1996, and the results of
operations for the three months and nine months ended September 30, 1996 and
1995.
The condensed 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 condensed consolidated financial statements
have been restated for all periods prior to the acquisitions to give effect to
the accounts of RCS and Helian.
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 have been 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 periods have been reclassified to
conform to current period presentation.
Operating results for the three-month and nine-month periods are not
necessarily indicative of the results that may be expected for a full year or
any portion thereof.
PROVISION FOR INCOME TAXES
Taxes have been provided for the three months and the nine months ended
September 30, 1996, at an effective rate of 37%.
2. PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF INCOME
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 nursing facilities, an adult congregate
living facility, a medical products distribution company and a billing and
supply service company (collectively, the "SMS Business"). The acquisition was
recorded using the purchase method of accounting, and the results of operations
subsequent to April 1, 1995 have been included in the accompanying financial
statements.
Page 7
<PAGE> 8
The Pro Forma Condensed Consolidated Statement of Income for the nine months
ended September 30, 1995 gives effect to the acquisition of the SMS Business as
if such acquisition had occurred on January 1, 1995.
The Pro Forma Condensed Consolidated Statement of Income is not
necessarily indicative of the combined results that would have occurred had the
acquisition taken place on January 1, 1995, nor is it necessarily indicative of
results that may occur in the future.
3. NET INCOME PER SHARE
Net income per share is calculated using the weighted average number of
common and common equivalent shares outstanding during the respective periods.
Common stock equivalents consist of the number of shares issuable upon the
exercise of warrants and stock options (calculated using the treasury stock
method).
4. ACQUISITION OF SMS BUSINESS
Effective April 1, 1995, the Company acquired 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. The purchase agreement also provides that, if certain
financial goals for the SMS Business were met during the period commencing
April 1, 1995 and ending February 29, 1996 (the "Earn-Out Period"), the
purchase price was to be increased by up to 888,889 shares. Additionally, if
certain financial goals were exceeded during the Earn-Out Period, the purchase
price was to be further increased by as much as $20,000,000 payable in either
shares of the Company's common stock or cash, at the option of the sellers.
The Company has concluded that the sellers of the SMS Business, as a group, are
not entitled to the 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. While the Company believes it has
valid claims and that the sellers are not entitled to either the shares or any
additional consideration under the earn-out, the sellers filed a lawsuit
against the Company on April 2, 1996 in the Circuit Court for Duval County,
Florida, alleging, among other things, breach of contract and violation of
Florida securities laws, and claiming unspecified damages. The Company
believes that such claims are without merit.
Page 8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
BACKGROUND
TheraTx provides outcomes-oriented healthcare services with a focus in two
specialized practice areas: postacute care and occupational health.
TheraTx provides subacute rehabilitation and respiratory therapy program
management services to skilled nursing facilities and operates owned, leased
and managed inpatient facilities that provide a broad range of subacute,
specialty and basic medical and other geriatric services. Subacute care is
provided to patients who (i) are medically stable but fragile, and recovering
from an accident, illness or surgery; (ii) require a coordinated array of
extensive nursing, rehabilitation or other ancillary services in an inpatient
setting; and (iii) have clearly defined discharge goals, generally to their
homes or other community settings. Subacute care providers bridge the gap
between higher-cost acute care hospitals and similar providers and lower-cost
traditional skilled nursing facilities that lack the intensive coordinated
services required to care for higher acuity patients.
TheraTx provides occupational healthcare and related services in
outpatient clinics. Occupational medicine is the treatment of individuals
injured in the workplace. The treatment of work-related injuries typically
involves intense clinical care, including physical therapy and frequent
examinations. The goal is to return the employee to work as soon as is
medically feasible and minimize the employer's and insurer's lost-time wages,
disability payments and possible legal costs.
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
products distribution and related services to the long-term care industry.
OVERVIEW
TheraTx's patient care revenues primarily are derived from providing
rehabilitation management services to skilled nursing facilities, inpatient
healthcare services to subacute and long-term care patients and outpatient
treatment to patients with work-related injuries. The growth in the Company's
patient care revenues primarily has been attributable to an increase in the
number of rehabilitation management programs and the acquisition of inpatient
skilled nursing facilities. To a lesser extent, such growth has been due to
increased net revenues per rehabilitation management program. Typically, the
net revenues generated by a new rehabilitation management program increase
substantially for a period of less than twelve months; thereafter the rate of
growth decreases. Also contributing to the growth in patient care revenues has
been the Company's increased focus on treating short-stay, subacute patients in
the Company's skilled nursing facilities. Subacute patients generally require
more intensive skilled nursing care and rehabilitation, and more pharmacy and
other ancillary medical services than do patients with lower acuity.
<TABLE>
<CAPTION>
SEPTEMBER 30, (1)
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Number of Rehabilitation Management Programs.... 209 169
Inpatient Facilities:
Number of owned, leased and managed facilities.. 29 21
Licensed beds................................... 3,941 2,866
Number of Occupational Healthcare Clinics........ 16 11
</TABLE>
- --------------------------
(1) Numbers expressed are at end of period.
Page 9
<PAGE> 10
The following table provides certain information related to the Company's
patient care operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------ ----------------------------------------------
1996 1995 1996 1995
------------------------------
SELECTED STATISTICAL DATA(1): ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA
-------------- -------------- -------------- -------------- --------------
Payor Mix: <C> <C> <C> <C> <C>
Medicare.................................... 54.1% 51.7% 53.9% 53.2% 52.1%
Private, managed care and other............. 31.2 37.7 32.2 37.4 37.3
Medicaid.................................... 14.7 10.6 13.9 9.4 10.6
Revenue mix:
Rehabilitation subacute..................... 56.8% 57.6% 57.0% 59.0% 58.2%
Medical subacute............................ 4.8 4.4 5.0 5.0 4.8
Occupational medicine and services.......... 6.9 9.3 7.1 9.2 8.8
Basic healthcare............................ 30.2 24.8 29.5 23.5 24.7
Other specialty............................. 1.3 3.9 1.4 3.3 3.5
</TABLE>
(1) Excludes revenues from management services and other and medical supplies
and related services.
RESULTS OF OPERATIONS -- HISTORICAL
The following table sets forth for the three-month and nine-month periods
ended September 30, 1996 and 1995, the percentage relationship to total net
revenues of certain costs, expenses and income together with the change of such
items from period to period on a percentage basis.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------- -------------------------------
1996 1995 1996 1995
--------------- -------------- --------------- --------------
Revenues: <C> <C> <C> <C>
Patient care revenues, net................... 92.1% 90.3% 92.0% 91.8%
Management services and other................ 2.7 2.3 2.7 2.0
Sales of medical supplies and related
services.................................... 5.2 7.4 5.3 6.2
----- ----- ----- -----
Total net revenues.......................... 100.0 100.0 100.0 100.0
Operating costs and expenses:
Cost of revenues:
Salaries, wages and benefits(1)............. 56.3 55.8 56.5 57.0
Other operating expenses(1)................. 14.6 15.3 14.7 15.1
Cost of medical supply sales and
related services(2)....................... 81.7 81.8 80.5 76.2
Corporate, general and
administrative.............................. 9.6 9.7 10.1 10.8
Depreciation and amortization................ 2.8 2.9 2.8 3.0
Rent......................................... 3.2 2.4 2.8 2.5
Merger costs................................. -- -- -- 0.3
Total operating costs and
expenses................................ 87.1 87.0 87.4 88.9
Income from operations........................ 12.9 13.0 12.6 11.1
Interest and other expense, net............... (3.3) (3.2) (3.1) (2.9)
Income before income taxes, minority
interests, and extraordinary item.......... 9.6 9.8 9.5 8.2
Provision for income taxes.................... 3.5 3.8 3.5 3.4
Income before minority interests and
extraordinary item......................... 6.1 6.0 6.0 4.8
Minority interests............................ -- -- -- --
Income before extraordinary item.............. 6.1 6.0 6.0 4.8
Extraordinary item, net of income
taxes...................................... -- -- -- 0.2
Net income.................................... 6.1 6.0 6.0 4.6
<CAPTION>
1995 -- 1996
PERCENTAGE CHANGE
--------------------------------------
THREE NINE
MONTHS MONTHS
ENDED ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------ ------------------
<S> <C> <C>
Revenues:
Patient care revenues, net.................................. 19.9% 28.3%
Management services and other............................... 39.1 73.6
Sales of medical supplies and related services.............. (18.5) 9.0
Total net revenues......................................... 17.5 27.9
Operating costs and expenses:
Cost of revenues:
Salaries, wages and benefits(1)............................ 21.5 28.1
Other operating expenses(1)................................ 14.5 26.4
Cost of medical supply sales and
related services(2)...................................... (18.5) 15.1
Corporate, general and
administrative........................................... 16.1 19.1
Depreciation and amortization............................... 14.3 20.0
Rent........................................................ 55.2 43.2
Merger costs................................................ -- (100.0)
Total operating costs and expenses......................... 17.6 25.8
Income from operations....................................... 16.6 45.0
Interest and other expense, net.............................. 20.2 38.0
Income before income taxes, minority
interests, and extraordinary item.......................... 15.3 47.4
Provision for income taxes................................... 11.8 32.0
Income before minority interests and
extraordinary item........................................ 17.6 58.3
Minority interests........................................... (386.7) (135.5)
Income before extraordinary item............................. 18.8 57.2
Extraordinary item, net of income
taxes...................................................... -- (100.0)
Net income................................................... 18.8 63.6
</TABLE>
- ----------------------------
(1) Calculated as a percentage of patient care revenues, net and management
services and other revenues.
(2) Calculated as a percentage of sales of medical supplies and related
services.
Page 10
<PAGE> 11
THREE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1995
Patient care revenues, net. The increase in patient care revenues, net
for the quarter ended September 30, 1996 over the corresponding period in 1995
primarily was attributable to growth in rehabilitation management programs and,
to a lesser extent, the acquisition of inpatient skilled nursing facilities.
Rehabilitation management programs experienced approximately 26.2% revenue
growth from 1995 to 1996. This increase primarily is due to the 23.7% increase
in the number of rehabilitation management programs from September 30, 1995 to
September 30, 1996. The Company added 90 rehabilitation management programs
from October 1, 1995 through September 30, 1996 and terminated 50 programs,
ending the quarter with 209 programs. Also, patient care revenues during the
third quarter of 1996 included revenue from six leased facilities added
subsequent to September 30, 1995.
Management services and other. Management services and other revenues
increased during the third quarter of 1996 over the third quarter of 1995
primarily as a result of the addition of staffing services related to the
recruitment and temporary placement of therapists. The remainder of the
increase primarily was due to the acquisition of management contracts for four
occupational healthcare clinics during the first quarter of 1996 and the
addition of two inpatient facilities operated under management agreements
subsequent to September 30, 1995.
Sales of medical supplies and related services. The decrease in sales of
medical supplies and related services for the third quarter of 1996 from the
sales of medical supplies and related services for the same period of 1995
primarily was due to the loss of a large customer in the first quarter of 1996.
Salaries, wages and benefits. The majority of the increase in salaries,
wages and benefits during the three months ended September 30, 1996 over the
same period of 1995 was attributable to personnel costs resulting from the
addition of clinicians required to staff new rehabilitation management
programs. The remainder of the increase in salaries, wages and benefits during
the three months ended September 30, 1996 over the three months ended September
30, 1995, primarily was attributable to increased personnel costs at leased
inpatient facilities added subsequent to September 30, 1995. Personnel costs
as a percentage of patient care net revenues during the three months ended
September 30, 1996, increased slightly as compared to the corresponding 1995
period primarily as a result of the growth in rehabilitation management
programs, which typically have higher personnel costs as a percentage of
patient care net revenues than do inpatient skilled nursing facilities.
Other operating expenses. The increase in other operating expenses during
the three months ended September 30, 1996 over the same period of 1995,
primarily was due to costs at leased inpatient facilities added subsequent to
September 30, 1995. The decrease in other operating expenses as a percentage
of patient care net revenues during the three months ended September 30, 1996,
as compared to the corresponding 1995 period, was primarily due to the addition
of rehabilitation management programs, which typically have lower other
operating costs as a percentage of patient care net revenues than do inpatient
skilled nursing facilities.
Cost of medical supply sales and related service. The decrease in the
cost of medical supply sales and related services during the third quarter of
1996 over the third quarter of 1995 primarily was attributable to the decrease
in medical supply sales and related services from period to period.
Corporate, general and administrative. Corporate, general and
administrative expenses increased during the three months ended September 30,
1996 over the same period of 1995, primarily as a result of higher costs
necessary to support the growth in rehabilitation management programs and the
addition of inpatient facilities.
Depreciation and amortization. The increase in depreciation and
amortization expense for the three months ended September 30, 1996 over the
three months ended September 30, 1995 primarily was related to office and
leasehold improvements and equipment in inpatient skilled nursing facilities
added subsequent to September 30, 1995.
Rent. Rent expense increased during the quarter ended September 30, 1996
over rent expense for the corresponding period in 1995 primarily due to the
addition of six leased inpatient facilities subsequent to September 30, 1995.
The remainder of the increase primarily relates to additional corporate office
space.
Interest and other expense, net. Interest expense, net for the three
months ended September 30, 1996 as compared to the corresponding period in 1995
reflected increased interest expense resulting from additional debt outstanding
under the Company's Senior Credit Facility.
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Provision for income taxes. The Company's effective tax rate for the
third quarter of 1996 was 37% as compared to 38% for the third quarter of 1995.
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995.
Patient care revenues, net. The increase in patient care revenues, net
for the nine months ended September 30, 1996 over the corresponding period in
1995 primarily was attributable to the acquisition of inpatient skilled nursing
facilities and growth in rehabilitation management programs. Patient care
revenues during the nine months ended September 30, 1996 included revenue from
six owned facilities added subsequent to March 31, 1995, and revenue from six
leased facilities added subsequent to September 30, 1995. Rehabilitation
management programs experienced approximately 29.3% revenue growth from 1995 to
1996. This increase primarily is due to the increase in the number of
rehabilitation management programs from September 30, 1995 to September 30,
1996.
Management services and other. Management services and other revenues
increased during the nine months ended September 30, 1996 over the same period
of 1995 primarily as a result of the addition of staffing services related to
the recruitment and temporary placement of therapists. The remainder of the
increase primarily was due to the acquisition of management contracts for four
occupational healthcare clinics during the first quarter of 1996 and the
addition of two inpatient facilities operated under management agreements
subsequent to September 30, 1995.
Sales of medical supplies and related services. The increase in sales of
medical supplies and related services for the nine months ended September 30,
1996 over the same period of 1995 primarily relates to the inclusion of
revenues for the entire nine-month period of 1996 from the medical products
distribution company and the Part B billing and supply service company acquired
April 1, 1995 in the acquisition of the SMS business. The increase in sales
resulting from the inclusion of these revenues for the entire 1996 period is
partially offset by the loss of a large customer in the first quarter of 1996.
Salaries, wages and benefits. A significant portion of the increase in
salaries, wages and benefits during the nine months ended September 30, 1996
over the same period of 1995 was attributable to personnel costs resulting from
the addition of clinicians required to staff new rehabilitation management
programs. The remainder of the increase in salaries, wages and benefits during
the nine months ended September 30, 1996, primarily was attributable to
increased personnel costs at leased inpatient facilities added subsequent to
September 30, 1995. Personnel costs as a percentage of patient care net
revenues during the nine months ended September 30, 1996, decreased slightly as
compared to the corresponding 1995 period primarily as a result of the
acquisition of inpatient skilled nursing facilities subsequent to March 31,
1995, and leased facilities added subsequent to September 30, 1995, which
typically have lower personnel costs as a percentage of patient care net
revenues than do rehabilitation management programs.
Other operating expenses. The increase in other operating expenses during
the nine months ended September 30, 1996 over the same period of 1995,
primarily was due to costs at owned and leased inpatient facilities added
subsequent to March 31, 1995. Also contributing to the period over period
increase in other operating expenses were costs related to rehabilitation
management programs added subsequent to September 30, 1995.
Cost of medical supply sales and related services. The increase in the
cost of medical supply sales and related services during the nine months ended
September 30, 1996 over the nine months ended September 30, 1995 was primarily
attributable to expenses from the medical products distribution company and the
Part B billing and supply service company acquired April 1, 1995 in the
acquisition of the SMS Business.
Corporate, general and administrative. Corporate, general and
administrative expenses increased during the nine months ended September 30,
1996 over the same period of 1995, primarily as a result of higher costs
necessary to support the growth in rehabilitation management programs and the
addition of inpatient facilities. Corporate, general and administrative
expenses decreased as a percentage of revenues during the nine months ended
September 30, 1996 over the nine months ended September 30, 1995, primarily due
to the growth in net revenues combined with efficiencies realized from the
Company's prior investments in personnel, information systems and
administrative support functions.
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Depreciation and amortization. Depreciation and amortization increased
during the nine months ended September 30, 1996 over the corresponding period
in 1995, primarily as a result of the owned and leased facilities acquired
subsequent to March 31, 1995 and the medical products distribution company and
the Part B billing and supply service company acquired April 1, 1995.
Rent. Rent expense increased for the nine months ended September 30, 1996
over the same period of 1995, primarily due to the addition of six leased
inpatient facilities acquired subsequent to September 30, 1995.
Interest and other expense, net. The increase in interest and other
expense, net for the nine months ended September 30, 1996 as compared to the
corresponding period in 1995, primarily was related to a full nine months of
interest incurred on the Company's 8% Convertible Subordinated Debentures due
2002 (the "Notes") issued in February 1995 and interest expense on additional
debt drawn under the Company's credit facility. Interest and other expense for
the nine months ended September 30, 1996 reflected a gain recorded on the sale
of a portion of the Company's partnership interest in an ambulatory surgery
center. Interest and other expense for the nine months ended September 30,
1995 was partially offset by interest income of approximately $965,000 earned
on the proceeds from the Notes prior to their use in the April 1, 1995
acquisition of SMS.
Provision for income taxes. The Company's effective tax rate for the nine
months ended September 30, 1996 was 37.0% compared to 38.8% for the nine months
ended September 30, 1995.
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RESULTS OF OPERATIONS -- PRO FORMA
The Pro Forma Condensed Consolidated Statement of Income for the nine
months ended September 30, 1995 gives effect to the acquisition of the SMS
Business by TheraTx in April 1995, as if such acquisition had occurred on
January 1, 1995.
The following table sets forth for the nine-month period ended September
30, 1996, on a historical basis, and for the nine-month period ended September
30, 1995, on a pro forma basis, the percentage relationship to total net
revenues of certain costs, expenses, and income together with the change of
such items from period to period on a percentage basis.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------- 1995 -- 1996
1996 1995 PERCENTAGE
ACTUAL PRO FORMA CHANGE
--------- ----------- ------------
<S> <C> <C> <C>
Revenues:
Patient care revenues, net............................................ 92.0% 90.1% 22.3%
Management services and other......................................... 2.7 1.8 73.6
Sales of medical supplies and related services........................ 5.3 8.1 (20.6)
----- -----
Total net revenues................................................... 100.0 100.0 19.8
Operating costs and expenses:
Cost of revenues:
Salaries, wages and benefits(1)...................................... 56.5 56.5 23.4
Other operating expenses(1).......................................... 14.7 16.0 13.7
Cost of medical supply sales and related services(2)................. 80.5 78.7 (18.8)
Corporate, general and administrative................................. 10.1 10.4 16.3
Depreciation and amortization......................................... 2.8 3.1 8.3
Rent.................................................................. 2.8 2.3 41.3
Merger costs.......................................................... -- .2 (100.0)
Total operating costs and expenses................................... 87.4 89.0 17.6
Income from operations................................................. 12.6 11.0 37.7
Interest and other expense, net........................................ (3.1) (3.2) 16.2
Income before income taxes, minority interests and extraordinary item.. 9.5 7.8 46.6
Provision for income taxes............................................. 3.5 3.2 31.2
Income before minority interests and extraordinary item................ 6.0 4.6 57.4
Minority interests..................................................... -- -- (135.5)
Income before extraordinary item....................................... 6.0 4.6 56.3
Extraordinary item, net of income taxes................................ -- 0.2 (100.0)
Net income............................................................. 6.0 4.4 62.6
</TABLE>
- -------------------------
(1) Calculated as a percentage of patient care revenues, net and management
services and other revenues.
(2) Calculated as a percentage of sales of medical supplies and related
services.
NINE MONTHS ENDED SEPTEMBER 30, 1996 (ACTUAL) COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 (PRO FORMA)
Patient care revenues, net. The increase in patient care revenues, net
for the nine months ended September 30, 1996 over the corresponding pro forma
period in 1995 primarily was attributable to growth in rehabilitation
management programs and the addition of inpatient skilled nursing facilities.
Rehabilitation management programs experienced approximately 29.3% revenue
growth from 1995 to 1996. This increase primarily is due to the 23.7% increase
in the number of rehabilitation management programs from September 30, 1995 to
September 30, 1996. The Company added 90 rehabilitation management programs
from October 1, 1995 through September 30, 1996 and terminated 50 programs,
ending the period with 209 programs. Patient care revenues during the nine
months ended September 30, 1996 included revenue from six leased facilities
added subsequent to September 30, 1995.
Management services and other. Management services and other revenues
increased during nine months ended September 30, 1996 over the same pro forma
period of 1995 primarily as a result of the addition of staffing services
related to the recruitment and temporary placement of therapists. The
remainder of the increase primarily was due to the acquisition of management
contracts for four occupational healthcare clinics during the first quarter
of 1996 and the addition of two inpatient facilities operated under management
agreements subsequent to September 30, 1995.
Sales of medical supplies and related services. The decrease in sales of
medical supplies and related services for the nine months ended September 30,
1996 from the pro forma sales of medical supplies and related services for the
same period of 1995 primarily was due to the loss of a large customer in the
first quarter of 1996.
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Salaries, wages and benefits. The increase in salaries, wages and
benefits during the nine months ended September 30, 1996 over same proforma
period of 1995 was attributable to increased personnel costs resulting from the
addition of clinicians required to staff new rehabilitation management
programs. The remainder of the increase in salaries, wages and benefits during
the nine months ending September 30, 1996 over the proforma period of 1995 was
primarily attributable to personnel costs at leased inpatient facilities added
subsequent to September 30, 1995.
Other operating expenses. The majority of the increase in other operating
expenses during the nine months ended September 30, 1996 over pro forma other
operating expenses for the same period of 1995 was due to costs at leased
inpatient facilities added subsequent to September 30, 1995. The remainder of
the increase for the nine months ending September 30, 1996 over the pro forma
period of 1995 primarily was attributable to the increase in the number of
rehabilitation management programs subsequent to September 30, 1995. The
decrease in other operating expenses as a percentage of patient care net
revenues during the nine months ended September 30, 1996 from the same pro
forma period of 1995 resulted from the reduction of ancillary charges for
rehabilitation services at owned facilities and the growth in rehabilitation
management programs, which typically have lower other operating expenses as a
percentage of net revenues than do owned facilities.
Cost of medical supply sales and related services. The decrease in the
cost of medical supply sales and related services during the nine months ended
September 30, 1996 from the pro forma costs for the same period of 1995
primarily was attributable to the decrease in medical supply sales and related
services from period to period.
Corporate, general and administrative. Corporate, general and
administrative expenses increased during the nine months ended September 30,
1996 over the same pro forma period of 1995 primarily as a result of higher
costs necessary to support the growth in rehabilitation management programs and
the addition of inpatient facilities. Corporate, general and administrative
expenses decreased as a percentage of revenues during the nine months ended
September 30, 1996 from the pro forma period ended September 30, 1995,
primarily due to the growth in net revenues combined with efficiencies realized
from the Company's prior investments in personnel, information systems and
administrative support functions.
Depreciation and amortization. The increase in depreciation and
amortization expense for the nine months ended September 30, 1996 over the
corresponding pro forma period ended September 30, 1995, was primarily
attributable to the addition of inpatient facilities and equipment used in the
Company's rehabilitation management programs.
Rent. Rent expense increased during the nine months ended September 30,
1996 over the pro forma rent expense for the corresponding period in 1995
primarily due to the addition of six leased inpatient facilities subsequent to
September 30, 1995.
Interest and other expense, net. The increase in interest and other
expense, net for the nine months ended September 30, 1996 as compared to pro
forma interest and other expense, net for the corresponding period in 1995,
primarily was related to interest on additional debt drawn under the Company's
credit facility to finance acquisitions and working capital requirements. This
increase was partially offset by a gain on the sale of a portion of the
Company's partnership interest in an ambulatory surgery center during the
second quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
TheraTx has financed its cash requirements primarily through public and
private sales of capital stock, secured and unsecured debt and equipment lease
financings. For the nine months ended September 30, 1996 and 1995, net cash
used in operating activities was $52 thousand and $8.4 million, respectively.
Net cash provided by financing activities for the nine months ended September
30, 1996 and 1995 was $19.3 million and $101.4 million, respectively.
TheraTx's capital requirements have related primarily to acquisitions and
increases in accounts receivable.
On May 8, 1995, TheraTx entered into a $125.0 million Senior Credit
Facility ("Senior Credit Facility") with a group of lenders. 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 $5.0 million swing line to accommodate same-day borrowings and a $5.0 million
stand-by letter of credit facility. Future borrowings under
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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 TheraTx 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.
As of September 30, 1996, TheraTx had $67.0 million outstanding under the Senior
Credit Facility.
Accounts receivable, net of allowances were $95.0 million and $76.8
million at September 30, 1996 and December 31, 1995, respectively. Estimated
settlements due from third-party payors aggregated $9.3 million and $7.1
million at September 30, 1996 and December 31, 1995, respectively.
Effective February 1, 1996, TheraTx acquired all of the outstanding shares
of WCMC Management, Inc., which manages four occupational healthcare clinics,
for $2.0 million in cash and a short-term promissory note for $1.5 million.
In April 1996, the Company acquired Professional Rehabilitation
Associates, Inc., a staffing services company providing temporary placement of
therapists, for $4.1 million in cash and Occupational Health International,
P.C., an occupational healthcare clinic, for $2.1 million in cash.
In June 1996, the Company also acquired an occupational medical clinic in
the Raleigh, North Carolina area for $1.5 million in cash.
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 $1.8 million 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. The Company also purchased an adjacent 6.2 acre parcel of
land for the development of a 120-bed skilled nursing facility for $1.1 million
on July 16, 1996.
TheraTx currently has no material commitments for capital expenditures,
other than as discussed in the preceding paragraphs. TheraTx believes that its
future capital requirements will depend upon a number of factors, including the
amount of cash generated from operations and the rate at which TheraTx grows
through additional sites, expanded services and acquisitions.
The Company believes that cash from operations and borrowings available
under existing credit facilities will be sufficient to meet its cash needs for
at least the next twelve months. However, acquisition opportunities or other
factors could require the Company to seek additional financing prior to such
time. There can be no assurance that additional financing will be available or
on terms favorable to the Company and its stockholders.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On March 15, 1996, the Company filed a lawsuit in the United States
District Court, Northern District of Georgia, Atlanta Division, against
the sellers of the SMS Business and certain of their affiliates alleging
various claims, including misrepresentations in connection with the sale
of the SMS Business. The SMS acquisition agreements included an
earn-out pursuant to which 888,889 shares of TheraTx stock were issued
into escrow and up to an additional $20.0 million in TheraTx stock or
cash would be paid to the sellers if certain financial performance
objectives were achieved by the SMS Business during the eleven-month
period ended February 29, 1996. The Company has concluded that the
sellers of the SMS Business, as a group, 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.
While the Company believes it has valid claims and that the sellers are
not entitled to either the Escrow Shares or any additional
consideration, the sellers filed a lawsuit against the Company on April
2, 1996 in the Circuit Court for Duval County, Florida, alleging, among
other things, breach of contract and violation of Florida securities
laws and claiming unspecified damages. The Company believes that such
claims are without merit. In addition to being time-consuming and
costly, however, litigation is subject to inherent uncertainty. In the
event the SMS Sellers were to ultimately prevail on their claims, it
could have a material adverse effect on the Company's financial
condition.
ITEM 2. CHANGES IN SECURITIES -- None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES -- None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS -- None
ITEM 5. OTHER INFORMATION
This report contains certain statements which may be regarded as
"forward-looking statements" (as that term is defined in the Private
Securities Litigation Reform Act of 1995). Such forward-looking
statements involve risks and uncertainties. The Company's actual
results may differ significantly from the results discussed in the
forward-looking statements. Factors that might cause such difference
include, but are not limited to, those items discussed below.
RISK FACTORS
DEPENDENCE ON REIMBURSEMENT BY THIRD-PARTY PAYORS
Based on the Company's billing records, revenues received directly
or indirectly from the Medicare program for the Company's services
represent a significant portion of the Company's net revenues. The
Medicare program is subject to statutory and regulatory changes,
retroactive and prospective rate adjustments, administrative rulings and
funding restrictions, all of which could have the effect of limiting or
reducing reimbursement levels for the Company's services. During late
1995, Congress considered (but did not enact) legislation to reduce
Medicare spending significantly. The Company anticipates that the
federal government will continue to review and assess changes in payment
methodologies under the Medicare program. Due to the uncertainties
regarding the ultimate features of these proposals, their enactment and
implementation, the Company cannot predict whether any changes to this
program will be adopted or, if adopted, the effect, if any, such changes
will have on the Company. Any significant decrease in Medicare
reimbursement levels could have a material adverse effect on the
Company. There can be no assurance that facilities operated by the
Company or third-party facilities in which the Company manages
rehabilitation and respiratory therapy management programs, now or in
the future, will continue to receive Medicare payments at current
levels.
The Company bills on a "salary equivalency" fee-based schedule for
physical therapy services provided to Medicare patients in its
rehabilitation and respiratory therapy management programs. Skilled
nursing facilities are, with certain exceptions, only entitled to bill
Medicare for such physical therapy services based on the salary
equivalency guidelines. As a result, the Company's billing rates and
gross margins for physical therapy under the salary equivalency
guidelines for physical therapy services are significantly lower than
those for speech language pathology and occupational therapy, which are
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reimbursed under the "prudent buyer" rule. The Health Care Financing
Administration ("HCFA") is currently considering changes to the Medicare
reimbursement guidelines for therapy services. The Company
believes that HCFA intends to update the salary equivalency guidelines
for physical therapy and respiratory therapy services and to apply salary
equivalency guidelines to speech and occupational therapy services. In
addition, certain HCFA offices issued a memoranda containing specific
data which intermediaries may use in making "prudent buyer" decisions
regarding payment for occupational and speech therapy services. The
Company believes the data, if followed, would result in a significant
decrease in the amounts reimbursed for such services throughout the
industry. Although the Company has no way to determine when any changes
will be made to the current Medicare reimbursement guidelines for therapy
services, the imposition of salary equivalency guidelines on speech and
occupational therapy services that results in a significant decrease in
reimbursement rates for such services, or the widespread use by
intermediaries of the data in the HCFA memoranda, would significantly
decrease the Company's margins and have a material adverse effect on the
Company's business.
The Medicare program also imposes various limits on reimbursement
for skilled nursing facility services, including limits on reimbursement
for routine costs. Under the Omnibus Budget Reconciliation Act of 1993,
these cost limits were frozen at 1993 levels until October 1, 1995. No
legislation has been passed to continue the freeze, so current limits are
being calculated with index factors as if there had been no freeze.
Exceptions to these limits are available for, among other things, the
provision of atypical services. Due in part to the provision of subacute
services, the Company's costs for care delivered to Medicare patients in
certain of its skilled nursing facilities have generally exceeded the
routine cost limits. The successful operation of the Company's skilled
nursing facilities will depend in part on its ability to obtain
reimbursement for those costs that exceed the Medicare-established
reimbursement limits by obtaining exceptions. The General Accounting
Office ("GAO") is investigating routine cost limit exceptions to
determine, among other things, if subacute providers are capable of
providing more complex services than other skilled nursing facilities,
the financial impact on Medicare of skilled nursing facilities with
exceptions for ancillary services, and HCFA's ability to detect
inappropriate exception requests. The Company's failure to recover
excess costs or obtain such exceptions could adversely affect its results
of operations. In addition, fiscal intermediaries sometimes review
claims for therapy services prior to payment, which may result in payment
delays or disallowances.
The Company's facilities that participate in applicable state
Medicaid programs are subject to the risk of changes in Medicaid
reimbursement and payment delays resulting from budgetary shortfalls of
state Medicaid programs. The Company's current concentration of skilled
nursing facilities in certain states exposes it to the risk of changes in
Medicaid reimbursement programs in those states. Further, some state
Medicaid programs require certification of all beds in the facility,
which may limit the ability of a facility in any such state to establish
a distinct part Medicare unit for subacute care.
The Company's surgical centers are also subject to limits on
reimbursement. Surgical centers are currently reimbursed for allowed
charges for certain procedures. Federal law requires Medicare rates paid
to surgical centers to be reviewed on an annual basis. A significant
reduction in Medicare rates paid to the Company's surgical centers could
have a material adverse effect on the Company's surgical center business.
The Company also has contracts with private payors to provide
certain healthcare services to covered patients in its skilled nursing
facilities at a set per diem rate for each patient. The Company
anticipates that, due to the influence of managed care, the number of
patients served on a per diem, episodic or capitated basis will increase
in the future. There can be no assurance that the rates paid to the
Company by Medicare, Medicaid or other payors will be adequate to
reimburse the Company for the cost of providing services, or that a
significant decrease in Medicare or Medicaid reimbursement levels would
not have a material adverse effect on the Company's business.
HEALTH CARE REFORM
Political, economic and regulatory influences are resulting in
fundamental changes in the healthcare industry in the United States.
Congress has in the recent past, and may again in the near future,
consider a number of legislative proposals to significantly reduce
Medicare and Medicaid spending and to change payment methodologies for
various items and services, including those provided by the Company. In
addition, some states in which the Company operates are considering or
have adopted
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various healthcare reform proposals, including among other things,
demonstration projects to create managed care programs for Medicaid
beneficiaries which require waivers to federal Medicaid choice of
provider, coverage and payment requirements. Although these
demonstration projects do not currently apply to long-term care services,
these programs could in the future limit the types of long-term care
services or other providers available to Medicaid beneficiaries. The
Company anticipates that Congress and state legislatures will continue to
review and assess proposals to reduce healthcare spending, alternative
healthcare delivery systems and payment methods and that public debate of
these issues will likely continue in the future. Due to uncertainties
regarding the ultimate features of these budget reform initiatives and
their enactment and implementation, the Company cannot predict which, if
any, reform proposals will be adopted, when they may be adopted or what
impact they may have on the Company. There can be no assurance that such
reforms, if enacted, will not have a material adverse effect on the
Company.
GOVERNMENT REGULATION
The federal government, and all states in which the Company
operates, regulate various aspects of the Company's business. The
development and operation of skilled nursing facilities and surgical
centers is subject to federal, state and local licensure and
certification laws. Skilled nursing facilities and surgical centers are
subject to periodic inspection by governmental and other authorities to
assure compliance with the various standards established for continued
licensure under state law and certification under the Medicare and
Medicaid programs. Many states have adopted certificate of need or
similar health planning laws that generally require state agency approval
of certain new healthcare services or capital expenditures. The failure
to obtain or renew any required regulatory approvals or licenses could
materially and adversely affect the Company's ability to offer its
services, to receive Medicare and Medicaid payments and to expand its
services to new locations, any of which could adversely affect the
Company's business. From time to time, the Company has received, and may
in the future receive, notices from governmental agencies that a facility
or center fails to comply with regulatory requirements. The Company
takes what it believes to be appropriate action in each such
circumstance, although there can be no assurance that the Company will
not be adversely affected due to an alleged failure at a facility or
center to comply with regulatory requirements.
Effective July 1, 1995, HCFA promulgated a new survey, certification
and enforcement rules governing nursing facilities participating in the
Medicare and Medicaid programs. Among other things, the new HCFA rules
governing survey and certification of long-term care facilities define or
redefine a number of terms used in the survey and certification process
and grant HCFA and states various remedies to be imposed against
facilities found not to be in substantial compliance with program
requirements including the ability to impose civil monetary penalties for
non-compliance on a per diem basis. The regulations subject long-term
care facilities to greater scrutiny. While the Company believes its
facilities are in substantial compliance with program requirements, due
to the breadth of the new enforcement rules and their relatively recent
effective date, the Company's facilities could be subject to penalties
due to an alleged failure to comply with regulatory requirements.
Many states are considering or have passed legislation reforming
their workers' compensation laws. These reforms generally relate to
maximum reimbursement rates for occupational health services or provide
employers greater control over the provision of medical care to their
employees. Changes in workers' compensation laws may negatively impact
the demand for such services, lower reimbursement rates for such services
or create regulatory advantages for the Company's competitors. There can
be no assurance that changes in such laws will not adversely affect the
Company's business.
Certain states in which the Company conducts its occupational
healthcare and surgical center businesses have "corporate practice of
medicine" laws which may prohibit the ownership or operation of
healthcare facilities by a non-licensed entity or person or any form of
relationship which allows a non-licensed entity or person to exercise
control over the practice of medicine. The Company believes that each of
the healthcare facilities which it owns or operates is in compliance with
the above-referenced state laws. However, there can be no assurance that
these laws will not change in the future or that governmental authorities
will not find that certain actions taken by the Company violate the
corporate practice of medicine doctrine, either of which could have a
material adverse effect on the Company's business.
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INTEGRATION OF ACQUISITIONS
Prior to June 1994, the Company had neither operated skilled nursing
facilities nor provided any healthcare services other than rehabilitation
therapy services. Since that time, the Company has acquired numerous
skilled nursing facilities, a respiratory therapy business, a medical
supply business, a Medicare Part B billing and supply service, several
occupational health businesses, a surgical center business and a staffing
services business. Due in part to differences between the historical
core business of the Company and those of the acquired businesses, such
acquisitions have placed and may continue to place significant demands
on the Company's management and other resources. There can be no
assurance that these businesses can be integrated successfully, that
there will be any operating efficiencies between the businesses or that
the combined businesses can be operated profitably. The Company may
acquire other businesses in the future. The failure to integrate and
operate these or other acquired companies successfully could have a
material adverse effect on the Company's business and future prospects.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Because skilled nursing facility services are similar to those
provided by existing and potential customers of the Company's
rehabilitation management programs, there can be no assurance that
acquisitions of skilled nursing facilities will not adversely affect the
Company's relationships with rehabilitation management program customers
or the Company's ability to market its rehabilitation management
programs. Also, certain services of the Company compete with some of the
customers of the medical supply distribution business and the Medicare
Part B billing and supply service acquired by the Company. The Company
has had rehabilitation management program and medical supply contracts
canceled due, in part, to the Company being perceived as a competitor of
such customer. There can be no assurance that the acquisition of certain
businesses by the Company, or the provision of existing or additional
services by the Company, including those arising from the acquisition of
complementary businesses, will not in the future adversely affect the
relationships with the Company's customers or adversely affect the
operations, revenue or prospects of the Company.
The Company may acquire additional facilities and other
complementary businesses and its success will be partially dependent upon
its ability to manage and integrate the operations of acquired entities.
There can be no assurance that the Company will be successful in
identifying, acquiring, managing or integrating additional businesses.
Moreover, there can be no assurance that the acquisition by the Company
of complementary businesses will not adversely affect the Company's
relationships with existing or potential customers. In addition,
acquisitions may place significant demands on the Company's management
and other resources. As a result, there can be no assurance that future
acquisitions will not adversely affect the Company's business.
TERMINATION OF KEY CUSTOMER CONTRACTS
Contract terms for rehabilitation therapy management programs
generally range from one to three years. The Company's contract terms
for management of certain of the occupational medical facilities and
surgical centers generally range from one to ten years. There can be no
assurance that the Company's customers will continue to do business with
the Company following expiration of their current contract terms or
earlier if such contracts are terminable prior to expiration. The
termination or non-renewal of any material contracts could result in a
significant decrease in the Company's net revenues and could have a
material adverse effect on the Company's business, financial condition
and results of operations.
As of April 1995, the Company managed rehabilitation programs in
twenty facilities owned by Convalescent Services, Inc. ("CSI"). The
Company and CSI entered into an agreement pursuant to which the Company
terminated its programs in all of such facilities between April and
December 1995. In addition, the Company's contracts with facilities
owned by Life Care Centers of America, Inc. ("Life Care") accounted for
an aggregate of 7.0% and 0.8% of the Company's net revenues for the
quarters ended September 30, 1995 and 1996, respectively. During August
1995, Life Care informed the Company that it intended to offer its own
rehabilitation programs within its facilities and would not be renewing
its existing contracts with the Company. During the first nine months of
1996, contracts in 24 Life Care facilities were terminated and contracts
in an additional four Life Care facilities will be terminated prior to
the end of 1996.
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INCREASED LEVERAGE
In February 1995, the Company raised $96.5 million, net of
commissions and financing costs, through the sale of $100.0 million in
aggregate principal amount of 8% Convertible Subordinated Notes due 2002
(the "Notes"). The sale of the Notes increased the ratio of the Company's
long-term debt to total capitalization significantly from 28.8% at
December 31, 1994 to 52.0% at December 31, 1995. In addition, on May 5,
1995, the Company increased its senior credit facility from $65.0 million
to $125.0 million, which may allow the Company to increase its leverage.
As a result of this increased leverage, the Company's principal and
interest obligations have increased substantially. The degree to which
the Company is leveraged could adversely affect the Company's ability to
obtain additional financing for working capital, acquisitions or other
purposes and could make it more vulnerable to economic downturns
and competitive pressures.
SUBORDINATION OF NOTES
The indebtedness evidenced by the Notes is subordinate to the prior
payment in full of all Senior Indebtedness (as such term is defined in an
indenture dated as of February 15, 1995 (the "Indenture"), between the
Company and State Street Bank and Trust Company, as trustee). As of
December 31, 1995, the Company had approximately $52.4 million of
indebtedness outstanding (excluding accrued interest) which constituted
Senior Indebtedness. As of December 31, 1995, there was also outstanding
approximately $37.5 million of indebtedness and other obligations of
subsidiaries of the Company (excluding intercompany liabilities and
liabilities of a type not required to be reflected as a liability on the
balance sheet of such subsidiaries in accordance with generally accepted
accounting practices) as to which the Notes would have been effectively
structurally subordinated. The Indenture does not limit the amount of
future indebtedness, including Senior Indebtedness, which the Company or
any of its subsidiaries can create, incur, assume or guarantee. During
the continuance beyond any applicable grace period, if any, of any
default of the payment of principal, premium, interest or any other
payment due on any Senior Indebtedness, no payment of principal or
interest on the Notes may be made by the Company. In addition, upon any
distribution of assets of the Company upon any dissolution, winding up,
liquidation or reorganization, the payment of the principal and interest
on the Notes is subordinated to the extent provided in the Indenture to
the prior payment in full of all Senior Indebtedness. By reason of the
subordination, in the event of the Company's liquidation or dissolution,
holders of Senior Indebtedness may receive more, ratably, and holders of
the Notes may receive less, ratably, than the other creditors of the
Company. In addition, the Notes are obligations exclusively of the
Company and not of any of its subsidiaries. The Company's cash flow and
ability to service debt, including the Notes, may be dependent upon the
earnings of its subsidiaries and the distribution of those earnings to,
or upon royalties, license fees, loans or other payments of funds by
those subsidiaries to the Company. The subsidiaries are separate and
distinct legal entities and have no obligation, contingent or otherwise,
to pay any amounts due pursuant to the Notes or to make any funds
available therefor, whether by dividends, loans or other payments. In
addition, the payment of dividends and the making of loans and advances
to the Company by its subsidiaries may be subject to statutory,
contractual or other restrictions, are dependent upon the earnings of
those subsidiaries and are subject to various business considerations.
LIMITATIONS ON REPURCHASE UPON A DESIGNATED EVENT
Upon the occurrence of a Designated Event (as defined in the
Indenture), each holder of Notes will have certain rights, at the
holder's option, to require the Company to repurchase all or a portion of
such holder's Notes. If a Designated Event were to occur, there can be
no assurance that the Company would have sufficient funds to pay the
repurchase price for all Notes tendered by the holders thereof. In
addition, the Company's repurchase of Notes as a result of the occurrence
of a Designated Event may be prohibited or limited by, or create an event
of default under, the terms of agreements relating to borrowings which
the Company may enter into from time to time, including agreements
relating to Senior Indebtedness. Failure of the Company to repurchase
Notes at the option of the holder upon a Designated Event would result in
an Event of Default (as defined in the Indenture) with respect to the
Notes. No Notes may be redeemed at the option of holders upon a
Designated Event if there has occurred and is continuing an Event of
Default (other than a default in the payment of the repurchase price with
respect to such Notes on the repurchase date).
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COMPETITION
The Company anticipates that competition in providing rehabilitation
services to skilled nursing facilities will continue to increase. The
Company competes with contract rehabilitation companies for contracts
with skilled nursing facilities. In addition, many of the Company's
existing and potential customers, including Life Care Centers of America,
Inc., are developing subacute care programs within their facilities. The
development and management by skilled nursing facilities of their own
subacute care programs could adversely affect the Company's ability to
maintain and grow its rehabilitation management programs. Rehabilitation
management program customers also compete for patient referrals with
other providers of subacute care. Any inability of such customers to
compete effectively in this market could adversely affect the Company's
business.
The Company's inpatient facilities compete with general acute care
hospitals, skilled nursing facilities, rehabilitation hospitals,
long-term care hospitals and other subacute and specialty care providers.
Cost containment efforts, which encourage more efficient utilization of
acute care hospital services, have resulted in decreased hospital
occupancy in recent years. As a result, a significant number of general
acute care hospitals have converted portions of their facilities to other
purposes, including subacute care.
The Company believes that the primary factors in competing for
subacute patients and programs are the scope and quality of services
offered, the price of such services and the ability to demonstrate
cost-effective, enhanced and predictable clinical outcomes. The Company
believes it competes favorably with respect to each of these factors.
TheraTx's medical supply distribution business competes with
national and regional product supply companies. TheraTx believes that
the primary factors in competing for product supply business are the
price and quality of the products offered and service. TheraTx believes
that it competes favorably with respect to these factors.
The Company's occupational medicine facilities compete with other
healthcare providers in their respective geographic regions. Group
health and workers' compensation insurers, HMOs and hospitals all compete
in the occupational health business. TheraTx believes that the primary
factors in competing for occupational medicine business are the scope and
quality of services offered, expertise in occupational medicine and the
price of services.
The Company anticipates that competition in each of the Company's
practice areas will continue to increase. Many competitors have
significantly greater financial and other resources than the Company.
Many competitors also have greater public recognition and acceptance, or
offer a wider range of products or services than the Company. There can
be no assurance that the Company can compete effectively with respect to
the factors referenced above in any of the Company's practice areas.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company anticipates that its existing capital resources and
credit facilities will be adequate to satisfy its capital requirements
for at least the next twelve months. The Company's future capital
requirements will depend, however, on many factors including, but not
limited to, the rate at which it opens new programs, the size and timing
of future acquisitions, if any, and the availability of additional
financing. To the extent that existing resources and future earnings are
insufficient to fund the Company's activities, the Company may need to
raise additional funds through debt or equity financings. No assurance
can be given that such additional financing will be available or that, if
available, it can be obtained on terms favorable to the Company and its
stockholders. The unavailability of adequate funds could adversely
affect the Company's operations and ability to implement its strategy.
RISKS ASSOCIATED WITH INTANGIBLE ASSETS
As of September 30, 1996, approximately $104.6 million, or 28.5% of
the Company's total assets were intangible assets. Such intangible
assets consist primarily of goodwill resulting from acquisitions. There
can be no assurance that the value of such intangible assets will ever be
realized by the Company, particularly in any sale or liquidation of the
Company. Any significant decrease in the value of such intangible assets
or increase in the rate of amortization thereof would adversely affect
the Company's financial position and results of operations.
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POSSIBLE VOLATILITY OF PRICE OF STOCK AND NOTES
The stock market has experienced extreme price and volume
fluctuations which have particularly affected the market price for many
healthcare companies and which have often been unrelated to the operating
performance of these companies. The trading price of TheraTx Common
Stock and the Notes could also be subject to significant fluctuations in
response to variations in quarterly operating results, the gain or loss
of significant contracts, changes in management, future announcements
concerning the Company, legislative or regulatory changes, general trends
in the industry and other events or factors.
POTENTIAL SHORTAGE OF CLINICIANS; INCREASED LABOR COSTS
The Company employs or contracts with a significant number of
physicians, skilled speech-language pathologists, occupational
therapists, physical therapists, nurses and aides. Current industry
demand for these clinicians exceeds the number of available clinicians
and the Company anticipates that this shortage will continue or increase.
The shortage has resulted, and will continue to result, in intense
competition and increasing salaries for these clinicians. There can be
no assurance that reimbursement for the Company's services will be
sufficient to cover increased personnel costs, which would adversely
affect the Company's results of operations. In addition, due in part to
the rapid growth in the number of its rehabilitation management programs,
the Company is required to hire more costly temporary contract therapists
to meet its needs. The lack of available clinicians and the need to hire
temporary contract therapists could limit the Company's ability to expand
and adversely affect its results of operations.
COLLECTABILITY OF RECEIVABLES
It often takes the Company in excess of 100 days to collect accounts
receivable from third-party payors and customers. While the Company
believes it maintains adequate reserves, third-party payors and customers
in the healthcare industry from time to time contest or delay payment for
services provided. The inability of the Company to collect a significant
portion of its receivables in a timely manner could adversely affect the
Company's results of operations. In addition, certain of the Company's
skilled nursing facilities are subject to limits on reimbursement for
routine costs. The Company's failure to recover excess costs or to
obtain exceptions to these reimbursement limits could adversely affect
the Company's results of operations strategy.
DEPENDENCE ON KEY PERSONNEL
The Company's success depends upon its executive officers and
members of its management team, the loss of one or more of whom could
adversely affect the Company's business. The Company's success also
depends on its ability to attract and retain qualified clinical
management, marketing and other personnel. The Company competes with
general acute care hospitals, rehabilitation facilities, nursing homes,
ambulatory care facilities and other healthcare providers for the
services of physicians, registered nurses, therapists and other clinical
personnel. Such clinical personnel are in high demand and are often
subject to competing offers. There can be no assurance that the Company
will be able to attract and retain the qualified personnel necessary for
its business.
LIABILITY CLAIMS
The Company's services subject it to an inherent risk of liability.
Malpractice claims may be asserted against the Company if its services
are alleged to have resulted in patient injury or have other adverse
effects. The Company maintains professional malpractice insurance and
other insurance coverage which it believes to be adequate.
The Company's insurance policies generally must be renewed on an
annual basis. Although the Company has not experienced difficulty in
obtaining insurance coverage at acceptable rates, there can be no
assurance that the Company will be able to obtain such insurance on
commercially reasonable terms in the future, if at all, or that any such
insurance will be adequate. In addition, the Company is from time to
time subject to litigation that is not covered by insurance and several
of such claims are pending against the Company, including claims asserted
by the sellers of the SMS Business. See Item 1, Legal Proceedings.
There can be no assurance that either current or future uninsured claims
would not have a material adverse effect on the Company's business,
financial position, results of operations or liquidity. The Company's
medical supply distribution business also subjects the Company to an
inherent risk of product liability claims.
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SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION OF ADDITIONAL SHARES
Future sales of TheraTx Common Stock in the public market, including
shares issuable upon conversion of the Notes, could adversely affect the
market price of the TheraTx Common Stock. The Company has also provided
certain holders of TheraTx Common Stock and the Notes with registration
rights.
LIMITED OPERATING HISTORY; PROFITABILITY
The Company, and certain significant businesses which it has
acquired, have each experienced significant losses and have limited
histories of profitability. There can be no assurance that the Company
will be profitable in the future. The future operating results of the
Company will depend on many factors, including general economic
conditions, the level of competition, the ability to attract and retain
qualified personnel at competitive rates, government regulation and
reimbursement policies, and the ability to integrate other complementary
businesses into its current organization.
IMPACT OF PHYSICIAN SELF-REFERRAL AND ANTI-REMUNERATION LAWS
The Company is also subject to federal and state laws that prohibit
certain direct and indirect payments between healthcare providers that
are intended, among other things, to induce or encourage the referral of
patients to, or the recommendation of, a particular provider of items or
services. In addition, certain federal and state laws have recently been
enacted to prohibit physician self-referrals for certain "designated
health services" rendered to patients by a physician who has an ownership
interest or other financial relationship with the provider. Although
physicians with whom the Company contracts for medical director services
are not typically referring physicians, these prohibitions could, among
other things, require the Company to modify its contractual arrangements
with its medical directors or prohibit such physicians from referring
patients to the Company. Further, certain of the surgical centers
operated by the Company are limited partnerships in which certain
referring physicians or physician groups have an ownership interest.
Although the Company believes that it falls within an exemption
permitting the referring physicians to have an ownership interest in
certain of its centers, there are no available regulations which
interpret the scope of the exemption relied upon by the Company and there
is no assurance that the Company and its physician partners would fall
within the requirements of such exemption. If the laws are subsequently
interpreted to prohibit physician ownership in certain of the Company's
centers, the Company may be required to unwind, sell or buy the existing
physician limited partner interests, and the Company would be unable to
use the physician limited partnership structure in future ambulatory
surgery center or similar developments.
POTENTIAL EFFECT OF ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation and Bylaws contain
provisions that may discourage or prevent certain types of transactions
involving a change in control of the Company, including transactions in
which the stockholders might otherwise receive a premium for their shares
over then current market prices, and may limit the ability of the
stockholders to approve transactions that they may deem to be in their
best interests. The Company's Board of Directors also has the authority
to fix the rights and preferences of preferred stock and to issue such
shares, which may have the effect of delaying or preventing a change in
control of the Company, without action by the Company's stockholders. In
addition, on July 27, 1995, the Company's Board of Directors declared a
dividend of one right (a "Right") to purchase 1/100th of a share of
Series A Junior Participating Preferred Stock (the "Series A Preferred")
on each share of Common Stock. The rights will become exercisable only
if a person or group acquires 15.0% or more of the Company's Common Stock
(or 20.0% with respect to Warburg, Pincus Investors, L.P.) or announces a
tender offer which would result in ownership by a person or group of
15.0% or more of TheraTx's Common Stock (subject to certain exceptions).
Each Right has an exercise price of $60.00 for each 1/100th of a share of
Series A Preferred.
The provisions in the Company's Certificate of Incorporation and
Bylaws, the ability of the Board of Directors to issue preferred stock
and the existence of the Rights may have the effect of delaying,
deferring or preventing a change of control of the Company without
further action by the stockholders, may discourage bids for the Common
Stock at a premium over the market price of TheraTx's Common Stock and
may adversely affect the market price of, and the voting and other
rights of the holders of, TheraTx's
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Common Stock. The terms of the Notes could also discourage a transaction
involving a change in control of the Company.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
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* 2.1 Agreement and Plan of Reorganization dated as of May 6, 1994 by and
among Registrant, PC Acquisition Corp., a Delaware corporation,
PersonaCare, Inc., a Delaware corporation ("PersonaCare") and the
principal stockholders named therein. Incorporated by reference to
exhibit 2.2 to the Registration Statement on Form S-1, Registration
No. 33-78786.
* 2.2 Asset Purchase Agreement entered into as of January 13, 1995 by and
among TheraTx Healthcare Management, Inc., TheraTx Medical
Supplies, Inc., Registrant, Med-Care Services Northeast, Inc.,
Med-Care Services, Inc., Tri-City Medical Corporation, and
Tri-Medical Supply, Inc. of Georgia. Incorporated by reference as
exhibit (i) to the Current Report on Form 8-K dated April 4, 1995.
* 2.3 Asset Purchase Agreement entered into as of January 13, 1995 by and
among PersonaCare of St. Petersburg, Inc., PersonaCare of Pompano
East, Inc., PersonaCare of Pompano West, Inc., PersonaCare of
Clearwater, Inc., Registrant, Highland Pines Nursing Manor, Inc.,
Abbey Land Corporation, and Southern Management of Pompano Beach,
Inc. Incorporated by reference as exhibit (ii) to the Current
Report on Form 8-K dated April 4, 1995.
* 2.4 Asset Purchase Agreement entered into as of January 13, 1995 by and
among PersonaCare of Bradenton, Inc., Registrant, and Bradenton
Care Center, Ltd. Incorporated by reference as exhibit (iii) to
the Current Report on Form 8-K dated April 4, 1995.
* 2.5 Earn-Out, Indemnity and Escrow Agreement entered into as of April
4, 1995 by and among Registrant, Med-Care Services Northeast, Inc.,
Med-Care Services, Inc., Tri-City Medical Corporation, Tri-Medical
Supply, Inc. of Georgia, Highland Pines Nursing Manor, Inc., Abbey
Land Corporation, Southern Management of Pompano Beach, Inc., and
Jonathan H. Glenn. Incorporated by reference as exhibit (iv) to
the Current Report on Form 8-K dated April 4, 1995.
* 2.6 Earn-Out, Indemnity and Escrow Agreement entered into as of April
4, 1995 by and among Registrant, Bradenton Care Center, Ltd., and
Jonathan H. Glenn. Incorporated by reference as exhibit (v) to the
Current Report on Form 8-K dated April 4, 1995.
* 2.7 Merger Agreement and Plan of Consolidation, dated as of April 12,
1995 among Registrant, RCS Acquisition Corp., Respiratory Care
Services, Inc., SleepCorp, Inc., Therapy Management Corporation and
the Management Stockholders, as amended by that certain Agreement
dated as of April 28, 1995. Incorporated by reference as exhibit
2.7 to the Registration Statement on Form S-1, Registration No.
33-92402.
* 2.8 Escrow and Indemnity Agreement, entered into as of May 4, 1995
among Registrant, each of the stockholders who are signatories
thereto and Jonathan H. Glenn. Incorporated by reference as
exhibit 2.8 to the Registration Statement on Form S-1, Registration
No. 33-92402.
* 2.9 Agreement and Plan of Merger dated as of August 29, 1995 by and
among Registrant, Atlanta Acquisition Corp., a Delaware
corporation, and Helian Health Group, Inc., a Delaware corporation.
Incorporated by reference as exhibit 2.1 to the Registration
Statement on Form S-4, Registration No. 33-99476.
* 3.1 Certificate of Incorporation of Registrant, a Delaware corporation.
Incorporated by reference to exhibit 3.3 to the Registration
Statement on Form S-1, Registration No. 33-78786.
* 3.2 Amended and Restated Bylaws of Registrant, a Delaware corporation.
Incorporated by reference to exhibit 3.2 to the Registration
Statement on Form S-1, Registration No. 33-92404.
* 3.3 Certificate of Amendment of Certificate of Incorporation of
Registrant, a Delaware Corporation.
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* 4.1 Warrant Purchase Agreement and Warrant to Purchase Series D Preferred Stock
dated May 9, 1993 issued to LINC Capital Management Services, Ltd. ("LINC").
Incorporated by reference to exhibit 4.3 to the Registration Statement on Form
S-1, Registration No. 33-78786.
* 4.2 Second Amended and Restated Registration Rights Agreement dated as of May 6,
1994 among the Registrant and the investors listed therein. Incorporated by
reference to exhibit 4.5 to the Registration Statement on Form S-1, Registration
No. 33-78786.
* 4.3 Amended and Restated Note and Warrant Purchase Agreement, dated as of March 3,
1994, as amended, among the Registrant and the investors identified therein,
including the Form of Promissory Note and Form of Common Stock Purchase Warrant.
Incorporated by reference to exhibit 4.6 to the Registration Statement on Form
S-1, Registration No. 33-78786.
* 4.4 Warrant between Registrant and C.B. Francis dated July 28, 1994. Incorporated
by reference to exhibit 4.4 to the Registration Statement on Form S-1,
Registration No. 33-86604.
* 4.5 Indenture, dated February 15, 1995 between Registrant and The First National
Bank of Boston, as Trustee. Incorporated by reference to exhibit 4.5 to
Amendment No. 1 of the Annual Report on Form 10-K for the year ended December
31, 1994.
* 4.6 Form of 8% Convertible Subordinated Note due 2002. Incorporated by reference as
exhibit 4.5.1 to the Registration Statement on Form S-1, Registration No.
33-92402.
* 4.7 Registration Rights Agreement, dated February 9, 1995 among Registrant and the
Initial Purchasers defined therein. Incorporated by reference to exhibit 4.6 to
Amendment No. 1 of the Annual Report on 10-K for the year ended December 31,
1994.
* 4.8 Registration Rights Agreement dated as of May 4, 1995 among Registrant and the
parties who are signatories thereto (RCS). Incorporated by reference as exhibit
4.7 to the Registration Statement on Form S-1, Registration No. 33-92402.
* 4.9 Stockholders' Rights Plan of Registrant dated July 28, 1995 between Registrant
and U.S. Stock Transfer Corporation. Incorporated by reference as exhibit 4.8
to the Registration Statement on Form S-1, Registration No. 33-92402.
* 4.10 Form of Certificate of Designation of Series A Junior Participating Preferred
Stock of the Registrant. Incorporated by reference as exhibit 2.1 to the
Registration Statement on Form S-4, File No. 33-99476.
* 4.11 Amended and Restated Bylaws of Registrant. Incorporated by reference as exhibit
3.2 to the Registration Statement Form S-1, Registration No. 33-92404.
** 10.1 Master Therapy Services Agreement dated January 22, 1993 between Convalescent
Services, Inc. ("CSI") and Registrant. Incorporated by reference to exhibit
10.1 to the Registration Statement on Form S-1, Registration No. 33-78786.
** 10.1.1 Termination Agreement dated April 3, 1995 between Registrant, CSI and Mariner
Health Group, Inc. Incorporated by reference as exhibit 10.1.1 to the
Registration Statement on Form S-1, Registration No. 33-92402.
* 10.2 Master Lease Agreement dated May 9, 1993 between Registrant and LINC.
Incorporated by reference to exhibit 10.5 to the Registration Statement on Form
S-1, Registration No. 33-78786.
* 10.3 Sublease dated March 30, 1993 between National Computer Systems, Inc. and
Registrant, as amended. Incorporated by reference to exhibit 10.6 to the
Registration Statement on Form S-1, Registration No. 33-78786.
* 10.4 PersonaCare, Inc. 1992 Stock Option Plan (the "PersonaCare Plan"). Incorporated
by reference to exhibit 10.7 to the Registration Statement on Form S-1,
Registration No. 33-78786.
* 10.5 Form of Non-Qualified Stock Option Agreement pertaining to the PersonaCare Plan.
Incorporated by reference to exhibit 10.8 to the Registration Statement on Form
S-1, Registration No. 33-78786.
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* 10.6 Form of Stock Option Assumption Agreement under the PersonaCare Plan.
Incorporated by reference to exhibit 10.9 to the Registration Statement on Form
S-1, Registration No. 33-78786.
* 10.7 Registrant's Restated 1994 Stock Option/Stock Issuance Plan (the "1994 Plan"),
as amended. Incorporated by reference as exhibit 10.7 to the Registration
Statement on Form S-1, Registration No. 33-92402.
* 10.8 Form of Stock Option Agreement, together with addenda, and Stock Issuance
Agreement pertaining to the 1994 Plan. Incorporated by reference to exhibit
10.11 to the Registration Statement on Form S-1, Registration No. 33-78786.
* 10.9 Registrant's 401(k) Profit Sharing Plan and Trust Agreement (the "401(k) Plan").
Incorporated by reference to exhibit 10.12 to the Registration Statement on
Form S-1, Registration No. 33-78786.
* 10.9.1 Model Amendments to Registrant's 401(k) Plan. Incorporated by reference to
exhibit 10.9.1 to the Registration Statement on Form S-1, Registration No.
33-86604.
* 10.10 Form of Indemnification Agreement for the Registrant's directors. Incorporated
by reference to exhibit 10.13 to the Registration Statement on Form S-1,
Registration No. 33-78786.
* 10.11 Lease dated January 1, 1988 by and between Stamford Health Associates Limited
Partnership ("SHALP") and Courtland Gardens Health Center, Inc. Incorporated by
reference to exhibit 10.14 to the Registration Statement on Form S-1,
Registration No. 33-78786.
* 10.12 Lease dated January 1, 1988 by and between SHALP and Homestead Health Center,
Inc. Incorporated by reference to exhibit 10.15 to the Registration Statement
on Form S-1, Registration No. 33-78786.
* 10.13 Lease dated January 1, 1988 by and between SHALP and Courtland Gardens
Residence, Inc. Incorporated by reference to exhibit 10.16 to the Registration
Statement on Form S-1, Registration No. 33-78786.
* 10.14 Lease Agreement dated October 18, 1993 by and between Health Care REIT, Inc.
("HCRI") and PersonaCare of Owensboro, Inc. Incorporated by reference to
exhibit 10.17 to the Registration Statement on Form S-1, Registration No.
33-78786.
* 10.15 First Amended and Restated Lease Agreement dated January 1, 1993 by and between
HCRI and PersonaCare of Pennsylvania, Inc. (the "Easton Lease") together with
Second Amendment dated April 1, 1994. Incorporated by reference to exhibit
10.18 to the Registration Statement on Form S-1, Registration No. 33-78786.
* 10.16 Lease Agreement dated April 20, 1993 by and between HCRI and PersonaCare of San
Antonio, Inc. (the "San Antonio Lease"). Incorporated by reference to exhibit
10.19 to the Registration Statement on Form S-1, Registration No. 33-78786.
* 10.17 Agreement Regarding Amendment of Leases dated October 18, 1993 with HCRI
amending the Easton Lease and the San Antonio Lease. Incorporated by reference
to exhibit 10.20 to the Registration Statement on Form S-1, Registration No.
33-78786.
* 10.18 Lease dated March 1, 1994 by and between Triple Springs, Inc. and PersonaCare of
Huntsville, Inc., as amended. Incorporated by reference to exhibit 10.21 to the
Registration Statement on Form S-1, Registration No. 33-78786.
* 10.19 First Mortgage Loan between First Bank, Trustee for the United States Department
of Housing and Urban Development and Middleton Village Associates, as amended.
Incorporated by reference to exhibit 10.25 to the Registration Statement on Form
S-1, Registration No. 33-78786.
* 10.20 Lease dated July 28, 1994 by and between C.B. Francis and PersonaCare of San
Pedro, Inc. Incorporated by reference to exhibit 10.20 to the Registration
Statement on Form S-1, Registration No. 33-86604.
* 10.21 Amended and Restated Financing and Security Agreement dated May 8, 1995 by and
among the Registrant and its subsidiaries as Borrowers, NationsBank, N.A., as
Agent, and the lenders party thereto. Incorporated by reference to exhibit
10.21 to the Registration
</TABLE>
Page 28
<PAGE> 29
<TABLE>
<S> <C> <C>
Statement on Form S-1, Registration No. 33-92402.
* 10.22 1993 Management Incentive Compensation Plan. Incorporated by reference to
exhibit 10.22 to the Registration Statement on Form S-1, Registration No.
33-86604.
* 10.23 Sublease dated May 27, 1994 between Compaq Computer Corporation and Registrant.
Incorporated by reference to exhibit 10.23 to Amendment No. 1 of the Annual
Report on Form 10-K for the year ended December 31, 1994.
* 10.24 Sublease dated December 7, 1994 between Compaq Computer Corporation and
Registrant. Incorporated by reference to exhibit 10.24 to the Amendment No. 1
of Annual Report on Form 10-K for the year ended December 31, 1994.
* 10.25 Office Lease Agreement dated April 25, 1995 between Regency Park West
Associates, L.P. and Registrant. Incorporated by reference to exhibit 10.25 to
the Registration Statement on Form S-1, Registration No. 33-92402.
* 10.26 Purchase and Sale Agreement dated April 25, 1995 between Registrant and Regency
Park West Associates, L.P. Incorporated by reference to exhibit 10.26 to the
Registration Statement on Form S-1, Registration No. 33-92402.
* 10.27 + 1989 Amended and Restated Stock Option Plan of Helian Health Group, Inc.
* 10.28 + Asset Purchase Agreement between Palo Alto Surgecenter Corporation and Palo Alto
Medical Foundation for Health Care, Research and Education dated September 22,
1988.
* 10.29 + Management Agreement between Palo Alto Surgecenter Corporation and Palo Alto
Medical Foundation for Health Care, Research and Education dated September 22,
1988.
* 10.30 + Equipment Lease between Palo Alto Surgecenter Corporation and Palo Alto Medical
Foundation for Health Care, Research and Education dated September 22, 1988.
* 10.31 + Sublease dated September 22, 1988, between Palo Alto Surgecenter Corporation, as
sublessor, and Palo Alto Medical Foundation for Health Care, Research and
Education, as sublessor, including Consent to Sublease, covering premises at 400
Forest Avenue, Palo Alto, California.
* 10.32 + Repurchase Agreement between Palo Alto Surgecenter Corporation and Palo Alto
Medical Foundation for Health Care, Research and Education dated September 22,
1988.
* 10.33 Amended and Restated 1989 Stock Option Plan of the Registrant. Incorporated by
reference to the Registration Statement on Form S-8, Registration No. 333-1608
* 10.34 The Registrant's 1996 Stock Option/Stock Issuance Plan. Incorporated by
reference to the Registrant's Preliminary Proxy filed with the Commission on May
3, 1996.
* 10.35 The Registrant's Employee Stock Purchase Plan. Incorporated by reference to the
Registrant's Preliminary Proxy filed with the Commission on May 3, 1996.
* 10.36 The Registrant's Executive Officer Severance Policy dated April 25, 1996.
11.1 Computation of Historical Earnings Per Share, Three Months ended September 30,
1996 and 1995.
11.2 Computation of Historical Earnings Per Share, Nine months ended September 30,
1996 and 1995.
11.3 Computation of Pro Forma Earnings Per Share, Nine months ended September 30, 1995
27 Financial Data Schedule (for SEC use only)
</TABLE>
- ------------------
* Previously filed and/or incorporated by reference.
+ Incorporated by reference to Registration Statement Number
33-31520 on Form S-1, filed October 11, 1989, Amendment Number 2
thereto filed November 21, 1989, and Post-Effective Amendments
Number 1 and Number 2 thereto filed November 22, 1990 and January
16, 1991, respectively.
** The Company has received confidential treatment for certain
portions of this document filed with the Commission.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended September
30, 1996.
Page 29
<PAGE> 30
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.
TheraTx, Incorporated
By: /s/ Donald R. Myll
-----------------------------------------------
Donald R. Myll, Senior Vice President and Chief
Financial Officer
(Principal Accounting and Financial Officer)
Date: November 11, 1996
Page 30
<PAGE> 1
EXHIBIT 11.1
THERATX, INCORPORATED
COMPUTATION OF HISTORICAL EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
PRIMARY
Weighted average common stock outstanding during the period.............. 20,548 20,289
Dilutive effect of common stock equivalents.............................. 574 362
--------- ---------
Total................................................................... 21,122 20,651
========= =========
Net income............................................................... $ 6,066 $ 5,108
========= =========
Net income per share..................................................... $ 0.29 $ 0.25
========= =========
FULLY DILUTED
Weighted average common stock outstanding during the period.............. 20,548 20,289
Dilutive effect of common stock equivalents.............................. 574 362
--------- ---------
Total................................................................... 21,122 20,651
========= =========
Net income............................................................... $ 6,066 $ 5,108
========= =========
Net income per share..................................................... $ 0.29 $ 0.25
========= =========
</TABLE>
<PAGE> 1
EXHIBIT 11.2
THERATX, INCORPORATED
COMPUTATION OF HISTORICAL EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
------- ---------------
<S> <C> <C>
PRIMARY
Weighted average common stock outstanding during the period.............. 20,497 19,836
Dilutive effect of common stock equivalents.............................. 374 456
------- -------
Total................................................................... 20,871 20,292
======= =======
Income before extraordinary item......................................... $17,197 $10,942
Extraordinary item, net of income taxes.................................. -- (428)
------- -------
Net income............................................................... $17,197 $10,514
======= =======
Earnings per share:
Income before extraordinary item......................................... $ 0.82 $ 0.54
Extraordinary item, net of income taxes.................................. -- (0.02)
------- -------
Net income............................................................... $ 0.82 $ 0.52
======= =======
FULLY DILUTED
Weighted average common stock outstanding during the period.............. 20,497 19,836
Dilutive effect of common stock equivalents.............................. 374 456
------- -------
Total................................................................... 20,871 20,292
======= =======
Income before extraordinary item......................................... $17,197 $10,942
Extraordinary item, net of income taxes.................................. -- (428)
------- -------
Net income............................................................... $17,197 $10,514
======= =======
Earnings per share:
Income before extraordinary item......................................... $ 0.82 $ 0.54
Extraordinary item, net of income taxes.................................. -- (0.02)
------- -------
Net income............................................................... $ 0.82 $ 0.52
======= =======
</TABLE>
<PAGE> 1
EXHIBIT 11.3
THERATX, INCORPORATED
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
1995
---------------
<S> <C>
PRIMARY
Weighted average common stock outstanding during the period........... 20,202
Dilutive effect of common stock equivalents........................... 456
-------
Total................................................................ 20,658
========
Income before extraordinary item...................................... $11,004
Extraordinary item, net of income taxes............................... (428)
-------
Net income............................................................ $10,576
=======
Earnings per share:
Income before extraordinary item...................................... $ 0.53
Extraordinary item, net of income taxes............................... (0.02)
-------
Net income............................................................ $ 0.51
=======
FULLY DILUTED
Weighted average common stock outstanding during the period........... 20,202
Dilutive effect of common stock equivalents........................... 456
-------
Total................................................................ 20,658
=======
Income before extraordinary item...................................... $11,004
Extraordinary item, net of income taxes............................... (428)
-------
Net income............................................................ $10,576
=======
Earnings per share:
Income before extraordinary item...................................... $ 0.53
Extraordinary item, net of income taxes............................... (0.02)
-------
Net income............................................................ $ 0.51
=======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 9,943
<SECURITIES> 0
<RECEIVABLES> 106,230
<ALLOWANCES> (11,266)
<INVENTORY> 6,051
<CURRENT-ASSETS> 132,702
<PP&E> 141,657
<DEPRECIATION> (19,560)
<TOTAL-ASSETS> 367,035
<CURRENT-LIABILITIES> 38,189
<BONDS> 171,355
0
0
<COMMON> 20
<OTHER-SE> 157,791
<TOTAL-LIABILITY-AND-EQUITY> 367,035
<SALES> 15,381
<TOTAL-REVENUES> 288,600
<CGS> 12,375
<TOTAL-COSTS> 207,067
<OTHER-EXPENSES> 45,204
<LOSS-PROVISION> 3,624
<INTEREST-EXPENSE> 10,016
<INCOME-PRETAX> 27,331
<INCOME-TAX> 10,112
<INCOME-CONTINUING> 17,219
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,197
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.82
</TABLE>
