<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 June 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
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Commission File number 0-24292
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THERATX, INCORPORATED
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(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
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(Address of principal executive offices, including zip code)
(770) 569-1840
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ X ] NO []
The number of shares outstanding of the registrant's Common Stock, $0.001 Par
Value, as of August 2, 1996, was 20,676,859 shares.
<PAGE> 2
INDEX
THERATX, INCORPORATED
<TABLE>
<CAPTION>
PART I -- FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets -- June 30, 1996 (Unaudited) and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income (Unaudited) -- Three months ended June 30,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Income (Unaudited) --Six months ended June 30,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows (Unaudited) -- Six months ended
June 30, 1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements (Unaudited) -- June 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . 16
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
</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>
JUNE 30, DECEMBER 31,
1996 1995
--------------- ---------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 10,516 $ 10,530
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . -- 1,023
Accounts receivable, net of allowances for doubtful accounts and denials . 92,813 76,766
Third-party settlements, net . . . . . . . . . . . . . . . . . . . . . . . 14,204 7,084
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,417 5,415
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . 6,676 3,942
Receivable from stockholder . . . . . . . . . . . . . . . . . . . . . . . -- 379
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . -- 2,010
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 1,737 1,737
----------- -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 131,363 108,886
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,751 125,915
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . (17,857) (14,238)
----------- -----------
112,894 111,677
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 105,326 97,844
Long-term notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . 8,174 8,404
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,788 2,987
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 362,545 $ 329,798
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued expenses . . . . . . . . . . . . . . . $ 15,411 $ 16,462
Accrued payroll and related expenses . . . . . . . . . . . . . . . . . . . 22,882 16,819
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . 4,038 3,679
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 90 --
Long-term debt, current portion . . . . . . . . . . . . . . . . . . . . . 365 656
----------- -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 42,786 37,616
Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . 67,834 51,741
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74 327
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 213
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78 2
Commitments and contingencies
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 20
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 122,329 121,403
Note receivable from stockholder . . . . . . . . . . . . . . . . . . . . . (100) (100)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,311 18,576
----------- -----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 151,560 139,899
----------- -----------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . $ 362,545 $ 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
JUNE 30,
---------------------------
1996 1995
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<S> <C> <C>
Revenues:
Patient care revenues, net . . . . . . . . . . . . . . . . . . . . . . . . . $ 88,278 $ 72,924
Management services and other . . . . . . . . . . . . . . . . . . . . . . . 3,015 1,444
Sales of medical supplies and related services . . . . . . . . . . . . . . . 4,566 7,098
-------- ---------
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95,859 81,466
Operating costs and expenses:
Cost of revenues:
Salaries, wages and benefits . . . . . . . . . . . . . . . . . . . . . . . 51,458 42,337
Other operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . 13,256 11,606
Cost of medical supply sales and related services . . . . . . . . . . . . 3,805 5,245
Corporate, general and administrative . . . . . . . . . . . . . . . . . . . 10,280 9,227
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 2,629 2,522
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,587 1,864
Merger costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 600
-------- ---------
Total operating costs and expenses . . . . . . . . . . . . . . . . . . . . 84,015 73,401
-------- ---------
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,844 8,065
Interest and other expense, net . . . . . . . . . . . . . . . . . . . . . . . . 2,707 2,741
-------- ---------
Income before income taxes, minority interests and extraordinary item . . . . . 9,137 5,324
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 3,312 2,438
-------- ---------
Income before minority interests and extraordinary item . . . . . . . . . . . . 5,825 2,886
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18) 22
-------- ---------
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . 5,807 2,908
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . . . -- (428)
-------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,807 $ 2,480
======== ==========
Earnings per share:
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . $ 0.28 $ 0.14
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- (0.02)
-------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.28 $ 0.12
======== =========
Weighted average number of shares outstanding . . . . . . . . . . . . . . . . . 20,963 20,708
======== =========
</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>
SIX MONTHS ENDED JUNE 30,
-----------------------------------------
1996 1995
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ACTUAL ACTUAL PRO FORMA
----------- ------------ -----------
<S> <C> <C> <C>
Revenues:
Patient care revenues, net . . . . . . . . . . . . . . . . . . $ 173,953 $ 130,657 $ 140,751
Management services and other . . . . . . . . . . . . . . . . 4,968 2,475 2,475
Sales of medical supplies and related services . . . . . . . . 10,262 7,834 13,085
-------- -------- ---------
Total net revenues . . . . . . . . . . . . . . . . . . . . . 189,183 140,966 156,311
Operating costs and expenses:
Cost of revenues:
Salaries, wages and benefits . . . . . . . . . . . . . . . . 101,333 76,825 81,403
Other operating expenses . . . . . . . . . . . . . . . . . . 26,479 19,818 23,373
Cost of medical supply sales and related services . . . . . 8,192 5,617 10,109
Corporate, general and administrative . . . . . . . . . . . . 19,564 16,214 16,805
Depreciation and amortization . . . . . . . . . . . . . . . . 5,311 4,311 5,035
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,797 3,521 3,595
Merger costs . . . . . . . . . . . . . . . . . . . . . . . . . -- 600 600
-------- -------- ---------
Total operating costs and expenses . . . . . . . . . . . . . 165,676 126,906 140,920
-------- -------- ---------
Income from operations . . . . . . . . . . . . . . . . . . . . . 23,507 14,060 15,391
Interest and other expense, net . . . . . . . . . . . . . . . . . 5,736 3,805 5,032
-------- --------
Income before income taxes, minority interests and
extraordinary item . . . . . . . . . . . . . . . . . . . . . . 17,771 10,255 10,359
Provision for income taxes . . . . . . . . . . . . . . . . . . . 6,575 4,498 4,540
-------- -------- ---------
Income before minority interests and extraordinary item . . . . . 11,196 5,757 5,819
Minority interests . . . . . . . . . . . . . . . . . . . . . . . (65) 77 77
-------- --------
Income before extraordinary item . . . . . . . . . . . . . . . . 11,131 5,834 5,896
Extraordinary item, net of income taxes . . . . . . . . . . . . . -- (428) (428)
-------- -------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,131 $ 5,406 $ 5,468
======== ======== =========
Earnings per share:
Income before extraordinary item . . . . . . . . . . . . . . . $ 0.54 $ 0.29 $ 0.28
Extraordinary item . . . . . . . . . . . . . . . . . . . . . . -- (0.02) (0.02)
-------- -------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.54 $ 0.27 $ 0.26
======== ======== =========
Weighted average number of shares outstanding . . . . . . . . . . 20,804 20,137 20,686
======== ======== =========
</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>
SIX MONTHS ENDED
JUNE 30,
-------------------------------
1996 1995
------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,131 $ 5,406
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 . . . . . . . . . . . . . . . . . . . . . . 5,311 4,311
Provision for bad debts and denials . . . . . . . . . . . . . . . . . . . 2,427 2,501
(Gain) loss on sale of assets . . . . . . . . . . . . . . . . . . . . . . (450) 2
Equity in (income) loss of affiliate . . . . . . . . . . . . . . . . . . . 109 (20)
Write-off of deferred financing costs . . . . . . . . . . . . . . . . . . -- 612
Amortization of deferred financing costs . . . . . . . . . . . . . . . . . 324 250
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . -- (1,235)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (171) (129)
Changes in operating assets and liabilities:
Accounts receivable and third party settlements . . . . . . . . . . . . (22,955) (24,827)
Prepaid expenses and other current assets . . . . . . . . . . . . . . . (2,703) (1,605)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2) (1,757)
Income taxes receivable or payable . . . . . . . . . . . . . . . . . . . 2,100 800
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . 2,718 9,222
---------- ----------
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . (2,539) (6,469)
---------- ----------
INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . (5,293) (3,854)
Proceeds from sales of property and equipment . . . . . . . . . . . . . . . . 865 67
Purchases of short-term investments . . . . . . . . . . . . . . . . . . . . . -- (1,019)
Sales of short-term investments . . . . . . . . . . . . . . . . . . . . . . . 1,023 27
Acquisition of companies and payments related to acquisitions . . . . . . . . (9,420) (87,073)
Cash acquired in acquisitions . . . . . . . . . . . . . . . . . . . . . . . . 312 74
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,454) (727)
---------- ----------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . (13,967) (92,505)
---------- ----------
FINANCING ACTIVITIES:
Proceeds from convertible debt . . . . . . . . . . . . . . . . . . . . . . . -- 100,000
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 17,000 6,499
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . (1,773) (1,214)
Capitalized financing costs . . . . . . . . . . . . . . . . . . . . . . . . . -- (5,000)
Payments on notes receivable from stockholders . . . . . . . . . . . . . . . 379 182
Payments on capital lease obligations . . . . . . . . . . . . . . . . . . . . (22) (904)
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . 926 494
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18) --
---------- ----------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . 16,492 100,057
---------- ----------
(Decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . (14) 1,083
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . 10,530 11,560
---------- ----------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . $ 10,516 $ 12,643
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,931 $ 2,305
========== ==========
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,358 $ 7,034
========== ==========
</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 June 30, 1996, the
condensed consolidated statements of income for the three-month and six-month
periods ended June 30, 1996 and 1995, and the condensed consolidated statements
of cash flows for the six months ended June 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 June 30, 1996, and the results of operations for the three months and six
months ended June 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 six-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 six months ended June
30, 1996, at an effective rate of 36% and 37%, respectively.
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 six months
ended June 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.
Page 9
<PAGE> 10
The following table provides certain information related to the Company's
patient care operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -----------------------------------
1996 1995 1996 1995
SELECTED STATISTICAL DATA: ---------- ---------- ---------- -----------------------
ACTUAL ACTUAL ACTUAL ACTUAL PRO FORMA
---------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Payor Mix:
Medicare . . . . . . . . . . . . . . . . . . . . 54.0% 52.1% 53.8% 54.1% 52.4%
Private, managed care and other . . . . . . . . 32.1 37.4 32.7 37.2 37.1
Medicaid . . . . . . . . . . . . . . . . . . . . 13.9 10.5 13.5 8.7 10.5
Revenue mix(1):
Rehabilitation subacute . . . . . . . . . . . . 57.2% 57.5% 57.1% 59.8% 58.5%
Medical subacute . . . . . . . . . . . . . . . . 5.0 5.0 5.2 5.4 5.0
Occupational medicine and services . . . . . . . 7.2 9.1 7.1 9.2 8.5
Basic healthcare . . . . . . . . . . . . . . . . 29.2 25.4 29.1 22.7 24.7
Other specialty . . . . . . . . . . . . . . . . 1.4 3.0 1.5 2.9 3.3
Number of Rehabilitation Management Programs(2). . 181 149 181 149 149
Inpatient Facilities(2):
Number of owned, leased and managed facilities. . 29 21 29 21 21
Licensed beds . . . . . . . . . . . . . . . . . 3,735 2,866 3,735 2,866 2,866
Number of Occupational Healthcare Clinics(2). . . . 16 11 16 11 11
</TABLE>
- -------------------------------
(1) Excludes revenues from management services and other and medical supplies
and related services.
(2) Numbers expressed are at end of period.
RESULTS OF OPERATIONS -- HISTORICAL
The following table sets forth for the three-month and six-month periods
ended June 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> 1995 -- 1996
PERCENTAGE CHANGE
---------------------
THREE MONTHS ENDED SIX MONTHS ENDED THREE SIX
JUNE 30, JUNE 30, MONTHS MONTHS
---------------------- -------------------- ENDED ENDED
1996 1995 1996 1995 JUNE 30 JUNE 30
--------- --------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Patient care revenues, net . . . . . . . . . . 92.1% 89.5% 92.0% 92.7% 21.1% 33.1%
Management services and other. . . . . . . . . 3.1 1.8 2.6 1.7 108.8 100.7
Sales of medical supplies and related
services . . . . . . . . . . . . . . . . . . 4.8 8.7 5.4 5.6 (35.7) 31.0
----- ----- ----- -----
Total net revenues 100.0 100.0 100.0 100.0 17.7 34.2
Operating costs and expenses:
Cost of revenues:
Salaries, wages and benefits(1). . . . . . . 56.4 56.9 56.6 57.7 21.5 31.9
Other operating expenses(1). . . . . . . . . 14.5 15.6 14.8 14.9 14.2 33.6
Cost of medical supply sales and related
services(2). . . . . . . . . . . . . . . . 83.3 73.9 79.8 71.7 (27.5) 45.8
Corporate, general and administrative. . . . . 10.7 11.3 10.3 11.5 11.4 20.7
Depreciation and amortization 2.7 3.1 2.8 3.1 4.2 23.2
Rent . . . . . . . . . . . . . . . . . . . . . 2.7 2.3 2.5 2.5 38.8 36.2
Merger costs . . . . . . . . . . . . . . . . . -- 0.7 -- 0.4 (100.0) (100.0)
Total operating costs and expenses . . . . . 87.6 90.1 87.6 90.0 14.5 30.6
Income from operations . . . . . . . . . . . . . 12.4 9.9 12.4 10.0 46.9 67.2
Interest and other expense, net. . . . . . . . . 2.8 3.4 3.0 2.7 (1.2) 50.7
Income before income taxes, minority interests,
and extraordinary item . . . . . . . . . . . . 9.6 6.5 9.4 7.3 71.6 73.3
Provision for income taxes . . . . . . . . . . . 3.5 3.0 3.5 3.2 35.8 46.2
Income before minority interests and
extraordinary item . . . . . . . . . . . . . . 6.1 3.5 5.9 4.1 101.8 94.5
Minority interests . . . . . . . . . . . . . . . -- -- -- -- (181.8) (184.4)
Income before extraordinary item . . . . . . . . 6.1 3.5 5.9 4.1 99.7 90.8
Extraordinary item, net of income taxes. . . . . -- 0.5 -- 0.3 (100.0) (100.0)
Net income . . . . . . . . . . . . . . . . . . . 6.1 3.0 5.9 3.8 134.2 105.9
</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 JUNE 30, 1996 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1995
Patient care revenues, net. The increase in patient care revenues, net for
the quarter ended June 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 23.8% revenue
growth from 1995 to 1996. This increase primarily is due to the 21.5% increase
in the number of rehabilitation management programs from June 30, 1995 to June
30, 1996. The Company added 86 rehabilitation management programs from July 1,
1995 through June 30, 1996 and terminated 54 programs, ending the quarter with
181 programs. Also, patient care revenues during the second quarter of 1996
included revenue from six leased facilities added subsequent to June 30, 1995.
Management services and other. Management services and other revenues
increased during the second quarter of 1996 over the second 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.
Sales of medical supplies and related services. The decrease in sales of
medical supplies and related services for the second 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 June 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 June 30, 1996 over the three months ended June 30, 1995, primarily
was attributable to increased personnel costs at leased inpatient facilities
added subsequent to June 30, 1995.
Other operating expenses. The increase in other operating expenses during
the three months ended June 30, 1996 over the same period of 1995, primarily
was due to costs at leased inpatient facilities added subsequent to June 30,
1995.
Cost of medical supply sales and related service. The decrease in the cost
of medical supply sales and related services during the second quarter of 1996
over the second 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 June 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. This increase was partially offset by a decrease in
corporate personnel and overhead costs related to the occupational health
business. Corporate functions for the occupational health business were
relocated to the Company's Atlanta corporate office in early 1996. Corporate,
general and administrative expenses decreased as a percentage of revenues
during the three months ended June 30, 1996 from the three months ended June
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. Depreciation and amortization expense for
the three months ended June 30, 1996 did not change significantly from the
three months ended June 30, 1995. The increase in depreciation and
amortization expense due to the six leased facilities added subsequent to June
30, 1995 was offset by the decrease in depreciation and amortization expense
related to the consolidation of the occupational health business's corporate
functions.
Rent. Rent expense increased during the quarter ended June 30, 1996 over
rent expense for the corresponding period in 1995 primarily due to the addition
of six leased inpatient facilities subsequent to June 30, 1995.
Merger costs. During the quarter ended June 30, 1995, the Company incurred
$600,000 of legal, accounting and other transaction costs in connection with
the merger with RCS during May 1995.
Interest and other expense, net. Interest expense, net for the three
months ended June 30, 1996 as compared to the corresponding period in 1995
reflected increased interest expense resulting from additional debt
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<PAGE> 12
outstanding under the Company's Senior Credit Facility which was offset by a
gain on the sale of a portion of the Company's partnership interest in an
ambulatory surgery center.
Provision for income taxes. The Company's effective tax rate for the
second quarter of 1996 was 36% as compared to 46% for the second quarter of
1995. The 1995 effective rate is higher than the statutory rate primarily due
to non- deductible merger costs recorded during the period and state taxes.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1995.
Patient care revenues, net. The increase in patient care revenues, net for
the six months ended June 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 six months ended June 30, 1996 included revenue from twelve
owned and leased facilities added subsequent to March 31, 1995. Rehabilitation
management programs experienced approximately 29.2% revenue growth from 1995 to
1996. This increase primarily is due to the increase in the number of
rehabilitation management programs from June 30, 1995 to June 30, 1996.
Management services and other. Management services and other revenues
increased during the six months ended June 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.
Sales of medical supplies and related services. The increase in sales of
medical supplies and related services for the six months ended June 30, 1996
over the same period of 1995 primarily relates to the inclusion of revenues for
the entire six months 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.
Salaries, wages and benefits. A significant portion of the increase in
salaries, wages and benefits during the six months ended June 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 six months ended June 30, 1995, primarily was attributable to increased
personnel costs at owned and leased inpatient facilities added subsequent to
June 30, 1995.
Other operating expenses. The increase in other operating expenses during
the six months ended June 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 June 30, 1995.
Cost of medical supply sales and related services. The increase in the
cost of medical supply sales and related services during the six months ended
June 30, 1996 over the six months ended June 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 six months ended June 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. This increase was partially offset by a decrease in
personnel and overhead costs related to the occupational health business.
Corporate functions for the occupational health business were relocated to the
Company's Atlanta corporate office in early 1996. Corporate, general and
administrative expenses decreased as a percentage of revenues during the six
months ended June 30, 1996 over the six months ended June 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. Depreciation and amortization increased
during the six months ended June 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 six months ended June 30, 1996 over
the same period of 1995, primarily due to the addition of six leased inpatient
facilities acquired subsequent to June 30, 1995.
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<PAGE> 13
Interest and other expense, net. The increase in interest and other
expense, net for the six months ended June 30, 1996 as compared to the
corresponding period in 1995, primarily was related to a full six 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 six months ended June 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 six months ended June 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 six
months ended June 30, 1996 was 37% compared to 44% for the six months ended
June 30, 1995. The 1995 effective rate is higher than the statutory rate
primarily due to non-deductible merger costs recorded during the period and
state taxes.
RESULTS OF OPERATIONS -- PRO FORMA
The Pro Forma Condensed Consolidated Statement of Income for the six months
ended June 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 six-month period ended June 30,
1996, on a historical basis, and for the six- month period ended June 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>
SIX MONTHS ENDED
JUNE 30,
---------------------- 1995 -- 1996
1996 1995 PERCENTAGE
ACTUAL PRO FORMA CHANGE
--------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Patient care revenues, net . . . . . . . . . . . . . . . . . . . . . . . . 92.0% 90.0% 23.6%
Management services and other . . . . . . . . . . . . . . . . . . . . . . . 2.6 1.6 100.7
Sales of medical supplies and related services. . . . . . . . . . . . . . . 5.4 8.4 (21.6)
----- -----
Total net revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 21.0
Operating costs and expenses:
Cost of revenues:
Salaries, wages and benefits(1) . . . . . . . . . . . . . . . . . . . . . 56.6 56.8 24.5
Other operating expenses(1) . . . . . . . . . . . . . . . . . . . . . . . 14.8 16.3 13.3
Cost of medical supply sales and related services(2) . . . . . . . . . . 79.8 77.3 (19.0)
Corporate, general and administrative . . . . . . . . . . . . . . . . . . . 10.3 10.8 16.4
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . 2.8 3.2 5.5
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.5 2.3 33.4
Merger costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 0.4 (100.0)
Total operating costs and expenses . . . . . . . . . . . . . . . . . . . 87.6 90.2 17.6
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 9.8 52.7
Interest and other expense, net . . . . . . . . . . . . . . . . . . . . . . . 3.0 3.2 14.0
Income before income taxes, minority interests and extraordinary item . . . . 9.4 6.6 71.6
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 2.9 44.8
Income before minority interests and extraordinary item . . . . . . . . . . . 5.9 3.7 92.4
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 0.1 (184.4)
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . 5.9 3.8 88.8
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . . -- 0.3 (100.0)
Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 3.5 103.6
- -------------------------------
</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.
SIX MONTHS ENDED JUNE 30, 1996 (ACTUAL) COMPARED TO THE SIX MONTHS ENDED
JUNE 30, 1995 (PRO FORMA)
Patient care revenue, net. The increase in patient care revenues, net for
the six months ended June 30, 1996 over the corresponding pro forma period in
1995 primarily was attributable to growth in rehabilitation management programs
and the acquisition of inpatient skilled nursing facilities. Rehabilitation
management programs experienced approximately 29.2% revenue growth from 1995 to
1996. This increase primarily is due to the 21.5% increase in the number of
rehabilitation management programs from June 30, 1995 to June 30, 1996. The
Company added 86 rehabilitation management programs from July 1, 1995 through
June 30, 1996 and terminated 54 programs, ending the period with 181 programs.
Patient care revenues during the six months ended June 30, 1996 included
revenue from six leased facilities added subsequent to June 30, 1995.
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<PAGE> 14
Management services and other. Management services and other revenues
increased during six months ended June 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.
Sales of medical supplies and related services. The decrease in sales of
medical supplies and related services for the six months ended June 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.
Other operating expenses. The majority of the increase in other operating
expenses during the six months ended June 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 June 30, 1995. The remainder of the
increase for the six months ending June 30, 1996 over the pro forma period of
1995 primarily was attributable to the increase in the number of rehabilitation
management programs subsequent to June 30, 1995. The decrease in other
operating expenses as a percentage of patient care net revenues during the six
months ended June 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 six months ended
June 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 six months ended June 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. This increase was partially offset by a
decrease in personnel and overhead costs related to the occupational health
business. Corporate functions for the occupational health business were
relocated to the Company's Atlanta corporate office in early 1996. Corporate,
general and administrative expenses decreased as a percentage of revenues
during the six months ended June 30, 1996 from the pro forma period ended June
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. Depreciation and amortization expense for
the six months ended June 30, 1996 did not change significantly from the pro
forma period ended June 30, 1995.
Rent. Rent expense increased during the six months ended June 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 June 30,
1995.
Interest and other expense, net. The increase in interest and other
expense, net for the six months ended June 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.
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 six months ended June 30, 1996 and 1995, net cash used in
operating activities was $2.5 million and $6.4 million, respectively. Net cash
provided by financing activities for the six months ended June 30, 1996 and
1995 was $16.5 million and $100.1 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 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
Page 14
<PAGE> 15
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 June 30, 1996, TheraTx had $65.0 million outstanding under the Senior
Credit Facility.
Accounts receivable, net of allowances were $92.8 million and $76.8 million
at June 30, 1996 and December 31, 1995, respectively. Estimated settlements
due from third-party payors aggregated $14.2 million and $7.1 million at June
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.
Page 15
<PAGE> 16
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 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
The Company held its Annual Meeting of Stockholders (the "Meeting") on
May 30, 1996. At the Meeting the stockholders were asked to vote and
approve the following matters:
1. Amendment to the Company's Certificate of Incorporation
The Company's stockholders approved the proposal to amend the
Company's Certificate of Incorporation to increase the number
of authorized shares of Common Stock, $0.001 par value per
share, from 30,000,000 to 50,000,000 shares.
Of the total shares present or represented at the Meeting, this
proposal received 97.3% approval. A total of 15,476,625 shares
were voted in favor, 367,216 shares were voted against, there
were 30,000 broker non- votes, and 32,124 shares abstained from
voting on this proposal.
2. The Company's 1996 Stock Option/Stock Issuance Plan
The stockholders approved the Company's 1996 Stock Option/Stock
Issuance Plan.
Of the total shares present or represented at the Meeting, this
proposal received 70.8% approval. A total of 11,254,630 shares
were voted in favor, 1,345,116 shares were voted against, there
were 3,283,290 broker non-votes, and 22,929 shares abstained
from voting on this proposal.
3. The Company's Employee Stock Purchase Plan
The stockholders approved the Company's Employee Stock Purchase
Plan.
Of the total shares present or represented at the Meeting, this
proposal received 79.2% approval. A total of 12,596,010 shares
were voted in favor, 113,650 shares were voted against, there
were 3,180,899 broker non-votes, and 15,406 shares abstained
from voting on this proposal.
4. Election of Directors
The stockholders also approved the Company's director nominees,
Bret W. Jorgensen, Craig T. Davenport, Robert J. Erra and
Patrick T. Hackett, to serve until the 1999 Annual Meeting and
until their respective successors have been elected and
qualified. There were no other nominations other than those
made by the Company.
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The voting on the nominations was as follows:
<TABLE>
<CAPTION>
NOMINEE AFFIRMATIVE VOTES VOTES WITHHELD
------- ----------------- --------------
<S> <C> <C>
Bret W. Jorgensen 13,758,617 (86.5%) 2,147,348 (13.5%)
Craig T. Davenport 13,758,617 (86.5%) 2,147,348 (13.5%)
Robert J. Erra 13,758,617 (86.5%) 2,147,348 (13.5%)
Patrick T. Hackett 13,758,617 (86.5%) 2,147,348 (13.5%)
</TABLE>
5. Appointment of Independent Auditors
The Company's proposal to ratify the appointment of Ernst &
Young LLP as the Company's independent auditors for fiscal
year ending December 31, 1996 was also approved by the
stockholders.
Of the total shares present or represented at the Meeting, the
proposal received 99.9% approval. A total of 15,886,638
shares were voted in favor, 12,462 shares were voted against,
there were zero broker non-votes, and 6,865 shares abstained
from voting on this proposal.
ITEM 5. OTHER INFORMATION
This report contains forward-looking statements which 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
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 and respiratory 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 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, or if, 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
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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.
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 is currently considering 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 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.
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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. The regulations
subject long- term care facilities to greater scrutiny. While the
Company believes its facilities are in substantial compliance with
program requirements, the breadth of the new enforcement rules and
their relatively recent effective date, along with delays in the
implementation of certain aspects of the rules, have created
uncertainty over how the rules will be implemented. 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.
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
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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 1.7% of the Company's net
revenues for the quarters ended June 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 six months of 1996, contracts in 21 Life Care facilities were
terminated and contracts in an additional seven Life Care facilities
will be terminated prior to the end of 1996.
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.
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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).
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
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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 June 30, 1996, approximately $105.3 million, or 29.1% 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.
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
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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.
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
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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
a 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 Common Stock. The terms of the
Notes could also discourage a transaction involving a change in
control of the Company.
Page 24
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
EXHIBIT NO.
----------
* 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.
Page 25
<PAGE> 26
* 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.
Page 26
<PAGE> 27
* 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 Statement on Form S-1, Registration No.
33-92402.
Page 27
<PAGE> 28
* 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 June 30, 1996 and 1995.
11.2 Computation of Historical Earnings Per Share, Six Months
ended June 30, 1996 and 1995.
11.3 Computation of Pro Forma Earnings Per Share, Six Months
Ended June 30, 1995
27 Financial Data Schedule (for SEC use only)
- -------------------------------
* 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
June 30, 1996.
Page 28
<PAGE> 29
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: August 12, 1996
Page 29
<PAGE> 1
Exhibit 3.3
FORM OF CERTIFICATE OF AMENDMENT OF
CERTIFICATE OF INCORPORATION OF
THERATX, INCORPORATED
(A DELAWARE CORPORATION)
John A. Bardis and Jonathan H. Glenn certify that:
1. John A. Bardis is the President of TheraTx,
Incorporated, a Delaware corporation (the "Corporation").
2. Jonathan H. Glenn is the Secretary of the
corporation.
3. Article IV of the Certificate of Incorporation of the
Corporation is amended by deleting subpart A thereof and by substituting in
lieu of said subpart A the following subpart:
"A. Classes of Stock. The corporation is authorized to issue
two classes of stock to be designated "Common Stock" and
"Preferred Stock," respectively. The total number of shares
which the corporation is authorized to issue is 55,000,000
shares, of which 50,000,000 shares shall be Common Stock, par
value $.001 per shares, and 5,000,0000 shares shall be
Preferred Stock, par value $.001 per share."
4. The foregoing amendment has been duly approved by the
Corporation's Board of Directors.
5. The foregoing amendment of the number of shares of
Common Stock authorized has been duly approved by the required vote of the
Corporation's stockholders in accordance with the provisions of Sections 211
and 242 of the Delaware General Corporation Law. The Corporation has one class
of stock outstanding, that being the Common Stock. As of May 1, 1996, the
record date of the Corporation's 1996 annual stockholders meeting at which the
foregoing amendment of the number of shares of Common Stock authorized was
approved, the Corporation had issued 20,609,889 shares of its Common Stock.
The number of shares voting in favor of the amendment equaled or exceeded the
vote required. The percentage vote required was more than 50% of the
outstanding Common Stock of the Corporation entitled to vote at the 1996 annual
stockholders meeting.
We declare under penalty of perjury under the laws of the
State of Delaware that the matters set forth in this Certificate are true and
correct of our own knowledge.
Dated: May 30, 1996
----------------------------------------
John A. Bardis
----------------------------------------
Jonathan H. Glenn
<PAGE> 1
Exhibit 10.36
THERATX, INCORPORATED
EXECUTIVE OFFICER SEVERANCE POLICY
TheraTx, Incorporated (the "Company") believes that the key to its
continued success is the retention of its team of Executive Officers. In order
to retain those Executive Officers, and to assure them of adequate severance
pay in the event of a Change of Control, as defined below, the Company adopts
the following policy, effective as of April 25, 1996.
EXECUTIVE OFFICERS TO WHICH THE POLICY IS APPLICABLE
This policy is applicable to each person specifically designated by
the Board of Directors as an "Executive Officer." This policy shall not cover
individuals designated as presidents or vice presidents of the Company, its
subsidiaries, divisions or otherwise, unless the Board has specifically
designated such individual as an Executive Officer.
SEVERANCE BENEFITS
Upon the occurrence of any of the events set forth below, each
Executive Officer shall be entitled to receive from the Company: (i) an amount
equal to such Executive Officer's base salary, at the rate then in effect, for
a period of twenty (20) months, in the case of each corporate vice president,
and for a period of twenty four (24) months, in the case of each senior vice
president and the president and (ii) an amount equal to the then current one
month health care insurance premium paid by the Company for such Executive
Officer, multiplied by twenty (20) or twenty four (24), as the case may be.
All severance benefits shall be paid to the Executive Officer in a lump sum on
the date of such Executive Officer's termination of employment with the
Company. In addition to the foregoing benefits, in the event that the total
value of all payments which vest or become due to an Executive Officer upon the
occurrence of any of the events described below shall become subject to the
federal excise tax on excess severance benefits (or any similar successor tax)
the Company shall pay to such Executive Officer a bonus in an amount equal to
145% of the excise tax initially payable by such executive. The Company shall
not, however, pay a bonus attributable to such excise taxes to the extent such
taxes are attributable to accelerated vesting on options initially granted, or
restricted stock initially made available for sale, within one year of the
Change of Control. For the purpose of the foregoing, options that are repriced
or otherwise changed shall be considered granted at the time of their initial
grant date.
EVENTS TRIGGERING SEVERANCE BENEFITS
Each Executive Officer of the Company shall be entitled to receive the
severance benefits set forth above in the event of a Change of Control of the
Company and (i) such Executive Officer is not offered employment following the
Change of Control; or (ii) such Executive Officer is offered employment
following the Change of Control, but declines to accept because such
<PAGE> 2
employment is conditioned upon any of the following (each of which is referred
to as a"Condition of Employment"):
(i) a change in the Executive Officer's principal work
location which is more than one hundred (100) miles from the Executive Office's
principal work location prior to the Change in Control and without the
Executive Officer's written concurrence; or
(ii) the Executive Officer's base salary is reduced from
its level immediately prior to the Change in Control; or
(iii) the Executive Officer's new duties are inconsistent
with, or result in a reduction of the powers or functions associated with, such
Executive Officer's position, duties, responsibilities and status with the
Company prior to the Change in Control. Such determination shall be based on
all relevant facts and circumstances, provided, however, that, with respect to
all Executive Officers other than the Company's president, if there is any
dispute regarding such determination, such determination shall be made in the
good faith judgment of the president following the Change of Control (but only
if such president is the same individual who was the president of the Company
immediately preceding the Change of Control).
Such Executive Officers shall also be entitled to receive the
severance benefits set forth above if, after accepting employment following the
Change of Control, such Executive Officer's employment is terminated, prior to
the expiration of twenty (20) months from the Change of Control, in the case of
a corporate vice president, or twenty four (24) months from the Change of
Control, in the case of a senior vice president or the president, (i)
voluntarily or involuntarily due to the subsequent imposition of a Condition of
Employment or (ii) for any reason other than for good cause. For the purposes
of this severance policy of the Company, the term "good cause" shall mean only
any one or more of the following: (i) the commission in the course of such
Executive Officer's employment of any dishonest or fraudulent act; (ii) the
conviction of a felony, whether or not committed in the course of employment;
or (iii) the willful and knowing disclosure of any trade secrets or
confidential Company information to persons not authorized to receive such
confidential information. However, if an Executive Officer accepts employment
with the acquiring or surviving entity and his or her employment is
substantially terminated for good cause, any severance benefits not paid as of
the date of such termination shall be forfeited. In addition, if any Executive
Officer accepts employment with the acquiring or surviving entity and remains
in such employment for a period of twenty (20) months or more, in the case of a
corporate vice president, or twenty four (24) months or more, in the case of a
senior vice president or the president, such Executive Officer shall be
entitled to no severance benefits under this policy of the Company.
CHANGE OF CONTROL
For the purposes of this severance policy, the term "Change in
Control" means any one or more of the following:
(i) the successful acquisition by a person or related
group of persons, (other than the Company or a person that directly or
indirectly controls, is controlled by or is under
<PAGE> 3
common control with, the Company) of beneficial ownership (within the meaning
of Rule 13d-3 of the Securities Exchange Act of 1934, as amended) of securities
possessing more than fifty percent (50%) of the total combined voting power of
the Corporation's outstanding securities pursuant to a transaction or series of
related transactions which the Board does not at any time recommend the
Company's stockholders to accept or approve;
(ii) the first date within any period of thirty-six (36)
consecutive months or less on which there is effected a change in the
composition of the Company's Board such that a majority of the Board ceases, by
reason of one or more contested elections for Board membership, to be comprised
of individuals who either (i) have been members of the Company's Board
continuously since the beginning of such period or (ii) have been elected or
nominated for election as Board members during such period by at least a
majority of the Board members described in clause (i) who were still in office
at the time such election or nomination was approved by the Board;
(iii) a merger or consolidation in which the Company is not
the surviving entity, except for a transaction the principal purpose of which
is to change the state in which the Company is incorporated;
(iv) the sale, transfer or other disposition of all or
substantially all of the assets of the Company in complete liquidation or
dissolution of the Company;
(v) any reverse merger in which the Company is the
surviving entity but in which securities possessing more than fifty percent
(50%) of the total combined voting power of the Company's outstanding
securities are transferred to a person or persons different from the persons
holding those securities immediately prior to such merger; or
(vi) the issuance by the Company of securities possessing
more than fifty percent (50%) of the total combined voting power of the
Company's outstanding securities (determined after such issuance) in a single
transaction or a series of related transactions.
<PAGE> 1
Exhibit 11.1
THERATX, INCORPORATED
COMPUTATION OF HISTORICAL EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
---------- -----------
<S> <C> <C>
PRIMARY
Weighted average common stock outstanding during the period . . . . . . . . 20,495 20,314
Dilutive effect of common stock equivalents . . . . . . . . . . . . . . . . 468 394
-------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,963 20,708
======== =========
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . $ 5,807 $ 2,908
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . -- (428)
-------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,807 $ 2,480
======== =========
Earnings per share:
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . $ 0.28 $ 0.14
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . -- (0.02)
-------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.28 $ 0.12
======== =========
FULLY DILUTED
Weighted average common stock outstanding during the period . . . . . . . . 20,495 20,314
Dilutive effect of common stock equivalents . . . . . . . . . . . . . . . . 828 394
-------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,323 20,708
======== =========
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . $ 5,807 $ 2,908
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . -- (428)
-------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,807 $ 2,480
======== =========
Earnings per share:
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . $ 0.27 $ 0.14
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . -- (0.02)
-------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.27 $ 0.12
======== =========
</TABLE>
<PAGE> 1
Exhibit 11.2
THERATX, INCORPORATED
COMPUTATION OF HISTORICAL EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1996 1995
---------- -----------
<S> <C> <C>
PRIMARY
Weighted average common stock outstanding during the period . . . . . . . . 20,471 19,647
Dilutive effect of common stock equivalents . . . . . . . . . . . . . . . . 333 490
-------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,804 20,137
======== =========
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . $ 11,131 $ 5,834
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . -- (428)
-------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,131 $ 5,406
======== =========
Earnings per share:
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . $ 0.54 $ 0.29
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . -- (0.02)
-------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.54 $ 0.27
======== =========
FULLY DILUTED
Weighted average common stock outstanding during the period . . . . . . . . 20,471 19,647
Dilutive effect of common stock equivalents . . . . . . . . . . . . . . . . 787 490
-------- ---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,258 20,137
======== =========
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . $ 11,131 $ 5,834
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . -- (428)
-------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,131 $ 5,406
======== =========
Earnings per share:
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . $ 0.52 $ 0.29
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . -- (0.02)
-------- ---------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.52 $ 0.27
======== =========
</TABLE>
<PAGE> 1
Exhibit 11.3
THERATX, INCORPORATED
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
1995
------------
<S> <C>
PRIMARY
Weighted average common stock outstanding during the period . . . . . . . . . . . . . . . . 20,196
Dilutive effect of common stock equivalents . . . . . . . . . . . . . . . . . . . . . . . . 490
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,686
==========
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,896
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . (428)
----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,468
==========
Earnings per share:
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.28
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (0.02)
----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.26
==========
FULLY DILUTED
Weighted average common stock outstanding during the period . . . . . . . . . . . . . . . 20,196
Dilutive effect of common stock equivalents . . . . . . . . . . . . . . . . . . . . . . . 490
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,686
==========
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,896
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (428)
----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,468
==========
Earnings per share:
Income before extraordinary item . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.28
Extraordinary item, net of income taxes . . . . . . . . . . . . . . . . . . . . . . . . . (0.02)
----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.26
==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 10,516
<SECURITIES> 0
<RECEIVABLES> 116,310
<ALLOWANCES> 9,293
<INVENTORY> 5,417
<CURRENT-ASSETS> 131,363
<PP&E> 130,751
<DEPRECIATION> 17,857
<TOTAL-ASSETS> 362,545
<CURRENT-LIABILITIES> 42,786
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 151,540
<TOTAL-LIABILITY-AND-EQUITY> 362,545
<SALES> 10,262
<TOTAL-REVENUES> 189,183
<CGS> 8,192
<TOTAL-COSTS> 136,004
<OTHER-EXPENSES> 29,672
<LOSS-PROVISION> 2,427
<INTEREST-EXPENSE> 6,299
<INCOME-PRETAX> 17,771
<INCOME-TAX> 6,575
<INCOME-CONTINUING> 11,131
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,131
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.52
</TABLE>
