SCHEDULE 14A
(Rule 14a-101)
Information Required in Consent Statement
SCHEDULE 14A INFORMATION
Consent Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant /x/
Filed by Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Consent Statement / / Confidential, for Use of the
/X/ Definitive Consent Statement Commission Only (as
permitted by
/ / Definitive Additional Materials Rule 14a-6(e)(2))
/ / Soliciting Material Pursuant to
Rule 14a-11(c) or Rule 14a-12
THERATX, INCORPORATED
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Consent Statement,
if Other Than the Registrant)
Payment of filing fee (Check the appropriate box):
/x/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement no.:
(3) Filing Party:
(4) Date Filed:
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[TheraTx Letterhead]
April 24, 1997
Dear Noteholders:
TheraTx, Incorporated ("TheraTx") is soliciting consents to amend the
Indenture under which its 8% Convertible Subordinated Notes Due 2002 (the
"Notes") were issued. If adopted, the proposed amendment will provide that
reports of Vencor, Inc. ("Vencor"), which has become TheraTx's parent and a
guarantor of the Notes, be provided to the Trustee under the Indenture and the
holders of Notes, rather than those of TheraTx which you are currently
receiving. TheraTx believes that these reports will provide the holders of Notes
with a more comprehensive and useful measure of the financial position of the
consolidated companies and will save TheraTx unnecessary accounting and related
expenses.
To reimburse you for administrative expenses incurred in providing your
consent, we will make a payment, subject to the terms and conditions set forth
in the accompanying Consent Solicitation Statement, in the amount of $0.10 per
$1,000 principal amount of Notes to each holder whose properly executed consent
in favor of the amendment is received (and not timely revoked) on or before 4:00
p.m. (New York City time) on Wednesday, April 30, 1997, or such later date as
may be set by the Company. To ensure that you will be eligible to receive a
payment, you should complete and return the accompanying pink consent form as
soon as possible. DO NOT SEND IN YOUR NOTE CERTIFICATES IN CONNECTION WITH THIS
CONSENT SOLICITATION. However, you may want to consider doing so in connection
with the Notice of Repurchase Right and Designated Event, dated March 31, 1997,
which TheraTx has mailed separately to each holder of Notes.
The Notes will remain outstanding represented by their current
certificates in the name of TheraTx and will continue to have all rights
attendant thereto, except as provided in the proposed amendment. Certificates
will not be exchanged.
Vencor has provided a subordinated guarantee of the Notes on the terms
described in the accompanying Consent Solicitation Statement.
The Company believes that adoption of the amendment is important and
urges you to give your consent. Thank you for your cooperation.
Sincerely,
John A. Bardis
President and Chief Executive Officer
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CONSENT SOLICITATION STATEMENT
April 24, 1997
THERATX, INCORPORATED
8% Convertible Subordinated Notes Due 2002
TheraTx, Incorporated, a Delaware corporation ("TheraTx" or the
"Company"), is soliciting consents (the "Consents") to amend (the "Amendment")
the Indenture dated as of February 15, 1995 between TheraTx and State Street
Bank and Trust Company as successor trustee (the "Trustee") to the First
National Bank of Boston, as amended by the First Supplemental Indenture dated as
of March 21, 1997 and the Second Supplemental Indenture dated as of April 24,
1997 (as so amended, the "Indenture"), under which its 8% Convertible
Subordinated Notes Due 2002 (the "Notes") were issued. The Amendment provides
that the Trustee and the holders of Notes would receive quarterly and annual
reports of the financial position of Vencor, Inc., a Delaware corporation
("Vencor" or the "Guarantor" and, together with TheraTx, the "Companies"),
rather than reports of TheraTx. The Amendment is subject to the receipt on or
prior to 4:00 p.m., New York City time on Wednesday, April 30, 1997, or such
later date as may be set by the Company (the "Expiration Date"), of valid
consents in favor of the Amendment granted (and not revoked) by not less than a
majority in aggregate principal amount of the Notes outstanding (the "Requisite
Consent").
The Company has fixed the close of business on April 17, 1997 as the
record date (the "Record Date") for holders of Notes entitled to consent to the
Amendment (the "Noteholders"). Only Noteholders of record on the register for
the Notes at the close of business on the Record Date are entitled to consent to
the Amendment. Subject to obtaining the Requisite Consent, the Company will pay
each Noteholder who delivers (and does not timely revoke) prior to the
Expiration Date a Consent in favor of the Amendment a payment (the "Consent
Fee") at the rate of $0.10 per $1,000 principal amount of Notes held by such
Noteholder. This Consent Solicitation Statement is being mailed to Noteholders
of record on or about April 24, 1997.
The Company has not authorized any person (including the Information
Agent and the Tabulation Agent) to give any information or to make any
representation in connection with this solicitation of Consents (the
"Solicitation") other than those contained herein and, if given or made, such
information or representation must not be relied upon as having been authorized.
This consent solicitation statement (the "Consent Solicitation Statement") is
not being made to, and no consents are being solicited from, Noteholders in any
jurisdiction in which it is unlawful to make such solicitation or grant such
consents. The delivery of this Consent Solicitation Statement shall not, under
any circumstances, create any implication that the information herein is correct
after the date hereof.
Questions concerning the terms of the Solicitation and requests for
assistance in filling out and delivering Consents or for additional copies of
this Consent Solicitation Statement or the Consent Letter should be directed to
D.F. King & Co., Inc. (the "Information Agent") at (800) 755-3105. Deliveries of
Consents should be made to D.F. King & Co., Inc. at 77 Water Street, 20th Floor,
New York, New York 10005; Attention: Thomas Germinario; facsimile no. (212)
809-8839 (facsimiles should be confirmed by physical delivery). D.F. King & Co.,
Inc. will calculate the number of Consents received (in that capacity and not in
its capacity as Information Agent, D.F. King & Co., Inc. is sometimes referred
to herein as the "Tabulation Agent"). CONSENT FORMS SHOULD BE DELIVERED ONLY TO
THE TABULATION AGENT. IN NO EVENT SHOULD A HOLDER DELIVER NOTE CERTIFICATES.
Notes will continue to be represented by current certificates in the name of
TheraTx, Incorporated.
THE CONSENT SOLICITATION WILL EXPIRE AT 4:00 P.M., NEW YORK CITY TIME, ON
WEDNESDAY, APRIL 30, 1997, UNLESS EXTENDED FOR A SPECIFIED PERIOD OF TIME OR
ON A DAILY BASIS UNTIL THE REQUISITE CONSENT HAS BEEN RECEIVED.
The Information Agent for the Consent Solicitation is:
D.F. King & Co., Inc.
The date of this Consent Solicitation Statement is April 24, 1997.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the historical financial information and notes thereto
appearing in Annex A to this Consent Solicitation Statement. Defined terms used
in this summary have the meanings assigned to them elsewhere in this
Consent Solicitation Statement.
Purpose of the Solicitation; The Amendment
The purpose of the Solicitation is to obtain approval of the Amendment,
which provides that the Trustee and the Noteholders would receive reports on the
financial condition of Vencor rather than on TheraTx.
The Solicitation
Requisite Consent.............Not less than a majority in aggregate principal
amount of the Notes outstanding in favor of the
Amendment.
Expiration....................The Solicitation is scheduled to expire at 4:00
p.m., New York City time, on Wednesday, April 30,
1997. If the Requisite Consent is not received by
such date, the Company may, in its discretion,
extend the Solicitation for one or more specified
periods or until the date on which the Requisite
Consent is received.
Consent Fee...................A payment to each Noteholder who delivers (and
does not timely revoke) prior to the Expiration
Date a Consent in favor of the Amendment with
respect to such Noteholder's Notes will be made at
the rate of $0.10 per $1,000 principal amount of
such Notes, subject to the Consent Fee Condition
described below. The Company expects that the
Consent Fee will be made promptly following the
Expiration Date. Interest will not accrue on any
Consent Fee due to consenting Noteholders.
Noteholders who do not timely deliver a Consent
in favor of the Amendment with respect to their
Notes will not receive a Consent Fee, even though
the Amendment, if it is approved and becomes
effective, will be binding on them.
Consent Fee Condition.........The Company's obligation to pay a Consent Fee to
a Noteholder who grants a consent in favor of the
Amendment is contingent upon obtaining the
Requisite Consent by the Expiration Date.
Termination...................The Solicitation may be terminated by the
Company at any time prior to the Expiration Date,
in which case no Consent Fee will be payable,
provided that the Requisite Consent has not been
obtained.
Procedure for Consenting......Any Noteholder desiring to deliver a Consent
should either (i) complete and sign the Consent
and mail or otherwise deliver the Consent,
together with a duly executed proxy if the
Noteholder was not the Noteholder as of the
Record Date, and any other required documents to
the Tabulation Agent at its address or facsimile
number set forth on
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the cover page of this Consent Solicitation
Statement or (ii) request his or her broker,
dealer, commercial bank, trust company or other
nominee to effect the transaction for him or
her.
Special Procedures for
Beneficial Owners............Any owner whose Notes are registered in the name
of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to Consent
should contact such registered Noteholder
promptly and instruct such registered Noteholder
to execute and deliver a Consent on his or her
own behalf. If such beneficial owner wishes to
execute and deliver a Consent on his or her own
behalf rather than through his or her broker or
other agent, he or she must obtain a proxy from
the registered Noteholder as of the Record Date
authorizing the beneficial owner to execute and
deliver the Consent on behalf of such registered
Noteholder; however, this procedure may result in
delays in submission of the beneficial owner's
Consent and, accordingly, a risk of loss of the
right to receive the Consent Fee.
Revocation....................Consents may be revoked at any time up to, but
will become irrevocable upon, the evidencing to
the Trustee, in accordance with the provisions of
the Indenture, of the receipt of the Requisite
Consent with respect to the Amendment. Any
Noteholder who revokes a Consent will not receive
a Consent Fee in respect of such Consent unless
another Consent is executed and delivered (and not
revoked) prior to the Expiration Date.
Certain Tax
Considerations...............The Company believes that Noteholders who receive
the Consent Fee will realize taxable income in the
amount of such Consent Fee. See "Certain Federal
Income Tax Consequences."
Information Agent;
Tabulation Agent ............D. F. King & Co., Inc. is serving as both
Information Agent and Tabulation Agent in
connection with the Solicitation.
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THE COMPANIES
TheraTx
TheraTx provides outcomes-oriented healthcare services with a focus in
two specialized practice areas: postacute care and occupational health.
The Company was incorporated in California in July 1989 and
reincorporated in Delaware in July 1994. On March 18, 1997, Vencor completed a
tender offer (the "Tender Offer") for all of the issued and outstanding shares
of common stock, par value $.001 per share, of TheraTx (the "Shares"). Pursuant
to the Tender Offer, Vencor acquired approximately 99% of the outstanding
Shares. On March 21, 1997, Peach Acquisition Corp. ("Merger Sub"), a Delaware
corporation and a wholly owned subsidiary of Vencor, was merged with and into
TheraTx (the "Merger"), with TheraTx as the corporation surviving the Merger and
therefore becoming a wholly owned subsidiary of Vencor. Pursuant to the Merger,
each share of TheraTx outstanding immediately prior to such time (other than
shares owned by Vencor, Merger Sub or any other subsidiary of Vencor or shares
held by stockholders exercising their appraisal rights pursuant to Delaware
General Corporation Law) was converted into the right to receive $17.10 in cash,
without interest. To finance the Tender Offer, which was valued at approximately
$407 million, Vencor obtained a $1.75 billion senior credit facility. Vencor
currently intends to integrate the TheraTx business with its business as Vencor
deems advisable.
The principal offices of TheraTx are located at 1105 Sanctuary Parkway,
Alpharetta, Georgia 30201 ((770) 569-1840).
For additional information concerning TheraTx, see "Available
Information" and Annex A hereto.
Vencor
Vencor currently intends to become the Guarantor of the Notes. See
"Background and Purposes of the Solicitation; The Amendment--Guarantee." Vencor
is one of the nation's largest providers of healthcare services primarily
focusing on the needs of the elderly. At December 31, 1996, Vencor's operations
included 38 long-term acute care hospitals containing 3,325 licensed beds, 313
skilled nursing centers containing 39,619 licensed beds, 34 institutional
pharmacies and, through its affiliate, Atria Communities, Inc., 21 assisted and
independent living communities with 2,942 units. Healthcare services provided
through this network of facilities included long-term intensive hospital care,
nursing care, contract respiratory therapy services, acute cardiopulmonary care,
subacute and post-operative care, inpatient and outpatient rehabilitation
therapy, specialized care for Alzheimer's disease, hospice care, home health
care, pharmacy services and assisted and independent living. At December 31,
1996, Vencor was providing contract healthcare services to over 4,000 nursing
and subacute care centers. Vencor also continues to develop VenTouch(TM),
formerly known as ProTouch(R), a comprehensive paperless clinical information
system designed to increase the operating efficiencies of Vencor's facilities.
For the year ended December 31, 1996, Vencor had assets of
approximately $1.97 billion, revenues of approximately $2.6 billion and net
income of approximately $48 million.
For additional information concerning Vencor, see "Available
Information" and Vencor's Annual Report on Form 10-K for the year ended December
31, 1996 (the "Vencor 10-K"), which has previously been mailed to all
Noteholders with a preliminary version of this Consent Soliciation Statement.
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AVAILABLE INFORMATION
Vencor is subject to the information requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and, in accordance therewith, files
reports and other information with the Securities and Exchange Commission (the
"Commission"). Such reports and other information can be inspected and copied at
the public reference facilities of the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, DC 20549, and at the Commission's Regional
Offices at Seven World Trade Center, Suite 1300, New York, New York 10048 and at
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material also can be obtained from the Public Reference Section
of the Commission at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C.
20549, at prescribed rates. Such material may also be accessed electronically at
the Commission's site on the World Wide Web located at http://www.sec.gov. In
addition, copies of such reports and other information filed by Vencor should be
available for inspection at the New York Stock Exchange, Inc. (the "NYSE"), 20
Broad Street, New York, New York 10005.
TheraTx, while still subject to certain of the informational
requirements of the Exchange Act, has filed a certification with the Commission
that the number of holders of record of each of its common stock and the Notes
has been reduced to less than 300 persons, and, accordingly, is eligible for
deregistration under the Exchange Act within 90 days of March 25, 1997 and
thereby relieved from the information requirements thereunder. Currently,
TheraTx's reporting obligations under Sections 13(d) and 15 of the Exchange Act
have been suspended. The reports and other information filed by TheraTx prior to
the effectiveness of the deregistration are available at the same locations as
the Vencor information (other than the NYSE).
Copies of the Indenture, the First Supplemental Indenture and the
Second Supplemental Indenture (each as defined herein) are available, without
charge, upon oral or written request by any person to whom this Consent
Solicitation Statement is delivered. Requests for such documents should be
directed to the Secretary of Vencor, 3300 Providian Center, 400 West Market
Street, Louisville, Kentucky 40202 ((502) 596-7300).
In addition, TheraTx's Annual Report on Form 10-K for the year ended
December 31, 1996 is attached hereto as Annex A and the Vencor 10-K was
previously mailed to all Noteholders with a preliminary version of this Consent
Solicitation Statement.
BACKGROUND AND PURPOSES OF THE SOLICITATION; THE AMENDMENT
Supplemental Indenture and Repurchase Right
On March 21, 1997, the Merger was consummated. TheraTx entered into a
First Supplemental Indenture, dated as of March 21, 1997 (the "First
Supplemental Indenture") with the Trustee in accordance with the terms of the
Indenture, which provides that any holder of a Note may convert such Note into
the amount of securities, cash or other assets of TheraTx that such holder would
have owned immediately after the Merger if such holder had converted such Note
into shares of TheraTx common stock immediately before the effective time of the
Merger, i.e. $712.52 in cash for each $1,000 principal amount of Notes.
Alternatively, pursuant to a mandatory offer to repurchase the Notes (contained
in a separate Notice of Repurchase Right and Designated Event), TheraTx has
offered to repurchase the Notes for an amount equal to 100% of the principal
amount of the Note repurchased, together with accrued interest to the date of
repurchase. Such offer to repurchase the Notes is scheduled to expire at 11:59
p.m., New York City time, on Wednesday, April 30, 1997.
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Guarantee
TheraTx, Vencor and the Trustee have entered into a Second Supplemental
Indenture dated as of April 24, 1997 (the "Second Supplemental Indenture"),
which provides that, pursuant to the terms therein, Vencor will guarantee the
collectibility of all payments which may, from time to time, become due from the
Company to a Noteholder pursuant to the Indenture. Under the Second Supplemental
Indenture, the Guarantor is a surety only and not a principal, and will have no
obligation to make a Guarantee Payment (as defined in the Second Supplemental
Indenture) until the Company fails to make a payment when due and written demand
for such payment is given. Additionally, the Second Supplemental Indenture
provides that the Guarantor's obligation to make a Guarantee Payment is, upon
the occurrence of certain conditions, including, among others, the bankruptcy of
Vencor, a declaration that the Notes are due and payable before maturity or the
default by Vencor on any of the Guarantor Senior Indebtedness (as defined in the
Second Supplemental Indenture), subordinate and subject in right of payment to
the prior payment in full of the Guarantor's Senior Indebtedness.
Purpose of the Solicitation
This Solicitation is being made for the purpose of amending Section 6.4
of the Indenture. Under Section 6.4, TheraTx is required to file with the
Trustee and transmit to the Noteholders, certain reports, including annual and
quarterly financial statements of the Company. The Amendment will amend Section
6.4 so that all references to TheraTx will, instead, refer to Vencor.
Because TheraTx now has less than 300 stockholders, it will no longer
be required to file reports with the Commission (after certain filings become
effective). However, under the terms of Indenture, TheraTx will still be
required to prepare such reports for delivery to the Trustee and the
Noteholders. Now that TheraTx is a wholly owned subsidiary of Vencor, the
Companies would not currently intend to prepare such separate consolidated
financial statements for TheraTx and its subsidiaries if the provisions of
Section 6.4 of the Indenture were not applicable. Instead, the Companies would
prefer to reflect the financial position of TheraTx solely in the consolidated
financial statements of Vencor. The Companies believe that this presentation
will provide the Noteholders with a more comprehensive and useful measure of the
financial position of the consolidated companies and will save the Companies
unnecessary accounting and related expenses. In addition, because the Notes are
guaranteed by Vencor, the Noteholders will be in the same position as they
were before the Second Supplemental Indenture was executed, in that they will be
receiving reports from the company with the ultimate payment obligations
pursuant to the Indenture. To reimburse Noteholders for administrative expenses
incurred in providing Consents, TheraTx is offering a payment at the rate of
$0.10 for each $1,000 in principal amount of Notes.
The Amendment
The Amendment will be effected by means of a Third Supplemental
Indenture (the "Third Supplemental Indenture") that will amend or supplement the
Indenture as described above under "--Purpose of the Solicitation." The Third
Supplemental Indenture will be executed by the Company, the Guarantor and the
Trustee on or promptly after the Expiration Date. The Company's (and the
Guarantor's) obligation to pay the Consent Fee, however, is not conditioned upon
execution of the Third Supplemental Indenture.
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Board of Director's Recommendation
The Board of Directors of the Company has approved the Amendment and
the terms of the Solicitation, and the Company strongly urges that the
Noteholders consent in favor of the Amendment.
THE SOLICITATION
Terms of the Solicitation
The Solicitation is made only to Noteholders. The term "Noteholder"
means a person in whose name the applicable Notes were registered on the Note
register as of April 14, 1997 (the "Record Date"). Accordingly, any Noteholder
who delivers (and does not thereafter timely revoke) a properly completed and
executed Consent in favor of the Amendment will remain entitled to receive the
Consent Fee if at least a majority of the aggregate principal amount of the
Notes outstanding (the "Requisite Consent") are granted in favor of the
Amendment (and not revoked), even if he or she thereafter transfers the Notes to
another person, unless such transferor also duly transfers his or her right to
execute a Consent to the transferee and the transferee timely revokes the
Consent in favor of the Amendment. See "--Revocation of Consents." Consents,
once they become effective, will be binding on any transferee(s) whether or not
any notation with respect to the Consent is made on the Notes transferred. A
transferee Noteholder who wishes to deliver a Consent with respect to a Note as
to which the Noteholder of record on the Record Date has not delivered a Consent
or has delivered and revoked a Consent must obtain a proxy from such Noteholder
of record in order to deliver an effective Consent with respect to such Note. A
transferee Noteholder who delivers a Consent with respect to Notes as to which a
Consent has already been delivered by a previous Noteholder will not be entitled
to a Consent Fee unless such transferee, likewise by proxy, first revokes the
earlier Consent.
For purposes of determining whether the Requisite Consent has been
received and in accordance with the Indenture, Notes held by TheraTx, Vencor or
any of their affiliates will not be counted as being outstanding. As of the date
of this Consent Solicitation Statement, there was $100 million in principal
amount of Notes outstanding. The failure of a Noteholder to deliver a Consent
(including any failures resulting from broker non-votes) will have the same
effect as if such Noteholder had voted "Against" the Amendment.
The Consent Fee will be paid only to Noteholders whose Consents in
favor of the Amendment are received by the Tabulation Agent on or prior to the
Expiration Date (such Noteholders are referred to collectively as "Consenting
Noteholders"), but in any case only if such Consents are not timely revoked.
Noteholders who do not timely deliver a Consent will receive no Consent Fee even
though the Amendment, if it is approved and becomes effective, will be binding
on them.
The Solicitation is scheduled to expire at 4:00 p.m., New York City
time, on Wednesday, April 30, 1997. However, if the Requisite Consent is not
received by such time, the Company may extend the Solicitation for a specific
period or may continue to accept on a daily basis in the order received Consents
from Noteholders thereunder until the date on which the Requisite Consent is
obtained. Without limiting the manner in which the Company may choose to make
public announcement of any extension, amendment or termination of the
Solicitation, the Company shall have no obligation to publish, advertise or
otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service.
Subject to the conditions contained herein, the Consent Fee will be
paid by check to Consenting Noteholders. The obligation of the Company to pay
the Consent Fee to Consenting Noteholders is contingent only upon receipt of the
Requisite Consent on or prior to the Expiration Date. The Company may waive such
condition. The Company expects that the Consent Fee will be paid promptly after
the Expiration Date. The
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Tabulation Agent will act as agent for the Company for the purpose of
distributing the Consent Fee to Consenting Noteholders. No interest will accrue
on any Consent Fee due to Consenting Noteholders.
The Company may, at any time prior to the Expiration Date determine in
its sole discretion not to proceed with the Solicitation, in which case the
Indenture would not be amended and no Consent Fee would be paid with respect
thereto, provided that the Requisite Consent thereunder has not been received.
Procedures for Consent
Noteholders wishing to consent to the Amendment must complete, sign and
date the accompanying Consent Letter in accordance with the instructions
contained therein and mail, deliver by hand or transmit via facsimile (confirmed
by physical delivery) such Consent and other required documentation to the
Tabulation Agent so that it is received on or before the Expiration Date. To be
sure that a Consent is timely received and that a Noteholder will be eligible
for the Consent Fee, such Noteholder should arrange for the Tabulation Agent to
receive the Consent on or before 4:00 p.m., New York City time, on Wednesday,
April 30, 1997.
CONSENTS SHOULD BE SIGNED AND RETURNED IN THE ENCLOSED PRE- ADDRESSED
ENVELOPE BY MAIL OR HAND DELIVERY OR SENT BY FACSIMILE (CONFIRMED BY PHYSICAL
DELIVERY) TO D.F. KING & CO., INC. AT 77 WATER STREET, 20TH FLOOR, NEW YORK, NEW
YORK 10005; ATTENTION: THOMAS GERMINARIO; FACSIMILE NO. (212) 809-8839, IN
ACCORDANCE WITH THE INSTRUCTIONS SET FORTH HEREIN. IN NO EVENT SHOULD A HOLDER
DELIVER NOTE CERTIFICATES IN CONNECTION WITH THIS CONSENT SOLICITATION. HOWEVER,
YOU MAY WANT TO CONSIDER DOING SO IN CONNECTION WITH THE NOTICE OF REPURCHASE
RIGHT AND DESIGNATED EVENT, DATED MARCH 31, 1997, WHICH WAS MAILED SEPARATELY TO
EACH NOTEHOLDER.
The method of delivering Consents is at the election and risk of the
Noteholder, but the Company suggests that any mail delivery be made far enough
in advance of Wednesday, April 30, 1997 to permit timely delivery to the
Tabulation Agent. Delivery will be effective only upon actual receipt by the
Tabulation Agent. Consents also may be delivered by hand to the Tabulation Agent
at its address set forth herein or by facsimile at the number set forth herein
(confirmed by physical delivery). Noteholders also may request their respective
brokers, dealers, commercial banks, trust companies or nominees to effect
delivery on behalf of such Noteholder. Noteholders may confirm that Consents
have been tabulated by the Tabulation Agent by calling (800) 755-3105 between
the hours of 9:00 a.m. and 4:30 p.m., New York City time.
Any beneficial owner whose Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to deliver a Consent should contact such registered Noteholder promptly and
instruct such registered Noteholder to deliver such Consent on his or her
behalf. If such beneficial owner wishes to deliver a Consent on his or her own
behalf rather than having his or her broker or agent do so, he or she must
obtain a proxy from the registered Noteholder as of the Record Date authorizing
the beneficial owner to consent with respect to the Notes on behalf of such
registered Noteholder; however, this procedure may result in delays in
submission of the beneficial owner's Consent and, accordingly, a risk of loss of
the right to receive the Consent Fee.
Beneficial owners of Notes whose Notes are registered, as of the Record
Date, in the name of The Depository Trust Company ("DTC"), a broker, dealer,
commercial bank, trust company or nominee should contact DTC or such broker,
dealer, commercial bank, trust company or nominee promptly and instruct such
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person, as Noteholder of such Notes, to execute and then deliver the Consent in
favor of the applicable Amendment on behalf of the beneficial owner prior to the
Expiration Date in order to receive any Consent Fee.
Any beneficial owner of Notes held of record by DTC or its nominee,
through authority granted by DTC, may direct the DTC participant through which
such beneficial owner's Notes are held in DTC to execute, on such beneficial
owner's behalf, or may obtain a proxy from such DTC participant and execute
directly as if such beneficial owner were a registered Noteholder, a Consent
with respect to Notes beneficially owned by such beneficial owner on the Record
Date.
For purposes of this Consent Solicitation Statement, (i) the term
"Noteholder" includes only a registered Noteholder, (ii) the term "record
Noteholder" or "registered Noteholder" shall be deemed to include DTC
participants and (iii) DTC has authorized DTC participants to execute Consents
as if they were registered Noteholders.
If the Consent is signed by a trustee, executor, administrator,
guardian, attorney-in-fact, officer of a corporation or any other person acting
in a fiduciary or representative capacity, such persons should so indicate when
signing, and proper evidence satisfactory to the Trustee of such person's
authority to so act must be submitted with the Consent in order for the Consent
to be accepted.
All Consents that are properly completed, signed and delivered to the
Tabulation Agent, and not revoked, prior to the Expiration Date, will be given
effect in accordance with the specifications thereof. If none of the boxes on
the Consent Letter are marked, but the Consent Letter is otherwise properly
completed and signed, the Noteholder will be deemed to have consented to the
Amendment in respect of all Notes in respect of which such Consent Letter has
been delivered and held by such Noteholder as of the Record Date.
Consents by the Noteholders as of the Record Date must be executed in
exactly the same manner as such Noteholder's name appears on the Notes. If Notes
to which a Consent relates are held of record by two or more joint Noteholders,
all such Noteholders must sign the Consent. If a Consent is signed by a trustee,
partner, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person must so indicate when signing and must submit with the Consent
Letter appropriate evidence of authority to execute the Consent. In addition, if
a Consent relates to less than the total principal amount of Notes registered in
the name of such Noteholder, the Noteholder must list the serial numbers and
principal amount of Notes registered in the name of such Noteholder to which the
Consent relates. If Notes are registered in different names, separate Consents
must be executed covering each form of registration. If a Consent Letter is
executed by a person other than the registered Noteholder as of the Record Date,
then it must be accompanied by the proxy set forth on the Consent Letter duly
executed by such registered Noteholder, with the signature guaranteed by a firm
which (i) is a member of a registered national securities exchange or member of
the National Association of Securities Dealers, Inc., or is a commercial bank or
trust company having an office in the United States and (ii ) is a participant
in an authorized signature guarantee program confirming the right of the
signatory to execute the Consent Letter on behalf of the registered Noteholder,
unless waived by TheraTx.
The Consent by a Noteholder pursuant to one of the procedures set forth
herein will constitute an agreement between such Noteholder and the Company in
accordance with and subject to the terms and conditions set forth herein and in
the Consent form.
The ownership of registered Notes shall be proved by the register of
the issue of the Notes or as otherwise provided in the Indenture. The Trustee
may require such additional proof of execution or ownership as it deems
necessary. All questions as to the validity, form, eligibility (including time
of receipt), revocations and acceptance of Consents, and entitlement to the
Consent Fee, will be resolved in the first instance by the Company, whose
determination will be binding subject only to such final review as may be
prescribed by the Trustee. The Company reserves the absolute right to reject any
or all Consents that are not in proper form or the acceptance of which could, in
the opinion of the Company's counsel, be unlawful.
10
<PAGE>
The Company also reserves the right, subject only to such final review
as the Trustee prescribes, to waive any irregularities or conditions of delivery
as to any particular Consent. The Company's interpretation of the terms and
conditions of the Solicitation (including the instructions in the Consent) will
be final and binding. Unless waived, any irregularities in connection with
deliveries must be cured within such time as the Company determines. The
Company, the Information Agent, the Tabulation Agent and the Trustee will be
under no duty to give notification of any such irregularities or waiver and will
incur no liability for failure to give such notification. Deliveries of Consents
as to which irregularities exist will not be deemed to have been made until such
irregularities have been cured or waived.
Revocation of Consents
Consents may be revoked at any time up to, but will become irrevocable
upon the receipt by the Trustee of the Requisite Consent. To revoke a Consent, a
written notice of revocation must be timely received by the Tabulation Agent,
acting on behalf of the Trustee, prior to such time at its address set forth on
the back cover page of this Consent Solicitation Statement. Notice of revocation
of a Consent must contain the description of the Notes to which it relates
(including the certification number or numbers and principal amount of such
Notes) and be signed by the Noteholder in the same manner as the Consent by
which such Noteholder consented. Any Consent so revoked will be deemed not to
have been validly given for the purposes of the Solicitation and no Consent Fee
will be made with respect thereto unless another Consent is executed and
delivered (and not likewise revoked) prior to the Expiration Date.
Solicitation of Consents
In addition to solicitation by mail, directors, officers and employees
of TheraTx and Vencor, none of whom will be specifically compensated for such
services, may solicit Consents from the Noteholders, personally or by telephone,
telecopy or telegram or other forms of communication. Brokerage houses,
nominees, fiduciaries and other custodians will be requested to forward
soliciting materials to beneficial owners and will be reimbursed for their
reasonable expenses incurred in sending such materials to beneficial
Noteholders.
In addition, Vencor, on behalf of its wholly owned subsidiary TheraTx,
has retained D.F. King & Co., Inc. to assist in the distribution of the
solicitation materials and in the solicitation of Consents from the Noteholders,
as well as to calculate the number of Consents received. The fee to be paid to
D.F. King & Co., Inc. for such services by Vencor is not expected to exceed
$5,000, plus reasonable out-of-pocket costs and expenses. Vencor has agreed
to indemnify D.F. King & Co., Inc. in its capacity as the Tabulation Agent and
Information Agent against certain liabilities and expenses in connection with
the Consent Solicitation. Vencor will pay all other expenses in connection with
the Solicitation.
SECURITY OWNERSHIP OF DIRECTORS AND EXECUTIVE OFFICERS
The common stock of TheraTx is wholly owned by Vencor. The following
table sets forth certain information with respect to the beneficial ownership of
Vencor's Common Stock by (a) each director of TheraTx, (b) each of the five most
highly compensated executive officers of TheraTx and (c) all of TheraTx's
directors and executive officers as of March 31, 1997, as a group.
COMMON STOCK
NAME OF INDIVIDUAL OR NUMBER IN GROUP BENEFICIALLY PERCENT
OWNED(1), (2) OF CLASS
- ------------------------------------------------ ------------- --------
John A. Bardis.................................. -- --
Bret W. Jorgensen............................... -- --
L. John Wilkerson, Ph.D......................... -- --
Michael R. Barr................................. 456,762(3) *
Jill L. Force................................... 70,486(4) *
Thomas T. Ladt.................................. 119,432(5) *
W. Bruce Lunsford............................... 2,422,951(6) 3.5%
W. Earl Reed, III............................... 365,773 *
Donald R. Myll.................................. 1,000 *
Laura E. Cayce.................................. 200 *
William J. Haffey, Ph.D......................... -- --
All directors and executive officers as
a group (11 persons).......................... 3,436,604 5.0%
- -------------------
(*) Less than 1%
(1) Beneficial ownership of shares, for purposes of this Consent Solicitation
Statement, as determined in accordance with applicable Securities and
Exhcange Commission rules, includes shares as to which a person has or
shares voting power and/or investment power. Beneficial ownership is given
as of March 31, 1997, except as othewise noted below.
(2) Except as set forth in the accompanying footnotes, the named persons have
sole voting power and sole investment power over the shares beneficially
owned by them. The number of shares shown does not include the interest of
certain persons in shares held by family members in their own right, or in
shares held for their benefit in Vencor's 401(k) Plan. The numbers shown
include the shares which may be acquired by them through the exercise of
options, which are exercisable as of, or within 60 days after, March 31,
1997, under Vencor's stock option plans as follows: Mr. Barr - 103,017
shares; Ms. Force 41,126 shares; Mr. Ladt - 55,238 shares; Mr. Lunsford -
350,097 shares; and Mr. Reed 115,252 shares.
(3) Excludes 44,744 shares held in trust for his minor children and 3,750
shares held in trust for other family members.
(4) Includes 5,625 shares held by Ms. Force jointly with her spouse. Also
includes 2,812 shares held in her spouse's individual retirement account
and 1,400 shares held by her spouse as custodian for their children. Ms.
Force shares voting and investment power with her spouse with regard to
these shares.
(5) Includes 7,029 shares held by his spouse as custodian for his children and
20,058 shares held by his spouse. With respect to these 27,087 shares, Mr.
Ladt shares voting and investment power with his spouse.
(6) Includes 71,412 shares held by a private foundation with respect to which
Mr. Lunsford has sole voting power and shared investment power. Excludes
16,365 shares held in trust for the benefit of his children.
11
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general summary of certain United States federal
income tax consequences applicable to Noteholders and the receipt of the Consent
Fee and is included herein for general information only. The summary is based on
the Internal Revenue Code of 1986, as amended (the "Code"), existing and
proposed regulations thereunder, published rulings and court decisions, changes
to any of which subsequent to the date hereof may affect the tax treatment of
Noteholders described herein. This discussion deals only with Notes held as
capital assets, and not with special classes of holders, such as dealers in
securities or currencies, banks, tax-exempt organizations and life insurance
companies. For purposes of the discussion herein, a "U.S. Holder" means a
beneficial holder of a Note that is for United States federal income tax
purposes (a) a citizen or resident of the United States, (b) a corporation or
partnership created under the laws of the United States or of any political
subdivision thereof, (c) any estate (other than an estate the income of which,
from sources outside the United States which is not effectively connected with
the conduct of a trade or business within the United States, is not includable
in gross income), or (d) any trust if a court within the United States is able
to exercise primary supervision over the administration of the trust, and one or
more United States fiduciaries have the authority to control all substantial
decisions of the trust. A "non-U.S. Holder" means any person other than a U.S.
Holder. No ruling has been or will be requested from the Internal Revenue
Service (the "IRS") regarding the tax consequences of the adoption of the
Amendment and the Consent Fee.
Proposed Amendment and Payments
While the matter is not entirely free from doubt, the Company believes
that the adoption of the Amendment and the execution of the Third Supplemental
Indenture should not result in a deemed taxable exchange of the Notes for United
States federal income tax purposes and should have no United States federal
income tax consequences upon Noteholders (apart from their receipt of the
Consent Fee, as described herein). The Company intends to treat the Consent Fee
for federal income tax purposes as compensation income paid to Noteholders who
grant Consents pursuant to the Solicitation, and each Noteholder would recognize
ordinary income in an amount equal to the amount of the Consent Fee at the time
such Consent Fee accrues or is received pursuant to such Noteholder's method of
tax accounting.
Withholding
A U.S. Holder other than certain exempt recipients (such as
corporations) may be subject to backup withholding at the rate of 31% with
respect to the Consent Fee received by such U.S. Holder pursuant to the
Solicitation unless such U.S. Holder complies with certain certification and
identification requirements. Accordingly, to prevent backup withholding, each
U.S. Holder who consents to the Amendment must either (i) complete a Form W-9,
certifying (under penalties of perjury) that the taxpayer identification number
("TIN") provided is correct (or that such U.S. Holder is awaiting assignment of
a TIN) and that either (a) the U.S. Holder has not been notified by the IRS that
such U.S. Holder is subject to backup withholding as a result of a failure to
report interest or dividends or (b) the IRS has notified such U.S. Holder that
it is no longer subject to backup withholding or, in the alternative (ii)
provide an adequate basis for an exemption from backup withholding. If backup
withholding results in an overpayment of taxes, a refund or credit may be
obtained provided the required information is furnished to the IRS. Non-U.S.
Holders are subject to withholding on the Consent Fee at a 30% rate unless (i)
such non-U.S. Holder is engaged in the conduct of a trade or business in the
United States to which the receipt of the Payment is effectively connected and
provides a properly executed IRS Form 4224, or (ii) an income tax treaty between
the United States and the country of residence of the non-U.S. Holder eliminates
or reduces the withholding tax on the receipt of the Consent Fee and such
non-U.S. Holder provides a properly executed IRS Form 1001.
12
<PAGE>
THE FEDERAL INCOME TAX SUMMARY SET FORTH ABOVE IS INCLUDED FOR GENERAL
INFORMATION ONLY. NOTEHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE AMENDMENT AND THE
CONSENT FEE PURSUANT TO THE SOLICITATION DESCRIBED HEREIN, INCLUDING THE
APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
13
<PAGE>
Annex A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ___________
COMMISSION FILE NUMBER 0-24292
THERATX, INCORPORATED
(Exact name of registrant as specified in its charter)
---------------------
DELAWARE 33-0359338
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
1105 SANCTUARY PARKWAY, SUITE 100, ALPHARETTA, GA 30201
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code:(770) 569-1840
---------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
-------------------
COMMON STOCK, PAR VALUE $.001 PER SHARE
8% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2002
PREFERRED STOCK PURCHASE RIGHTS
Indicate by check mark 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
----- -----
Indicate by a check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
THE REGISTRANT, A WHOLLY-OWNED SUBSIDIARY OF VENCOR, INC., MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(A) AND (B) OF FORM 10-K AND
IS THEREFORE FILING THIS FORM WITH REDUCED DISCLOSURE FORMAT PURSUANT TO
GENERAL INSTRUCTIONS I(2).
All of the Common Stock, par value $.001 per share, of TheraTx is held by
Vencor, Inc., a Delaware corporation.
As of April 3, 1997, there were 1,000 Shares of Common Stock outstanding,
all of which were held by Vencor, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
None
================================================================================
<PAGE>
THERATX, INCORPORATED
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ITEM 1. BUSINESS......................................................... 1
ITEM 2. PROPERTIES....................................................... 10
ITEM 3. LEGAL MATTERS.................................................... 10
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER 11
MATTERS..........................................................
ITEM 6. SELECTED FINANCIAL DATA.......................................... 12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND 12
RESULTS OF OPERATIONS............................................
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 19
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 19
FINANCIAL DISCLOSURE.............................................
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT................... 19
ITEM 11. EXECUTIVE COMPENSATION........................................... 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 20
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. 20
</TABLE>
THERATX(R), PERSONACARE(TM), THERASYS(TM) AND HELIAN(R) ARE TRADEMARKS OF THE
COMPANY.
<PAGE>
PART I
ITEM 1. BUSINESS.
THE COMPANY
GENERAL
TheraTx, Incorporated ("TheraTx" or the "Company") 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 and provides
occupational healthcare and related services in out-patient clinics. 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
supply distribution and related services to the long-term care industry.
The Company was incorporated in California in July 1989 and reincorporated
in Delaware in July 1994. The Company's principal offices are located at 1105
Sanctuary Parkway, Suite 100, Alpharetta, Georgia 30201 and its telephone
number at that location is (770) 569-1840. On March 18, 1997, Vencor, Inc., a
Delaware corporation ("Vencor") completed a tender offer (the "Tender Offer")
for all of the issued and outstanding shares of common stock, par value $.001
per share, of TheraTx (the "Shares"). Pursuant to the Tender Offer, Vencor
acquired approximately 99% of the outstanding Shares. On March 21, 1997,
TheraTx was merged (the "Merger") with and into a wholly-owned subsidiary of
Vencor and, therefore, became a wholly-owned subsidiary of Vencor. Vencor
currently intends to integrate the TheraTx business with its business as Vencor
deems advisable.
BACKGROUND
SUBACUTE INDUSTRY BACKGROUND
Historically, subacute patients remained in general acute-care hospitals
until ready to return home. Hospitals were reimbursed under "reasonable cost"
or "fee-for-service" arrangements and were under little pressure to reduce
costs or lengths of stay. In 1983, in an effort to control hospital costs,
Medicare established the prospective payment system under which hospitals
generally are now reimbursed a predetermined amount per patient episode,
regardless of the patient's consumption of services or length of stay. Managed
care organizations and other private payors are also using a variety of
measures, such as negotiated payments and utilization review, to limit hospital
costs and reduce lengths of stay.
These economic and regulatory pressures have resulted in the earlier
discharge of patients from hospitals into alternative care settings. Because
many of these patients still require intensive medical and rehabilitation
services that typically cannot be administered at home, a market has emerged
for alternative site inpatient services. This market initially was divided
into relatively distinct segments, with long-term care hospitals focused on
patients requiring medically complex services, rehabilitation hospitals focused
on medically stable patients with intensive rehabilitation needs and skilled
nursing facilities focused on patients whose medical needs were more custodial
in nature. The Company believes none of these traditional alternatives fully
meet the needs of payors and providers in serving a broad range of subacute
patients.
A-1
<PAGE>
SUBACUTE MARKET
In response to this demand, a number of healthcare providers, including
the Company, have established specialized subacute programs and facilities
focused on subacute care. Subacute patients can generally be classified as
either those who require medically intensive care or those who require
rehabilitation intensive care. Medically intensive subacute patients generally
require between three and six hours of nursing care per day, as well as
extensive respiratory, pharmacy, laboratory or other ancillary medical
services. In contrast, rehabilitation intensive subacute patients typically
have more limited medical support needs and receive higher levels of
rehabilitation services. In its rehabilitation management programs, the
Company provides services primarily to rehabilitation intensive patients. In
its inpatient facilities, the Company provides services to rehabilitation
intensive patients (through its rehabilitation management programs), as well
as to medically intensive patients.
OCCUPATIONAL HEALTH INDUSTRY BACKGROUND
The cost of workers' compensation claims has increased significantly in
recent years. These escalating costs are due in part to a general rise in the
cost of healthcare, an increase in the number of work-related injuries and
illnesses, and the requirement that employers pay the majority of lost wages
and all compensable medical and non-medical costs of their employees.
Indemnity costs, including wage replacement, disability and legal costs,
account for approximately 60% of the total workers' compensation expense in the
U.S. Therefore, in a workers' compensation delivery system, the focus is to
return the injured employee back to the work site in a timely manner. Prompt
and aggressive treatment of worker injuries and illnesses may increase the
medical cost but still keep the employer's or insurer's overall workers'
compensation costs lower by lessening lost-time wages, disability payments and
possible legal costs. To cost-effectively treat work-related injuries,
workers' compensation providers use treatment guidelines different from those
used by group healthcare providers. These occupational healthcare protocols
involve more intense clinical care, including physical therapy, and more
frequent examinations and communications.
SERVICES
SUBACUTE PROGRAMS
Rehabilitation Management Programs
TheraTx operates rehabilitation management programs in third-party and the
Company's skilled nursing facilities. Because the goal of an integrated
subacute rehabilitation program is to assist less medically intensive subacute
patients in quickly achieving clinical objectives and discharge goals, the
Company believes that its services enable its skilled nursing facility clients
to market themselves more effectively as providers of subacute care. The
average length of treatment for subacute patients treated in the Company's
rehabilitation management programs is under 30 days, with most subacute
patients discharged to their homes or to other community settings.
Rehabilitation management program contract terms range from one to three
years. Some contracts are terminable by the facility only for cause while
others are terminable at any time. The contracts generally provide that during
the term of the contract the Company may not open a competitive program in a
specific geographic market, typically defined by established discharge
patterns. TheraTx bills third-party skilled nursing facilities directly for
physical, occupational and speech therapy and program management services at
predetermined rates. The contracts provide that if reimbursement for the
Company's services is denied or reduced by third-party payors, the Company will
indemnify the facility for such denials or reductions. TheraTx bills the
Company's skilled nursing facilities at comparable rates for rehabilitation
management programs operated in such facilities.
Subacute Units
TheraTx operates subacute units in a majority of its inpatient facilities.
TheraTx's subacute units generally provide care to subacute patients who
require between three and six hours of nursing care per day and offer a broad
range of services, including ventilator and respiratory therapy (some with
piped-in oxygen and blood gas monitoring equipment), rehabilitation therapy,
infusion therapy, wound care, oncology care, renal care and coordinated complex
medical care, although the specific services offered vary from unit to unit.
Each subacute unit is physically segregated from the rest of the facility, has
its own professional staff and contains certain specialized medical equipment.
TheraTx's subacute units are less institutional than typical general acute-care
hospitals with flexible visiting hours and family counseling.
A-2
<PAGE>
OCCUPATIONAL HEALTH SERVICES
As of December 31, 1996, the Company operated sixteen occupational health
facilities in Georgia, Florida, North Carolina, Arizona, and California. The
Company has developed a specialized medical model delivery system, management
system, and occupational medicine network which it believes is effective at
managing and controlling workers' compensation costs. The Company's
occupational health centers utilize staff model physician practices, with
primary care doctors managing the cases as the "gatekeepers." Through
treatment guideline protocols for each work-related diagnosis, the Company's
goal is to treat employee-patients so that they may return to work as soon as
medically feasible thereby avoiding costly litigation and inappropriate
tertiary care. Services include evaluation and treatment of work-related
illnesses and injuries, physical therapy, post-surgical rehabilitation, work
conditioning, pre-placement, annual and executive physicals, psychological
testing, drug and alcohol testing and screening of employees for exposure to
hazardous substances.
OTHER SERVICES.
Basic Medical and Other Geriatric Services
As of December 31, 1996, TheraTx operated 29 owned, leased or managed
facilities located primarily in the Midwest, Southeast and Northeast regions of
the United States. In addition to the subacute services offered in certain of
its skilled nursing facilities, the inpatient facilities also provide long-term
care services consisting of skilled nursing care and assisted living services.
Long-term care patients require less intensive nursing care, rehabilitation and
other ancillary services than subacute patients.
TheraTx operates specialized units in certain of its inpatient facilities
to treat patients suffering from Alzheimer's disease and other forms of
dementia. TheraTx also offers specialty hospice and chronic ventilator care in
certain of its skilled nursing facilities.
Surgical Centers
The Company operates two ambulatory surgery centers and one surgical
specialty hospital. The surgical centers operated by the Company provide a
facility and support staff necessary for surgeons to perform non-emergency
procedures which (i) usually do not require an overnight stay, (ii) are
performed to correct conditions which are not generally life threatening, and
(iii) the physician determines are most appropriately performed in an
ambulatory surgery center. The surgical specialty hospital is a licensed
acute-care hospital with surgical suites and private patient rooms. These
types of surgical facilities specialize in elective outpatient and inpatient
surgical procedures and generally have significantly lower charges than a
traditional hospital. The surgical centers and the specialty hospital operated
by the Company are generally owned in partnership with physicians, physician
groups, hospitals and/or community members. The Company contracts with each of
its surgery centers to provide management, administrative and purchasing
services and support for a management fee.
Medical Supplies and Related Services
TheraTx operates a medical supply distribution business which provides
medical supplies and related products to the long-term care industry.
Additionally, through its Medicare Part B billing and supply service business,
the Company furnishes certain products and supplies and provides Medicare Part
B billing services to the long-term care industry and their patients eligible
for Medicare Part B benefits.
Respiratory Therapy and Related Services
TheraTx provides respiratory therapy services, cardio-pulmonary services
and sleep diagnostic services in hospitals and subacute facilities.
A-3
<PAGE>
INFORMATION SYSTEMS AND CLINICAL METHODOLOGIES
TheraTx has experience in developing and applying standardized clinical
programs, clinical information and outcomes management systems and standardized
operating systems and procedures. In particular, TheraTx believes that
TheraSys, its proprietary clinical and management information system, enables
the Company to focus clinical resources on achieving low costs and enhanced
clinical outcomes.
TheraSys has been implemented in all rehabilitation management programs
and the Company has implemented selected components of TheraSys in its
inpatient facilities. TheraSys is a central element of the Company's clinical
and operating systems and is designed to:
- focus clinicians on achieving the desired clinical
outcomes by requiring them to identify a targeted outcome for
each patient and to develop a plan that identifies the services
required to achieve that outcome;
- track clinical activity, costs and functional outcomes
for all patients treated by TheraTx and provide localized and
centralized data analysis and reporting;
- generate and track data that may form the basis for
predicting costs and outcomes under per diem, episodic and
capitated reimbursement arrangements;
- provide the information necessary to assist management at
all levels in their decision making process to enhance clinical
quality, productivity and profitability;
- produce standardized and customized reports for
physicians, facilities and payors, that enable local and
field-level managers to supply a broad range of information to
their customers; and
- generate billing, payroll and clinical documentation for
services provided by TheraTx.
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 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 general 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 health facilities compete with other healthcare
providers in the respective geographic regions. Group health and workers'
compensation insurers, HMO's and hospitals all compete in the occupational
health business. TheraTx believes the primary factors in competing for
occupational health 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
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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.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 11,100 people,
including approximately 6,400 full-time employees and 4,700 part-time
employees. The Company has no collective bargaining agreements with any unions
and believes that its overall relations with its employees are good.
INSURANCE
The Company carries general liability, comprehensive property damage,
professional liability, workers' compensation and other insurance coverages
that management considers adequate for the protection of its assets and
operations. There can be no assurance, however, that the coverage limits of
such policies will be adequate. A successful claim against the Company in
excess of its insurance coverage could have a material adverse effect on the
Company and its financial condition. Claims against the Company, regardless of
their merit or outcome, may also have an adverse effect on the Company's
reputation and business.
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. President Clinton has
also proposed significant Medicare payment cuts as part of the fiscal year 1998
budget. The Company cannot predict whether any changes to the Medicare 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. On March 28,
1997, the Health Care Financing Administration ("HCFA") issued a proposed rule
to change Medicare reimbursement guidelines for therapy services. Under the
proposed rule, HCFA would revise the salary equivalency guidelines for physical
therapy and respiratory therapy services and establish new salary equivalency
guidelines for speech and occupational therapy services. The proposed
guidelines are based on a blend of data from wage rates for hospitals and
skilled nursing facilities, and include salary, fringe benefits and expense
factors. Rates are defined by specific geographic market areas, based upon a
modified version of the hospital wage index. Following a 60 day comment
period, HCFA will consider comments and issue a final rule. The new guidelines
will not become effective until 60 days after publication of the final rule in
the Federal Register. While the Company cannot predict when the final
regulation will be issued, or if changes will be made to the proposed
guidelines, the Company believes that the imposition of salary equivalency
guidelines on speech and occupational therapy services, as proposed, would
significantly decrease the Company's margins and have a material adverse effect
on the Company's business.
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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. 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") has investigated 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. President Clinton
and Congress are 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. Proposals in the President's budget including establishing a
prospective payment system for skilled nursing facilities; limits on annual
updates in payments to skilled nursing facilities for routine services;
requiring consolidated billing by a facility for all Part A and B claims for
facility's residents; and other cost saving proposals affecting Medicare
skilled nursing facility services. Federal budget proposals would also limit
federal funds to state Medicaid programs. Proposals include repealing the
"Boren Amendment" federal payment standard for Medicaid payments to Medicaid
nursing facilities, and granting greater flexibility to states to establish
Medicaid managed care proposals without the need to obtain a federal wavier.
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 pursuant to Federal waivers of 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
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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.
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 12.5% and 4.4% of the Company's net revenues for
the years ended December 31, 1994 and 1995, respectively. The
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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.
During August 1995, Life Care Centers of America, Inc. ("Life Care")
informed the Company that it intended to offer its own rehabilitation programs
within its facilities and would not be renewing its existing contracts with the
Company. The Company's contracts with Life Care terminated during the period
commencing March 1996 and ending December 1996. The Company's contracts with
these facilities accounted for an aggregate of 7.7%, 7.0%, and 1.8% of the
Company's net revenues for the years ended December 31, 1994, 1995 and 1996,
respectively.
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
Health Group, Inc. There can be no assurance that the management agreement
will be renewed or, if renewed, will be on terms favorable to the Company.
SUBORDINATION OF NOTES; CONVERTIBLE SOLELY INTO CASH
The indebtedness evidenced by the 8% Convertible Subordinated Notes due
2002 (the "Notes") of TheraTx is subordinate to the prior payment in full of
all Senior Indebtedness (as such term is defined in an indenture dated as of
February 15, 1995 (the "Indenture"), between the Company and State Street Bank
and Trust, as Successor Trustee (the "Trustee") to The First National Bank of
Boston). As of December 31, 1996, the Company had approximately $78.3 million
of indebtedness outstanding (excluding accrued interest) which constituted
Senior Indebtedness. As of December 31, 1996, there was also outstanding
approximately $22.2 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 Vencor or any of the
Company's 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 and Vencor are separate and distinct legal entities and have no
obligation, contingent or otherwise, to pay any amounts due pursuant to the
Notes or to make any funds available therefor, whether by dividends, loans or
other payments. In addition, the payment of dividends and the making of loans
and advances to the Company by its subsidiaries may be subject to statutory,
contractual or other restrictions, are dependent upon the earnings of those
subsidiaries and are subject to various business considerations. In addition,
the Company has issued a notice of repurchase right entitling the holders of
the Notes to have their Notes repurchased for an amount equal to 100% of the
principal amount of the Note, together with accrued interest to the repurchase
date. The repurchase date is scheduled for May 12, 1997.
On March 21, 1997, the Company and the Trustee entered into a Supplemental
Indenture (the "Supplemental Indenture") to the Indenture. The Supplemental
Indenture provides, in accordance with the provisions of the Indenture, that
as a result of the Merger, each Note is convertible into the kind and amount of
shares of stock and other securities or property or assets (including cash)
receivable by a holder of a number of Shares which would have been issuable to
such holder, if such holder had converted immediately prior to the effective
time of the Merger. As a result thereof, the Notes are convertible solely into
cash.
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 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.
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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.
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.
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
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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.
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.
ITEM 2. PROPERTIES
As of March 14, 1997, the Company operated 27 owned and leased inpatient
facilities with a total of 3,787 beds. Fourteen of such facilities, with a
total of 1,929 beds, are owned by the Company. Thirteen of such facilities,
with a total of 1,858 beds, are leased. The Company's rights as lessee could
be subject to termination if the lessor of a facility fails to pay its taxes,
loan obligations that are secured by the facility, if any, or other similar
obligations. The Company has not experienced any such lease terminations,
although there can be no assurance that the Company's rights to operate its
leased facilities will not be so affected in the future. The Company's
facilities are subject to various governmental zoning and use restrictions.
The Company leases two surgery centers with the leases expiring through
March 2003. In addition, the Company leases 12 occupational health centers in
Arizona, California, North Carolina and Georgia. The Company owns an
acute-care hospital in California which it leases to an affiliated partnership
that operates the facility.
On April 25, 1995, the Company entered into a twenty-year operating lease
relating to the construction and lease of approximately 107,000 square feet of
corporate office space. The lease agreement provides for an annual base lease
rate of approximately $1.8 million adjusted annually for inflation. In
addition to the base lease rate, the Company will pay certain building
operating costs. The lease term began in July 1996 upon completion of the
office building. The Company also purchased an adjacent 6.2 acre parcel of
land for $1.1 million on July 16, 1996.
ITEM 3. LEGAL MATTERS
The Company is, and may in the future be, party to litigation arising in
the course of its business. There can be no assurance that the Company's
insurance coverage will be adequate to cover all liabilities occurring out of
such claims or that any such claims will be covered by the Company's insurance.
Any material claim that is not covered by insurance may have an adverse effect
on the Company's business.
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On March 15, 1996, the Company filed a lawsuit in the United States
District Court for the Northern District of Georgia, Atlanta Division, against
the sellers of the SMS Business and certain of their affiliates alleging
various claims, including misrepresentations in connection with the sale of the
SMS Business. The lawsuit was transferred to the United States District Court
for the Middle District of Florida in Jacksonville. There is currently pending
before the court a motion for summary judgment filed by the SMS affiliates. No
trial date has been set. The SMS acquisition agreements included an earn-out
pursuant to which 888,889 shares of TheraTx common stock were issued into
escrow and up to an additional $20.0 million in TheraTx common 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's position is that the sellers of the SMS Business, as a
group, are not entitled to the earn-out payment as the financial performance of
the SMS Business was, as a whole, significantly below the threshold entitling
the sellers to any payment under the earn-out. As a result, the Company has
canceled 762,131 shares of the escrowed shares. The remaining shares were
tendered in connection with the Tender Offer and the funds to be received will
be placed in escrow. While the Company believes it has valid claims and that
the sellers are not entitled to either the proceeds of the escrowed 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. While the Company believes that such
claims are without merit, 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. No trial date is set. Discovery is proceeding
in both cases.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Omitted pursuant to Instruction I.(2)(c) of Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Prior to the Merger, the Shares traded in the over-the-counter market and
were quoted on the Nasdaq National Market under the symbol "THTX." As a result
of the Merger, all of the Company's common equity is held by Vencor.
As of April 3, 1997, the Shares were held by Vencor as the only
stockholder of record.
THE NOTES
The Company's 8% Convertible Subordinated Debentures due 2002 (the
"Notes") were originally issued in a private placement on February 16, 1995.
Prior to August 23, 1995, there was no public market for the Notes, although
the Notes were eligible for trading in the PORTAL Market. The registered Notes
trade on The Nasdaq Small-Cap Market under the symbol "THTXG." There can be no
assurance that an active trading market for the Notes will develop or, if such
market develops, as to the liquidity or sustainability of such a market. On
March 14, 1997, the last reported sale price of the Notes on The Nasdaq
Small-Cap Market was $100 per Note. The Notes, as a result of the Merger, are
no longer convertible into shares. There can be no assurance that Nasdaq will
continue to permit the Notes to trade.
DIVIDEND POLICY
The Company has not paid or declared any cash dividends on its capital
stock since inception.
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ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for TheraTx for each of the
five years in the period ended December 31, 1996 are derived from the Company's
consolidated financial statements. The selected financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with the other financial
information included or incorporated by reference herein.
STATEMENT OF OPERATIONS DATA: (1)
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues.............................. $46,329 $76,427 $174,282 $314,176 $391,155
Income (loss) from operations............. (1,461) (5,116) 16,990 30,675 48,579
Income (loss) before income taxes,
minority interest and extraordinary item. (1,286) (5,474) 14,564 20,773 36,116
Income (loss) before minority interest
and extraordinary item................... (2,554) (4,035) 11,147 11,184 22,752
Income (loss) before extraordinary item... (2,557) (3,466) 11,593 11,257 22,717
Net income (loss)......................... (2,557) (3,466) 11,593 10,829 21,583
Earnings (loss) per common share:
Income (loss) before extraordinary item. $ (0.47) $ (0.57) $ 0.73 $ 0.55 $ 1.11
Net income (loss)....................... (0.47) (0.57) 0.73 0.53 1.05
Weighted average shares outstanding....... 5,400 6,092 15,972 20,407 20,544
</TABLE>
BALANCE SHEET DATA: (1)
(In thousands)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.. $ 5,041 $ 5,739 $ 11,560 $ 10,530 $ 10,708
Working capital............ 15,136 11,672 49,320 71,270 108,551
Intangible assets, net..... 4,530 2,234 27,427 97,844 104,284
Total assets............... 45,195 51,370 181,985 329,798 385,322
Total debt................. 9,488 17,328 46,952 152,397 178,266
Total stockholders' equity. 28,128 24,941 110,244 139,899 162,374
</TABLE>
(1) Gives effect to the acquisitions of Respiratory Care Services, Inc.
("RCS") and Helian Health Group, Inc. ("Helian"), which have been recorded
as poolings of interests.
ITEM 7. 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.
A-12
<PAGE>
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
supply distribution and related services to the long-term care industry.
MERGERS AND ACQUISITIONS
On February 9, 1997, the Company entered into an Agreement and Plan of
Merger with Vencor, Inc. ("Vencor") and Peach Acquisition Corp., a wholly owned
subsidiary of Vencor ("Peach"), pursuant to which Peach commenced a Tender
Offer on February 14, 1997 to purchase all of the outstanding Shares of the
Company's Common Stock and the associated rights to purchase Series A Junior
Participating Stock at a cash price of $17.10 per share (the "Tender Offer").
The Tender Offer expired on March 18, 1997 and Vencor purchased approximately
99% of the outstanding Shares of the Company's Common Stock at that time.
Following the merger, the Company became a wholly-owned subsidiary of Vencor.
The Shares of Common Stock that were not acquired in the Tender Offer have been
converted into the right to receive $17.10 per share in cash.
Effective May 5, 1995, TheraTx completed a merger with RCS in which
TheraTx issued approximately 724,000 Shares of common stock in exchange for all
outstanding common stock of RCS. RCS provides respiratory care services,
cardiopulmonary services and sleep diagnostic services in acute-care hospitals
and subacute facilities. RCS also sells and rents home durable medical
equipment. On December 28, 1995, TheraTx completed a merger with Helian in
which TheraTx issued approximately 2,456,000 Shares of common stock in exchange
for all outstanding Shares of common stock of Helian. Helian provides
occupational healthcare and related services in eleven outpatient clinics and
operates three ambulatory surgery centers and one surgical specialty hospital.
These transactions have been accounted for as poolings of interests and,
accordingly, the consolidated financial results have been restated for all
periods prior to the acquisitions to give effect to the results of RCS and
Helian.
On May 31, 1994, TheraTx acquired PersonaCare, Inc. ("PersonaCare"), a
company that operates owned and leased inpatient facilities that provide a
broad range of subacute, specialty, and basic medical and other geriatric
services. Effective April 1, 1995, the Company acquired certain assets and
assumed certain liabilities from eight companies managed by Southern Management
Services, Inc. ("SMS"), including five skilled nursing facilities, an adult
congregate living facility, a medical products distribution company and a
Medicare Part B billing and supply service company (collectively, the "SMS
Business"). Also, as a result of four acquisitions, the Company added a leased
inpatient facility in July 1994, an owned inpatient facility in February 1995,
a leased inpatient facility in June 1995 and three leased inpatient facilities
in October 1995. These acquisitions have been recorded using the purchase
method of accounting. Accordingly, operating results for the acquired
businesses are included in the Company's consolidated results of operations
subsequent to the respective dates of acquisition.
The purchase of the SMS Business primarily was financed with proceeds from
the February 1995 private placement of $100.0 million of seven-year convertible
subordinated notes, due 2002, with a coupon rate of 8% (the "Notes"). In
conjunction with the merger with Vencor, pursuant to the terms of the
convertible subordinated notes, the Company is required to offer to repurchase
the notes for 100% of the principal amount, together with accrued interest,
within fifteen days after the expiration of the Tender Offer.
OVERVIEW
TheraTx's patient care revenues primarily are derived from providing
rehabilitation management programs to 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.
A-13
<PAGE>
The following table provides certain information related to the Company's
patient care operations. The data for all periods give effect to the Helian
and RCS mergers which have been accounted for as poolings of interests.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
SUBACUTE AND LONG-TERM CARE
Rehabilitation management programs:
Number of programs (1)(2).............................. 125 175 216
Average revenue per program per year (in thousands) (3) $ 830 $ 894 $ 885
Average length of stay in days......................... 23 24 22
Inpatient facilities:
Number of owned and leased facilities (1).............. 13 25 27
Number of managed facilities (1)....................... -- 3 2
Licensed beds (1)(4)................................... 1,688 3,159 3,787
Average daily census................................... 1,417 2,749 3,305
Payor mix: (5)
Medicare.............................................. 27.3 % 23.2 % 33.3 %
Private, managed care and other....................... 56.4 51.6 38.7
Medicaid.............................................. 16.3 25.2 28.0
OCCUPATIONAL HEALTHCARE
Number of outpatient clinics (1)....................... 11 11 16
Outpatient clinic visits per year (in thousands)....... 292 309 332
CONSOLIDATED
Payor mix (6):
Medicare.............................................. 53.3 % 53.0 % 54.1 %
Private, managed care and other....................... 41.9 36.7 31.9
Medicaid.............................................. 4.8 10.3 14.0
Revenue mix (7):
Rehabilitation subacute............................... 56.0 % 58.9 % 57.6 %
Medical subacute...................................... 9.4 4.9 4.8
Occupational medicine and services.................... 16.7 8.9 6.8
Basic healthcare...................................... 16.1 24.4 29.6
Other specialty....................................... 1.8 2.9 1.2
</TABLE>
- ------------------
(1) Numbers expressed are at end of period.
(2) At December 31, 1994, 1995, and 1996, the number of rehabilitation
management programs includes twelve, twenty, and twenty-two programs,
respectively, in operation at the Company's skilled nursing facilities.
(3) Represents the aggregate net revenues from rehabilitation management
programs during the period divided by the average of the number of
programs in operation at the beginning and end of the period. Includes
revenue from rehabilitation management programs for therapy services
provided in the Company's skilled nursing facilities.
(4) Does not include 450 and 208 licensed beds in inpatient facilities
operated under management agreements for years ended 1995 and 1996,
respectively.
(5) Excludes rehabilitation therapy services revenues included in the
Company's rehabilitation management program revenues. The period ended
December 31, 1994 includes revenues in inpatient facilities subsequent to
May 31, 1994, the date of the PersonaCare acquisition.
(6) Excludes revenues from certain respiratory therapy services and sales of
medical supplies and related services.
(7) Excludes revenues from management fees and other services and sales of
medical supplies and related services.
A-14
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the years ended December 31, 1994,
1995, and 1996, the percentage relationship to 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>
PERCENTAGE OF PERCENTAGE CHANGE
REVENUES -----------------------------------
YEAR ENDED DECEMBER 31, 1995 1996
----------------------------------------------- OVER OVER
1994 1995 1996 1994 1995
-------------- -------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Patient care revenues, net........... 96.9 % 91.5 % 92.0 % 70.2 % 25.3 %
Management services and other........ 2.2 2.2 2.7 78.2 54.4
Sales of medical supplies and
related services..................... 0.9 6.3 5.3 1,164.8 3.2
----- ----- -----
Total net revenues................. 100.0 100.0 100.0 80.3 24.5
Operating costs and expenses:
Costs of revenues:
Salaries, wages and benefits(1)..... 56.2 57.0 56.5 72.9 24.9
Other operating expenses(1)......... 14.1 15.2 14.8 84.1 22.2
Cost of medical supply sales and
related services(2)................. 38.8 81.3 80.9 2,547.0 2.7
Corporate, general and administrative 14.4 10.6 10.1 32.9 19.1
Depreciation and amortization........ 3.3 3.0 2.8 61.4 18.8
Rent................................. 2.6 2.5 2.8 68.0 44.2
Merger costs......................... -- 1.5 -- N/A N/A
Total operating costs and
expenses....................... 90.3 90.2 87.6 80.2 20.8
Income from operations................ 9.7 9.8 12.4 80.5 58.4
Interest and other expense, net....... 1.4 3.2 3.2 308.2 25.9
Income before income taxes, minority
interest and extraordinary item..... 8.4 6.6 9.2 42.6 73.9
Provision for income taxes............ 2.0 3.0 3.4 180.6 39.4
Income before minority interest and
extraordinary item.................. 6.4 3.6 5.8 0.3 103.4
Minority interest..................... 0.3 -- -- (83.6) (147.9)
Income before extraordinary item...... 6.7 3.6 5.8 (2.9) 101.8
Extraordinary item, net of taxes...... -- (0.1) (0.3) N/A N/A
Net income............................ 6.7 3.5 5.5 (6.6) 99.3
</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.
A-15
<PAGE>
FISCAL YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Patient care revenues, net. The increase in patient care revenues, net
for the year ended December 31, 1996 over the corresponding period in 1995
primarily was attributable to the growth in rehabilitation management programs
and the acquisition of inpatient skilled nursing facilities. Rehabilitation
management programs experienced approximately 29% revenue growth from 1995 to
1996. This increase primarily is due to the increase in the number of
rehabilitation management programs from December 31, 1995 to December 31, 1996
and revenue growth in maturing programs. Patient care revenues during 1996
included revenue from two leased facilities added during 1996 as well as
revenue for all of 1996 from the six owned facilities added subsequent to March
31, 1995, and revenue from five leased facilities added subsequent to February
1, 1995.
Management services and other. Management services and other revenues
increased during the year ended December 31, 1996 over the same period in 1995
primarily as a result of the addition of staffing services related to the
recruitment and temporary placement of therapists. The remainder of the
increase primarily was due to the acquisition of management contracts for four
occupational healthcare clinics during the first quarter of 1996 and the
addition of two inpatient facilities operated under management agreements
subsequent to October 1, 1995.
Sales of medical supplies and related services. The increase in sales of
medical supplies and related services for the year ended December 31, 1996 over
the same period of 1995 primarily relates to the inclusion of revenues for the
entire year from the medical products distribution company and the Part B
billing and supply service company acquired April 1, 1995 in the acquisition of
the SMS business. The increase in sales resulting from the inclusion of these
revenues for the entire 1996 period is partially offset by the loss of a large
customer in the first quarter of 1996.
Salaries, wages and benefits. Of the increase in salaries, wages and
benefits during 1996 over 1995, approximately 60% was attributable to personnel
costs resulting from the addition of clinicians required to staff new
rehabilitation management programs. The remainder of the increase during 1996
over 1995 primarily was attributable to personnel costs at owned and leased
inpatient facilities added during 1995 and 1996.
Other operating expenses. The majority of the increase in other operating
expenses during 1996 over 1995 was due to costs at owned and leased inpatient
facilities added during 1995 and 1996. Also contributing to the increase in
other operating expenses during 1996 over 1995 was the increase in the number
of rehabilitation management programs during 1996.
Cost of medical supply sales and related services. The cost of medical
supply sales and related services increased slightly; however, as a percentage
of sales of medical supplies and related services, cost of medical supply sales
and related services remained relatively flat in 1996 from 1995.
Corporate, general and administrative. Corporate, general and
administrative expenses increased during 1996 over 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.
Depreciation and amortization. Depreciation and amortization increased
during 1996, as compared to 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. Also contributing to the increase in depreciation and
amortization expense during 1996 over 1995 was depreciation on asset additions
required to support the growth in rehabilitation management programs.
Rent. Rent expense increased during 1996 over 1995 primarily due to the
addition of five leased facilities in late 1995 and the addition of two leased
facilities in early 1996. To a lesser extent, the remainder of the increase
relates to additional corporate office space.
Interest and other expense, net. The increase in interest and other
expense, net for 1996, as compared to 1995, primarily was related to interest
expense on additional debt drawn under the Company's credit facility and a full
year of interest incurred on the Company's 8% Convertible Subordinated
Debentures due 2002 (the "Notes") issued in February 1995. Interest and other
expense for 1996 reflected a gain recorded on the sale of a portion of the
Company's partnership interest in an ambulatory surgery center. Interest and
other expense for 1995 was partially offset by interest income of approximately
$965,000 earned on the proceeds from the Notes prior to their use in the April
1, 1995 acquisition of SMS.
A-16
<PAGE>
Provision for income taxes. The Company's effective tax rate for 1996 was
37.0% as compared to 46.2% in 1995.
Extraordinary item. During 1996, the Company recorded charges in
connection with the write-off of certain assets and the direct costs related to
the closure of an ambulatory surgery center. During 1995, the Company wrote
off deferred financing costs in connection with refinancing its revolving
credit facility and recorded charges related to the early extinquishment of
certain debt. These charges have been recorded as an extraordinary item during
1996 and 1995, respectively. The 1996 charges were classified as an
extraordinary item as required by APB 16, Business Combinations, based on the
following: (i) the 1995 operating loss incurred by the surgery center is
significant to the 1995 operating results of the former Helian business, (ii)
the loss on the closure is material in relation to the 1996 operating
performance of the former Helian business and (iii) the surgery center
operations were discontinued within two years of the effective date of the
Helian merger.
FISCAL YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Patient care revenues, net. Patient care revenues, net increased during
1995 over 1994 primarily as a result of the acquisition of inpatient skilled
nursing facilities and growth in rehabilitation management programs. Patient
care revenues during 1995 included revenue from twelve owned and leased
facilities added during 1995 as well as revenue for all of 1995 from the twelve
owned and leased PersonaCare facilities acquired May 31, 1994 and the leased
inpatient facility added July 1994. Rehabilitation management programs
experienced approximately 61% revenue growth from 1994 to 1995. Approximately
63% of this revenue growth was related to rehabilitation management programs
that became operational during 1995. The remaining 37% of the increase in
revenues from rehabilitation management programs resulted from growth in
revenues from programs in operation prior to January 1, 1995, partially offset
by reductions in revenues from programs terminated during 1995. The Company
added 81 rehabilitation management programs during 1995 and terminated 31
programs, ending the year with 175 programs.
Management services and other. Management services and other revenues
increased during 1995 over 1994 primarily as a result of the addition of
staffing services related to the recruitment and temporary placement of
therapists during 1995.
Sales of medical supplies and related services. The increase in sales of
medical supplies and related services during 1995 over 1994 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. Of the increase in salaries, wages and
benefits during 1995 over 1994, approximately 51% was attributable to personnel
costs at owned and leased inpatient facilities added during 1994 and 1995. The
remainder of the increase in salaries, wages and benefits during 1995 over 1994
primarily was attributable to increased personnel costs resulting from the
addition of clinicians required to staff new rehabilitation management
programs.
Other operating expenses. Approximately 79% of the increase in other
operating expenses during 1995 over 1994 was due to costs at owned and leased
inpatient facilities added during 1994 and 1995. The remainder of the increase
during 1995 over 1994 primarily was attributable to the increase in the number
of rehabilitation management programs during 1995.
Cost of medical supply sales and related services. The increase in the
cost of medical supply sales and related services during 1995 over 1994
primarily was attributable to revenues generated by the medical products
distribution company and the Part B billing and supply service company acquired
during 1995.
Corporate, general and administrative. Corporate, general and
administrative expenses increased during 1995 over 1994 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 1995 from 1994 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.
A-17
<PAGE>
Depreciation and amortization. Depreciation and amortization increased
during 1995, as compared to 1994, primarily as a result of the owned and leased
facilities acquired during 1994 and 1995 and the medical products distribution
company and the Part B billing and supply service company acquired during 1995.
Rent. Rent expense increased during 1995 over 1994 primarily due to the
addition of seven leased inpatient facilities during 1994 and five leased
inpatient facilities during 1995.
Merger costs. During 1995, the Company recorded $4.6 million of merger
costs and related expenses in connection with the Helian and RCS mergers.
Interest and other expense, net. The increase in interest and other
expense, net for 1995, as compared to 1994, primarily was related to interest
incurred on the Notes issued in February 1995. To a lesser extent, interest
expense incurred on debt related to the owned and leased facilities acquired
from PersonaCare and additional debt drawn under the Company's credit facility
also contributed to the increase in interest expense during 1995. Interest and
other expense during 1995 also included charges of $542,000 related to losses
incurred on the sale of a diagnostic imaging clinic and the write-off of
equipment. The increase in interest and other expense, net was partially
offset by interest income of $2.4 million earned during 1995 and a reduction of
interest expense resulting from the repayment of debt out of proceeds from the
initial public offering.
Provision for income taxes. The Company's effective tax rate for 1995 was
46.2% as compared to 23.5% in 1994. The 1995 effective rate is higher than the
statutory rate primarily due to non-deductible merger costs recorded during the
period and state taxes. The Company's 1994 effective tax rate is lower than
the statutory rate primarily due to the benefit of net operating loss
carryforwards utilized during the period.
Extraordinary item. During 1995, the Company wrote off deferred financing
costs in connection with refinancing its revolving credit facility and incurred
charges related to the early extinguishment of certain debt. These costs were
recorded as an extraordinary item.
LIQUIDITY AND CAPITAL RESOURCES
During September 1994, TheraTx repaid $13.4 million of mortgage debt and
accrued interest out of the net proceeds received from the initial public
offering and restructured $33.0 million of mortgage debt in conjunction with a
Revolving Credit Facility (the "Revolving Credit Facility"). The Revolving
Credit Facility was refinanced on May 8, 1995 with a $125.0 million Senior
Credit Facility ("Senior Credit Facility") with a group of lenders. In
conjunction with the merger with Vencor, the Company entered into a note
payable to Vencor upon demand (the "Vencor Note"). Advances under the Vencor
Note are to be used to repay existing debt and to fund working capital
requirements, purchases of property and equipment, acquisitions and general
corporate requirements. On March 18, 1997, all borrowings under the Senior
Credit Facility were repaid and the Senior Credit Facility was terminated. The
Company also repaid approximately $1.3 million in debt outstanding. As of
March 31, 1997, approximately $95 million was outstanding under the Vencor
Note.
Accounts receivable, net of allowances were $76.8 million and $103.2
million at December 31, 1995 and 1996, respectively. Estimated settlements due
from third-party payors aggregated $7.1 million and $11.8 million at December
31, 1995 and 1996, respectively.
On February 16, 1995, TheraTx completed the private placement of the Notes
and received proceeds of $96.5 million, net of commissions and financing costs.
The Notes are redeemable at the option of TheraTx after February 3, 1998. As
a result of the merger with Vencor, pursuant to the terms of the Indenture, the
Company is required to offer to repurchase the Notes for 100% of the principal
amount, together with accrued interest, within fifteen days after the
expiration of the Tender Offer. Proceeds from the sale of the Notes primarily
were used to fund the acquisition of the SMS Business.
Effective April 1, 1995, the Company acquired certain of the assets and
assumed certain liabilities from eight companies managed by Southern Management
Services, Inc. ("SMS"), including five skilled nursing facilities, an adult
congregate living facility, a medical products distribution company and a
Medicare Part B billing and supply service company (collectively, the "SMS
Business"). The purchase price paid by the Company for the SMS Business
included (i) approximately $34,180,000 in cash paid at closing by the Company
to certain lenders of the SMS Business in connection with the retirement of
bank debt and mortgage debt and (ii) $43,250,000 in cash and 1,097,407 shares
of the Company's common stock. In addition, 888,889 shares of the Company's
common stock were issued into escrow (the "Escrow Shares"). The Escrow Shares
were to be released if certain financial
A-18
<PAGE>
goals for the SMS Business were achieved during the period commencing April 1,
1995 and ending February 29, 1996 ("the Earn-Out Period"), and the purchase
price was to be further increased by as much as $20,000,000 payable in either
shares of the Company's stock or cash, at the option of the sellers, if certain
financial goals were exceeded during the Earn-Out Period. The Company has
concluded that the sellers of the SMS Business are not entitled to the Escrow
Shares and are not entitled to any earn-out payment as the financial
performance of the SMS Business was, as a whole, significantly below the
threshold entitling the sellers to any payment under the earn-out. As a
result, none of the Escrow Shares are included as outstanding as of December
31, 1996 for financial reporting purposes. The holders of shares received in
the acquisition have certain registration rights.
During 1995, the Company acquired Lafayette Health Care Center, Inc.,
Tucker Nursing Center, Inc. and Horizon Health Care Services, Inc. TheraTx
paid $6,700,000 in cash and issued 112,150 shares of common stock in connection
with these acquisitions. Tucker Nursing Center, Inc. operates a 148-bed
skilled nursing facility under a ten-year lease that began April 1, 1995.
Under the terms of the lease agreement, the owner of the facility has the right
to require the Company to purchase the facility for $7,300,000 at any time
during the term of the lease.
On April 25, 1995, the Company entered into a twenty-year operating lease
relating to the construction and lease of approximately 107,000 square feet of
corporate office space. The lease agreement provides for an annual base lease
rate of approximately $1.8 million adjusted annually for inflation. In
addition to the base lease rate, the Company will pay certain building
operating costs. The lease term began in July 1996 upon completion of the
office building.
During 1996, the Company acquired WCMC Management, Inc., Professional
Rehabilitation Associates, Inc., Occupational Health International, P.C., NFM,
Inc. and an occupational medical clinic in the Raleigh, North Carolina area for
$9.9 million in cash and a short-term promissory note for $1.5 million.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by
Regulation S-X are included in this Form 10-K commencing on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors - Omitted pursuant to Instruction
I.(2)(c) of Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION - Omitted pursuant to Instruction I.(2)(c) of
Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Omitted pursuant to Instruction I.(2)(c) of Form 10-K.
A-19
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Omitted pursuant to Instruction I.(2)(c) of Form 10-K.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS:
The Company's financial statements appear in a separate section of this
Annual Report on Form 10-K commencing on the pages referenced below:
<TABLE>
<S> <C>
Page
TheraTx, Incorporated
Report of Ernst & Young LLP, Independent Auditors..................................... F-1
Report of Independent Accountants..................................................... F-2
Consolidated Statements of Income for the years ended December 31, 1994, 1995
and 1996.............................................................................. F-3
Consolidated Balance Sheets as of December 31, 1995 and 1996.......................... F-4
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1994,
1995 and 1996.......................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996................................................................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
(2) FINANCIAL STATEMENT SCHEDULES:
The financial statement schedules of the Company are included in a
separate section of this Annual Report on Form 10-K commencing on the pages
referenced below. All other schedules have been omitted because they are not
applicable, not required, or the information is included in the financial
statements or notes thereto.
<TABLE>
<CAPTION>
Page
----
<S> <C>
TheraTx, Incorporated
Schedule II -- Valuation and Qualifying Accounts............................... S-1
</TABLE>
(3) EXHIBITS:
EXHIBIT NO.
<TABLE>
<S> <C> <C>
* 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.
</TABLE>
A-20
<PAGE>
<TABLE>
<S> <C> <C>
* 2.5 Earn-Out, Indemnity and Escrow Agreement entered into as of April 4, 1995 by and among
Registrant, Med-Care Services Northeast, Inc., Med-Care Services, Inc., Tri-City Medical
Corporation, Tri-Medical Supply, Inc. of Georgia, Highland Pines Nursing Manor, Inc.,
Abbey Land Corporation, Southern Management of Pompano Beach, Inc., and Jonathan H.
Glenn. Incorporated by reference as exhibit (iv) to the Current Report on Form 8-K
dated April 4, 1995.
* 2.6 Earn-Out, Indemnity and Escrow Agreement entered into as of April 4, 1995 by and among
Registrant, Bradenton Care Center, Ltd., and Jonathan H. Glenn. Incorporated by
reference as exhibit (v) to the Current Report on Form 8-K dated April 4, 1995.
* 2.7 Merger Agreement and Plan of Consolidation, dated as of April 12, 1995 among Registrant,
RCS Acquisition Corp., Respiratory Care Services, Inc., SleepCorp, Inc., Therapy
Management Corporation and the Management Stockholders, as amended by that certain
Agreement dated as of April 28, 1995. Incorporated by reference as exhibit 2.7 to the
Registration Statement on Form S-1, Registration No. 33-92402.
* 2.8 Escrow and Indemnity Agreement, entered into as of May 4, 1995 among Registrant, each of
the stockholders who are signatories thereto and Jonathan H. Glenn. Incorporated by
reference as exhibit 2.8 to the Registration Statement on Form S-1, Registration No.
33-92402.
* 2.9 Agreement and Plan of Merger dated as of August 29, 1995 by and among Registrant,
Atlanta Acquisition Corp., a Delaware corporation, and Helian Health Group, Inc., a
Delaware corporation. Incorporated by reference as exhibit 2.1 to the Registration
Statement on Form S-4, Registration No. 33-99476.
* 2.10 Agreement and Plan of Merger dated as of February 9, 1997, among Registrant, Vencor,
Inc. and Peach Acquisition Corp. Incorporated by reference as exhibit 2.1 to the
current report on Form 8-K filed on February 11, 1997.
* 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 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.
4.2 First Supplemental Indenture, dated as of March 21, 1997, between Registrant and State
Street Bank and Trust Company, as successor trustee.
* 4.3 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.
* 4.4 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.
* 10.1 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.
* 10.2 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.
* 10.3 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.
* 10.4 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.
* 10.5 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.
* 10.6 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,
</TABLE>
A-21
<PAGE>
<TABLE>
<S> <C> <C>
1994. Incorporated by reference to exhibit 10.18 to the Registration Statement on Form
S-1, Registration No. 33-78786.
* 10.7 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.
* 10.8 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.
* 10.9 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.
11.1 TheraTx, Incorporated Statement Regarding Computation of Earnings (Loss) Per Share.
23.1 Consent of Ernst & Young L.L.P., Independent Auditors.
23.2 Consent of Coopers & Lybrand, L.L.P., Independent Accountants (Helian Health Group, Inc.)
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
- -----------------
* Previously filed and/or incorporated by reference.
+ Incorporated by reference to Registration Statement Number 33-31520 on
Form S-1, filed October 11, 1989, Amendment Number 2 thereto filed
November 21, 1989, and Post-Effective Amendments Number 1 and Number 2
thereto filed November 22, 1990 and January 16, 1991, respectively.
** The Company has received confidential treatment for certain portions of
this document filed with the Commission.
(B) REPORTS ON FORM 8-K:
None
A-22
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THERATX, INCORPORATED
By: /s/ JOHN A. BARDIS
----------------------------------
John A. Bardis
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN A. BARDIS
- ---------------------
John A. Bardis President, Chief Executive Officer and Director 4/11/97
(Principal Executive Officer)
/s/ BRET W. JORGENSEN
- ---------------------
Bret W. Jorgensen Director 4/11/97
/s/ L. JOHN WILKERSON
- ---------------------
L. John Wilkerson Director 4/11/97
/s/ MICHAEL R. BARR
- ---------------------
Michael R. Barr Director 4/11/97
/s/ W. BRUCE LUNSFORD
- ---------------------
W. Bruce Lunsford Director 4/11/97
/s/ W. EARL REED, III
- ---------------------
W. Earl Reed, III Director 4/11/97
/s/ JILL L. FORCE
- ---------------------
Jill L. Force Director 4/11/97
/s/ THOMAS T. LADT
- ---------------------
Thomas T. Ladt Director 4/11/97
/s/ KARLA T. MOUNT
- ---------------------
Karla T. Mount Vice President, Finance
(Principal Accounting Officer)
</TABLE>
A-23
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
TheraTx, Incorporated
We have audited the accompanying consolidated balance sheets of TheraTx,
Incorporated and Subsidiaries as of December 31, 1995 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1996. Our audits also
included the financial statement schedule listed in the Index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits. We did not audit the financial
statements and schedule of Helian Health Group, Inc. and subsidiaries for the
year ended November 30, 1994; which statements reflect total net revenues
constituting 22% in 1994 and total net income of 12% in 1994 of the related
consolidated totals. Those statements and schedule were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to data included for Helian Health Group, Inc. and subsidiaries for the
year ended November 30, 1994, is based solely on the report of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of TheraTx, Incorporated
and Subsidiaries at December 31, 1995 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects the information set forth therein.
Atlanta, Georgia ERNST & YOUNG LLP
March 21, 1997
F-1.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Helian Health Group, Inc.
We have audited the consolidated financial statements and consolidated
financial statement schedule of Helian Health Group, Inc. and subsidiaries as
of November 30, 1994 and for the year then ended. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Helian Health
Group, Inc. and subsidiaries as of November 30, 1994, and the results of their
operations and their cash flows for the year ended November 30, 1994, in
conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when considered in
relation to the basic financial statements taken as a whole, presents fairly,
in all material respects the information required to be included therein.
COOPERS & LYBRAND L.L.P.
San Jose, California
February 3, 1995
F-2.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues:
Patient care revenues, net......................................... $168,829 $287,365 $359,949
Management services and other...................................... 3,880 6,915 10,678
Sales of medical supplies and related services..................... 1,573 19,896 20,528
-------- -------- --------
Total net revenues............................................... 174,282 314,176 391,155
Operating costs and expenses:
Costs of revenues:
Salaries, wages and benefits...................................... 97,009 167,704 209,480
Other operating expenses.......................................... 24,303 44,753 54,707
Cost of medical supply sales and related services................. 611 16,173 16,613
Corporate, general and administrative.............................. 25,024 33,268 39,608
Depreciation and amortization...................................... 5,745 9,274 11,022
Rent............................................................... 4,600 7,729 11,146
Merger costs....................................................... -- 4,600 --
-------- -------- --------
Total operating costs and expenses............................... 157,292 283,501 342,576
-------- -------- --------
Income from operations.............................................. 16,990 30,675 48,579
Interest and other expense, net..................................... 2,426 9,902 12,463
-------- -------- --------
Income before income taxes, minority interest and extraordinary
item ............................................................. 14,564 20,773 36,116
Provision for income taxes.......................................... 3,417 9,589 13,364
-------- -------- --------
Income before minority interest and extraordinary item.............. 11,147 11,184 22,752
Minority interest................................................... 446 73 (35)
-------- -------- --------
Income before extraordinary item.................................... 11,593 11,257 22,717
Extraordinary item, net of income taxes............................. -- (428) (1,134)
-------- -------- --------
Net income.......................................................... $ 11,593 $ 10,289 $ 21,583
======== ======== ========
Earnings per common share:
Income before extraordinary item................................... $ 0.73 $ 0.55 $ 1.11
Extraordinary item................................................. -- (0.02) (0.06)
-------- -------- --------
Net income......................................................... $ 0.73 $ 0.53 $ 1.05
======== ======== ========
Weighted average number of shares outstanding....................... 15,972 20,407 20,544
</TABLE>
See accompanying notes.
F-3.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value data)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
ASSETS 1995 1996
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents....................................................... $ 10,530 $ 10,708
Short-term investments.......................................................... 1,023 --
Accounts receivable less allowances for doubtful accounts and denials of $8,024
and $12,221 at December 31, 1995 and 1996, respectively....................... 76,766 103,225
Third-party settlements......................................................... 7,084 11,822
Prepaid expenses and other current assets....................................... 3,942 9,851
Inventory....................................................................... 5,415 5,977
Current note receivable......................................................... -- 10
Receivable from stockholder..................................................... 379 --
Income taxes receivable......................................................... 2,010 698
Deferred income taxes........................................................... 1,737 5,527
-------- --------
Total current assets.......................................................... 108,886 147,818
Property and equipment, net...................................................... 111,677 125,652
Intangible assets, net of accumulated amortization of $5,276 and $9,137 at
December 31, 1995 and 1996, respectively....................................... 97,844 104,284
Long-term notes receivable....................................................... 8,404 4,910
Other assets..................................................................... 2,987 2,658
-------- --------
Total assets.................................................................. $329,798 $385,322
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 9,560 $ 9,292
Accrued payroll and related expenses............................................ 16,819 19,814
Accrued interest payable........................................................ 3,679 3,863
Other accrued expenses.......................................................... 6,902 5,506
Long-term debt, current portion................................................. 656 792
-------- --------
Total current liabilities..................................................... 37,616 39,267
Long-term debt, net of current portion........................................... 51,741 77,474
Subordinated debt................................................................ 100,000 100,000
Other liabilities................................................................ 327 47
Deferred income taxes............................................................ 213 6,020
Minority interests............................................................... 2 140
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value:
Authorized Shares -- 50,000; issued and outstanding shares -- 20,437 and 20,614
at December 31, 1995 and 1996, respectively.................................... 20 20
Additional paid-in capital...................................................... 121,403 122,691
Note receivable from stockholder................................................ (100) (100)
Retained earnings............................................................... 18,576 39,763
-------- --------
Total stockholders' equity.................................................... 139,899 162,374
-------- --------
Total liabilities and stockholders' equity.................................... $329,798 $385,322
======== ========
</TABLE>
See accompanying notes.
F-4.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL
------------------------ ---------------------- PAID IN
SHARES PAR VALUE SHARES PAR VALUE CAPITAL
------------ ---------- ----------- --------- -----------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1994 16,465 $ 17 5,963 $ 6 $ 28,679
Issuance of common stock upon exercise of stock
options and other....................................... -- -- 294 -- 648
Issuance of common and preferred stock in connection with
PersonaCare acquisition................................. 2,421 2 811 1 29,997
Issuance of common stock in initial public offering....... -- -- 4,010 4 43,323
Conversion of preferred stock............................. (18,886) (19) 7,909 8 11
Repayment of officer note receivable...................... -- -- -- -- --
Issuance of stock options................................. -- -- -- -- 90
Purchase of common stock.................................. -- -- (57) -- (140)
Cash dividends paid....................................... -- -- -- -- --
Net income................................................ -- -- -- -- --
------- --- ------ --- --------
Balance at December 31, 1994............................... -- -- 18,930 19 102,608
Issuance of common stock upon exercise of stock options
and other................................................ -- -- 298 -- 652
Repayment of officer note receivable...................... -- -- -- -- --
Issuance of common stock in connection with mergers and
acquisitions............................................. -- -- 1,209 1 18,043
Merger costs paid by former shareholders of acquired
company.................................................. -- -- -- -- 100
Cash dividends paid....................................... -- -- -- -- --
Net income................................................ -- -- -- -- --
------- --- ------ --- --------
Balance at December 31, 1995............................... -- --
Issuance of common stock upon exercise of stock options
and other................................................ -- -- 177 -- 1,288
Net loss for Helian Health Group, Inc. for the month ended
December 31, 1995....................................... -- -- -- -- --
Cash dividends paid....................................... -- -- -- -- --
Net income................................................ -- -- -- -- --
------- --- ------ --- --------
Balance at December 31, 1996 -- $-- 20,614 $20 $122,691
======= === ====== === ========
<CAPTION>
NOTES TOTAL
RECEIVABLE FROM RETAINED STOCKHOLDERS'
STOCKHOLDERS EARNINGS EQUITY
------------ -------- ------
<S> <C> <C> <C>
Balance at January 1, 1994 $(290) $(3,471) $ 24,941
Issuance of common stock upon exercise of stock
options and other........................................ -- -- 648
Issuance of common and preferred stock in connection with
PersonaCare acquisition.................................. -- -- 30,000
Issuance of common stock in initial public offering....... -- -- 43,327
Conversion of preferred stock............................. -- -- --
Repayment of officer note receivable...................... 8 -- 8
Issuance of stock options................................. -- -- 90
Purchase of common stock.................................. -- -- (140)
Cash dividends paid....................................... -- (223) (223)
Net income................................................ -- 11,593 11,593
----- ------- --------
Balance at December 31, 1994............................... (282) 7,899 110,244
Issuance of common stock upon exercise of stock options
and other................................................ -- -- 652
Repayment of officer note receivable...................... 182 -- 182
Issuance of common stock in connection with mergers and
acquisitions............................................. -- -- 18,044
Merger costs paid by former shareholders of acquired
company.................................................. -- -- 100
Cash dividends paid....................................... -- (152) (152)
Net income................................................ -- 10,829 10,829
----- ------- --------
Balance at December 31, 1995............................... (100) 18,576 139,899
Issuance of common stock upon exercise of stock options
and other................................................ -- -- 1,288
Net loss for Helian Health Group, Inc. for the month ended
December 31, 1995........................................ -- (378) (378)
Cash dividends paid....................................... -- (18) (18)
Net income................................................ -- 21,583 21,583
----- ------- --------
Balance at December 31, 1996 $(100) $39,763 $162,374
===== ======= ========
</TABLE>
See accompanying notes.
F-5.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1994 1995 1996
------------- -------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income................................................... $ 11,593 $ 10,829 $ 21,583
Net loss for Helian Health Group, Inc. for the month ended
December 31, 1995........................................... -- -- (378)
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Write-off of deferred financing costs....................... -- 612 --
Disposal of business........................................ -- -- 1,800
Depreciation and amortization............................... 5,745 9,274 11,022
Amortization of deferred financing costs.................... -- 652 646
Provisions for bad debts and denials........................ 5,496 4,627 5,324
Deferred income taxes....................................... 479 807 1,816
Net (gain) loss on sale of assets........................... -- 1,032 (299)
Minority interest in consolidated subsidiaries.............. (446) (73) 35
Other, net.................................................. (88) 27 445
Changes in operating assets and liabilities:
Accounts receivable and third-party settlements............ (22,587) (37,413) (33,636)
Prepaid expenses and other current assets.................. (198) (147) (5,895)
Inventory.................................................. -- (2,084) (606)
Income taxes receivable or payable......................... (1,064) (2,305) 1,294
Other assets............................................... (5) -- --
Accounts payable and accrued liabilities................... 2,489 9,882 (2,329)
-------- -------- --------
Net cash provided by (used in) operating activities.......... 1,414 (4,280) 822
-------- -------- --------
INVESTING ACTIVITIES:
Acquisition of companies and payments related to
acquisitions............................................... (1,828) (88,636) (9,903)
Purchases of property and equipment.......................... (4,711) (8,800) (18,056)
Proceeds from sales of assets................................ -- -- 647
Purchases of short-term investments.......................... (1,539) (1,000) --
Sales of short-term investments.............................. 258 1,595 1,023
Issuance of notes receivable................................. (4,080) (25) --
Repayment of notes receivable................................ 1,298 177 --
Cash acquired in acquisitions................................ 1,749 77 470
Other, net................................................... (235) (1,379) (1,221)
-------- -------- --------
Net cash used in investing activities........................ (9,088) (97,991) (27,040)
-------- -------- --------
FINANCING ACTIVITIES:
Payments on line of credit................................... (6,800) -- --
Proceeds from convertible debt............................... -- 100,000 --
Proceeds from long-term debt................................. 37,210 18,105 27,000
Payments on long-term debt................................... (56,702) (11,334) (2,231)
Retirement of put warrants................................... (1,350) -- --
Capitalized financing costs.................................. (669) (5,000) --
Payments on notes receivable from stockholders............... -- -- 379
Proceeds from notes payable to stockholders.................. 2,070 -- --
Payments on notes payable to stockholders.................... (3,641) -- --
Payments on capital lease obligations........................ (434) (1,212) (22)
Proceeds from issuance of common stock....................... 43,974 652 1,288
Other, net................................................... (162) 30 (18)
-------- -------- --------
Net cash provided by financing activities.................... 13,496 101,241 26,396
-------- -------- --------
Increase (decrease) in cash and cash equivalents............. 5,822 (1,030) 178
Cash and cash equivalents, beginning of year................. 5,738 11,560 10,530
-------- -------- --------
Cash and cash equivalents, end of year....................... $ 11,560 $ 10,530 $ 10,708
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest....................................... $ 3,593 $ 8,001 $ 12,732
Cash paid for income taxes................................... 2,554 11,442 9,637
</TABLE>
See accompanying notes.
F-6.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
TheraTx, Incorporated and its subsidiaries ("TheraTx" or the "Company")
provide outcomes-oriented healthcare services with a focus in two specialized
practice areas: postacute care and occupational health.
TheraTx provides subacute rehabilitation and respiratory therapy
management services to skilled nursing facilities, operates owned, leased and
managed inpatient facilities that provide a broad range of subacute, specialty
and basic medical and other geriatric services and provides occupational
healthcare and related services in outpatient clinics. In addition to its
primary practice areas, TheraTx operates outpatient surgery centers, owns and
operates an acute-care specialty hospital, provides respiratory therapy and
related services to hospitals and provides medical supply distribution and
related services to the long-term care industry.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of TheraTx have been prepared to
give effect to the May 1, 1995 merger with Respiratory Care Services, Inc. and
its majority-owned subsidiaries ("RCS") and the December 28, 1995 merger with
Helian Health Group, Inc. and its majority-owned subsidiaries ("Helian").
These transactions have been accounted for as poolings of interests and,
accordingly, the consolidated financial statements have been restated for all
periods prior to the acquisitions to give effect to the accounts of RCS and
Helian. (See Note 4.)
Helian's financial results prior to 1996 have been prepared on a fiscal
year ending November 30. Accordingly, Helian financial results for the fiscal
year ending November 30 have been combined with TheraTx's results for the
fiscal year ending December 31 for all periods presented prior to 1996.
Effective January 1, 1996, Helian's fiscal year-end was changed from
November 30 to December 31 to conform to the Company's year-end. Accordingly,
Helian's operations for the one month ended December 31, 1995, including net
sales of $2,791,000 and a net loss of $378,000, have been excluded from
combined results and reported as an adjustment to consolidated retained
earnings as of January 1, 1996.
All material intercompany accounts and transactions have been eliminated
in consolidation. Certain amounts in prior year periods have been reclassified
to conform to current year presentation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
The Company classifies short-term highly liquid investments with original
maturities of ninety days or less as cash equivalents.
The cash balances at December 31, 1995 and 1996 include $750,000 that is
restricted under the Senior Credit Facility. (See Note 7.) These funds are in
an interest-bearing account and will be released upon the occurrence of
specified events.
SHORT-TERM INVESTMENTS
Investments consist of certificates of deposit and are carried at cost
that approximates market.
PATIENT CARE REVENUES, NET AND RELATED RECEIVABLES
Patient care revenues include amounts reimbursable by third-party payors
under contractual arrangements. These contractual arrangements provide for
payments based on prospective payment, cost reimbursement and other payment
formulas. The difference between established billing rates and amounts
estimated to be received are accounted for as contractual allowances. Final
determination of amounts earned under certain contractual arrangements is
subject to audit or adjustment by third-party payors. The financial statements
include provisions for estimated adjustments resulting from such audits or
other changes in circumstances during the year.
F-7.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
The Company is reimbursed by Medicare for medical and rehabilitation
services provided in the Company's skilled nursing facilities at an interim
rate with final settlement determined after submission of annual cost reports
by the Company and audits thereof by the government fiscal intermediary.
Differences between amounts accrued and final settlements, if any, are recorded
in operations in the year of settlement.
The Company bills third-party skilled nursing facility customers directly
for services provided in its programs at such third-party facilities.
Substantially all of such customers are subject to federal and state
regulations. A significant portion of the cost of the Company's services is
ultimately reimbursed to the Company's customers by Medicare. Although
Medicare accepts charges by the Company's customers for usual, customary and
reasonable charges at market rates, such charges are subject to audit and
retroactive adjustment. The Company reimburses its customers for any charges
that are denied by Medicare in accordance with its customer contracts. The
financial statements include provisions for estimated future denials.
INVENTORY
Inventory, which is comprised primarily of medical supplies held for sale
and durable medical equipment, is valued at the lower of cost (determined by
the first-in, first-out method) or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Property includes the cost of
acquiring and renovating facilities and equipment. The cost of repairs and
maintenance is charged to operations as incurred. Depreciation is provided
using the straight-line method over the estimated useful life (forty years for
buildings; three to ten years for equipment and furniture; and the lesser of
the lease term or ten years for leasehold improvements). Depreciation expense
of $4,232,000, $6,915,000 and $7,481,000 includes amortization of assets
recorded under capital leases for years ended December 31, 1994, 1995 and 1996,
respectively.
Property and equipment consists of the following at December 31 (in
thousands):
<TABLE>
<CAPTION>
1995 1996
---- ----
<S> <C> <C>
Land and improvements.................... $ 9,945 $ 10,958
Buildings and improvements............... 79,886 83,921
Construction-in-progress................. 1,334 5,325
Furniture, fixtures and equipment........ 31,240 38,771
Leasehold improvements................... 3,510 7,738
-------- --------
125,915 146,713
Accumulated depreciation and
amortization........................... (14,238) (21,061)
-------- --------
$111,677 $125,652
======== ========
</TABLE>
INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill and deferred financing
costs. Goodwill represents the excess of cost over the market value of assets
acquired and is amortized using the straight-line method over forty years.
Deferred financing costs are amortized using the straight-line method over
the term of the related debt.
CARRYING VALUE OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In accordance with FASB Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long Lived Assets to be Disposed Of, the Company
records impairment losses on long-lived assets when events and circumstances
indicate that the assets might be impaired and the undiscounted cash flows
estimated to be generated by those assets are less than the carrying amounts of
those assets. Based on the Company's estimate of future undiscounted cash
flows, the Company expects to recover the carrying amounts of its long-lived
assets. Nonetheless, it is reasonably possible that the estimate of
undiscounted cash flows may change in the near term resulting in the need to
write-down those assets to fair value.
F-8.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
EMPLOYEE STOCK OPTIONS
The Company grants stock options for a fixed number of shares to employees
and directors with an exercise price at least equal to the fair value of the
shares at the date of grant. The company accounts for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognizes no compensation expense for the stock option
grants. Pro forma information regarding net income as required by SFAS No.
123, Accounting for Stock-Based Compensation, is included in Note 13.
NET INCOME PER SHARE
Net income per common share is calculated using the weighted average
number of common and common equivalent shares outstanding during the respective
periods. Common stock equivalents consist of (i) the number of common shares
issuable upon conversion of preferred stock and (ii) the number of shares
issueable upon exercise of warrants and stock options.
Pursuant to the requirements of the Securities and Exchange Commission,
common shares and common equivalent shares issued at prices below the public
offering price of $12.00 per share during the twelve months immediately
preceding the date of the initial filing of the registration statement,
excluding common shares and common equivalent shares issued in connection with
the acquisition of PersonaCare, have been included in the calculation of common
shares and common equivalent shares, using the treasury stock method, as if
they were outstanding for all periods prior to the date of the initial public
offering.
In 1994 and 1995, the number of shares issuable upon the exercise of
warrants and stock options was calculated using the treasury stock method.
In 1996, the weighted average common equivalent shares outstanding were
computed using the "modified treasury stock method" in accordance with
Accounting Principles Board Opinion No. 15 ("APB 15"). The modified treasury
stock method is used when the number of shares obtainable upon exercise of
outstanding options, warrants and their equivalents, in the aggregate, exceeds
20% of the Company's outstanding common stock. Under this method, all options,
warrants and their equivalents are assumed to have been exercised, whether or
not dilutive and the aggregate proceeds used to repurchase up to 20% of the
outstanding shares. Excess proceeds not utilized for the purchase of such
shares are assumed to be utilized to reduce outstanding debt with any remainder
invested in interest bearing securities. Net earnings is increased for the
assumed interest savings or interest income, net of taxes. For the fiscal year
ending December 31, 1996, the effects of the application of the modified
treasury stock method were anti-dilutive; thus, as prescribed by APB 15, common
equivalent shares were excluded in determining net income per common share.
3. FINANCIAL INSTRUMENTS
CARRYING VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the balance sheet for cash and cash
equivalents, accounts receivable and accounts payable and borrowings under the
Company's Senior Credit Facility approximates fair value.
The fair value of the Company's subordinated debt at December 31, 1996 is
$94,000,000 and is based on quoted market prices.
CONCENTRATION OF CREDIT RISK
At December 31, 1995 and 1996, approximately 12.2% and 11.1%,
respectively, of the Company's accounts receivable and 100% of the Company's
third-party settlements are due from Medicare and Medicaid programs for
services provided in the Company's owned or leased inpatient facilities.
Additionally, at December 31, 1995 and 1996, approximately 53.3% and 58.0%,
respectively, of the Company's accounts receivable are from third-party
long-term care facilities for services provided by the Company at such
facilities. A significant portion of the cost of these services is ultimately
reimbursed to the third-party long-term care facilities by Medicare. Should
the related government agencies suspend or significantly reduce contributions
to the Medicare and Medicaid programs, the Company's ability to collect
F-9.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. FINANCIAL INSTRUMENTS -- (CONTINUED)
on its receivables would be adversely affected. At December 31, 1996, the
Company had recorded receivables of $20,786,000 and $4,288,000 due directly
from Medicare intermediaries and Medicaid programs, respectively. The Medicaid
receivables primarily relate to the states of Texas, Rhode Island, Connecticut,
Georgia, Florida, Pennsylvania, Ohio and Alabama.
Management believes the remaining receivable balances due from various
payors subject to differing economic conditions do not represent any
concentrated credit risks to the Company. Management continually monitors and
adjusts its reserves and allowances associated with these receivables.
4. MERGERS AND ACQUISITIONS
RCS MERGER. Effective May 5, 1995, TheraTx issued approximately 724,000
shares of common stock in exchange for all of the outstanding common stock of
RCS. RCS provides respiratory therapy services, cardio-pulmonary services and
sleep diagnostic services in hospitals and subacute facilities. RCS also sells
and rents home durable medical equipment. This transaction has been accounted
for as a pooling of interests. (See Note 2.)
HELIAN MERGER. Effective December 28, 1995, TheraTx issued approximately
2,456,000 shares of TheraTx common stock in exchange for all outstanding shares
of common stock of Helian. Helian operates eleven occupational medical
facilities, three ambulatory surgery centers and one surgical specialty
hospital. This transaction has been accounted for as a pooling of interests.
(See Note 2.)
Net revenues and net income (loss) for the merged companies for 1994 and
1995 through the dates of mergers are as follows (in thousands):
<TABLE>
<CAPTION>
NET
NET INCOME
REVENUES (LOSS)
-------- -------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1994
The Company................ $126,787 $ 9,607
Helian..................... 38,205 1,395
RCS........................ 9,290 591
-------- -------
Combined.................. $174,282 $11,593
======== =======
YEAR ENDED DECEMBER 31, 1995
The Company................ $275,853 $11,856
Helian..................... 35,397 (1,091)
RCS........................ 2,926 64
-------- -------
Combined.................. $314,176 $10,829
======== =======
</TABLE>
ACQUISITION OF PERSONACARE, INC. On May 31, 1994, TheraTx acquired
PersonaCare, Inc. ("PersonaCare"), a company that owns and operates inpatient
facilities. In conjunction with the acquisition, TheraTx issued an aggregate
of 3,232,221 shares of stock, comprised of 811,416 shares of common stock and
2,420,805 shares of Series E preferred stock in exchange for all outstanding
common and preferred stock of PersonaCare. Each share of preferred stock
converted into one share of common stock upon consummation of the initial
public offering. (See Note 5.) The holders of shares received in the merger
have certain registration rights.
The acquisition was recorded using the purchase method of accounting and
the results of PersonaCare's operations subsequent to May 31, 1994, have been
included in the accompanying financial statements. The PersonaCare stock
received by TheraTx was valued at $30,000,000 and the Company recorded costs of
approximately $1,200,000 in connection with the merger. The assets and
liabilities of PersonaCare have been recorded at fair market value. The
purchase price in excess of the net identifiable assets acquired of $25,886,000
was recorded as goodwill. In conjunction with the acquisition, the Company
assumed certain subordinated notes payable that were repaid during July 1994
from the net proceeds received in the Company's initial public offering.
F-10.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. MERGERS AND ACQUISITIONS -- (CONTINUED)
ACQUISITION OF SMS BUSINESS. Effective April 1, 1995, the Company
acquired certain of the assets and assumed certain liabilities from eight
companies managed by Southern Management Services, Inc. ("SMS"), including five
skilled nursing facilities, an adult congregate living facility, a medical
products distribution company and a Medicare Part B billing and supply service
company (collectively, the "SMS Business"). The purchase price paid by the
Company for the SMS Business included (i) approximately $34,180,000 in cash
paid at closing by the Company to certain lenders of the SMS Business in
connection with the retirement of bank debt and mortgage debt and (ii)
$43,250,000 in cash and 1,097,407 shares of the Company's common stock. In
addition, 888,889 shares of the Company's common stock were issued into escrow
(the "Escrow Shares"). The Escrow Shares were to be released if certain
financial goals for the SMS Business were achieved during the period commencing
April 1, 1995 and ending February 29, 1996 ("the Earn-Out Period"), and the
purchase price was to be further increased by as much as $20,000,000 payable in
either shares of the Company's stock or cash, at the option of the sellers, if
certain financial goals were exceeded during the Earn-Out Period. The Company
has concluded that the sellers of the SMS Business are not entitled to the
Escrow Shares and are not entitled to any earn-out payment as the financial
performance of the SMS Business was, as a whole, significantly below the
threshold entitling the sellers to any payment under the earn-out. As a
result, none of the Escrow Shares are included as outstanding as of December
31, 1996 for financial reporting purposes. The holders of shares received in
the acquisition have certain registration rights.
The acquisition was recorded April 1, 1995 using the purchase method of
accounting. The common stock issued in the transaction was valued at $16.75
per share based on the last reported sale price of the Company's common stock
on March 31, 1995. The assets and liabilities of SMS have been recorded at
fair market value. Intangible assets of approximately $64,306,000,
representing the cost of the acquisition in excess of the identifiable assets
acquired and liabilities assumed, consist primarily of goodwill that is being
amortized over forty years using the straight-line method.
PRO FORMA RESULTS. The following unaudited pro forma results were
developed assuming PersonaCare and the SMS Business had been acquired on
January 1, 1994 (in thousands, except per share data):
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER 31,
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Net revenues....................... $259,362 $329,521
Net income......................... 10,445 10,891
Pro forma net income per share..... 0.57 0.53
</TABLE>
The unaudited pro forma sales and earnings information is not necessarily
indicative of the combined results that would have occurred had the acquisition
taken place on January 1, 1994, nor are they necessarily indicative of results
that may occur in the future.
5. INITIAL PUBLIC OFFERING
On June 24, 1994, the Company's initial public offering was declared
effective by the Securities and Exchange Commission. The Company issued
4,010,000 shares of common stock at an offering price of $12.00 per share and
received net proceeds of approximately $43,327,000 (after deducting
underwriting discounts and offering costs of $4,793,000).
6. LONG-TERM NOTES RECEIVABLE
The long-term notes receivable at December 31, 1995 and 1996 include a
wrap-around third mortgage note receivable from the lessor of the Wisconsin
facility for $4,222,000. The note is collateralized by the lessor's property
and equipment. Additionally, the note serves as collateral for certain
long-term debt. (See Note 7.) The note bears interest at a rate designated to
approximate the Company's required lease payment to the lessor. Interest only
is receivable monthly on the note that becomes due at the end of the lease
term. Interest income of $545,000 related to this note has been recorded for
each of the years ended December 31, 1995 and 1996.
F-11.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1995 1996
------------ ----------
<S> <C> <C>
Senior Credit Facility.............................. $48,000 $75,000
Notes payable, Wisconsin facility, payable in
monthly installments of principal plus fixed
interest (8.9% average interest rate) through the
end of the lease term.............................. 2,518 2,300
Note payable to bank, interest at bank's prime rate
plus 1.75%, (11.0% at November 30, 1995)
collateralized by a building with principal and
interest payable in monthly installments........... 651 --
Notes payable to a financial institution, interest
at 7.82% and 7.56%, collateralized by property and
equipment, with principal and interest
payable in monthly installments through November
1997 and August 1998, respectively................. 454 279
Note payable to a financial institution, interest
at 7.66%, collateralized by property and equipment,
with principal and interest payable in monthly
installments through December 1998................. 727 491
Other............................................... 47 196
------- -------
52,397 78,266
Less current portion................................ (656) (792)
------- -------
$51,741 $77,474
======= =======
</TABLE>
In September 1994, the Company entered into a $65,000,000 Revolving Credit
Facility (the "Revolving Credit Facility"). In conjunction with the Revolving
Credit Facility, during 1994, the Company restructured $33,000,000 of mortgage
debt assumed in the acquisition of PersonaCare and repaid $13,375,000 of
PersonaCare debt and accrued interest out of the net proceeds received from the
Company's initial public offering.
On May 8, 1995, TheraTx entered into a $125,000,000 Senior Credit Facility
("Senior Credit Facility") with a group of lenders. The Senior Credit Facility
was used to refinance the Company's Revolving Credit Facility. Borrowings
under the Senior Credit Facility bear interest at a maximum rate of LIBOR plus
1.5%, adjusted for certain leverage ratios. The Senior Credit Facility
provides for a $5,000,000 swing line to accommodate same-day borrowings and a
$5,000,000 stand-by letter of credit facility. Future borrowings under the
Senior Credit Facility will be used to fund working capital requirements,
purchases of property and equipment, acquisitions, and general corporate
requirements. Borrowings under the Senior Credit Facility are secured by
substantially all of the assets of the Company and its subsidiaries, including
all of the capital stock of each subsidiary. The Senior Credit Facility
contains various financial covenants, including, but not limited to,
requirements for minimum net worth, maximum funded debt and other financial
ratios, and restrictions on payments of dividends, capital expenditures and
acquisitions. Subsequent to December 31, 1996, all borrowings under the Senior
Credit Facility were repaid in conjunction with the merger with Vencor, Inc.
(See Note 17.)
In 1995, the Company recorded charges in connection with the write-off of
certain deferred financing costs related to the Company's Revolving Credit
Facility. Additionally, the Company incurred costs in conjunction with the
early extinguishment of certain capital lease obligations. These items,
totaling $701,000, have been reported as an extraordinary item, net of income
taxes of $273,000 during the year ended December 31, 1995.
Certain letters of credit totaling $1,989,500 have been issued under the
Senior Credit Facility and are outstanding as of December 31, 1996. These
letters of credit, which mature throughout 1997, reduce the amount available to
be borrowed under the Senior Credit Facility.
The notes payable, Wisconsin facility, pertain to a facility that the
Company leases. The notes are collateralized by notes receivable from the
lessor. In connection with the notes payable, Wisconsin facility, the Company
has agreed to pay the debt service on the notes during the five-year term of
the lease and any subsequent renewal periods as a part of the rental
F-12.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. LONG-TERM DEBT -- (CONTINUED)
agreement. At the end of the lease term, any remaining balance on the notes
payable becomes the obligation of the lessor and the note receivable, serving
as collateral, is reduced by a like amount.
At December 31, 1996, the aggregate maturities of long-term debt for the
five years ending December 31, 2001 and thereafter are as follows (in
thousands):
<TABLE>
<S> <C>
1997........................................... $ 792
1998........................................... 592
1999........................................... 131
2000........................................... 75,087
2001........................................... 49
Thereafter..................................... 1,615
-------
$78,266
=======
</TABLE>
8. CONVERTIBLE SUBORDINATED NOTES
On February 16, 1995, the Company completed a private placement of
$100,000,000 of seven-year convertible subordinated notes due 2002, with a
coupon rate of 8%. The notes are redeemable at the option of the Company after
February 3, 1998. The proceeds primarily have been used to finance the
acquisition and assumption by the Company of certain assets and liabilities of
the SMS Business. (See Note 4.) As a result of the merger with Vencor
subsequent to December 31, 1996, the Company is required to offer to repurchase
the Notes for 100% of the principal amount, together with accrued interest.
(See Note 17.)
9. LEASES
The Company operates facilities pursuant to the terms of long-term
operating leases. The operating leases have initial terms ranging from five to
fifteen years. The leases provide for renewals, at the Company's option,
ranging from two to three periods of five years each. Generally, the leases
contain options for the Company to purchase the facilities at the end of the
lease terms at an amount related to the fair market value of the facility at
the time the option is exercised.
The Company also rents office space and office equipment under
non-cancelable operating leases.
On April 25, 1995, the Company entered into a twenty-year operating lease
relating to the construction and lease of approximately 107,000 square feet of
corporate office space. The lease agreement provides for an annual base lease
rate of approximately $1,800,000, adjusted annually for inflation. In addition
to the base lease rate, the Company will pay certain building operating costs.
The lease term began in July 1996 upon completion of the office building.
Future minimum lease commitments for all non-cancelable operating leases
as of December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- ------------------------
<S> <C>
1997......................... $ 11,944
1998......................... 11,499
1999......................... 10,179
2000......................... 9,665
2001......................... 9,414
Thereafter................... 53,932
--------
Total minimum lease payments $106,633
========
</TABLE>
F-13.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. INCOME TAXES
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Current income tax expense:
Federal.......................... $2,629 $7,382 $10,425
State............................ 295 1,053 457
------ ------ -------
Total current income tax
expense....................... 2,924 8,435 10,882
Deferred income tax expense....... 493 1,154 2,482
------ ------ -------
Total provision for income
taxes......................... $3,417 $9,589 $13,364
====== ====== =======
</TABLE>
A reconciliation of the provision for income taxes to the federal
statutory rate of 35% in 1994, 1995 and 1996, is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1994 1995 1996
----------- -------------- --------------
<S> <C> <C> <C>
Tax at statutory rate.............. $5,085 $7,275 $12,640
Surtax exemption................... (100) -- --
State taxes, net of federal
benefit.......................... 609 793 410
Goodwill amortization.............. 224 262 423
Merger costs....................... -- 1,561 --
Other.............................. 211 425 100
Change in valuation reserve........ (2,612) (727) (209)
------- ------ -------
$ 3,417 $9,589 $13,364
======= ====== =======
</TABLE>
The tax effects of temporary differences and carryforwards that give rise
to significant portions of deferred tax assets (liabilities) consist of the
following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996
-------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss
carryforwards................. $ 1,311 $ 458
Asset valuation allowances...... 2,985 4,610
Intangible assets............... 998 816
Accrued liabilities............. 6,009 5,041
Other........................... 78 776
------- -------
Gross deferred assets........... 11,381 11,701
Valuation allowance............. (2,090) (1,881)
------- -------
9,291 9,820
Deferred tax liabilities:
Depreciation.................... (5,672) (5,964)
Deferred revenue................ (710) (2,125)
Intangible asset................ (794) (1,833)
Cash-to-accrual................. (431) (168)
Other........................... (160) (223)
------- -------
$ 1,524 $ (493)
======= =======
</TABLE>
At December 31, 1996, the Company had available net operating loss
carryforwards of approximately $1,206,000 for income tax purposes. The net
operating loss carryforwards expire beginning in 2005 through 2008. Because of
changes in ownership of the Company, the annual utilization of these losses in
the future may be limited.
F-14.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCKHOLDERS' EQUITY
On May 25, 1994, the Company effected a one-for-three reverse stock split
on the Company's outstanding common stock. All share and per share amounts
have been restated to reflect the reverse stock split for all periods
presented.
Upon consummation of the initial public offering, each outstanding share
of Series A, B, C, and D preferred stock converted into .333333 shares of
common stock and each share of Series E preferred stock converted into one
share of common stock. (See Note 5.) In addition, upon conversion of the
preferred stock into common stock, outstanding warrants to purchase preferred
stock converted into warrants to purchase common stock exercisable over the
remaining term of the preferred stock warrant at an exercise price equal to the
exercise price per share under the preferred stock warrant, as adjusted for the
reverse stock split.
The Board of Directors has the authority to issue up to 5,000,000 shares
of preferred stock in one or more series and to fix the rights, qualifications,
preferences, privileges, limitations or restrictions of each such series.
The Company has reserved a total of 5,522,000 common shares for future
issuance upon exercise of stock warrants and stock options.
The Company has issued warrants to purchase 190,450 shares of its common
stock at prices ranging from $4.90 to $12.00 per share, which in management's
opinion, equaled or exceeded the fair market value of the stock at the date of
issuance. At December 31, 1996, warrants to purchase 78,925 shares of common
stock were outstanding. The warrants expire through July 2004.
On April 25, 1996, the Board of Directors adopted an Employee Stock
Purchase Plan (the "Purchase Plan") and reserved 1,000,000 shares of common
stock for future issuance. As of December 31, 1996, the company has not
implemented the Purchase Plan.
12. STOCKHOLDERS' RIGHTS PLAN
On July 27, 1995, the Company's Board of Directors adopted a Stockholders'
Rights Plan (the "Rights Plan"). In conjunction with the Rights Plan, the
Board of Directors declared a dividend of one right ("Right") to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock on
each share of common stock. Under the terms of the Rights Plan, the Rights
become exercisable only if a person or group acquires 15% or more of the
Company's common stock or announces a Tender Offer that would result in
ownership by a person or group of 15% or more of the Company's common stock (an
"Acquiring Person"), subject to certain exceptions. Each Right has an exercise
price of $60.00 and, in certain circumstances, may become exercisable or
exchangeable for consideration. Each Right, following the time the Rights
become exercisable, may be redeemed for $0.01 at the option of the Board of
Directors. Subsequent to December 31, 1996, the Company amended the Rights
Agreement to provide that Vencor, Inc. and its affiliates shall not be deemed
to be an Acquiring Person. (See Note 17.)
13. STOCK OPTION PLANS
On April 25, 1996, the Board of Directors adopted the 1996 Stock
Option/Stock Issuance Plan (the "1996 Plan") and reserved 2,000,000 shares of
common stock for issuance over the ten-year term of the 1996 Plan. This share
reserve will automatically increase on the first trading day of each calendar
year, beginning with the 1997 calendar year, by an amount equal to 2% of the
total number of shares of common stock outstanding on the last trading day of
the immediately preceding calendar year. In no event may any one participant
in the 1996 Plan be granted stock options, separately exercisable stock
appreciation rights or direct stock issuances for more than 750,000 shares in
the aggregate under the 1996 Plan per calendar year.
The 1996 Plan contains three separate equity incentive programs: (i) a
Discretionary Option Grant Program (the "Discretionary Program"); (ii) a Stock
Issuance Program; and (iii) an Automatic Option Grant Program. The
Discretionary Program and the Stock Issuance Program are administered by the
Compensation Committee of the Board (the "Committee"). The Committee has
complete discretion (subject to the provisions of the 1996 Plan) to determine
the terms of each grant. However, all grants under the Automatic Option Grant
Program are made in strict compliance with the provisions of that program.
F-15.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLANS -- (CONTINUED)
The exercise price per share of options granted under the Discretionary
Program may not be less than 100% of the fair market value of such shares at
the date of grant and the term of the options may not exceed ten years.
The purchase price of shares issued under the Stock Issuance Program may
not be less than 100% of the fair market value of such shares at the time of
issuance. Shares issued as a bonus for past services are vested upon issuance.
All other shares issued under the program are subject to a vesting schedule
tied to the performance of service or the attainment of performance goals.
During 1996, the Committee has generally granted options with
service-based options to vest over four years.
On March 3, 1994, the Board of Directors adopted the 1994 Stock
Option/Stock Issuance Plan (the "1994 Plan"). The 1994 Plan replaced the 1990
Stock Option Plan and became effective upon registration of the Company's
outstanding common stock under the Securities Exchange Act of 1933. All
outstanding options under the 1990 Stock Option Plan have been incorporated
into the 1994 Plan as of its effective date. Under the 1994 Plan, the Company
is authorized to issue up to 4,495,467 Shares of common stock to employees,
consultants and independent contractors. The purchase price of the shares
subject to incentive options granted will not be less than 100% of the fair
market value of such shares at the date of grant. The purchase price of shares
subject to non-qualified options granted will not be less than 85% of the fair
market value of such shares at the date of grant. The Plan is administered by
the Committee, which has the authority to determine the terms of each grant.
The Committee generally has granted options with either service-based vesting
or performance-based vesting. Service-based options generally vest over four
years. The performance-based options provide for vesting at the end of seven
years, with accelerated vesting over a five-year period if certain earnings
targets are achieved. The options have a term of ten years.
In connection with the acquisition of PersonaCare, the Company assumed the
PersonaCare, Inc. 1992 Stock Option Plan (the "PersonaCare Plan"). Immediately
following the acquisition, 54,863 Shares of the Company's common stock were
subject to the outstanding options assumed under the PersonaCare Plan. In
connection with the merger with Helian, TheraTx assumed the Helian Health
Group, Inc. 1989 Stock Option Plan (the "Helian Plan"). Immediately following
the acquisition, 237,683 shares of the Company's common stock were subject to
the outstanding options assumed under the Helian Plan. All of the assumed
options under the PersonaCare and Helian Plans accelerated automatically upon
consummation of the respective mergers and are now fully exercisable for vested
shares of the Company's common stock. No further option grants will be made
under either plan other than in connection with any regrant or repricing
programs that the Compensation Committee of the Company's Board of Directors
may authorize.
Effective May 30, 1996, the Committee approved a plan to reprice certain
options granted to employees pursuant to the 1994 Stock Option Plan. The
options were repriced effective May 30, 1996. Options originally priced from
$16.25 to $21.50 per share were repriced at $14.38 per share, the closing
market price of the common stock on May 30, 1996. Each of the repriced
options, whether vested or not vested, cannot be exercised for a period of one
year ending May 30, 1997, unless certain events defined under the 1994 Plan
occurred. At May 30, 1996, options to purchase a total of 242,000 shares of
common stock were repriced, of which approximately 58,000 were fully vested
prior to repricing.
Also, on May 30, 1996, the Committee approved a change to the 1994 Plan
providing for performance-based options to become service-based options at that
date, with vesting to occur over a period of four years. At May 30, 1996,
1,200,000 performance-based options were exchanged for service-based options.
F-16.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLANS -- (CONTINUED)
Following is a summary of stock option plan activity:
<TABLE>
<CAPTION>
SHARES UNDER WEIGHTED
OPTION EXERCISE PRICES AVERAGE PRICE
------ --------------- -------------
<S> <C> <C> <C>
Outstanding at January 1, 1994.. 717,055 .09 -- 18.95 6.36
Granted........................ 1,419,170 4.50 -- 21.50 14.42
Exercised...................... (148,568) .09 -- 7.50 0.85
Forfeited...................... (205,362) .12 -- 18.95 13.49
---------
Outstanding at December 31, 1994 1,782,295 .09 -- 21.50 12.16
Granted........................ 2,087,639 8.36 -- 18.25 16.69
Exercised...................... (183,340) .09 -- 12.13 1.82
Forfeited...................... (173,762) .15 -- 18.26 14.73
---------
Outstanding at December 31, 1995 3,512,832 .09 -- 21.50 14.45
Granted........................ 1,224,434 10.00 -- 16.69 13.84
Exercised...................... (133,493) .15 -- 16.25 9.47
Forfeited...................... (200,246) .15 -- 21.50 14.91
---------
Outstanding at December 31, 1996 4,403,527 .09 -- 21.50 14.83
=========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------- -----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ---------------------- ----------------- -------------- ----------- --------------- ------------
<S> <C> <C> <C> <C> <C>
.09 -- .48 75,221 5.8 .43 70,559 .42
3.75 -- 8.92 253,725 7.5 6.22 159,588 5.69
11.00 -- 16.69 2,337,077 8.5 13.66 594,878 13.15
18.25 -- 21.50 1,737,504 8.0 18.26 201,515 18.31
--------- --- ----- --------- -----
4,403,527 8.2 14.83 1,206,540 12.12
========= === ===== ========= =====
</TABLE>
In January 1996, the Company adopted FASB Statement No. 123, Accounting
for Stock-Based Compensation. Under Statement No. 123, the Company may
continue following existing accounting rules or adopt a new fair value method
of valuing stock-based awards. The Company has elected to continue to follow
APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its employee stock options and not
adopt the alternative fair value method of accounting provided under Statement
No. 123. Under APB 25, because the exercise price of the Company's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for both 1995 and 1996: risk free interest rates of 5.36% to 7.05%
depending on the date of grant; a dividend yield of 0%; volatility factors of
the expected market price of the Company's common stock of 0.507; and a
weighted-average expected life of the option of five years.
F-17.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. STOCK OPTION PLANS -- (CONTINUED)
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except for earnings per
share information):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Pro forma net income............... $7,758 $16,148
Pro forma earnings per share....... 0.38 0.79
</TABLE>
The weighted-average fair value of options granted during 1995 and 1996 is
$8.86 and $6.33, respectively. Because Statement 123 is applicable only to
options granted subsequent to December 31, 1994, its pro forma effect will not
be fully reflected until 1999.
14. RETIREMENT PLAN
The Company has a defined contribution 401(k) plan. The plan is for the
benefit of generally all employees and permits voluntary employee contributions
and Company profit sharing contributions. The Company contributed $104,000,
$355,000, and $522,000 to the plan for the years ended December 31, 1994, 1995
and 1996, respectively.
15. COMMITMENTS AND CONTINGENCIES
The Company maintains professional liability coverage on an occurrence
basis. The policy covers claims made up to $1,000,000 per incident, subject to
an aggregate limit of $3,000,000. In addition, the Company maintains
claims-made basis professional liability coverage for certain physicians and
facilities. The claims-made basis policies cover claims up to $1,000,000 per
incident, subject to an aggregate limit of $3,000,000. Management intends to
renew the existing or similar policies annually and expects to be able to
obtain reasonable coverage.
16. MAJOR CUSTOMERS
The Company had one major customer representing 12.5% of net revenues in
1994. In 1995 and 1996, the Company had no major customers that represented
10% or more of net revenues.
17. SUBSEQUENT EVENTS
Effective January 31, 1997, the Company closed an ambulatory surgery
center located in Northridge, California. The surgery center was owned by a
limited partnership in which the Company holds a 48.8% ownership interest and
serves as the general partner. The Company also served as the manager of the
surgery center under a management agreement. The Company recorded charges in
connection with the write-off of certain assets and the direct costs related to
the closure of the facility. The surgery center was acquired in the Helian
merger dated December 28, 1995, which was accounted for as a pooling of
interests. As required by APB 16, Business Combinations, the loss on the
closure totaling $1.8 million has been reported as an extraordinary item, net
of income taxes of $666,000, in 1996 based on the following; (i) the 1995
operating loss incurred by the surgery center is significant to the 1995
operating results of the former Helian business, (ii) the loss on the closure
is material in relation to the 1996 operating performance of the former Helian
business and (iii) the surgery center operations were discontinued within two
years of the effective date of the Helian merger.
On February 9, 1997, the Company entered into an Agreement and Plan of
Merger with Vencor, Inc. ("Vencor") and Peach Acquisition Corp., a wholly owned
subsidiary of Vencor ("Peach"), pursuant to which Peach commenced a tender
offer on February 14, 1997 to purchase all of the outstanding shares of the
Company's common stock and the associated rights to purchase Series A Junior
Participating Stock at a cash price of $17.10 per share (the "Tender Offer").
The Tender Offer expired on March 18, 1997 and Vencor purchased approximately
99% of the outstanding shares of the Company's common stock at that time.
Following the merger which was effective March 21, 1997, the Company became a
wholly-owned subsidiary of Vencor. The shares of common stock that were not
acquired in the Tender Offer have been converted into the right to receive
$17.10 per share in cash.
As a result of the merger with Vencor, pursuant to the terms of the
convertible subordinated notes, the Company is required to offer to repurchase
the notes for 100% of the principal amount, together with accrued interest,
within fifteen days after the expiration of the Tender Offer.
F-18.
<PAGE>
THERATX, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. SUBSEQUENT EVENTS -- (CONTINUED)
Additionally, in conjunction with the merger with Vencor, the Company
entered into a note payable to Vencor upon demand (the "Vencor Note").
Advances under the Vencor Note are to be used to repay existing debt and to
fund working capital requirements, purchases of property and equipment,
acquisitions and general corporate requirements. On March 18, 1997, all
borrowings under the Senior Credit Facility were repaid and the Senior Credit
Facility was terminated. The Company also repaid approximately $1.3 million in
debt outstanding. As of March 21, 1997, approximately $95 million was
outstanding under the Vencor Note.
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended December 31, 1995 and 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
1995 1996
----------------------------------- -----------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
----------------------------------- -----------------------------------
MAR. 31 JUN. 30 SEPT. 30 DEC. 31 MAR. 31 JUN. 30 SEPT. 30 DEC. 31
------- ------- -------- ------- ------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues........................ $59,500 $81,466 $84,609 $88,601 $93,324 $95,859 $99,417 102,555
Income from operations.............. 5,995 8,064 11,002 5,614 11,663 11,844 12,822 12,250
Income before income taxes,
minority interest, and
extraordinary item................. 4,931 5,324 8,288 2,230 8,634 9,137 9,560 8,785
Income before extraordinary item.... 2,926 2,908 5,108 315 5,324 5,807 6,066 5,520
Net income.......................... 2,926 2,480 5,108 315 5,324 5,807 6,066 4,386
Earnings per common share:
Income, before extraordinary
item............................. 0.15 0.14 0.25 0.02 0.26 0.28 0.29 0.27
Net income........................ $ 0.15 $ 0.12 $ 0.25 $ 0.02 $ 0.26 $ 0.28 $ 0.29 $ 0.21
Weighted average shares
outstanding........................ 19,598 20,708 20,651 20,711 20,689 20,963 21,222 20,600
</TABLE>
Amounts for the quarter ended March 31, 1995 have been restated to include
Helian and RCS. The quarters ending June 30 and September 30, 1995 include the
operations of RCS as reported and have been restated to include Helian. The
five quarters ended December 31, 1996 include RCS and Helian as reported.
F-19.
<PAGE>
SCHEDULE II
THERATX, INCORPORATED AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
ADDITIONS
---------------------
OTHER
BALANCE AT CHARGED TO ADDITIONS DEDUCTIONS BALANCE AT
BEGINNING COSTS AND -- -- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
- ----------- ---------- ---------- --------- -------------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1996:
Deducted from asset accounts:
Allowance for doubtful accounts............ $ 5,449 $3,571 $ 196 (A) $(1,449) (C) $ 7,767
Allowance for denials...................... 2,575 1,753 126 (B) -- 4,454
Valuation allowance for deferred tax assets 2,090 -- -- (209) (D) 1,881
------- ------ ------ ------- -------
Total..................................... $10,114 $5,324 $ 322 $(1,658) $14,102
======= ====== ====== ======= =======
Year Ended December 31, 1995:
Deducted from asset accounts:
Allowance for doubtful accounts............ $ 4,360 $3,221 $ 25 (A) $(2,157) (C) $ 5,449
Allowance for denials...................... 1,372 1,406 -- (203) (C) 2,575
Valuation allowance for deferred tax assets 2,817 -- -- (727) (D) 2,090
------- ------ ------ ------- -------
Total..................................... $ 8,549 $4,627 $ 25 $(3,087) $10,114
======= ====== ====== ======= =======
Year Ended December 31, 1994:
Deducted from asset accounts:
Allowance for doubtful accounts............ $ 2,810 $4,653 $ 673 (A) $(3,776) (C) $ 4,360
Allowance for denials...................... 561 843 -- (32) (C) 1,372
Valuation allowance for deferred tax assets 3,338 -- 2,091 (A) (2,612) (D) 2,817
------- ------ ------ ------- -------
Total..................................... $ 6,709 $5,496 $2,764 $(6,420) $ 8,549
======= ====== ====== ======= =======
</TABLE>
(A) Balances recorded in connection with acquisitions.
(B) Amounts recovered from previous write-offs.
(C) Uncollectable accounts written off.
(D) Reduction in valuation allowance, increasing net deferred tax assets.
S-1
<PAGE>
EXHIBIT 4.2
THERATX, INCORPORATED
AND
STATE STREET BANK AND TRUST COMPANY
Trustee
-----------------------------------------------------
FIRST SUPPLEMENTAL INDENTURE
Dated as of March 21, 1997
-----------------------------------------------------
8% Convertible Subordinated Notes due 2002
-----------------------------------------------------
Supplementing the Indenture Dated
as of February 15, 1995 between Theratx, Incorporated
and The First National Bank of Boston, Trustee
<PAGE>
FIRST SUPPLEMENTAL INDENTURE (the "First Supplemental Indenture"), dated
as of March 21, 1997 between Theratx, Incorporated, a corporation duly
organized and existing under the laws of the State of Delaware (the "Company"),
and State Street Bank and Trust Company, a Massachussets Banking corporation,
as Successor Trustee (the "Trustee").
WITNESSETH:
WHEREAS, the Company has heretofore made, executed and delivered to the
Trustee an Indenture, dated as of February 15, 1995 (the "Indenture"), between
the Company and the Trustee, providing for the issuance of up to $100,000,000
aggregate principal amount of 8% Convertible Subordinated Notes due 2002 (the
"Notes");
WHEREAS, the Company has heretofore issued $100,000,000 aggregate
principal amount of the Notes through a private placement on February 16, 1995;
WHEREAS, pursuant to the Agreement and Plan of Merger, dated as of
February 9, 1997 (,as amended by Amendment No. 1 thereto dated as of February
28, 1997, the "Merger Agreement"), among the Company, Vencor, Inc., a Delaware
Corporation ("Purchaser") and Peach Acquisition Corp., a Delaware corporation
and a wholly-owned subsidiary of Purchaser ("Merger Sub"), Purchaser and Merger
Sub agreed to commence and did commence a tender offer (the "Offer") for all of
the issued and outstanding common stock, par value $.001 per share (the "Common
Stock") of the Company.
<PAGE>
WHEREAS, the Merger Agreement provides that following consummation of the
Offer, Merger Sub is to be merged (the "Merger") with and into the Company
effective as of the time that a Certificate of Ownership and Merger is filed
with the Secretary of State of Delaware (the "Effective Time"), with the Company
being the surviving corporation in the Merger (sometimes hereinafter referred to
as the "Surviving Corporation").
WHEREAS, the Merger occurred on 21, 1997.
WHEREAS, Section 15.6 of the Indenture provides that if the Company is a
party to a consolidation, merger or transfer with another corporation as a
result of which holders of Common Stock are entitled to receive securities,
cash or other assets in exchange for their Common Stock, the corporation which
would be obligated to deliver securities, cash or other assets upon conversion
of the Notes shall enter into a supplemental indenture to the Indenture
providing that the holder of a Note may convert such Note into the kind and
amount of securities, cash or other assets such holder of a Note would have
owned immediately after the consolidation, merger or transfer if such holder of
a Note had converted the Note into Common Stock immediately before the
effective date of such consolidation, merger or transfer.
WHEREAS, Section 11.1(a) of the Indenture provides that the Company, when
authorized by a resolution of its Board of Directors, and the Trustee may,
without the consent
<PAGE>
of any holders of the Notes, enter into an indenture supplemental to the
Indenture to make provisions with respect to the conversion rights of the
holders of the Notes pursuant to the requirements of Section 15.6;
WHEREAS, the Surviving Corporation is executing and delivering to the
Trustee this First Supplemental Indenture in accordance with the provisions of
Sections 11.1 and 15.6 of the Indenture; and
WHEREAS, all acts and things necessary to make this First Supplemental
Indenture a valid, binding and legal agreement according to its terms have been
done and performed, and the execution of this First Supplemental Indenture has
in all respects been duly authorized.
NOW, THEREFORE, in consideration of the premises contained herein and in
the Indenture and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Surviving Corporation and the
Trustee hereby agree for the equal and proportionate benefit of the respective
holders from time to time of the Notes, as follows:
Section 1. Pursuant to Section 15.6 of the Indenture, the Surviving
Corporation hereby agrees that the holder of a Note may convert such
Note into the amount of securities, cash or other assets of the Surviving
Corporation that such holder would have owned immediately after the Merger if
such holder had converted such Note into Common Stock immediately before the
Effective Time.
<PAGE>
Section 2. In case any provision in this First Supplemental Indenture
shall be invalid, illegal or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
Section 3. Nothing in this First Supplemental Indenture, express or
implied, shall give to any person, other than the parties hereto and their
successors under the Indenture and the holders of the Notes, any benefit or any
legal or equitable right, remedy or claim under the Indenture.
Section 4. THIS FIRST SUPPLEMENTAL INDENTURE SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK AS APPLIED TO
CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
Section 5. This First Supplemental Indenture supplements the Indenture and
shall be a part and subject to all the terms thereof. Except as
supplemented hereby, the Indenture and all documents executed in connection
therewith shall continue in full force and effect and shall remain enforceable
and binding in accordance with their respective terms.
Section 6. This First Supplemental Indenture may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original,
but all such
<PAGE>
counterparts shall together constitute but one and the same instrument.
Section 7. The parties hereto will execute and deliver such further
instruments and do such further acts and things as may be reasonably required
to carry out the intent and purpose of this First Supplemental Indenture.
Section 8. All agreements of the Surviving Corporation in this First
Supplemental Indenture shall bind its successor. All agreements of the Trustee
in this First Supplemental Indenture shall bind its successor.
Section 9. If any provision of this First Supplemental Indenture limits,
qualifies or conflicts with another provision which is required to be included
in this First Supplemental Indenture by the Trust Indenture Act of 1939, as
amended, the required provision shall control.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed as of the day and year first above written.
THERATX, INCORPORATED
By: /s/ John A. Bardis
--------------------------------
Name: John A. Bardis
Title: President and CEO
ATTEST: /s/ Jonathan H. Glenn
--------------------------
Sworn to before me this
18th day of March, 1997.
/s/ Sharon Yeager
- ---------------------------------
Sharon Yeager, Notary Public
STATE STREET BANK AND TRUST COMPANY
By: /s/ James E. Mogavaro
--------------------------------
Name: James E. Mogavaro
Title: Assistant Vice President
ATTEST: Henry W. Seemore
Sworn to before me this
18th day of March, 1997.
/s/ Henry W. Seemore
- ---------------------------------
<PAGE>
EXHIBIT 11.1
THERATX, INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
----------- ------------ ---------
<S> <C> <C> <C>
PRIMARY
Weighted average common stock outstanding during the period........ 12,498 19,983 20,544
Cheap stock (1).................................................... 99 -- --
Dilutive effect of common stock equivalents (2).................... 3,375 424 --
------- ------- -------
Total........................................................... 15,972 20,407 20,544
======= ======= =======
Income before extraordinary item.................................... $11,593 $11,257 $22,717
Extraordinary item.................................................. -- (428) (1,134)
------- ------- -------
Net income.......................................................... $11,593 $10,829 $21,583
======= ======= =======
Earnings per share:
Income before extraordinary item................................... $ 0.73 $ 0.55 $1.11
Extraordinary item................................................. -- (0.02) (0.06)
------- ------- -------
Net income......................................................... $ 0.73 $ 0.53 $ 1.05
======= ======= =======
FULLY DILUTED
Weighted average common stock outstanding during the period........ 12,499 19,983 20,544
Cheap stock (1).................................................... 99 -- --
Dilutive effect of common stock equivalents (2).................... 3,498 428 --
------- ------- -------
Total........................................................... 16,096 20,411 20,544
======= ======= =======
Income before extraordinary item.................................... $11,593 $11,257 $22,717
Extraordinary item -- loss on early retirement of debt, net of taxes -- (428) (1,134)
------- ------- -------
Net income.......................................................... $11,593 $10,829 $21,583
======= ======= =======
Earnings per share:
Income before extraordinary item................................... $ 0.73 $ 0.55 $1.11
Extraordinary item................................................. -- (0.02) (0.06)
------- ------- -------
Net income......................................................... $ 0.73 $ 0.53 $ 1.05
======= ======= =======
</TABLE>
(1) Pursuant to Securities and Exchange Commission Accounting Bulletin No.
83, common stock and common stock equivalents issued at prices below the
assumed initial public offering price per share ("cheap stock") during the
twelve month period immediately preceding the initial filing date of the
Company's Registration Statement for its public offering have been
included as outstanding for all periods presented prior to the initial
public offering.
(2) In 1996, the weighted average common equivalent shares outstanding were
computed using the "modified treasury stock method" in accordance with
Accounting Principles Board Opinion No. 15 ("APB 15"). The modified
treasury stock method is used when the number of shares obtainable upon
exercise of outstanding options, warrants and their equivalents, in the
aggregate, exceeds 20% of the Company's outstanding common stock. Under
this method, all options, warrants and their equivalents are assumed to
have been exercised, whether or not dilutive and the aggregate proceeds
used to repurchase up to 20% of the outstanding shares. Excess proceeds
not utilized for the purchase of such shares are assumed to be utilized to
reduce outstanding debt with any remainder invested in interest bearing
securities. Net earnings is increased for the assumed interest savings or
interest income, net of taxes. For the fiscal year ending December 31,
1996, the effects of the application of the modified treasury stock method
were anti-dilutive; thus, as prescribed by APB 15, common equivalent
shares were excluded in determining net income per common share.
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-15171) pertaining to TheraTx, Incorporated 1996 Stock
Option/Stock Issuance Plan and Employee Stock Purchase Plan, the Registration
Statement (Form S-8 No. 33-84284) pertaining to the TheraTx, Incorporated 1994
Stock Option/Stock Issuance Plan and the PersonaCare, Inc. 1992 Stock Option
Plan, the Registration Statement (Form S-8 No. 33-97254) pertaining to the
TheraTx, Incorporated 1994 Stock Option/Stock Issuance Plan, the Registration
Statement (Form S-8 No. 333-1608) pertaining to the Helian Health Group, Inc.
Amended and Restated 1989 Stock Option Plan and the Registration Statement
(Form S-3 No. 33-97740) for the registration of 836,216 shares of TheraTx,
Incorporated common stock of our report dated March 21, 1997, with respect to
the consolidated financial statements and schedule of TheraTx, Incorporated and
Subsidiaries included in the Annual Report (Form 10-K) for the year ended
December 31, 1996.
Atlanta, Georgia ERNST & YOUNG LLP
April 9, 1997
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
TheraTx, Inc. on Form S-8 (File No.'s 333-15171, 33-84284, 33-97254 and
333-1608) and the registration statement on Form S-3 (File No. 33-97740) of our
report dated February 3, 1995 on our audit of the consolidated financial
statements and financial statement schedule of Helian Health Group, Inc. and
subsidiaries as of November 30, 1994, and for the year then ended, which report
is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Jose, California
April 9, 1997
<PAGE>
Financial Data Schedule
ARTICLE 5
TABLE
PERIOD-TYPE YEAR
FISCAL-YEAR-END DEC-31-1996
PERIOD-START JAN-01-1996
PERIOD-END DEC-31-1996
CASH 10,708
SECURITIES 0
RECEIVABLES 115,456
ALLOWANCES 12,221
INVENTORY 5,977
CURRENT-ASSETS 147,818
PP&E 146,713
DEPRECIATION 21,061
TOTAL-ASSETS 385,322
CURRENT-LIABILITIES 39,267
BONDS 0
PREFERRED-MANDATORY 0
PREFERRED 0
COMMON 20
OTHER-SE 162,374
TOTAL-LIABILITY-AND-EQUITY 385,322
SALES 20,528
TOTAL-REVENUES 391,155
CGS 16,613
TOTAL-COSTS 280,800
OTHER-EXPENSES 61,776
LOSS-PROVISION 5,324
INTEREST-EXPENSE 12,463
INCOME-PRETAX 36,116
INCOME-TAX 13,364
INCOME-CONTINUING 22,717
DISCONTINUED 0
EXTRAORDINARY 1,134
CHANGES 0
NET-INCOME 21,583
EPS-PRIMARY 1.05
EPS-DILUTED 1.05
<PAGE>
CONSENT LETTER
THERATX, INCORPORATED
8% CONVERTIBLE SUBORDINATED NOTES DUE 2002
To: D.F. King & Co., Inc.,
as Tabulation Agent
77 Water Street
New York, New York 10005
Attention: Thomas Germinario
Telephone: (800) 755-3105 (for confirmation of
facsimiles)
Fax: (212) 809-8839
THIS CONSENT LETTER SHOULD BE PROMPTLY DELIVERED TO D.F. KING & CO.,
INC., AS TABULATION AGENT. IN NO EVENT SHOULD A NOTEHOLDER (AS DEFINED BELOW)
DELIVER ANY NOTES IN CONNECTION WITH THIS CONSENT LETTER. A NOTEHOLDER MAY, IF
SUCH NOTEHOLDER SO CHOOSES, DELIVER NOTES IN CONNECTION WITH THE REPURCHASE
RIGHT DESCRIBED IN THE NOTICE OF REPURCHASE RIGHT AND DESIGNATED EVENT, DATED
MARCH 31, 1997, WHICH WAS MAILED SEPARATELY TO HOLDERS OF NOTES ON THE DATE OF
SUCH NOTICE.
The Consent Solicitation is made by THERATX, INCORPORATED. The Consent
Solicitation is made only to Noteholders of the Company's 8% Convertible
Subordinated Notes Due 2002 (the "Notes"), as described in the accompanying
Consent Solicitation Statement dated April 24, 1997 (the "Consent Solicitation
Statement"). The term "Noteholder" as used herein meanS (i) any person in whose
name Notes are registered as of the close of business on April 17, 1997 (the
"Record Date") in the register maintained by the Trustee, (ii) a beneficial
owner who has arranged for the registered Noteholder to execute a Consent Letter
and either deliver it to the Tabulation Agent, on such beneficial owner's
behalf, or send it to such beneficial owner for forwarding to the Tabulation
Agent, or (iii) a beneficial owner of Notes who has obtained a duly executed
proxy ("Proxy") substantially in the form set forth in this Consent Letter which
authorizes such person (or any other person claiming authority by or through
such person) to execute and deliver a Consent Letter with respect to the Notes
on behalf of the registered Noteholder. Capitalized terms used but not defined
herein have the meanings given to them in the Consent Solicitation Statement.
The terms of the Solicitation set forth in the Consent Solicitation Statement
under the caption "THE SOLICITATION," as well as the instructions set forth
following the space for signatures in this Consent Letter, are hereby
incorporated herein by reference and form part of the terms and conditions of
this Consent Letter.
NOTEHOLDERS WHO ARE NOT REGISTERED NOTEHOLDERS OF NOTES WITH RESPECT TO
WHICH A CONSENT LETTER IS DELIVERED MUST (I) OBTAIN AN EXECUTED PROXY
SUBSTANTIALLY IN THE FORM ATTACHED TO THIS CONSENT LETTER FROM THE REGISTERED
NOTEHOLDERS OF SUCH NOTES AND DELIVER SUCH PROXY TO THE TABULATION AGENT WITH
THE EXECUTED CONSENT LETTER OR (II) ARRANGE FOR SUCH REGISTERED NOTEHOLDER TO
EXECUTE A CONSENT LETTER AND DELIVER SUCH EXECUTED CONSENT LETTER EITHER TO THE
TABULATION AGENT OR TO SUCH BENEFICIAL OWNER FOR FORWARDING TO
-1-
<PAGE>
THE TABULATION AGENT. SEE INSTRUCTION 3 SET FORTH FOLLOWING THE SPACE FOR
SIGNATURES IN THIS CONSENT LETTER.
THIS CONSENT LETTER IS TO BE COMPLETED ON PAGES TWO AND FOUR AND
EXECUTED ON PAGE FIVE.
By execution hereof, the undersigned acknowledges receipt of the
Consent Solicitation Statement. The undersigned hereby takes the action with
respect to the Amendment described below and in the Consent Solicitation
Statement. The undersigned hereby represents and warrants that the undersigned
has full power and authority to give the Consent contained herein. The
undersigned will, upon request, execute and deliver any additional documents
deemed by the Company to be necessary or desirable to perfect the undersigned's
Consent or evidence such power and authority.
Please indicate by marking the appropriate box below whether you wish
to vote FOR the Amendment or AGAINST the Amendment. IF NEITHER OF THE BOXES IS
MARKED, BUT THIS CONSENT LETTER IS OTHERWISE PROPERLY COMPLETED AND SIGNED, YOU
WILL BE DEEMED TO HAVE VOTED FOR THE AMENDMENT. Please sign your name and fill
in the date on page five of this Consent Letter to evidence your vote on the
Amendment and to evidence the appointment of the Tabulation Agent as your agent
and attorney-in-fact for purposes of delivering this Consent Letter to the
Company. The undersigned acknowledges that it must comply with the other
provisions of this Consent Letter and complete the other information required
herein, to validly consent to the Amendment.
The Amendment would amend Section 6.4 of the Indenture so that the
obligation of TheraTx to file reports with the Trustee and transmit such reports
to the Noteholders will be terminated and replaced with an obligation of Vencor
to so file and so transmit reports of Vencor instead.
FOR |_| AGAINST |_|
The undersigned hereby irrevocably constitutes and appoints the
Tabulation Agent as its agent and attorney-in-fact (with full knowledge that the
Tabulation Agent also acts as the agent of the Company), with full power of
substitution, for purposes of delivering this Consent Letter to the Company. The
Power of Attorney granted in this paragraph shall be deemed irrevocable from and
after the Expiration Date and coupled with an interest.
The undersigned understands that a Consent Letter delivered pursuant to
any one of the procedures described under the caption "THE SOLICITATION--
Procedures for Consent" in the Consent Solicitation Statement and in the
instructions hereto will constitute a binding agreement between the undersigned
and the Company upon the terms and subject to the conditions of the Consent
Solicitation.
All authority conferred or agreed to be conferred by this Consent
Letter shall survive the death, incapacity, dissolution, or liquidation of the
undersigned and every obligation of the undersigned under this Consent Letter
shall be binding upon the undersigned's heirs, personal representatives,
successors and assigns.
-2-
<PAGE>
Unless otherwise specified in the table below, this Consent Letter
relates to the total principal amount of Notes held of record by the
undersigned. The undersigned has listed on the table below the serial numbers
and principal amount of Notes for which this Consent is given. If the space
provided below is inadequate, list all such information on a separate signed
schedule and affix the schedule to this Consent Letter.
-3-
<PAGE>
PLEASE COMPLETE THE FOLLOWING TABLE
<TABLE>
<CAPTION>
Principal Amount with
Respect to Which
Consents Are Given
Names(s) and (Complete only if Consents
Addresses of relate to less than entire
Registered Serial Aggregate Principal aggregate principal
Noteholder(s) Number(s)* Amount of Note(s) amount)**
<S> <C> <C> <C>
$ $
Total $ $
<FN>
____________________
* Need not be completed by holders whose Notes are held of record by
depositories.
** Unless otherwise indicated in the column labeled "Principal Amount With
Respect to Which Consents Are Given," the holder will be deemed to have
consented in respect of the entire aggregate principal amount represented by
the Notes indicated in the column labeled "Aggregate Principal Amount of
Note(s)."
</FN>
</TABLE>
_______________________________________________________________________________
SPECIAL PAYMENT INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
To be completed ONLY if To be completed ONLY if the
the check for the Consent Fee check for the Consent Fee is
is to be issued in the name of to be sent to someone OTHER
someone OTHER than the registered than the Registered Noteholder(s)
Noteholder(s). at the address of the registered
Noteholder(s) or, if the box
immediately to the left is filled
Issue check to: in, OTHER than the address
appearing therein.
Name:_____________________________ Deliver check to:
(Please Print)
Name:____________________________
(Please Print)
Address:__________________________
__________________________________ Address:_________________________
__________________________________ _________________________
(Include Zip Code)
_________________________
(Include Zip Code)
__________________________________
(Tax Identification or Social
Security Number)
_________________________
(Tax Identification or
Social Security Number)
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<PAGE>
IMPORTANT - READ CAREFULLY
This Consent Letter must be executed in exactly the same manner as
such Noteholder's name appears on the Notes. If Notes to which a Consent relates
are held of record by two or more joint Noteholders, all such Noteholders must
sign the Consent. If a Consent is signed by a trustee, partner, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, such person must so
indicate when signing and must submit with this Consent Letter appropriate
evidence of authority to execute the Consent. In addition, if a Consent relates
to less than the total principal amount of Notes registered in the name of such
Noteholder, the Noteholder must list the serial numbers and principal amount of
Notes registered in the name of such Noteholder to which the Consent relates. If
Notes are registered in different names, separate Consents must be executed
covering each form of registration. If this Consent Letter is executed by a
person other than the registered Noteholder as of the Record Date, then it must
be accompanied by the proxy set forth on this Consent Letter duly executed by
such registered Noteholder, with the signature guaranteed by a firm which (i) is
a member of a registered national securities exchange or member of the National
Association of Securities Dealers, Inc., or is a commercial bank or trust
company having an office in the United States and (ii) is a participant in an
authorized signature guarantee program confirming the right of the signatory to
execute the Consent Letter on behalf of the registered Noteholder, unless waived
by TheraTx.
SIGN HERE
_______________________________________________________________________________
Signature(s) of Noteholder(s)
_______________________________________________________________________________
Signature(s) of Noteholder(s)
Date:__________, 1997
Name(s):_______________________________________________________________________
(Please Print)
_______________________________________________________________________
(Please Print)
Capacity:______________________________________________________________________
Address:_______________________________________________________________________
(include Zip Code)
Area Code and Telephone No.:__________________
Tax Identification or Social Security No.:_____________________
GUARANTEE OF SIGNATURE(S)
(If required by the Consent Letter)
Authorized Signature:__________________________________________________________
Name:__________________________________________________________________________
(Please Print)
Address:_______________________________________________________________________
(Include Zip Code)
Name of Firm:__________________________________________________________________
Dated:___________, 1997
-5-
<PAGE>
IMPORTANT TAX INFORMATION
Under current Federal income tax law, a Noteholder who receives a
Consent Fee from the Company as consideration for such Noteholder's Consent in
favor of the Amendment is required by law to provide the Company with his or her
correct taxpayer identification number (i.e., social security number or employer
identification number) on Substitute Form W-9. If the Company is not provided
with the correct taxpayer identification number by such Noteholder, that
Noteholder may be subject to a $50 penalty imposed by the Internal Revenue
Service. In addition, delivery to such Noteholder of the Consent Fee may be
subject to backup withholding.
Certain Noteholders (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. In order for a foreign individual to qualify as an
exempt recipient, such Noteholder must generally submit a Form W-8, signed under
penalties of perjury, attesting to such individual's exempt status. A Form W-8
can be obtained from the Company. Noteholders are urged to consult their own tax
advisors to determine whether they are exempt from these backup withholding and
reporting requirements.
If backup withholding applies, the Company is required to withhold 31
percent of any Consent Fee made to such Noteholder. Backup withholding is not an
additional tax. Rather, the tax liability of persons subject to backup
withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of taxes, a refund may be obtained.
INSTRUCTIONS FOR HOLDERS
FORMING PART OF THE TERMS AND CONDITIONS OF THIS CONSENT LETTER
1. DELIVERY OF THIS CONSENT LETTER. Subject to the terms and conditions
of the Consent Solicitation, a properly completed and duly executed copy of this
Consent Letter, a Proxy (if applicable) substantially in the form set forth in
this Consent Letter, and any other documents required by this Consent Letter
must be received by the Tabulation Agent at its address or facsimile number
(faxes should be confirmed by physical delivery) set forth on the face of this
Consent Letter prior to 4:00 P.M., New York City time, on Wednesday, April 30,
1997, unless extended (the "Expiration Date"). Consents may be revoked at any
time up to, but will become irrevocable upon the receipt by the Trustee of the
Requisite Consent. To revoke a Consent, a written notice of revocation must be
timely received by the Tabulation Agent, acting on behalf of the Trustee, prior
to such time at its address set forth on the front page of this Consent Letter.
Notice of revocation of a Consent must contain the description of the Notes to
which it relates (including the certification number or numbers and principal
amount of such Notes) and be signed by the Noteholder in the same manner as the
Consent by which such Noteholder consented. Any Consent so revoked will be
deemed not to have been validly given for the purposes of the Solicitation and
no Consent Fee will be paid with respect thereto unless another Consent is
executed and delivered (and not likewise revoked) prior to the Expiration Date.
The method of delivery of this Consent Letter and all other required documents
to the Tabulation Agent is at the election and risk of the Noteholder and,
except as otherwise provided below, delivery will be deemed made only when
actually received by the Tabulation Agent. In all cases, sufficient time should
be allowed to assure timely delivery. Beneficial owners whose
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<PAGE>
Notes are registered in the name of someone other than such beneficial owner
(for example, in the name of The Depository Trust Company ("DTC") or the owner's
stockbroker) should ensure that the Consent Letter is forwarded to the
Tabulation Agent on a timely basis. No Consent Letter should be sent to any
person other than the Tabulation Agent.
2. QUESTIONS REGARDING VALIDITY, FORM, LEGALITY, ETC. The ownership of
registered Notes shall be proved by the register of the issue of the Notes or as
otherwise provided in the Indenture. The Trustee may require such additional
proof of execution or ownership as it deems necessary. All questions as to the
validity, form, eligibility (including time of receipt), revocations and
acceptance of Consents, and entitlement to the Consent Fee, will be resolved in
the first instance by the Company, whose determination will be binding subject
only to such final review as may be prescribed by the Trustee. The Company
reserves the absolute right to reject any or all Consents that are not in proper
form or the acceptance of which could, in the opinion of the Company's counsel,
be unlawful. The Company also reserves the right, subject only to such final
review as the Trustee prescribes, to waive any irregularities or conditions of
delivery as to any particular Consent. The Company's interpretation of the terms
and conditions of the Solicitation (including the instructions in the Consent)
will be final and binding. Unless waived, any irregularities in connection with
deliveries must be cured within such time as the Company determines. The
Company, the Information Agent, the Tabulation Agent and the Trustee will be
under no duty to give notification of any such irregularities or waiver and will
incur no liability for failure to give such notification. Deliveries of Consents
as to which irregularities exist will not be deemed to have been made until such
irregularities have been cured or waived.
3. HOLDERS ENTITLED TO CONSENT. Only a registered Noteholder as of the
Record Date (or his or her representative or attorney-in-fact acting pursuant to
a valid Proxy) or a beneficial owner who has complied with the procedures set
forth in the next sentence may execute and deliver a Consent. A beneficial owner
of a Note who is not the registered Noteholder of such Note (e.g., a beneficial
owner whose Notes are registered in the name of a nominee such as a brokerage
firm) must (i) arrange for the registered Noteholder to execute a Consent Letter
and deliver it either to the Tabulation Agent on such beneficial owner's behalf
or to such beneficial owner for forwarding to the Tabulation Agent by such
beneficial owner or (ii) obtain and forward a duly executed Proxy from the
registered Noteholder authorizing the beneficial owner to execute and deliver a
Consent Letter with respect to the Notes on behalf of such registered
Noteholder. This Consent by a registered Noteholder is a continuing consent
notwithstanding that registered ownership of a Note is transferred after the
date of this Consent Letter. Any Beneficial Owner of Notes held of record by DTC
or its nominee, through authority granted by DTC, may direct the participant in
DTC (a "DTC Participant") through which such beneficial owner's Notes are held
in DTC to execute, on such beneficial owner's behalf, or may obtain a proxy from
such DTC Prticipant and execute directly, as if such beneficial owner were a
registered Noteholder, a consent letter with respect to the Notes beneficially
owned by such beneficial owner on the Record Date. For purposes of the Consent
Solicitation and this Consent Letter, the term "record Noteholder" or
"registered Moteholder" shall be deemed to include DTC Participants.
4. SIGNATURES ON THIS CONSENT LETTER; PROXIES. Consents by the
Noteholders must be executed in exactly the same manner as such Noteholder's
name appears on the Notes. If Notes to which a Consent relates are held of
record by two or more joint Noteholders, all such Noteholders must sign the
Consent. If a Consent is signed
-7-
<PAGE>
by a trustee, partner, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or representative
capacity, such person must so indicate when signing and must submit with this
Consent Letter appropriate evidence of authority to execute the Consent. In
addition, if a Consent relates to less than the total principal amount of Notes
registered in the name of such Noteholder, the Noteholder must list the serial
numbers and principal amount of Notes registered in the name of such Noteholder
to which the Consent relates. If Notes are registered in different names,
separate Consents must be executed covering each form of registration. If this
Consent Letter is executed by a person other than the registered Noteholder as
of the Record Date, then it must be accompanied by the proxy set forth on this
Consent Letter duly executed by such registered Noteholder, with the signature
guaranteed by a firm which (i) is a member of a registered national securities
exchange or member of the National Association of Securities Dealers Inc., or
is a commercial bank or trust company having an office in the United States and
(ii) is a participant in an authorized signature guarantee program confirming
the right of the signatory to execute the Consent Letter on behalf of the
registered Noteholder, unless waived by TheraTx.
5. CONSENT FEE INSTRUCTIONS. Upon the terms and subject to the
conditions set forth in this Consent Letter and in the Consent Solicitation
Statement, the Company will, promptly following the Expiration Date, pay to each
Noteholder who delivers to the Company an Accepted Consent (as defined below) to
the approval of the Amendment a Consent Fee of $0.10 for each $1,000 in
aggregate principal amount of Notes in respect of which such Consent has been
delivered. An "Accepted Consent" is a properly completed and executed Consent
Letter that (a) is timely received by the Tabulation Agent and not thereafter
revoked as provided below and in the Consent Solicitation Statement, (b)
evidences a vote FOR the Amendment, and (c) is accepted by the Company in
accordance with the terms and subject to the conditions set forth in this
Consent Letter and in the Consent Solicitation Statement. Interest will not
accrue on any Consent Fee due to Consenting Noteholders. Please indicate on page
four of this Consent Letter to whom such payment should be made, if other than
the registered Noteholder(s) of the Notes.
6. REVOCATION OF CONSENT. Consents may be revoked at any time up to,
but will become irrevocable upon, the receipt by the Trustee of the Requisite
Consent. To revoke a Consent, a written notice of revocation must be timely
received by the Tabulation Agent, acting on behalf of the Trustee, prior to such
time at its address set forth on the front page of this Consent Letter. Notice
of revocation of a Consent must contain the description of the Notes to which it
relates (including the certification number or numbers and principal amount of
such Notes) and be signed by the Noteholder in the same manner as the Consent by
which such Noteholder consented.
7. EXTENSIONS; AMENDMENT; TERMINATION. The Solicitation is scheduled
to expire at 4:00 p.m., New York City time, on Wednesday, April 30, 1997.
However, if the Requisite Consent is not received by such time, the Company may
extend the Solicitation for a specific period or may continue to accept on a
daily basis in the order received Consents from Noteholders thereunder until the
date on which the Requisite Consent is obtained. Without limiting the manner in
which the Company may choose to make public announcement of any extension,
amendment or termination of the Solicitation, the Company shall have no
obligation to publish, advertise or otherwise communicate any such public
announcement, other than by making a timely release to the Dow Jones News
Service. The Company may, at any time prior to the Expiration Date determine in
its sole discretion, not to proceed with the Solicitation, in which case the
Amendment would not be made and no Consent Fee would be paid with respect
thereto, provided that the Requisite Consent thereunder has not been received.
-8-
<PAGE>
8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to
this Consent Letter or the terms and conditions of the Consent Solicitation may
be directed to the Information Agent or to your broker, dealer, commercial bank,
or trust company. Requests for additional copies of the Consent Solicitation
Statement and this form of Consent Letter may be directed toll free to D.F. King
& Co., Inc. at (800) 755-3105.
-9-
<PAGE>
FORM OF PROXY WITH RESPECT TO THE CONSENT SOLICITATION
THERATX, INCORPORATED
8% CONVERTIBLE SUBORDINATED NOTES DUE 2002
The undersigned hereby irrevocably appoints __________________________*
as attorney and proxy of the undersigned, with full power of substitution, to
execute and deliver the Consent Letter on which this form of proxy is set forth
with respect to the Notes in accordance with the terms of the Consent
Solicitation described in the Consent Solicitation Statement dated April 24,
1997, with all the power the undersigned would possess if consenting personally.
THIS PROXY IS IRREVOCABLE AND IS COUPLED WITH AN INTEREST. The aggregate
principal amount and serial numbers of Notes as to which this Proxy is given are
set forth below.
Aggregate Principal Amount of Note(s) Serial Number(s)
__________________________________________ _______________________________
IF THE NOTES ARE OWNED BY TWO OR MORE PERSONS, EACH SHOULD SIGN. EXECUTORS,
ADMINISTRATORS, TRUSTEES, GUARDIANS AND ATTORNEYS-IN-FACT SHOULD ADD THEIR
TITLE. IF A SIGNER IS A CORPORATION, PLEASE GIVE FULL CORPORATE NAME AND HAVE A
DULY AUTHORIZED OFFICER SIGN, STATING TITLE. IF A SIGNER IS A PARTNERSHIP OR
TRUST, PLEASE SIGN IN PARTNERSHIP OR TRUST NAME BY A DULY AUTHORIZED PERSON.
Signature(s) of Holder(s)
of Record:______________________________________
Name(s):________________________________________
Title:__________________________________________
Dated:_______, 1997
Signature of Holder
of Record:______________________________________
Name:___________________________________________
Title:__________________________________________
Dated:__________________________________________
GUARANTEE OF SIGNATURE(S)
(See Instruction 4)
Authorized Signature:__________________________________________________________
Name:__________________________________________________________________________
(Please Print)
Address:_______________________________________________________________________
(Include Zip Code)
Name of Firm:__________________________________________________________________
Dated:___________, 1997
________
* Insert name of beneficial owner.
-10-
<PAGE>
PAYER'S NAME: THERATX, INCORPORATED
SUBSTITUTE Part 1 -- PLEASE PROVIDE YOUR __________
FORM W-9 TIN IN THE BOX AT RIGHT AND Social Security
CERTIFY BY SIGNING AND DATING Number
BELOW OR
Please fill in ______________
your name and Employer
address below PART 2--CERTIFICATION--UNDER Identification
PENALTIES OF PERJURY, I Number
___________________ CERTIFY THAT:
Name PART 3--
(1) The number shown on this
form is my correct Taxpayer AWAITING TIN |_|
___________________ Identification Number (or
Address (number I am waiting for a number to
and street) be issued to me); and
(2) I am not subject to backup PART 4
___________________ withholding because (a) I am
City, State and exempt from backup withholding EXEMPT |_|
Zip Code or (b) I have not been notified
by the Internal Revenue Service
("IRS") that I am subject to
backup withholding as a result
of failure to report all interest
Department of the or dividends, or (c) the IRS has
Treasury Internal notified me that I am no longer
Revenue Service subject to backup withholding.
Payer's Request CERTIFICATION INSTRUCTIONS--You must cross out item (2)
for Taxpayer in Part 2 above if you have been notified by the IRS
Identification that you are subject to backup withholding because of
Number (TIN) under reporting of interest or dividends on your tax
return. However, if after being notified by the IRS
that you were subject to backup withholding you
received another notification from the IRS stating that
you are no longer subject to backup withholding, do not
cross out item (2). If you are exempt from backup
withholding, check the box in Part 4 above.
SIGNATURE______________________ DATE____________,1997
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE CONSENT SOLICITATIONS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN
PART 3 OF THE SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number within 60 days, 31% of all
reportable payments made to me will be withheld until I provide a taxpayer
identification number.
__________________________________ _________________________, 1997
Signature Date
-11-
<PAGE>
THERATX, INCORPORATED
8% Convertible Subordinated Notes Due 2002
April 24, 1997
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Subject to the terms and conditions set forth in the Consent
Solicitation Statement dated April 24, 1997 (the "Consent Solicitation
Statement"), TheraTx, Incorporated (the "Company") is soliciting (the
"Solicitation") consents (the "Consents") from the Noteholders (as defined in
the Consent Solicitation Statement) of its 8% Convertible Subordinated Notes Due
2002 (the "Notes") in connection with the adoption of an amendment (the
"Amendment") to the Indenture (as defined in the Consent Solicitation Statement)
pursuant to which the Notes have been issued and will pay $0.10 per $1,000
principal amount of Notes (the "Consent Fee") to Holders whose Consents in favor
of the Amendment are received (and not timely revoked) prior to 4:00 p.m., New
York City time, on April 30, 1997 or such later date as may be set (the
"Expiration Date"). The Company's obligation to pay a Consent Fee to Noteholders
who Consent in favor of the Amendment is subject to obtaining Consents in favor
of the Amendment from Noteholders of at least a majority in aggregate principal
amount of the Notes outstanding.
The Company will not pay any fees or commissions to any broker or
dealer or other person for soliciting Consents. However, you will be reimbursed
for customary mailing and handling expenses incurred by you in forwarding any of
the enclosed materials to your clients.
Enclosed are copies of the following documents:
1. Consent Solicitation Statement dated April 24, 1997;
2. Consent Letter (to be used in delivering the Consents),
including a form of proxy (to be used in delivering the Consents if
the Noteholder is not the registered Holder as of April 17, 1997)
(Pink);
3. Form of letter (with attached instructions) which you may
use for correspondence with your clients, including a Letter of
Instructions (to be used by your clients to instruct you to deliver
Consents as to their Notes or to deliver a proxy to the client to
enable the client to so Consent) (Green);
4. Guidelines of the Internal Revenue Service for certification of
Taxpayer Identification Number on Substitute Form W-9; and
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<PAGE>
5. Return envelope addressed to D.F. King & Co., Inc., the
Tabulation Agent.
YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS
AS SOON AS POSSIBLE. CONSENTS MUST BE ACTUALLY RECEIVED BY THE TABULATION AGENT
AT OR BEFORE 4:00 P.M., NEW YORK CITY TIME, ON WEDNESDAY, APRIL 30, 1997, UNLESS
EXTENDED.
In order to take advantage of the Solicitation, a duly executed and
properly completed Consent and any other required documents should be sent to
the Tabulation Agent by mail, by hand or by facsimile, all in accordance with
the instructions set forth in the Consent and in the Consent Solicitation
Statement. Any inquiries you may have with respect to the Solicitation or
requests for additional copies of the above documents should be addressed to the
Information and Tabulation Agent (toll free telephone no. (800) 755-3105;
facsimile no. (212) 809-8839).
Very truly yours,
D.F. KING & CO., INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL
CONSTITUTE YOU OR ANY PERSON AS AN AGENT OR AN AFFILIATE OF THE COMPANY, THE
INFORMATION AGENT OR THE TABULATION AGENT, OR AUTHORIZE YOU OR ANY OTHER PERSON
TO MAKE ANY STATEMENTS ON BEHALF OF ANY OF THEM WITH RESPECT TO THE
SOLICITATION, EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE CONSENT SOLICITATION
STATEMENT AND THE CONSENT.
-2-
<PAGE>
THERATX, INCORPORATED
8% Convertible Subordinated Notes Due 2002
April 24, 1997
To Our Clients:
Enclosed for your consideration are the Consent Solicitation Statement
dated April 24, 1997 (the "Consent Solicitation Statement") and the Consent
Letter relating to the solicitation (the "Solicitation") by TheraTx,
Incorporated (the "Company") of consents (the "Consents") in favor of the
proposed amendment to the Indenture under which its 8% Convertible Subordinated
Notes Due 2002 (the "Notes") were issued (the "Amendment") from the Noteholders
(as defined in the Consent Solicitation Statement) of the above listed Notes.
Subject to the conditions set forth in the Consent Solicitation Statement, the
Company will pay $0.10 per $1,000 principal amount of Notes (the "Consent Fee")
to Noteholders whose Consents in favor of the Amendment are received (and not
timely revoked) on or before 4:00 p.m., New York City time, on April 30, 1997
(or such later date as may be set by the Company, the "Expiration Date"). The
Company's obligation to pay a Consent Fee to a Noteholder who Consents in favor
of the Amendment is subject to obtaining Consents in favor of the Amendment from
Noteholders of at least a majority in aggregate principal amount of the Notes
outstanding (the "Requisite Consent").
We are the registered Noteholder for your account and a Consent to the
proposed Amendment can be given by us as the registered Noteholder only if you
so instruct us. The Consent is furnished to you for your information only and
cannot be used by you to consent to the proposed Amendment with respect to your
Notes unless we execute a proxy which authorizes you to consent. We request your
instructions as to whether you wish us to consent to the proposed Amendment with
respect to your Notes or deliver to you a proxy so that you can deliver a
Consent yourself to the proposed Amendment. Of course, in either case you will
be entitled to the Consent Fee.
In order to receive the Consent Fee, a Consent in favor of the
Amendment with respect to your Notes must be submitted, either by us pursuant to
your instructions or by you pursuant to our proxy so that it is received by the
Tabulation Agent, on or prior to 4:00 p.m., New York City time, on the
Expiration Date.
If you wish to have us (i) consent to the proposed Amendment with
respect to your Notes or (ii) deliver to you a proxy so that you may deliver a
Consent yourself, please so instruct us by completing the appropriate
instruction on the form attached hereto and executing, detaching and returning
to us such form. An envelope to return your instructions to us is enclosed. If
you authorize us to consent to the proposed Amendment, we will execute a Consent
as to ALL of your Notes for the proposed Amendment.
<PAGE>
THERATX, INCORPORATED
8% CONVERTIBLE SUBORDINATED NOTES DUE 2002
LETTER OF INSTRUCTIONS
WITH RESPECT TO DELIVERY OF CONSENTS
IN CONNECTION WITH THE CONSENT SOLICITATION
(To be used if you wish us to (1) consent on your behalf
Or (2) execute and deliver to you by a proxy so that
you may deliver a consent)
To:-------------------------------------------------
(Fill in name of custodian holding Notes)
The undersigned acknowledge(s) receipt of your letter and the enclosed Consent
Solicitation Statement dated April 24, 1997 (the "Consent Solicitation
Statement") and the Consent Letter in connection with the solicitation by the
Company of consents to the Amendment (as defined in the Consent Solicitation
Statement) of the Indenture governing the Notes.
CHECK ONE BOX
|_| AUTHORIZATION TO CONSENT - This will instruct you to deliver a Consent
Letter (as defined in the Consent Solicitation Statement) in favor of
the Amendment with respect to the entire principal amount indicated
hereon of the Notes held by you for the account of the undersigned,
upon the terms and subject to the conditions set forth in the Consent
Solicitation Statement.
|_| REQUEST FOR PROXY - This will instruct you to execute and deliver to
the undersigned a proxy with respect to the entire principal amount
indicated hereon of the Notes held by you for the account of the
undersigned in the form set forth on the form of Consent Letter so that
the undersigned may deliver a Consent Letter.
PLEASE PROVIDE THE FOLLOWING INFORMATION:
- ------------------------------------
Name and address of Beneficial Owner
- ------------------------------------
Principal Amount Beneficially Owned
- ------------------------------------
SIGNATURE
- ------------------------------------
Name and Title (Please Print)
Dated: , 1997
-----------------------
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Guidelines For Determining the Proper Name And Identification Number To Give The
Payer.-- Social Security numbers have nine digits separated by two hyphens:
i.e., 000-00-0000. Employer identification numbers have nine digits separated by
only one hyphen: i.e., 00-0000000. The table below will help determine the name
and number to give the payer.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Give the name and
Give the name and EMPLOYER
SOCIAL SECURITY IDENTIFICATION
For this type of account number of - For this type of account number of -
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. An individual's account The individual 6. Sole proprietorship account The owner(3)
2. Two or more individuals (joint The actual owner of the 7. A valid trust, estate, or The legal entity(4)
account) account or, if combined pension trust
funds, any one of the
individuals(1) 8. Corporate account The corporation
3. Custodian account of a minor The minor(2) 9. Association, club, religious, The organization
(Uniform Gift to Minors Act) charitable, educational or other
tax-exempt organization
4. a. The usual revocable savings The grantor-trustee(1) account
trust account (grantor is
also trustee) 10. Partnership The partnership
b. So-called trust account that The actual owner(1) 11. A broker or registered nominee The broker or nominee
is not a legal or valid trust
under State law 12. Account with the Department The public entity
of Agriculture in the name of a
5. Sole proprietorship account The owner(3) public entity (such as a State
or local government, school
district, or prison) that receives
agricultural program payments
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's social security number.
(3) You must show your individual name, but you may also enter your business or
"doing business as" name. You may use either your Social Security Number or
Employer Identification Number.
(4) List first and circle the name of the legal trust, estate, or pension
trust. (Do not furnish the identifying number of the personal
representative or trustee unless the legal entity itself is not designated
in the account title.)
Note: If no name is circled when more than one name is listed, the number will
be considered to be that of the first name listed.
</FN>
</TABLE>
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
Page 2
<TABLE>
<S> <C>
OBTAINING A NUMBER
If you don't have a taxpayer identification number or you For interest and dividends, all listed payees are exempt
don't know your number, obtain Form SS-5, Application for except item (9). For broker transactions, payees listed
a Social Security Number Card (for individuals), or Form SS-4 in items (1) through (13) and a person registered under
Application for Employer Identification Number (for the Investment Advisers Act of 1940 who regularly
businesses and all other entities), at the local office of the acts as a broker are exempt.
Social Security Administration or the Internal Revenue
Service and apply for a number.
Payees Exempt From Backup Withholding Exempt payees described above should file Form W-9
The following is a list of payees specifically exempted from to avoid possible erroneous backup withholding. FILE
backup withholding depending upon the type of payment THIS FORM WITH THE PAYER, FURNISH YOUR
(see below): TAXPAYER IDENTIFICATION NUMBER, WRITE
(1) A corporation. "EXEMPT" IN PART 1 OF THE FORM, AND RETURN IT
(2) An organization exempt from tax under TO THE PAYER. If you are a nonresident alien or a
section 501(a), or an IRA or a custodial foreign entity not subject to backup withholding, give
account under section 403(b)(7). the payer a completed Form W-8, Certificate of Foreign
(3) The United States or any agency or Status.
instrumentality thereof.
(4) A State, the District of Columbia, a Privacy Act Notice. - Section 6109 requires most
possession of the United States, or any recipients of dividend, interest, or other payments to
subdivision or instrumentality thereof. give taxpayer identification numbers to payers who
(5) A foreign government, a political subdivision must report the payments to IRS. The IRS uses the
of a foreign government, or any agency or numbers for identification purposes. Payers must be
instrumentality thereof. given the numbers whether or not recipients are
(6) An international organization or any agency required to file tax returns. Payers must generally
or instrumentality thereof. withhold 31% of taxable interest, dividend, and certain
(7) A foreign central bank of issue. other payments to a payee who does not furnish a
(8) A dealer in securities or commodities taxpayer identification number to a payer. Certain
required to register in the U.S. or a penalties may also apply.
possession of the U.S.
(9) A futures commission merchant registered Penalties
with the Commodity Futures Trading (1) Failure To Furnish Taxpayer Identification
Commission. Number.-If you fail to furnish your correct taxpayer
(10) A real estate investment trust. identification number to a payer, you are subject to a
(11) An entity registered at all times during the penalty of $50 for each such failure unless your failure
tax year under the Investment Company Act is due to reasonable cause and not to willful neglect.
of 1940. (2) Civil Penalty For False Information With Respect
(12) A common trust fund operated by a bank To Withholding.-If you make a false statement with
under section 584(a). no reasonable basis which results in no imposition of
(13) A financial institution. backup withholding, you are subject to a penalty of
(14) A middleman known in the investment $500.
community as a nominee or listed in the (3) Criminal Penalty For Falsifying
most recent publication of the American Information.-Willfully falsifying certifications or
Society of Corporate Secretaries, Inc., affirmations may subject you to criminal penalties
Nominee List. including fines and/or imprisonment.
(15) A trust exempt from tax under section 664 FOR ADDITIONAL INFORMATION CONTACT YOUR
or described in section 4947. TAX CONSULTANT OR THE INTERNAL REVENUE
SERVICE.
</TABLE>
