<PAGE> 1
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 March 31, 1996
--------------
or
[]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- -------------
Commission File number 0-24292
-------
THERATX, INCORPORATED
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 33-0359338
- - --------------------------------------- -------------------------------------
State of Jurisdiction of Incorporation I.R.S. Employer Identification Number
or Organization
</TABLE>
400 Northridge Road, Suite 400
Atlanta, GA 30350
- - --------------------------------------------------------------------------------
(Address of principal executive offices, including zip code)
(770) 518-9449
- - --------------------------------------------------------------------------------
(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 April 30, 1996, was 21,361,220 shares.
<PAGE> 2
INDEX
THERATX, INCORPORATED
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets - March 31, 1996 (Unaudited) and
December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income (Unaudited) - Three months ended March 31,
1996 and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows (Unaudited) - Three months ended March 31, 1996
and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements (Unaudited) - March 31, 1996 . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . 8
PART II - OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . 14
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
Page 2 of 29
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THERATX, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
ASSETS (Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 10,184 $ 10,530
Short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . 1,023 1,023
Accounts receivable, net of allowances for doubtful accounts and denials . 85,979 76,766
Third-party settlements, net . . . . . . . . . . . . . . . . . . . . . . . 10,101 7,084
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,526 5,415
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . 4,800 3,942
Receivable from stockholder . . . . . . . . . . . . . . . . . . . . . . . - 379
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . 2,227 2,010
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 1,737 1,737
------------ ------------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 121,577 108,886
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,159 125,915
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . (16,102) (14,238)
------------ ------------
112,057 111,677
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 98,954 97,844
Long-term notes receivable . . . . . . . . . . . . . . . . . . . . . . . . . 8,174 8,404
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,733 2,987
------------ ------------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 344,495 $ 329,798
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,807 $ 9,560
Accrued payroll and related expenses . . . . . . . . . . . . . . . . . . . 19,341 16,819
Accrued interest payable . . . . . . . . . . . . . . . . . . . . . . . . . 1,702 3,679
Other accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 7,905 6,902
Long-term debt, current portion . . . . . . . . . . . . . . . . . . . . . 435 656
------------ ------------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 37,190 37,616
Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . 61,580 51,741
Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000 100,000
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417 327
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 213 213
Minority interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 2
Commitments and contingencies
Stockholders' equity:
Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 20
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . 121,593 121,403
Note receivable from stockholder . . . . . . . . . . . . . . . . . . . . . (100) (100)
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,522 18,576
------------ ------------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 145,035 139,899
------------ ------------
Total liabilities and stockholders' equity . . . . . . . . . . . . . . . $ 344,495 $ 329,798
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
Page 3 of 29
<PAGE> 4
THERATX, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------------
1996 1995
--------- -------------------------
ACTUAL ACTUAL PRO FORMA
--------- --------- ----------
<S> <C> <C> <C>
Revenues:
Patient care revenues, net . . . . . . . . . . . . . . . . . . $ 85,675 $ 57,733 $ 67,827
Management services and other . . . . . . . . . . . . . . . . 1,953 1,031 1,031
Sales of medical supplies and related services . . . . . . . . 5,696 736 5,987
--------- --------- ----------
Total net revenues . . . . . . . . . . . . . . . . . . . . . 93,324 59,500 74,845
Operating costs and expenses:
Cost of revenues:
Salaries, wages and benefits . . . . . . . . . . . . . . . . 49,080 34,488 39,066
Other operating expenses . . . . . . . . . . . . . . . . . . 14,018 8,291 11,846
Cost of medical supply sales and related services . . . . . 4,387 486 4,978
Corporate, general and administrative . . . . . . . . . . . . 9,284 6,794 7,385
Depreciation and amortization . . . . . . . . . . . . . . . . 2,682 1,789 2,513
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,210 1,657 1,731
--------- --------- ----------
Total operating costs and expenses . . . . . . . . . . . . . 81,661 53,505 67,519
--------- --------- ----------
Income from operations . . . . . . . . . . . . . . . . . . . . . 11,663 5,995 7,326
Interest and other expense, net . . . . . . . . . . . . . . . . . 3,029 1,064 2,291
--------- --------- ----------
Income before income taxes and minority interest . . . . . . . . 8,634 4,931 5,035
Provision for income taxes . . . . . . . . . . . . . . . . . . . 3,263 2,060 2,102
--------- --------- ----------
Income before minority interest . . . . . . . . . . . . . . . . . 5,371 2,871 2,933
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . (47) 55 55
--------- --------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,324 $ 2,926 $ 2,988
========= ========= ==========
Net income per common share . . . . . . . . . . . . . . . . . . . $ 0.26 $ 0.15 $ 0.14
========= ========= ==========
Weighted average number of shares outstanding . . . . . . . . . . 20,689 19,598 20,695
========= ========= ==========
</TABLE>
See notes to condensed consolidated financial statements.
Page 4 of 29
<PAGE> 5
THERATX, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,324 $ 2,926
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 . . . . . . . . . . . . . . . . . . . . . . 2,682 1,789
Provision for bad debts and denials . . . . . . . . . . . . . . . . . . . 1,199 1,532
Write-off of deferred financing costs . . . . . . . . . . . . . . . . . . - 131
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (70)
Amortization of deferred financing costs . . . . . . . . . . . . . . . . . 166 75
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . - (413)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148 (42)
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . (12,060) (8,436)
Inventory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (111) -
Prepaid expenses and other current assets . . . . . . . . . . . . . . . (858) (1,628)
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . (217) -
Accounts payable and accrued liabilities . . . . . . . . . . . . . . . . (1,705) 1,398
------------ ------------
Net cash used in operating activities . . . . . . . . . . . . . . . . . . . . (5,810) (2,738)
------------ ------------
INVESTING ACTIVITIES:
Purchases of property and equipment . . . . . . . . . . . . . . . . . . . . . (2,087) (1,590)
Sales of short-term investments . . . . . . . . . . . . . . . . . . . . . . . - 27
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (636) (3,785)
Acquisition of companies . . . . . . . . . . . . . . . . . . . . . . . . . . (2,000) (5,850)
------------ ------------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . (4,723) (11,198)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from convertible debt . . . . . . . . . . . . . . . . . . . . . . . - 100,000
Proceeds from long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 10,000 6,207
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . (382) (519)
Payments on notes receivable from stockholders . . . . . . . . . . . . . . . 379 -
Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . 190 266
Capitalized financing costs . . . . . . . . . . . . . . . . . . . . . . . . . - (3,500)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (97)
------------ ------------
Net cash provided by financing activities . . . . . . . . . . . . . . . . . . 10,187 102,357
------------ ------------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . (346) 88,421
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . 10,530 11,560
------------ ------------
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . $ 10,184 $ 99,981
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,999 $ 1,013
============ ============
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,352 $ 4,058
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
Page 5 of 29
<PAGE> 6
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 March 31, 1996,
the condensed consolidated statements of income for the three-month periods
ended March 31, 1996 and 1995, and the condensed consolidated statements of
cash flows for the three months ended March 31, 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 March 31, 1996, and the results of operations for the three months ended
March 31, 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 year periods have been reclassified to
conform to current year presentation.
Operating results for the three-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 ended March 31, 1996, at an
effective rate of 38%.
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. The Pro Forma Condensed Consolidated Statement of Income for the
three months ended March 31, 1995 gives effect to the acquisition of the SMS
Business as if such acquisition had occurred on January 1, 1995.
Page 6 of 29
<PAGE> 7
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. In addition, 888,889 shares of the Company's common
stock were issued into escrow (the "Escrow Shares"). The Company may recover
from SMS up to a maximum of $20,000,000 in value of the Escrow Shares (at a
deemed value per Escrow Share of $22.50) if certain financial goals for the SMS
Business were not met during the period commencing April 1, 1995 and ending
February 29, 1996 (the "Earn-Out Period"). The Escrow Shares are to be
released if certain financial goals for the SMS Business were achieved, and the
purchase price is to be further increased by as much as $20,000,000 if certain
financial goals were exceeded during the Earn-Out Period. The consideration
payable for exceeding certain financial goals is 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 are not entitled to the
Escrow Shares and were not entitled to any earn-out payment as the financial
performance of the SMS Business was, as a whole, significantly below the
threshold entitling the sellers to any payment under the earn-out. As a
result, none of the Escrow Shares are included as outstanding as of March 31,
1996 for financial reporting purposes. 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.
Page 7 of 29
<PAGE> 8
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 programs for skilled nursing facilities, inpatient
healthcare services to subacute and long-term care patients and outpatient
treatment of 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 8 of 29
<PAGE> 9
The following table provides certain information related to the Company's
patient care operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
1996 1995
------- -----------------------
SELECTED STATISTICAL DATA: ACTUAL ACTUAL PRO FORMA
------- ------ ---------
<S> <C> <C> <C>
Payor Mix:
Medicare . . . . . . . . . . . . . . . . . . . . . . . . . . 53.6% 56.8% 52.8%
Private, managed care and other . . . . . . . . . . . . . . 33.4 36.9 36.6
Medicaid . . . . . . . . . . . . . . . . . . . . . . . . . . 13.0 6.3 10.6
Revenue mix(2):
Rehabilitation subacute . . . . . . . . . . . . . . . . . . 54.6% 62.6% 59.5%
Medical subacute . . . . . . . . . . . . . . . . . . . . . . 5.5 5.9 5.0
Occupational medicine and services . . . . . . . . . . . . . 6.9 9.3 7.9
Basic healthcare . . . . . . . . . . . . . . . . . . . . . . 31.4 19.2 23.9
Other specialty . . . . . . . . . . . . . . . . . . . . . . 1.6 3.0 3.7
Number of Rehabilitation Management Programs(1) . . . . . . . 184 139 139
Inpatient Facilities:
Number of owned, leased and managed facilities(1) . . . . . 28 14 20
Licensed beds(1) . . . . . . . . . . . . . . . . . . . . . . 3,609 1,822 2,718
Number of Occupational Healthcare Clinics(1) . . . . . . . . . 15 11 11
- - -------------------------------
</TABLE>
(1) Numbers expressed are at end of period.
(2) Excludes revenues from management services and other and medical supplies
and related services.
RESULTS OF OPERATIONS-HISTORICAL
The following table sets forth for the three-month periods ended March 31,
1996 and 1995, the percentage relationship to total net revenues of certain
costs, expenses and income together with the change of such items from period
to period on a percentage basis.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1995 - 1996
-------------------- PERCENTAGE
1996 1995 CHANGE
----- ---- ------
<S> <C> <C> <C>
Revenues:
Patient care revenues, net . . . . . . . . . . . . . . . . . . 91.8% 97.0% 48.4%
Management services and other . . . . . . . . . . . . . . . . 2.1 1.7 89.4
Sales of medical supplies and related services . . . . . . . . 6.1 1.3 673.9
----- -----
Total net revenues . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 56.8
Operating costs and expenses:
Cost of revenues:
Salaries, wages and benefits(1) . . . . . . . . . . . . . . 56.0 58.7 42.3
Other operating expenses(1) . . . . . . . . . . . . . . . . 16.0 14.1 69.1
Cost of medical supply sales and related services(2) . . . . 77.0 66.0 802.7
Corporate, general and administrative . . . . . . . . . . . . 9.9 11.4 36.6
Depreciation and amortization . . . . . . . . . . . . . . . . 2.9 3.0 49.9
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 2.8 33.4
Total operating costs and expenses . . . . . . . . . . . . . 87.5 89.9 52.6
Income from operations . . . . . . . . . . . . . . . . . . . . . 12.5 10.1 94.5
Interest and other expense, net . . . . . . . . . . . . . . . . . 3.2 1.8 184.7
Income before income taxes and minority interest . . . . . . . . 9.3 8.3 75.1
Provision for income taxes . . . . . . . . . . . . . . . . . . . 3.5 3.5 58.4
Income before minority interest . . . . . . . . . . . . . . . . . 5.8 4.8 87.1
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . (0.1) .1 (185.5)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 4.9 82.0
</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 9 of 29
<PAGE> 10
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1995
Patient care revenues, net. The increase in patient care revenues, net for
the quarter ended March 31, 1996 over the corresponding period in 1995 was
attributable to the acquisition of inpatient skilled nursing facilities and
growth in rehabilitation management programs. Patient care revenues during the
first quarter of 1996 included revenue from twelve owned and leased facilities
added subsequent to March 31, 1995. Rehabilitation management programs
experienced approximately 38% revenue growth from 1995 to 1996. This increase
primarily is due to the 32.4% increase in the number of rehabilitation
management programs from March 31, 1995 to March 31, 1996. The Company added
97 rehabilitation management programs from April 1, 1995 through March 31, 1996
and terminated 52 programs, ending the quarter with 184 programs.
Management services and other. Management services and other revenues
increased during the first quarter of 1996 over the first three months 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 during the three months ended March 31,
1996 over the same period of 1995 primarily was due to the inclusion of
revenues 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. The majority of the increase in salaries,
wages and benefits during the three months ended March 31, 1996 over the same
period of 1995, was attributable to personnel costs at owned and leased
inpatient facilities added subsequent to March 31, 1995. The remainder of the
increase in salaries, wages and benefits during the three months ended March
31, 1996 over the three months ended March 31, 1995, primarily was attributable
to increased personnel costs resulting from the addition of clinicians required
to staff new rehabilitation management programs.
Other operating expenses. The majority of the increase in other operating
expenses during the three months ended March 31, 1996 over the same period of
1995, was due to costs at owned and leased inpatient facilities added
subsequent to March 31, 1995. The remainder of the increase during the three
months ended March 31, 1996 over the three months ended March 31, 1995,
primarily was attributable to the increase in the number of rehabilitation
management programs added subsequent to March 31, 1995.
Cost of medical supply sales and related services. The increase in the
cost of medical supply sales and related services during the first quarter of
1996 over the first quarter of 1995 primarily was attributable to revenues
generated by the medical products distribution company and the Part B billing
and supply service company acquired April 1, 1995.
Corporate, general and administrative. Corporate, general and
administrative expenses increased during the three months ended March 31, 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
owned and leased inpatient facilities. Corporate, general and administrative
expenses decreased as a percentage of revenues during the three months ended
March 31, 1996 over the three months ended March 31, 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 quarter ended March 31, 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 three months ended March 31, 1996
over the same period of 1995, primarily due to the addition of five leased
inpatient facilities subsequent to March 31, 1995.
Interest and other expense, net. The increase in interest and other
expense, net for the three months ended March 31, 1996 as compared to the
corresponding period in 1995, primarily was related to the three months of
interest incurred on the Company's 8% Convertible Subordinated Debentures due
2002 (the "Notes") issued in February 1995. In addition, interest and other
expense for the first quarter of 1995 was partially offset by interest income
of approximately $965,000 earned on the proceeds from the Notes prior to the
April 1, 1995 acquisition of
Page 10 of 29
<PAGE> 11
SMS. To a lesser extent, interest expense incurred on debt related to the
owned and leased facilities acquired subsequent to March 31, 1995 and
additional debt drawn under the Company's credit facility also contributed to
the increase in interest expense for the first quarter of 1996.
Provision for income taxes. The Company's effective tax rate for the first
quarter of 1996 was 37.8%.
RESULTS OF OPERATIONS - PRO FORMA
The Pro Forma Condensed Consolidated Statement of Income for the three
months ended March 31, 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 three-month period ended March 31,
1996, on a historical basis, and for the three-month period ended March 31,
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>
THREE MONTHS ENDED
MARCH 31,
----------------------- 1995 - 1996
1996 1995 PERCENTAGE
ACTUAL PRO FORMA CHANGE
------ --------- ----------
<S> <C> <C> <C>
Revenues:
Patient care revenues, net . . . . . . . . . . . . . . . . . . 91.8% 90.6% 26.3%
Management services and other . . . . . . . . . . . . . . . . 2.1 1.4 89.4
Sales of medical supplies and related services . . . . . . . . 6.1 8.0 (4.9)
----- -----
Total net revenues . . . . . . . . . . . . . . . . . . . . . 100.0 100.0 24.7
Operating costs and expenses:
Cost of revenues:
Salaries, wages and benefits(1) . . . . . . . . . . . . . . 56.0 56.7 25.6
Other operating expenses(1) . . . . . . . . . . . . . . . . 16.0 17.2 18.3
Cost of medical supply sales and related services(2) . . . . 77.0 83.1 (11.9)
Corporate, general and administrative . . . . . . . . . . . . 9.9 9.9 25.7
Depreciation and amortization . . . . . . . . . . . . . . . . 2.9 3.4 6.7
Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.4 2.3 27.7
Total operating costs and expenses . . . . . . . . . . . . . 87.5 90.2 20.9
Income from operations . . . . . . . . . . . . . . . . . . . . . 12.5 9.8 59.2
Interest and other expense, net . . . . . . . . . . . . . . . . . 3.2 3.1 32.2
Income before income taxes and minority interest . . . . . . . . 9.3 6.7 71.5
Provision for income taxes . . . . . . . . . . . . . . . . . . . 3.5 2.8 55.2
Income before minority interest . . . . . . . . . . . . . . . . . 5.8 3.9 83.1
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . (0.1) 0.1 (185.5)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 4.0 78.2
</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.
THREE MONTHS ENDED MARCH 31, 1996 (ACTUAL) COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1995 (PRO FORMA)
Patient care revenues, net. Patient care revenues, net increased during
the first quarter of 1996 over the pro forma patient care revenues, net for the
same period of 1995 primarily as a result of the increase in rehabilitation
management programs. Rehabilitation management programs experienced
approximately 38% revenue growth from the quarter ended March 31, 1995 to the
corresponding period in 1996. This increase is due to a 32.4% increase in the
number of rehabilitation management programs from March 31, 1995 to March 31,
1996. The Company added 97 rehabilitation management programs from April 1,
1995 through March 31, 1996 and terminated 52 programs, ending the quarter with
184 programs. The remainder of the increase in patient care revenues, net is a
result of the acquisition of inpatient skilled nursing facilities. Patient
care revenues, net during the first quarter of 1996 included revenue from six
leased facilities added subsequent to March 31, 1995.
Management services and other. Management services and other revenues
increased during the first quarter of 1996 over the pro forma management
services and other revenues for the first three months of 1995
Page 11 of 29
<PAGE> 12
primarily as a result of the addition of staffing services related to the
recruitment and temporary placement of therapists subsequent to March 31, 1995.
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 first quarter of 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.
Salaries, wages and benefits. Of the increase in salaries, wages and
benefits during the first quarter of 1996 over pro forma first quarter 1995
approximately 74% was attributable to increased personnel costs primarily
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 first quarter of 1996 over the pro forma first quarter of
1995 primarily was attributable to personnel costs at leased inpatient
facilities added subsequent to March 31, 1995.
Other operating expenses. The majority of the increase in other operating
expenses during the first quarter of 1996 over pro forma other operating
expenses for the same period of 1995 was due to costs at leased inpatient
facilities added subsequent to March 31, 1995. The remainder of the increase
during the first quarter of 1996 over the pro forma first quarter of 1995
primarily was attributable to the increase in the number of rehabilitation
management programs subsequent to March 31, 1995.
Cost of medical supply sales and related services. The decrease in the
cost of medical supply sales and related services during the first quarter of
1996 over the pro forma costs for the first 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 first quarter of 1996 over the pro
forma first quarter of 1995 primarily as a result of higher costs necessary to
support the growth in rehabilitation management programs. Corporate, general
and administrative expenses remained constant as a percentage of revenues
during the first quarter of 1996 from the pro forma first quarter of 1995
primarily due to the growth in net revenues.
Depreciation and amortization. Depreciation and amortization increased
during the first quarter of 1996, as compared to pro forma depreciation and
amortization for the same period of 1995, primarily as a result of the owned
and leased facilities acquired subsequent to March 31, 1995.
Rent. Rent expense increased during the quarter ended March 31, 1996 over
the pro forma rent expense for the corresponding period in 1995 primarily due
to the addition of five leased inpatient facilities subsequent to March 31,
1995.
Interest and other expense, net. The increase in interest and other
expense, net for the three months ended March 31, 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.
Provision for income taxes. The Company's effective tax rate for the
first quarter of 1996 was 37.8%.
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 quarters ended March 31, 1996 and 1995, net cash used in
operating activities was $5.8 million and $2.7million, respectively. Net cash
provided by financing activities for the quarters ended March 31, 1996 and 1995
was $10.2 million and $102.4 million, respectively. TheraTx's capital
requirements have related primarily to acquisitions and increases in accounts
receivable.
On May 8, 1995, TheraTx entered into a $125.0 million Senior Credit
Facility ("Senior Credit Facility") with a group of lenders. Borrowings under
the Senior Credit Facility bear interest at a maximum rate of LIBOR plus 1.5%,
adjusted for certain leverage ratios. The Senior Credit Facility provides for
a $5.0 million swing line to accommodate same-day borrowings and a $5.0 million
stand-by letter of credit facility. Future borrowings under the Senior Credit
Facility will be used to fund working capital requirements, purchases of
property and equipment, acquisitions, and general corporate requirements.
Borrowings under the Senior Credit Facility are secured by substantially all of
the assets of TheraTx and its subsidiaries, including all of the capital stock
of each subsidiary.
Page 12 of 29
<PAGE> 13
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 March 31, 1996, TheraTx had $58.0 million
outstanding under the Senior Credit Facility.
Accounts receivable, net of allowances were $86.0 million and $76.8
million at March 31, 1996 and December 31, 1995, respectively. Estimated
settlements due from third-party payors aggregated $10.1 million and $7.1
million at March 31, 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 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. In addition, during April 1996, the
Company acquired Occupational Health International, P.C., an occupational
healthcare clinic, for $2.1 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 is scheduled to commence July 1996 upon
completion of the office building. The Company also entered into a contract to
purchase an adjacent 6.2 acre parcel of land for the development of a 120-bed
skilled nursing facility for approximately $1.14 million. The purchase is
expected to close in July 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 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 13 of 29
<PAGE> 14
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. On May 7, 1996 the Company transferred the action to the
United States District Court, Middle District of Florida, Jacksonville
Division. 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 - None
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
Page 14 of 29
<PAGE> 15
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 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
health care 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 health care 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 health care reform proposals, including
among other things, demonstration projects to create managed care programs
for Medicaid beneficiaries which
Page 15 of 29
<PAGE> 16
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 health care spending, alternative health care delivery systems and
payment methods and that public debate of these issues will likely continue
in the future. Due to uncertainties regarding the ultimate features of
these budget reform initiatives and their enactment and implementation, the
Company cannot predict which, if any, reform proposals will be adopted,
when they may be adopted or what impact they may have on the Company.
There can be no assurance that such reforms, if enacted, will not have a
material adverse effect on the Company.
Government Regulation
The federal government, and all states in which the Company operates,
regulate various aspects of the Company's business. The development and
operation of skilled nursing facilities and surgical centers is subject to
federal, state and local licensure and certification laws. Skilled nursing
facilities and surgical centers are subject to periodic inspection by
governmental and other authorities to assure compliance with the various
standards established for continued licensure under state law and
certification under the Medicare and Medicaid programs. Many states have
adopted certificate of need or similar health planning laws that generally
require state agency approval of certain new health care 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 health
care and surgical center businesses have "corporate practice of medicine"
laws which may prohibit the ownership or operation of health care
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 health care
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.
Page 16 of 29
<PAGE> 17
Integration of Acquisitions
Prior to June 1994, the Company had neither operated skilled nursing
facilities nor provided any health care 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, an
occupational health business and a surgical center business. Due in part
to differences between the historical core business of the Company and
those of the acquired businesses, such acquisitions have placed and may
continue to place significant demands on the Company's management and other
resources. There can be no assurance that these businesses can be
integrated successfully, that there will be any operating efficiencies
between the businesses or that the combined businesses can be operated
profitably. The Company may acquire other businesses in the future. The
failure to integrate and operate these or other acquired companies
successfully could have a material adverse effect on the Company's business
and future prospects. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Because skilled nursing facility services are similar to those
provided by existing and potential customers of the Company's managed
programs, there can be no assurance that acquisitions of skilled nursing
facilities will not adversely affect the Company's relationships with
managed program customers or the Company's ability to market its managed
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
managed 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.
On April 3, 1995 the Company entered into a Termination Agreement with
Convalescent Services, Inc. ("CSI") and Mariner Health Group, Inc., which
terminated a Master Therapy Services Agreement and set a timetable for the
termination of certain ancillary agreements between the Company and CSI.
CSI accounted for approximately 4.4% of the Company's net revenues for the
quarter ended March 31, 1995. The Termination Agreement, which began April
1995, provided for a phased-in replacement of programs in the CSI
facilities, and the replacement and termination was completed in December
1995.
As of March 31, 1996, the Company operated rehabilitation therapy
management programs in 16 facilities owned by Life Care Centers of America,
Inc. ("Life Care"). The Company's contracts with these facilities
accounted for an aggregate of 4.5% and 2.3% of the Company's net revenues
for the quarters ended March 31, 1995 and 1996, respectively. During
August 1995, Life Care informed the Company
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<PAGE> 18
that it intended to offer its own rehabilitation programs within its
facilities and would not be renewing its existing contracts with the
Company. The Company's contracts with Life Care expire over the period
commencing November 1995 and ending December 1996. The Company and Life
Care have agreed to delay the termination of the programs to occur during
the period commencing March 1996 and ending December 1996. The loss of
Life Care as a customer could have an adverse affect on the Company's
business, financial condition and results of operations.
The Company believes it will be able to replace a substantial portion
of the programs in the Life Care facilities with programs in other
third-party facilities. However, there can be no assurance that the
Company will be able to replace a substantial portion of the lost Life Care
business with comparable business in the same markets. Further, even if a
substantial portion of the lost Life Care business is replaced, there can
be no assurance that such new business will generate comparable revenues or
margins.
As part of its surgical center business, the Company manages the
Surgecenter of Palo Alto pursuant to a ten year management agreement dated
September 1988. The management agreement has historically accounted for a
significant portion of the operating profit of the Company's subsidiary,
Helian. There can be no assurance that the management agreement will be
renewed or, if renewed, will be on terms favorable to the Company.
Increased Leverage
In February 1995, the Company raised $96.5 million, net of commissions
and financing costs, through the sale of $100.0 million in aggregate
principal amount of 8% Convertible Subordinated Notes due 2002 (the
"Notes"). The sale of the Notes increased the ratio of the Company's
long-term debt to total capitalization significantly from 28.8% at December
31, 1994 to 52.0% at December 31, 1995. In addition, on May 5, 1995, the
Company increased its senior credit facility from $65.0 million to $125.0
million, which may allow the Company to increase its leverage. As a result
of this increased leverage, the Company's principal and interest
obligations have increased substantially. The degree to which the Company
is leveraged could adversely affect the Company's ability to obtain
additional financing for working capital, acquisitions or other purposes
and could make it more vulnerable to economic downturns and competitive
pressures.
Subordination of Notes
The indebtedness evidenced by the Notes is subordinate to the prior
payment in full of all Senior Indebtedness (as such term is defined in an
indenture dated as of February 15, 1995 (the "Indenture"), between the
Company and The First National Bank of Boston, 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
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<PAGE> 19
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 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
health care 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.
Page 19 of 29
<PAGE> 20
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 March 31, 1996, approximately $99.0 million, or 28.7% 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 health care
companies and which have often been unrelated to the operating performance
of these companies. The trading price of TheraTx Common Stock and the
Notes could also be subject to significant fluctuations in response to
variations in quarterly operating results, the gain or loss of significant
contracts, changes in management, future announcements concerning the
Company, legislative or regulatory changes, general trends in the industry
and other events or factors.
Potential Shortage of Clinicians; Increased Labor Costs
The Company employs or contracts with a significant number of
physicians, skilled speech-language pathologists, occupational therapists,
physical therapists, nurses and aides. Current industry demand for these
clinicians exceeds the number of available clinicians and the Company
anticipates that this shortage will continue or increase. The shortage has
resulted, and will continue to result, in intense competition and
increasing salaries for these clinicians. There can be no assurance that
reimbursement for the Company's services will be sufficient to cover
increased personnel costs, which would adversely affect the Company's
results of operations. In addition, due in part to the rapid growth in the
number of its rehabilitation management programs, the Company is required
to hire more costly temporary contract therapists to meet its needs. The
lack of available clinicians and the need to hire temporary contract
therapists could limit the Company's ability to expand and adversely affect
its results of operations.
Collectability of Receivables
It often takes the Company in excess of 100 days to collect accounts
receivable from third-party payors and customers. While the Company
believes it maintains adequate reserves, third-party payors and customers
in the health care 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 health care providers for the services of physicians,
Page 20 of 29
<PAGE> 21
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. While the Company has no reason to believe
that any pending claims are material, 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 personnel at
competitive rates, government regulation and reimbursement policies, 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 health care 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.
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<PAGE> 22
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.
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.
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<PAGE> 23
* 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.
* 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.
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<PAGE> 24
* 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.
* 10.1.1Termination 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.
* 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.
* 10.9.1Model 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.
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<PAGE> 25
* 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.
* 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 Company
Incorporated by reference to the Registration Statement on Form
S-8, Registration No. 333-1608
11.1 Computation of Historical Earnings Per Share.
11.2 Computation of Pro Forma Earnings Per Share
27 Financial Data Schedule (for SEC use only)
Page 25 of 29
<PAGE> 26
- - -----------------
-- 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 ending March
31, 1996.
Page 26 of 29
<PAGE> 27
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: May 14, 1996
Page 27 of 29
<PAGE> 1
Exhibit 11.1
THERATX, INCORPORATED
COMPUTATION OF HISTORICAL EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
-------------------------
1996 1995
--------- ----------
<S> <C> <C>
PRIMARY
Weighted average common stock outstanding during the period . . . . . . . . 20,446 18,986
Dilutive effect of common stock equivalents . . . . . . . . . . . . . . . . 243 612
--------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,689 19,598
========= ==========
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,324 $ 2,926
========= ==========
Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.26 $ 0.15
========= ==========
FULLY DILUTED
Weighted average common stock outstanding during the period . . . . . . . . 20,446 18,986
Dilutive effect of common stock equivalents . . . . . . . . . . . . . . . . 257 612
--------- ----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,703 19,598
========= ==========
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,324 $ 2,926
========= ==========
Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.26 $ 0.15
========= ==========
</TABLE>
<PAGE> 1
Exhibit 11.2
THERATX, INCORPORATED
COMPUTATION OF PRO FORMA EARNINGS PER SHARE
(In thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
1995
------------
<S> <C>
PRIMARY
Weighted average common stock outstanding during the period . . . . . . . . . . . . . . . . . 18,986
Shares issued to SMS stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,097
Dilutive effect of common stock equivalents . . . . . . . . . . . . . . . . . . . . . . . . . 612
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,695
===========
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,988
===========
Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.14
===========
FULLY DILUTED
Weighted average common stock outstanding during the period . . . . . . . . . . . . . . . . . 18,986
Shares issued to SMS stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,097
Dilutive effect of common stock equivalents . . . . . . . . . . . . . . . . . . . . . . . . . 612
-----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,695
===========
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,988
===========
Net income per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.14
===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 10,184
<SECURITIES> 0
<RECEIVABLES> 104,348
<ALLOWANCES> 8,268
<INVENTORY> 5,526
<CURRENT-ASSETS> 121,577
<PP&E> 128,159
<DEPRECIATION> 16,102
<TOTAL-ASSETS> 344,495
<CURRENT-LIABILITIES> 37,190
<BONDS> 0
0
0
<COMMON> 20
<OTHER-SE> 145,015
<TOTAL-LIABILITY-AND-EQUITY> 344,495
<SALES> 5,696
<TOTAL-REVENUES> 93,324
<CGS> 4,387
<TOTAL-COSTS> 67,485
<OTHER-EXPENSES> 14,176
<LOSS-PROVISION> 1,199
<INTEREST-EXPENSE> 3,029
<INCOME-PRETAX> 8,634
<INCOME-TAX> 3,263
<INCOME-CONTINUING> 5,324
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,324
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
