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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, 2001
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ________
COMMISSION FILE NO. 0-20619
MATRIA HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2205984
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1850 PARKWAY PLACE
MARIETTA, GEORGIA 30067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (770) 767-4500
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE, TOGETHER
WITH ASSOCIATED COMMON STOCK PURCHASE RIGHTS
(Title of class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes |X| No | |
Indicate by 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. | |
As of March 11, 2002, there were 8,983,343 shares of Common Stock outstanding.
The aggregate market value of the Common Stock of the Registrant held by
nonaffiliates was approximately $206,606,435 based upon the closing sale price
on March 11, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the 2002 Annual
Meeting of Shareholders are incorporated by reference into Part III.
MATRIA HEALTHCARE, INC.
2001 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
Item 1. Business .......................................................... 3
Item 2. Properties ........................................................ 9
Item 3. Legal Proceedings ................................................. 9
Special Item Executive Officers of the Company ................................. 10
PART II
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters ................................. 12
Item 6. Selected Financial Data ........................................... 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................... 14
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk ..................................................... 22
Item 8. Financial Statements and Supplementary Data ....................... 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .......................... 23
PART III
Item 10. Directors and Executive Officers of the Company ................... 24
Item 11. Executive Compensation ............................................ 24
Item 12. Security Ownership of Certain Beneficial Owners
and Management .................................................. 24
Item 13. Certain Relationships and Related Transactions .................... 24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K ..................................................... 25
SIGNATURES .................................................................... 29
2
PART I
ITEM 1. BUSINESS.
GENERAL. Matria Healthcare, Inc., a Delaware corporation ("Matria" or the
"Company"), is a leading comprehensive, integrated disease management company,
offering its services to patients, physicians, health plans and employers.
Disease management encompasses a broad range of services aimed at controlling
healthcare costs through proactive management of care. Matria's strategy is to
focus on providing effective cost-saving solutions for four of the most costly
chronic diseases and medical conditions in the nation: diabetes, pregnancy and
select respiratory and cardiovascular diseases. Matria's disease management
programs seek to lower healthcare costs and improve patient outcomes through a
broad range of disease management, mail-order supply and clinical services.
Matria contracts with managed care organizations and self-insured employers for
the provision of its services for which the Company is generally compensated on
a fee-for-service basis.
Matria was incorporated on October 4, 1995 for the purpose of the merger
of Tokos Medical Corporation and Healthdyne Maternity Management. The effective
date of the merger was March 8, 1996. Matria's headquarters are located in
Marietta, Georgia.
BUSINESS SEGMENTS AND GEOGRAPHIC AREAS. In 2001, the Company's operations
consisted of two reportable business segments: Diabetes and Women's Health.
Information regarding revenues, operating earnings, and identifiable assets
(including intangibles) of each of the business segments in which the Company
operated in fiscal years 1999 through 2001, as well as information regarding
revenues of the Company attributed to the geographic areas in which the Company
operated during those years, is in note 13 of Notes to Consolidated Financial
Statements on pages F-21 through F-22 of this report.
Diabetes. The Company acquired the Diabetes segment business effective
January 1, 1999. The segment has two components: diabetes disease management and
medical device design, manufacturing and distribution services.
The diabetes disease management program improves health outcomes through
risk assessment, patient education, clinical interventions, compliance
management and outcomes reporting. As part of the compliance management process,
the Company sells glucose testing supplies, insulin, insulin pumps, syringes,
and other prescription and non-prescription drugs used by patients with
diabetes. These sales are made primarily on a mail-order basis. In February
2002, the Company acquired substantially all of the assets of ChoicePoint Health
Systems, Inc., a direct-to-consumer laboratory testing facility headquartered in
Olathe, Kansas, which serves the diabetes, cardiovascular and hypertension
patient populations. These assets are now held by the Company's subsidiary,
Matria Laboratories, Inc., a Delaware corporation. The diabetes disease
management program serves patients in the United States through its facilities
in Roanoke, Virginia, Irvine, California and Olathe, Kansas, and in Germany
through its facilities in Neumunster and Dresden, Germany. Approximately 36%,
44% and 47% of this business component's revenues were derived from its German
operations in 2001, 2000 and 1999, respectively.
Matria's Diabetes segment also is a leading designer, assembler, packager
and wholesale distributor of microsampling products, which are products used to
obtain and test small samples of blood. This component of the business operates
under the name Facet Technologies, LLC ("Facet"). Facet has a significant
presence in each of the three major products of the microsampling market:
standard lancets, lancing devices and safety lancets. Facet operates from
facilities in Marietta, Georgia, McDonough, Georgia, and Milton Keynes and
Northant, England. Its products are shipped primarily to North and South
America, Europe and Asia. Approximately 22%, 24% and 21% of this business
component's revenues were derived from sales outside of the United States in
2001, 2000 and 1999, respectively.
Because of the Company's dependence on foreign markets, deterioration in
foreign economic conditions and currency exchange rate fluctuations could have a
material adverse effect on the Company's business. Due to
3
the foregoing factors, as well as foreign local commercial and economic policies
and political uncertainties, the Company believes its activities outside of the
United States involve greater risk than its domestic business.
Women's Health. The Women's Health segment offers a wide range of disease
management services designed to assist physicians and payors in the
cost-effective management of maternity patients. Services include risk
assessment, patient education and management, infusion therapy, gestational
diabetes management and other monitoring and clinical services as prescribed by
the patient's physician. The Women's Health segment is headquartered in
Marietta, Georgia and has 41 sites of service throughout the United States, 12
of which are monitoring centers. All 41 sites are fully accredited as home care
organizations by the Joint Commission on Accreditation of Health Care
Organizations. In addition, the segment has two after-hours centers. Although
this segment maintains a dominant market share, the industry continues to be
vulnerable to several controversies surrounding the home obstetrical care
business, including academic debate as to the efficacy of certain services and
controversy over the "off-label" use of certain tocolytic medications. See
"Regulation and Healthcare Industry Changes" below in this Item 1. In addition,
changes in patient therapy mix negatively impacted this business' profitability
in 2001 and 2000.
Other. The Company also provides respiratory disease management programs.
The respiratory disease management business, which began in July 1998, provides
respiratory disease risk assessment, screening and case management services to
patients throughout the United States from its headquarters in Marietta, Georgia
in conjunction with National Jewish Medical and Research Center ("National
Jewish"), located in Denver, Colorado. In the fourth quarter 2001, the Company
began selling respiratory supplies on a mail-order basis. In 2002, the Company
began to market its cardiovascular disease management programs.
Discontinued Operations. The Company's former Cardiovascular segment was
acquired in July 1998 and was operated through the Company's wholly-owned
subsidiary, Quality Diagnostic Services, Inc. ("QDS"). QDS provided cardiac
event monitoring services, holter monitoring services and pacemaker follow-up to
patients throughout the United States from its headquarters in Marietta,
Georgia. Effective February 1, 2001, the Company sold the business and assets of
QDS, excluding accounts receivable. Through the divestiture of QDS, the Company
has discontinued its service offerings related to cardiac diagnostics.
CUSTOMERS, SUPPLIERS AND THIRD-PARTY PAYORS. The Company's revenues from
continuing operations were derived from the following types of customers:
approximately 42% from private third-party payors, 25% from medical device
manufacturers, 14% from domestic government payors, 12% from foreign healthcare
systems and 7% from employers.
The Company markets its disease management services and, until February 1,
2001, marketed its cardiovascular diagnostic services to patients, physicians,
other healthcare providers and third-party payors through its employee sales
force. In addition, the diabetes mail-order supply component utilizes television
and direct mail advertising. All of these businesses' revenues depend on payment
from third-party payors, such as managed care companies and government-sponsored
health insurance programs. Third-party payors are having greater control over
patient access and increasingly use their significant bargaining power to secure
discounted rates and other concessions from providers. This trend, as well as
other changes in reimbursement rates, policies or payment practices by
third-party payors (whether initiated by the payor or legislatively mandated)
could have an adverse impact on the Company's disease management businesses.
Regulations that govern reimbursement from domestic government-sponsored health
insurance programs, such as Medicare, are complex and the Company's compliance
with those regulations may be reviewed by federal agencies, including the
Department of Health and Human Services, the Department of Justice and the Food
and Drug Administration. Any failure to comply with these regulations could
result in delays or loss of reimbursement and other sanctions, including fines
and loss of provider status.
The Company's clinical services and supply business are reimbursed on a
fee-for-service or per item basis. Other aspects of disease management, however,
are paid for primarily on the basis of monthly fees for each member of a health
plan identified with a particular chronic disease or condition under contract or
enrolled in
4
the Company's program or on a case-rate basis. Some of the contracts for these
services provide that a portion of the Company's fees are at risk subject to the
Company's performance against financial cost savings and clinical criteria.
Thus, a portion of the Company's revenues is subject to confirmation of the
Company's performance against these financial cost savings and clinical
criteria. Estimates for performance under the terms of these contracts and other
factors affecting revenue recognition are accrued on an estimated basis in the
period the services are provided and adjusted in future periods when final
settlement is determined. These estimates are continually reviewed and adjusted
as information related to performance levels and associated fees become
available. Currently, less than 5% of the Company's revenues are at risk under
these arrangements.
Facet markets its products to large medical device manufacturers through
its employee sales force. Its customers include original equipment manufacturers
of blood glucose and other point-of-care test kits. Three major original
equipment manufacturer customers represented approximately 78% of Facet's total
sales in 2001. Although the Company believes its relationships with these
customers are strong, the loss of any of these major customers could have a
material adverse effect on this business component. Additionally, this business
is highly dependent on its exclusive supply relationship with Nipro Corporation,
from which it purchases a majority of its products on favorable payment terms.
The exclusive supply agreement expires in November 2002. The Company expects to
be able to renew this agreement on favorable terms. Termination of the exclusive
supply agreement or failure to continue the exclusive supply agreement on
favorable terms would have a material adverse effect on Facet's business, as
would any interruption in the supply of products from Nipro Corporation,
whatever the cause.
SEASONALITY. Revenues of the Women's Health segment tend to be seasonal.
Revenues typically begin to decrease with the onset of the holiday season
starting with Thanksgiving, causing the fourth quarter and first quarter
revenues of each year to be less than those of the second and third quarters.
The Company's other businesses do not reflect any significant degree of
seasonality.
TRADEMARKS, LICENSES AND PATENTS. The Company owns a number of trademarks
and service marks which, in the aggregate, are important to the marketing and
promotion of its products and services. The Company does not believe, however,
that any single trademark or service mark is material in relation to the
Company's business as a whole. The Company generally makes a practice of
protecting its most significant trademarks by registration.
The Company has licensed its respiratory disease management programs from
National Jewish. Insofar as the licensed programs are the cornerstone of the
Company's respiratory disease management programs, the license is material to
that portion of the Company's business. Additionally, the Company has an
exclusive, perpetual right to use and purchase from Respironics, Inc. the only
uterine activity monitor that has received pre-market approval from the Food and
Drug Administration ("FDA") for home use on patients with a history of previous
preterm birth. The Company's rights to the monitors had been a material
competitive advantage in marketing the Company's uterine activity monitoring
services. In 2001, the FDA reclassified the monitors from Class III into Class
II devices, which will make substantially equivalent devices available to the
Company's competitors, without their having to receive pre-market approval. As
part of the reclassification, the FDA has imposed special controls on the use of
such devices. It is not clear what impact these developments will have on the
Company's home uterine activity monitoring business.
The Company does not possess any patents that are material to its
business, although the patents owned by Nipro Corporation and its subcontractors
with respect to products distributed by Facet are material to the continued
marketing of those products.
Also, the Company considers its clinical and disease management programs
to be proprietary and material to the portion of the Company's business to which
they relate.
Any impairment of the Company's rights in the intellectual property
described above could have a material adverse effect on the particular business
to which they relate.
5
COMPETITION. The medical industry is characterized by rapidly developing
technology and increased competition. In all its product and service lines, the
Company competes with companies, both large and small, located in the United
States and abroad. Competition is strong in all lines, without regard to the
number and size of the competing companies involved. Certain of the Company's
competitors and potential competitors have significantly greater financial,
technical and sales resources than the Company and may, in certain locations,
possess licenses or certificates that permit them to provide products and
services that the Company cannot currently provide.
Although the Women's Health segment is a leading provider in its market,
with a market share of approximately 85%, the Women's Health business and the
Company's other disease management businesses compete with a vast and ever
increasing number of competitors. Competitors of the Company's disease
management businesses include national, regional and local home health agencies,
hospitals and physicians, as well as other companies devoted primarily to
offering one or more products or services similar or identical to those offered
by the Company, such as diabetes disease management. The Company competes on a
number of factors, including quality of care and service, reputation within the
medical community, geographical scope and price. The Company believes that its
clinical expertise and coordinated approach to patient services have enabled it
to compete effectively.
Competition in the microsampling business of the Company's Diabetes
segment also is based on quality, service and price. In addition, competition in
research involving the development of new products and the improvement of
existing products is particularly significant. Competitors' research efforts
could lead to the obsolescence of some or all of Facet's products. The
microsampling industry is highly fragmented, with numerous competitors of all
sizes. The quality of Facet's products, as well as its strong distribution
system, value-added approach to customer service, and design and development
expertise have enabled this business to achieve its significant market share,
notwithstanding the highly competitive environment in which it operates.
There can be no assurance that the Company will not encounter increased or
more effective competition in the future, which could limit the Company's
ability to maintain or increase its business or render some products and
services offered by Matria obsolete or non-competitive and which could adversely
affect the Company's operating results.
RESEARCH AND DEVELOPMENT. Facet maintains a dedicated research and
development staff at its headquarters in Marietta, Georgia. This business's
research and development activities are key factors in its ability to stay
abreast of its competition.
The Women's Health and other businesses of the Diabetes segment do not
maintain separate research and development teams. Program development and
refinements result from the cooperative efforts of the businesses' clinical,
operating and marketing staff, and these costs are charged to earnings when
incurred.
REGULATION AND HEALTHCARE INDUSTRY CHANGES. All of the Company's
businesses are subject to varying degrees of government regulation in the
countries in which they operate. There has been a trend in recent years both in
the United States and outside of the United States toward more stringent
regulation of, and enforcement of requirements applicable to, healthcare
providers and medical device manufacturers. The continuing trend of more
stringent regulatory oversight in healthcare, enforcement activities and product
clearance for medical devices have caused healthcare providers and manufacturers
to experience more uncertainty, greater risk, higher expenses and longer
approval cycles. Management does not expect this trend to change in the near or
long term, in the United States or abroad.
In the United States, regulation of the healthcare industry is
particularly pervasive. Many states require providers of home health services,
such as the Company's Women's Health segment, to be licensed as nursing or home
health agencies and to have medical waste disposal permits. In addition, the
operations of Matria's diabetes disease management businesses require Matria to
be licensed as a pharmacy in several states. Moreover, certain
6
employees of the Company are subject to state laws and regulations regarding the
ethics and professional practice of pharmacy and nursing. The Company may also
be required to obtain certification to participate in governmental payment
programs, such as Medicare and Medicaid. Some states have established
Certificate of Need ("CON") programs regulating the establishment or expansion
of healthcare operations. The failure to obtain, renew or maintain any of the
required licenses, certifications or CONs could adversely affect the Company's
disease management businesses.
In addition, the Company is subject to various federal and state statutes
regulating payments to or relationships with referral sources. Penalties for
violation of these statutes include substantial fines and penalties,
imprisonment and exclusion from participation in governmental healthcare
programs.
Moreover, many of the medical products utilized by the Company for the
provision of its services are classified as medical devices under the federal
Food, Drug and Cosmetic Act (the "FDC Act") and are subject to regulation by the
FDA. Certain recent FDA actions with respect to home uterine activity monitors
were discussed above in this Item 1 under "Trademarks, Licenses and Patents." In
addition, some of the Company's services involve the use of drugs that are
regulated by the FDA under the FDC Act. Although medical devices and drugs used
by the Company are labeled for specific indications and cannot be promoted for
any other indications, physicians may and do prescribe them for indications that
have not been approved by the FDA. The FDA allows physicians to prescribe drugs
and medical devices for such "off-label" indications under the "practice of
medicine" doctrine. Nevertheless, the Company believes that publicity concerning
the off-label use of terbutaline sulfate has adversely affected the Company's
Women's Health segment's business, and any future adverse publicity or increased
FDA scrutiny surrounding off-label use of any drugs and devices utilized in the
Company's business may have a further adverse impact on the Company's business.
The Health Insurance Portability and Accountability Act of 1996, or HIPAA,
governs the portability, privacy and security of medical records and other
individually identifiable patient data. Regulations issued by the Secretary of
Health and Human Services, acting pursuant to HIPAA, establish standards for the
protection of personal health information maintained by health care providers,
hospitals, health plans and health insurers, and health care clearinghouses. In
general, these regulations prohibit the use and disclosure of medical records
and other individually identifiable health information held or disclosed by
health care providers and other affected entities in any form, whether
communicated electronically, on paper, or orally, subject only to certain
limited exceptions. In addition, the regulations provide patients with
significant new rights to understand and control how their health information is
used. These regulations do not preempt more stringent state laws and
regulations. Health care providers and other affected entities have until April
2003 to come into compliance with the regulations. Additional regulations
requiring the use of uniform standards for electronic health care transactions
have been issued with compliance required by October 2002 unless an extension is
obtained. Further regulations establishing health care information security
requirements are being developed. Failure to comply with HIPAA can result in
criminal penalties and civil sanctions.
As a result of the Company's desire to assure compliance with the
increasingly complex regulatory environment for the healthcare industry, the
Company maintains a company-wide compliance program, developed in accordance
with federal guidelines.
Although the Company believes its operations as currently conducted are in
material compliance with existing applicable laws and regulations, there can be
no assurance that the Company will not become the subject of a regulatory or
other investigation or proceeding or that its interpretations of applicable laws
and regulations will not be challenged. The defense of any such challenge could
result in substantial cost to the Company and diversion of management's time and
attention. Thus, any such challenge could have a material adverse effect on the
Company's business, regardless of whether it ultimately is sustained. Moreover,
the Company believes that its businesses will continue to be subject to
increasing regulation, the scope and effect of which the Company cannot predict.
7
The healthcare industry in the United States is experiencing a period of
extensive change due to economic forces, regulatory influences and political
initiatives. Market-driven reforms from forces within the industry are exerting
pressure on healthcare companies to reduce healthcare costs. These market-driven
changes are resulting in industry wide consolidation that is expected to
increase the downward pressure on healthcare companies' profit margins, as
larger buyer and supplier groups exert pricing pressures on healthcare
companies. In addition, from time to time federal and state legislatures
consider healthcare reform proposals. The ultimate timing or effect of
legislative efforts and market-driven reforms cannot be predicted, and these
initiatives may adversely impact Matria's business.
EMPLOYEES. The Company currently employs a total of 1,019 full-time
employees and 55 regular part-time employees. In addition, the Company employs
an additional 828 part-time clinical employees to provide, among other things,
patient training and backup support on an "as needed" basis. None of the
Company's employees are represented by a union. The Company considers its
relationship with its employees to be satisfactory.
FORWARD-LOOKING STATEMENTS. This Annual Report on Form 10-K, including the
information incorporated by reference herein, contains various forward-looking
statements and information that are based on the Company's beliefs and
assumptions, as well as information currently available to the Company. From
time to time, the Company and its officers, directors or employees may make
other oral or written statements (including statements in press releases or
other announcements) that contain forward-looking statements and information.
Without limiting the generality of the foregoing, the words "believe",
"anticipate", "estimate", "expect", "intend", "plan", "seek" and similar
expressions, when used in this Form 10-K and in such other statements, are
intended to identify forward-looking statements. All statements that express
expectations and projections with respect to future matters, including, without
limitation, statements relating to growth, new lines of business and general
optimism about future operating results, are forward-looking statements. All
forward-looking statements and information in this Annual Report are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and are intended to be covered by the safe harbors created thereby.
Such forward-looking statements are not guarantees of future performance and are
subject to risks, uncertainties and other factors that may cause the actual
results, performance or achievements of the Company to differ materially from
historical results or from any results expressed or implied by such
forward-looking statements. Such factors include, without limitation: (i)
changes in reimbursement rates, policies or payment practices by third-party
payors, whether initiated by the payor or legislatively maintained; (ii) the
loss of major customers or failure to receive recurring orders from customers of
the mail-order supply business; (iii) termination of the Company's exclusive
supply agreement with Nipro Corporation or failure to continue the agreement on
the terms currently in effect; (iv) impairment of the Company's rights in
intellectual property; (v) increased or more effective competition; (vi) new
technologies that render obsolete or non-competitive products and services
offered by the Company; (vii) changes in laws or regulations applicable to the
Company or failure to comply with existing laws and regulations; (viii) future
healthcare or budget legislation or other health reform initiatives; (ix)
increased exposure to professional negligence liability; (x) difficulties in
successfully integrating recently acquired businesses into the Company's
operations and uncertainties related to the future performance of such
businesses; (xi) losses due to foreign currency exchange rate fluctuations or
deterioration of economic conditions in foreign markets; (xii) changes in
company-wide or business unit strategies and changes in patient therapy mix;
(xiii) the effectiveness of the Company's advertising, marketing and promotional
programs; (xiv) market acceptance of the Company's disease management products;
(xv) inability to successfully manage the Company's growth; (xvi) acquisitions
that strain the Company's financial and operational resources; (xvii) inability
to effect estimated cost savings and clinical outcomes improvements or to reach
agreement with the Company's disease management customers with respect to the
same; (xviii) inability to accurately forecast performance under the Company's
disease management contracts; (xix) inability of the Company's disease
management customers to provide timely and accurate data that is essential to
the operation and measurement of the Company's performance under its disease
management contracts; (xx) increases in interest rates and (xxi) the risk
factors discussed from time to time in the Company's SEC reports, including but
not limited to, its Annual Report on Form 10-K for the year ended December 31,
2001. Many of such factors are beyond the Company's ability to control or
predict, and readers are cautioned not
8
to put undue reliance on such forward-looking statements. The Company disclaims
any obligation to update or review any forward-looking statements contained in
this Annual Report or in any statement referencing the risk factors and other
cautionary statements set forth in this Annual Report, whether as a result of
new information, future events or otherwise, except as may be required by the
Company's disclosure obligations in filings it makes with the Securities and
Exchange Commission (the "Commission") under federal securities laws.
ITEM 2. PROPERTIES.
Matria's principal executive and administrative offices are located at
1850 Parkway Place, Marietta, Georgia, and total approximately 107,609 square
feet. The facility is leased through February 28, 2003.
Additional properties also are leased for the other operations of Matria.
The Women's Health segment's patient service centers are typically located in
suburban office parks and range between 600 and 5,200 square feet of space with
an average of approximately 2,200 square feet. Total square footage for these
facilities is approximately 88,000 square feet. These facilities are leased for
various terms through 2004.
In July 2001, Facet relocated to its current manufacturing facility which
consists of approximately 70,000 square feet of office and warehouse space in
McDonough, Georgia. The lease term on this new facility will expire in 2008.
Facet also occupies approximately 9,000 square feet of space in the Matria
headquarters building. This lease expires on February 28, 2003. In addition,
Facet leases approximately 1,000 square feet of warehouse space in Milton
Keynes, England under an automatically renewable lease, which can be cancelled
with six months notice. It also has a 200 square foot office in Northants,
England under a lease that expires in August 2002 with automatic annual
renewals.
The Company's diabetes disease management business maintains its United
States headquarters in Roanoke, Virginia, where its facility consists of
approximately 32,000 square feet of office and warehouse space, which is leased
through August 2006. The Irvine, California operation of this business leases
approximately 1,500 square feet of office and warehouse space, under a lease
that expires in December 2002. Matria Laboratories, Inc. leases approximately
12,000 square feet of space in Olathe, Kansas through May 1, 2002, with
provisions for an additional month. Matria Laboratories intends to relocate to a
smaller facility upon termination of the lease. This business also maintains
leased facilities in Neumunster and Dresden, Germany, consisting of
approximately 3,200 and 6,500 square feet, respectively. The Neumunster lease is
a month to month tenancy and the Dresden lease expires in 2005.
These facilities are generally in good condition, and Matria believes that
they are adequate for and suitable to its requirements.
ITEM 3. LEGAL PROCEEDINGS.
Matria is subject to various legal claims and actions incidental to its
business and the businesses of its predecessors and their respective
subsidiaries, including product liability claims and professional liability
claims. As did its predecessors, Matria maintains insurance, including insurance
covering professional and product liability claims, with customary deductible
amounts. There can be no assurance, however, that (i) additional suits will not
be filed in the future against Matria, (ii) Matria's prior experience with
respect to the disposition of its litigation accurately indicates the results
that will occur in pending or future cases or (iii) adequate insurance coverage
will be available at acceptable prices for incidents arising or claims made in
the future. There are no pending legal or governmental proceedings to which the
Company is a party that the Company believes would, if adversely resolved, have
a material adverse effect on Matria.
9
SPECIAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY.
The following sets forth certain information with respect to the executive
officers of the Company:
Name Age Position with the Company
---- --- -------------------------
Parker H. Petit 62 Chairman of the Board, President and
Chief Executive Officer
Jeffrey D. Koepsell 55 Executive Vice President and Chief Operating Officer
George W. Dunaway 41 Vice President - Finance and Chief Financial Officer
Yvonne V. Scoggins 52 Vice President - Financial Planning and Analysis
Roberta L. McCaw 46 Vice President - Legal, General Counsel and Secretary
Thornton A. Kuntz, Jr. 48 Vice President - Administration
The executive officers of the Company are elected annually and serve at
the pleasure of the Board of Directors.
Mr. Petit has served as Chairman of the Board since the Merger and as
President and Chief Executive Officer since October 5, 2000. In addition, he
served as a member of the three-person Office of the president in 1997. Mr.
Petit was the founder of Healthdyne and served as its Chairman of the Board of
Directors and Chief Executive Officer from 1970 until the Merger. Mr. Petit is
also a director of Intelligent Systems Corp. and Logility, Inc.
Mr. Koepsell has served as a director of the Company and as Executive Vice
President and Chief Operating Officer since May 17, 2000. From 1992 to 1998, he
was President and Chief Executive Officer of CardioLogic Systems, Inc., a
venture capital-backed company in the cardiopulmonary market segment formed in
cooperation with Johns Hopkins University and Medical Center. Prior thereto, he
served as President and Chief Executive Officer of Physiologic Diagnostic
Services, Inc., a women's health service provider acquired by Tokos in 1992. Mr.
Koepsell is also a former executive of Healthdyne.
Mr. Dunaway has been Vice President--Finance and Chief Financial Officer
since October 5, 1999. Prior thereto, Mr. Dunaway was employed by The Dun &
Bradstreet Corporation, a commercial credit information services provider, in
the following capacities: Chief Financial Officer of Dun & Bradstreet, U.S. from
1996 to October 1999; Vice President--Finance, Dun & Bradstreet, U. S. from 1995
to 1996; Chief Financial Officer of Dun & Bradstreet Plan Services from 1992 to
1995 and Assistant Vice President--Strategic Planning, Dun & Bradstreet Plan
Services from 1989 to 1992.
Ms. Scoggins has been Vice President -- Financial Planning and Analysis
since February 28, 2001 and previously was Vice President, Treasurer and Chief
Accounting Officer of the Company from December 15, 1997 to February 28, 2001
and also Vice President and Controller from March 8, 1996 to December 15, 1997.
Prior thereto, she was Vice President and Controller of Healthdyne from May 1995
to March 8, 1996; Vice President--Planning and Analysis of Healthdyne from May
1993 to May 1995; and Vice President and Chief Financial Officer of Home
Nutritional Services, Inc., a former majority owned subsidiary of Healthdyne,
from February 1990 to April 1993.
Ms. McCaw has been Vice President -- Legal, General Counsel and Secretary
of the Company since April 23, 1998 and previously was Assistant General Counsel
and Assistant Secretary of the Company from December 15, 1997 to April 23, 1998,
and Assistant General Counsel from July 1996 to December 1997. Prior thereto,
Ms.
10
McCaw was a partner at Tyler, Cooper & Alcorn, a Connecticut-based law firm,
from January 1990 to July 1996.
Mr. Kuntz has been Vice President -- Administration since February 24,
1998 and previously was Vice President--Human Resources of the Company from
March 8, 1996 to February 24, 1998. Prior thereto, he served as Vice
President--Administration of Healthdyne from August 1992 to March 1996.
11
PART II
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
Matria's common stock is traded in the over-the-counter market and is
quoted on the Nasdaq National Market ("NASDAQ") under the symbol "MATR". The
approximate number of stockholders as of March 11, 2002 was 1,900 record holders
and 7,000 street holders.
Matria has not paid any cash dividends with respect to its common stock
and does not intend to declare any dividends in the near future. The Company is
a party to a Loan and Security Agreement and an Indenture, each of which
contains covenants restricting the payment of dividends on and repurchases of
the Company's common stock.
The following table sets forth, for the calendar quarters indicated, the
high and low sales prices of Matria common stock as quoted on NASDAQ from
January 1, 2000 through December 31, 2001:
QUARTER LOW HIGH
------- --- ----
2000
First $16.24 $26.24
Second 11.75 21.00
Third 13.00 18.24
Fourth 7.25 14.24
2001
First $ 9.25 $16.63
Second 12.25 16.10
Third 15.05 25.15
Fourth 21.45 36.67
Share prices have been adjusted to reflect a one-for-four reverse stock
split that took effect on December 5, 2000.
12
ITEM 6. SELECTED FINANCIAL DATA.
The following sets forth selected consolidated financial data with respect
to the Company's operations. The data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations and the consolidated financial statements and related notes thereto.
The statement of operations data for the five years ended December 31, 2001 and
the related balance sheet data have been derived from the audited consolidated
financial statements of the Company.
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
2001 2000 1999 1998 1997
-------- ------- ------- ------- -------
(In thousands, except per share data)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenues $263,983 225,767 231,739 128,572 144,533
Earnings (loss) from continuing operations 7,925 13,694 31,366 (100,406) (20,902)
Net earnings (loss) from continuing operations per
common share:
Basic $ 0.78 1.10 3.05 (10.98) (2.29)
Diluted 0.76 1.05 2.82 (10.98) (2.29)
DECEMBER 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------- ------- ------- ------- -------
(In thousands)
CONSOLIDATED BALANCE SHEETS DATA:
Total assets $ 260,623 268,850 285,713 97,304 191,132
Long-term debt, excluding current installments 114,575 76,996 91,090 18,385 1,712
Redeemable preferred stock -- 41,446 41,005 -- --
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
GENERAL
In 1998 and early 1999, the Company implemented several strategic actions
to expand its business focus beyond managing the condition of pregnancy into
other disease management markets. These actions included: (i) the acquisition in
July 1998 of Quality Diagnostic Services, Inc. ("QDS"), a cardiac event
monitoring company; (ii) the completion of a licensing agreement in October 1998
with National Jewish Medical and Research Center ("National Jewish") to provide
services in the respiratory disease management market; and (iii) the acquisition
in January 1999 of the business and assets of Gainor Medical Management, L.L.C.
("Gainor Medical") and Diabetes Management Services, Inc. ("DMS"), diabetes
supplies and services companies.
During the past three years, the Company has continued to refine its
diversified disease management strategy. The Company determined that its
infertility practice management business, National Reproductive Medical Centers,
Inc. ("NRMC"), no longer fit its strategy, and during the third and fourth
quarters of 1999, the assets of the NRMC clinics were sold. During the second
quarter of 2000, the Company exited its clinical patient record software
business, Clinical-Management Systems, Inc. ("CMS") and, as a result, fully
reserved the value of its remaining assets. Additionally, in February 2001, the
Company sold the business and certain assets of QDS. The Company's consolidated
financial statements reflect QDS as a discontinued operation for 2001, 2000 and
1999.
Disease management is an emerging healthcare sector receiving a heightened
focus in the healthcare industry, and the competition in this sector is
fragmented without a dominant leader. The Company's management believes that
with the successful implementation of its expansion strategies, the Company will
become a market leader in disease management and that these strategies will
continue to result in revenue growth in 2002 and beyond.
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the consolidated
financial statements and related notes of the Company included in this Annual
Report. The historical results of operations are not necessarily indicative of
the results that will be achieved by the Company during future periods.
RESULTS OF OPERATIONS
Revenues increased $38.2 million or 16.9% in 2001 compared to 2000 due to
the strong growth in the Diabetes segment, where revenues increased $42.8
million or 37.3%. Both components of this segment, diabetes disease management
and medical device design, manufacturing and distribution services, achieved
revenue growth in excess of 25% in 2001. Revenues in the Women's Health segment
decreased by $5.5 million or 5.0% due primarily to a decline in the
prescriptions written for preterm labor management services and a change in the
patient therapy mix.
Revenues decreased $6.0 million or 2.6% in 2000 compared to 1999.
Excluding $10.4 million of 1999 revenues generated by NRMC, which was divested
during the second half of 1999, revenues increased by $4.4 million or 2.0%. Most
of this revenue growth in 2000 was provided by the Diabetes segment, which saw
an increase of $4.2 million or 3.8%.
Cost of revenues as a percentage of revenues increased to 55.2% in 2001
from 51.5 % in 2000 and 51.1% in 1999. The increase is primarily the result of
the variance in revenues among segments noted above, since the gross profit
margin of the Diabetes segment is lower than for the Women's Health segment.
Also, the cost of revenues as a percentage of revenues in the Women's Health
segment increased in 2001 due to the decline in revenues combined with
relatively fixed costs of labor.
14
Selling and administrative expenses as a percentage of revenues decreased
to 28.9% for 2001 compared to 30.3% for 2000. This decrease is also due
primarily to the variance in revenues noted above, since the percentage of
selling and administrative expenses to revenues for the Diabetes segment is
lower than that of the Women's Health segment. Selling and administrative
expenses as a percentage of revenues decreased to 30.3% for 2000 compared to
31.8% in 1999 due to economies of scale achieved from the 1999 restructuring
efforts within the Women's Health segment and due to declines in the Other
segments resulting from the sale of the assets of NRMC and from the exiting of
the clinical patient record software business. These decreases were partially
offset by increased corporate expenses resulting from a $1.2 million severance
payment to a former senior executive of the Company.
The Company provides for estimated uncollectible accounts as revenues are
recognized. The provision for doubtful accounts as a percentage of revenues in
the Women's Health segment was approximately 5% in 2001, 2000 and 1999. The
provision for doubtful accounts as a percentage of revenues in the Diabetes
segment was approximately 1% for each of the past three years. The provision is
adjusted periodically based upon the Company's quarterly evaluation of
historical collection experience, recoveries of amounts previously provided,
industry reimbursement trends and other relevant factors.
Amortization of intangible assets was $9.8 million in 2001 and 2000.
Amortization increased by $364,000 in 2000 compared to 1999 due to additional
amortization resulting from recording $13.7 million of incremental goodwill
related to the contingent consideration for the Gainor Medical acquisition.
During the second quarter of 2000, the Company recorded restructuring
expenses of $1.6 million related to its decision to exit its clinical patient
record software business, CMS. Restructuring expenses of $4.2 million in 1999
resulted from the implementation of a consolidation plan for the Women's Health
segment to reduce the number of monitoring centers from 38 to 15.
Interest expense increased by $1.8 million or 20.8% in 2001 compared to
2000 due to a higher average outstanding debt balance and higher interest rates
resulting from a $125 million private offering of 11% senior notes on July 9,
2001. This increase is net of the $633,000 benefit in 2001 from the interest
rate swap arrangement (discussed below in "Liquidity and Capital Resources").
The proceeds from this private offering were used to repay all amounts
outstanding under the Company's former bank credit facility and to repurchase
the subordinated acquisition notes, all shares of preferred stock (and thereby
eliminate their dividend requirements) and common stock warrants issued pursuant
to the acquisition of Gainor Medical. (See "Liquidity and Capital Resources"
below). The weighted average interest rate on outstanding indebtedness was
10.70% for 2001 compared to 9.43% for 2000. Interest expense increased by
$415,000 in 2000 compared to 1999 primarily due to an increase in the number of
days the Gainor Medical acquisition debt was outstanding and due to higher
interest rates.
Other income (expense) for 2001 includes a $737,000 charge to reduce the
carrying value amounts related to the Company's split dollar life insurance
program. This non-cash expense was the result of declines in the stock market.
Other income for 2000 included gains of $6.1 million from $7.3 million in
proceeds from sales of the Company's investment in WebMD Corporation ("WebMD").
Additionally, the Company recognized gains of $1.7 million in 2000 from the 1999
sale of assets of NRMC. At December 31, 1999, the Company's balance sheet
reflected notes receivable from the purchasers of NRMC totaling $1.1 million and
liabilities for patient refunds and reserves for potentially uncollectible notes
receivable and facility lease obligations totaling $2.8 million; no gain or loss
was recognized. In June 2000, the Company received $750,000 in full settlement
of notes receivable from one purchaser. The recognized gain reflected the
realization of most of the proceeds and a re-assessment of remaining patient
refunds and other obligations. Other income for 1999 included gains of $17.3
million from $20.7 million in proceeds from sales of shares of WebMD. See
"Liquidity and Capital Resources" below where the use of these proceeds is
discussed.
In 1999, the Company recorded a $4.0 million income tax benefit resulting
from a reduction in the deferred tax asset valuation allowance based on current
and expected future net earnings. As of December 31,
15
1999, the deferred tax asset valuation allowance was eliminated and the full
amount of deferred income tax assets, totaling $36.7 million, was reflected on
the consolidated balance sheet. The Company recorded a tax provision of $6.1
million and $9.1 million in 2001 and 2000, respectively. Cash outflows for
income taxes in 2001 and 2000 totaled $1.2 million and $2.2 million,
respectively, being comprised of federal alternative minimum taxes, state and
foreign taxes. As of December 31, 2001, the Company's remaining net operating
losses of $49.3 million, the tax effect of which is reflected in the deferred
tax asset, will be available to offset future tax liabilities.
The operating results of the Company's former Cardiovascular segment, QDS,
have been reported, net of tax, as discontinued operations. In 2001, the Company
reflected a loss from discontinued operations and a loss on disposal of
discontinued operations totaling approximately $1.2 million as a result of
greater than expected costs of collection and lower than expected cash receipts
from the retained receivables.
Subsequent to December 31, 2001, the Company has undertaken certain
actions to reduce its operating expenses and improve performance. These actions
will result in a one-time expense of approximately $1.3 million in the first
quarter of 2002 for severance and related expenses.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2001, the Company had cash and short-term investments
of $2.1 million. Net cash provided by continuing operations decreased from $20.1
million in 2000 to $7.9 million in 2001. This decline in cash flows from
continuing operations was due to increases in accounts receivable and prepaid
advertising expenditures in the Diabetes segment. Net cash provided by
continuing operations was $12.5 million in 1999.
The Company's accounts receivable days' sales outstanding were 67 days as
of December 31, 2001 compared to 64 days as of December 31, 2000. The 2001
amount consists of 60 days' sales for the Diabetes segment and 81 days' sales
for the Women's Health segment.
Net cash flows provided by (used in) operating activities related to the
discontinued operations of QDS were $3.1 million, $(623,000) and $710,000 in
2001, 2000 and 1999, respectively. The amount for 2001 represents collections of
accounts receivable, less payments of salary costs of personnel retained to
collect the accounts receivable and other accrued liabilities. As of December
31, 2001, approximately $2.2 million of accounts receivable remain to be
collected.
Net cash provided by (used in) investing activities totaled $9.7 million
in 2001, $(3.6) million in 2000 and $(78.2) million in 1999. The 2001 amount
included the $18.1 million of proceeds from the sale of the business and certain
assets of QDS. The proceeds from the sale were used to repay a portion of the
term loan facility.
During the first and second quarters of 2000 and the fourth quarter of
1999, the Company sold 203,393 shares and 561,030 shares, respectively, of
WebMD, resulting in proceeds of $7.3 million and $20.7 million, respectively.
Proceeds of $2.7 million were used in 1999 to exercise options and warrants to
purchase additional shares and $21.6 million was used to repay a portion of the
term loan facility ($15.0 million in 1999 and $6.6 million in 2000). No shares
were sold in 2001. At December 31, 2001, the Company had a remaining investment
in WebMD of 16,423 shares.
Capital expenditures for continuing operations of $8.4 million in 2001,
$7.4 million in 2000 and $5.1 million in 1999 relate primarily to the upgrade
and expansion of computer information systems. Capital expenditures incurred by
QDS were $3.5 million and $2.2 million in 2000 and 1999, respectively, relating
primarily to purchases of patient equipment.
In January 1999, in connection with the acquisitions of Gainor Medical and
DMS, the Company entered into a $125.0 million, five-year secured bank credit
facility. The credit facility consisted of an $80.0 million term loan facility
and a $45.0 million revolving credit facility. In January 1999, the Company
borrowed $105.0 million
16
under the facility, using $90.3 million for the purchases of Gainor Medical and
DMS and $14.7 million to repay existing debt. Also, the Company issued $45.0
million of redeemable preferred stock to the former owners of Gainor Medical,
consisting of $10.0 million of 4% Series A convertible redeemable preferred
stock ("Series A CRPS") and $35.0 million of 8% Series B redeemable preferred
stock ("Series B RPS") with attached warrants to purchase one million shares of
the Company's common stock. Also, the acquisition agreement for the Gainor
Medical business provided for an additional contingent purchase price adjustment
based on the 1999 financial performance of this portion of the business. In the
second and third quarters of 2000, an additional $13.7 million of purchase price
was paid by the issuance of 12% subordinated notes to the sellers.
In May 2001, the Company entered into a Securities Purchase Agreement with
Gainor Medical to repurchase all or part of the outstanding preferred stock,
common stock warrants and subordinated notes. On June 29, 2001, in the first
stage of the transaction, the Company repurchased 7,500 shares of the 10,000
shares of 4% Series A CRPS and 15,000 shares of the 35,000 shares of 8% Series B
RPS, with a combined face value of $22.5 million and a combined book value of
$21.1 million, for $18.9 million. The resulting gain of $2.1 million was
included in net earnings available to common shareholders in the second quarter.
On July 9, 2001, the Company issued $125 million of 11% senior notes at a
discount of 6.5% from the principal amount. The senior notes are unsecured and
will mature on May 1, 2008. Interest is payable semi-annually in arrears on May
1 and November 1. Among the covenants under the bond indenture is a requirement
to repurchase notes from the Company's annual excess cash flow, as defined, or
from the proceeds received from the sale of assets.
The Company used the proceeds from the senior notes to complete the
transactions under the Securities Purchase Agreement and repay all amounts
outstanding under the Company's bank credit facilities. The Company repurchased
the remaining 2,500 shares of Series A CRPS and 20,000 shares of Series B RPS,
with a face value of $22.5 million and a book value of $20.6 million, for $22.0
million. This second stage resulted in a $1.4 million loss included in net
earnings available to common shareholders in the third quarter and a net gain of
$739,000 from both transactions. The Company also repaid the 12% subordinated
notes at their face value of $14.0 million, plus accrued interest, and retired
one million common stock warrants with a book value of $4.4 million for $3.4
million. The retirement of the warrants, an equity security, was not reflected
as a gain.
In addition, on July 9, 2001, the Company repaid the entire $73.8 million
of outstanding bank debt and amended its senior revolving credit facility. The
amended facility has a borrowing capacity of $30.0 million and a three-year
final maturity. The amended facility is collateralized by accounts receivable,
inventories, property and equipment and certain other assets of the Company.
Borrowings under this agreement bear interest at the Company's option of (i)
prime plus 1.5% to 2.5% or (ii) the LIBOR rate plus 2.5% to 3.5%. The facility
requires a commitment fee payable quarterly, in arrears, of 1.0% to 1.5%, based
upon the unused portion. Under this agreement, the Company is required to
maintain certain financial ratios. As of December 31, 2001, there was no balance
outstanding under this credit facility.
The senior notes indenture and the amended credit facility set forth a
number of covenants binding on the Company. Negative covenants in such
instruments limit the ability of the Company to, among other things, incur
indebtedness and liens, pay dividends, repurchase shares, enter into merger
agreements, make investments, engage in new business activities unrelated to the
Company's current business or sell assets. In addition, under the amended credit
facility, the Company is required to maintain certain financial ratios. As of
December 31, 2001, the Company is in compliance with the financial covenants in
its credit instruments.
In August 2001, the Company repurchased in the open market $3.0 million
principal amount of outstanding senior notes (with a carrying value of $2.7
million, net of unamortized discount and debt issuance expenses) for $2.8
million, leaving $122 million outstanding under the senior notes as of December
31, 2001. Such repurchases in the open market are permitted under the bond
indenture and may be applied to reduce the amount required to be repurchased, at
100% of the principal amount, under the annual excess cash flow
17
repurchase covenant. The August 2001 repurchase fully satisfied the excess cash
flow repurchase covenant for 2001.
Effective August 1, 2001, the Company entered into an interest rate swap
transaction with a bank involving a notional amount of $60 million. This
transaction, which terminates in May 2008 if early termination rights are not
exercised, is considered to be a hedge against changes in the fair value of the
Company's fixed-rate debt obligation and is used to lower the Company's overall
borrowing costs. Under the arrangement, the bank will pay the Company an 11%
fixed rate of interest semi-annually in arrears on May 1 and November 1. The
Company will pay the bank semi-annually in arrears on May 1 and November 1 a
variable rate of interest based on the three-month LIBOR rate plus 5.2%,
compounded quarterly. The variable rate for the period from November 1, 2001 to
February 1, 2002 was 7.43%.
As of December 31, 2001, the interest rate swap agreement was reflected at
fair value of $639,000 on the Company's consolidated balance sheet, and the
related portion of fixed-rate debt being hedged was reflected at an amount equal
to the sum of its carrying value plus an adjustment of $639,000, representing
the fair value of the portion of the debt obligation hedged by the interest rate
swap attributable to the interest rate risk. In addition, the change during the
period in the fair value of the interest rate swap agreement, as well as the
change in the adjusted carrying value of the related portion of fixed-rate debt
being hedged, have offsetting effects on net interest expense in the
consolidated statements of operations since the interest rate swap is fully
effective. Interest expense was reduced by $633,000 for the five months ended
December 31, 2001 to reflect the net swap payments received or due from the bank
based on the lower variable interest rates.
In September 2000, the Board of Directors of the Company approved the
repurchase and retirement of $3.0 million of the Company's outstanding common
stock. On October 31, 2000, The Company completed this repurchase program,
having purchased approximately 297,000 shares of common stock. In November 2000,
the Board of Directors approved a continuation of the share repurchase program
and authorized the repurchase of an additional $3.0 million of common stock. As
of December 31, 2000, the Company had purchased a total of approximately 460,000
shares of common stock at a cost of approximately $4.7 million. In 2001, an
additional 81,900 shares were repurchased at a cost of approximately $976,000.
In December 2001, the Company repaid all outstanding convertible
subordinated debentures at the face amount of $830,000. During 2001, 2000 and
1999, a total of $411,000, $5,000 and $87,000 of debentures were converted to
common stock.
The following sets forth the Company's future minimum annual payments for
the five years subsequent to December 31, 2001 under its various debt and
noncancelable lease agreements:
Long-term
Debt and
Capital Operating
(in thousands) Leases Leases
-------------- -------------
2002 $ 615 5,469
2003 101 2,549
2004 23 1,151
2005 -- 1,032
2006 -- 868
Capital expenditures of approximately $10 million are estimated in 2002 as
the Company continues to enhance or replace its computer information systems.
18
The Company believes that its cash, other liquid assets, operating cash
flows and borrowing capacities under the amended revolving credit facility,
taken together, will provide adequate resources to fund ongoing operating
requirements, future capital expenditures and development of new projects.
CRITICAL ACCOUNTING POLICIES
A critical accounting policy is one which is both important to the
portrayal of the Company's financial condition and results of operations and
requires management's most difficult, subjective or complex judgments, often as
a result of the need to make estimates about the effect of matters that are
inherently uncertain. The Company's critical accounting policies are as follows:
REVENUE RECOGNITION AND ALLOWANCES FOR UNCOLLECTIBLE ACCOUNTS. Revenues
for the Women's Health and Other segments are generated by providing services
through patient service centers. Revenues from these segments are recognized as
the related services are rendered and are net of contractual allowances and
related discounts. The Diabetes segment provides services through its patient
service center, provides supplies to patients primarily on a mail-order basis,
and assembles, packages and distributes lancing products to original equipment
manufacturers. Revenues for services are recognized when services are provided
and revenues from product sales are recognized when products are shipped.
Revenues from this segment are recorded net of contractual and other discounts.
The Company's clinical services and supply business are reimbursed on a
fee-for-service or per item basis. Other aspects of disease management, however,
are paid for primarily on the basis of monthly fees for each member of a health
plan identified with a particular chronic disease or condition under contract or
enrolled in the Company's program or on a case-rate basis. Some of the contracts
for these services provide that a portion of the Company's fees are at risk
subject to the Company's performance against financial cost savings and clinical
criteria. Thus, a portion of the Company's revenues is subject to confirmation
of the Company's performance against these financial cost savings and clinical
criteria. Estimates for performance under the terms of these contracts and other
factors affecting revenue recognition are accrued on an estimated basis in the
period the services are provided and adjusted in future periods when final
settlement is determined. These estimates are continually reviewed and adjusted
as information related to performance levels and associated fees become
available. Currently, less than 5% of the Company's revenues are at risk under
these arrangements.
A significant portion of the Company's revenues is billed to third-party
reimbursement sources. Accordingly, the ultimate collectibility of a substantial
portion of the Company's trade accounts receivable is susceptible to changes in
third-party reimbursement policies. A provision for doubtful accounts is made
for revenues estimated to be uncollectible and is adjusted periodically based
upon the Company's evaluation of current industry conditions, historical
collection experience, and other relevant factors which, in the opinion of
management, deserve recognition in estimating the allowance for uncollectible
accounts.
GOODWILL AND OTHER INTANGIBLE ASSETS. See "New Accounting Standards" below
for a description of two new accounting pronouncements which will significantly
change the Company's accounting for goodwill and other intangible assets in 2002
and beyond. As of December 31, 2001, the Company had unamortized goodwill of
$107.5 million and unamortized intangible assets of $2.1 million, which
represented 42% of total assets. Under the new accounting standards, the
Company's goodwill will no longer be amortized to expense, but instead will be
tested for impairment at least annually. Other intangible assets will continue
to be amortized over their respective estimated useful lives and reviewed for
impairment.
In testing for impairment, the Company will evaluate the financial
earnings prospects of the acquired companies to which the goodwill and other
intangibles relate and determine whether changed circumstances indicate that any
portion of the carrying value of the goodwill or other intangible assets may no
longer be recoverable.
19
ACCOUNTING FOR INCOME TAXES. The Company accounts for income taxes using
an asset and liability approach. Deferred income taxes are recognized for the
tax consequences of "temporary differences" by applying enacted statutory tax
rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities and net
operating loss and tax credit carryforwards. Additionally, the effect on
deferred taxes of a change in tax rates is recognized in earnings in the period
that includes the enactment date.
The tax expense for 2001 was $6.1 million, but the related tax liability
was largely offset by available net operating losses from prior years. Cash
outflows in 2001 for income taxes totaled $1.2 million, being comprised of
federal alternative minimum taxes, and state and foreign taxes for jurisdictions
where net operating losses were not available. As of December 31, 2001, the
Company's remaining net operating losses of $49.3 million, the tax effect of
which is reflected in the deferred tax asset, will be available to offset future
tax liabilities.
In 1999, the Company eliminated the valuation allowance that was
previously reflected as an offset to the deferred tax asset, based on
expectations of significant earnings resulting from the acquisition of the
Diabetes segment. Management continues to believe that, more likely than not, it
will fully realize the value of the recorded deferred income tax assets.
The above listing is not intended to be a comprehensive list of all of the
Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting any available
alternative would not produce a materially different result. See the Notes to
Consolidated Financial Statements which contain additional accounting policies
and other disclosures required by generally accepted accounting principles.
NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141") and Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets ("SFAS 142"). SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated or
completed after June 30, 2001 and specifies criteria intangible assets acquired
in a purchase method business combination must meet to be recognized and
reported apart from goodwill. SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
SFAS 142. SFAS 142 also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("SFAS 121").
The Company was required to adopt the provisions of SFAS 141 immediately
and SFAS 142 effective January 1, 2002. SFAS 141 will require upon adoption of
SFAS 142 that the Company evaluate its existing goodwill and intangible assets
that were acquired in prior purchase business combinations, and to make any
necessary reclassifications in order to conform with the new criteria in SFAS
141 for recognition apart from goodwill. Upon adoption of SFAS 142, the Company
will be required to reassess the useful lives and residual values of all
intangible assets acquired, and make any necessary amortization period
adjustments by March 31, 2002. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company will be required to
test the intangible asset for impairment in accordance with the provisions of
SFAS 142 within the first quarter of 2002. Any impairment loss will be measured
as of the date of adoption and recognized as the cumulative effect of a change
in accounting principle in the first quarter of 2002.
As of January 1, 2002, the date of adoption of SFAS 142, the Company had
unamortized goodwill of $107.5 million and unamortized identifiable intangible
assets of $2.1 million, all of which will be subject to the
20
transition provisions of SFAS 141 and SFAS 142. Amortization expense related to
goodwill was $9.3 million, $9.2 million and $8.9 million in 2001, 2000 and 1999,
respectively. The Company evaluated the fair values of the business segments
identified under the provisions of SFAS 141 and SFAS 142 and does not anticipate
any significant reclassifications, adjustments to amortization periods or
transitional impairment losses upon adoption of these statements.
Also, in June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, Accounting for Asset Retirement Obligations ("SFAS 143"). An
asset retirement obligation refers to any type of closure or removal costs that
are incurred at any time during the life of an asset. SFAS 143 requires entities
to record the fair value of a liability for an asset retirement obligation in
the period in which it is incurred. When the liability is initially recorded,
the entity capitalizes a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, the entity either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
SFAS 143 is effective for the Company beginning January 1, 2003. The Company
does not expect SFAS 143 to have a significant effect on its financial
statements.
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets ("SFAS 144"), which supersedes both SFAS 121 and the accounting and
reporting provisions of Accounting Principles Board Opinion No. 30, Reporting
the Results of Operations--Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions ("Opinion 30"), for the disposal of a segment of a business (as
previously defined in that Opinion). SFAS 144 retains the fundamental provisions
in SFAS 121 for recognizing and measuring impairment losses on long-lived assets
held for use and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with SFAS 121. For
example, SFAS 144 provides guidance on how a long-lived asset that is used as
part of a group should be evaluated for impairment, establishes criteria for
when a long-lived asset is held for sale, and prescribes the accounting for a
long-lived asset that will be disposed of other than by sale. SFAS 144 retains
the basic provisions of Opinion 30 on how to present discontinued operations in
the income statement but broadens that presentation to include a component of an
entity (rather than a segment of a business). Unlike SFAS 121, an impairment
assessment under SFAS 144 will never result in a write-down of goodwill. Rather,
goodwill is evaluated for impairment under SFAS 142.
The Company was required to adopt SFAS 144 on January 1, 2002. Management
does not expect the adoption of SFAS 144 for long-lived assets held for use to
have a material impact on the Company's financial statements because the
impairment assessment under SFAS 144 is largely unchanged from SFAS 121. The
provisions of the Statement for assets held for sale or other disposal generally
are required to be applied prospectively after the adoption date to newly
initiated disposal activities. Therefore, management cannot determine the
potential effects that adoption of SFAS 144 will have on the Company's financial
statements.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements and
information that are based on the Company's beliefs and assumptions, as well as
information currently available to the Company. From time to time, the Company
and its officers, directors or employees may make other oral or written
statements (including statements in press releases or other announcements) that
contain forward-looking statements and information. Without limiting the
generality of the foregoing, the words "believe", "anticipate", "estimate",
"expect", "intend", "plan", "seek" and similar expressions, when used in this
Annual Report and in such other statements, are intended to identify
forward-looking statements. All statements that express expectations and
projections with respect to future matters, including, without limitation,
statements relating to growth, new lines of business and general optimism about
future operating results, are forward-looking statements. All forward-looking
statements and information in this Annual Report are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and are intended
to be covered by the safe harbors created thereby. Such forward-looking
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors that may cause the actual results,
21
performance or achievements of the Company to differ materially from historical
results or from any results expressed or implied by such forward-looking
statements. Such factors include, without limitation: (i) changes in
reimbursement rates, policies or payment practices by third-party payors,
whether initiated by the payor or legislatively maintained; (ii) the loss of
major customers or failure to receive recurring orders from customers of the
mail-order supply business; (iii) termination of the Company's exclusive supply
agreement with Nipro Corporation or failure to continue the agreement on the
terms currently in effect; (iv) impairment of the Company's rights in
intellectual property; (v) increased or more effective competition; (vi) new
technologies that render obsolete or non-competitive products and services
offered by the Company; (vii) changes in laws or regulations applicable to the
Company or failure to comply with existing laws and regulations; (viii) future
healthcare or budget legislation or other health reform initiatives; (ix)
increased exposure to professional negligence liability; (x) difficulties in
successfully integrating recently acquired businesses into the Company's
operations and uncertainties related to the future performance of such
businesses; (xi) losses due to foreign currency exchange rate fluctuations or
deterioration of economic conditions in foreign markets; (xii) changes in
company-wide or business unit strategies; (xiii) the effectiveness of the
Company's advertising, marketing and promotional programs and changes in patient
therapy mix; (xiv) market acceptance of the Company's disease management
products; (xv) inability to successfully manage the Company's growth; (xvi)
acquisitions that strain the Company's financial and operational resources;
(xvii) inability to effect estimated cost savings and clinical outcomes
improvements or to reach agreement with the Company's disease management
customers with respect to the same; (xviii) inability to accurately forecast
performance under the Company's disease management contracts; (xix) inability of
the Company's disease management customers to provide timely and accurate data
that is essential to the operation and measurement of the Company's performance
under its disease management contracts; (xx) increases in interest rates and
(xxi) the risk factors discussed from time to time in the Company's SEC reports,
including but not limited to, its Annual Report on Form 10-K for the year ended
December 31, 2001. Many of such factors are beyond the Company's ability to
control or predict, and readers are cautioned not to put undue reliance on such
forward-looking statements. The Company disclaims any obligation to update or
review any forward-looking statements contained in this Annual Report or in any
statement referencing the risk factors and other cautionary statements set forth
in this Annual Report, whether as a result of new information, future events or
otherwise, except as may be required by the Company's disclosure obligations in
filings it makes with the Commission under federal securities laws.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest rates on
the interest rate swap agreement and foreign exchange rates.
The Company's primary interest rate risk relates to its interest rate swap
facility, which is based on the three-month LIBOR rate. At December 31, 2001,
the Company's annual benefit under the interest rate swap totaled $2.1 million.
A hypothetical 10% change in the LIBOR rate applied to the December 31, 2001
balance of the interest rate swap agreement for a duration of one year would
result in a change in interest expense of approximately $134,000.
The Company's non-U.S. operations with sales denominated in other than
U.S. dollars (primarily in Germany) generated approximately 12% of total
revenues in 2001. In the normal course of business, these operations are exposed
to fluctuations in currency values. Management does not consider the impact of
currency fluctuations to represent a significant risk, and as such, has chosen
not to hedge its foreign currency exposure. A 10% change in the dollar exchange
rate of the euro would impact net earnings by approximately $272,000.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following Consolidated Financial Statements of the Company and its
subsidiaries and independent auditors' report thereon are included as pages F-1
through F-29 of this Annual Report on Form 10-K:
PAGE
Independent Auditors' Report F-1
Consolidated Balance Sheets - December 31, 2001 and 2000 F-2
Consolidated Statements of Operations - Years Ended
December 31, 2001, 2000 and 1999 F-3
Consolidated Statements of Common Shareholders' Equity and
Comprehensive Earnings - Years Ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Cash Flows - Years Ended
December 31, 2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
23
PART III
ITEMS 10-13.
The information contained under the heading "Management of the Company" in
the Company's definitive proxy materials for its 2002 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission, is
incorporated by reference herein. Additional information relating to the
executive officers of the Company is included as a Special Item in Part I of
this Annual Report on Form 10-K.
For purposes of determining the aggregate market value of the Company's
common stock held by non-affiliates as shown on the cover page of this report,
shares held by all directors and executive officers of the Company have been
excluded. The exclusion of such shares is not intended to, and shall not,
constitute a determination as to which persons may be "affiliates" of the
Company as defined by the Securities and Exchange Commission.
Section 16(a) of the Securities Exchange Act of 1934 as amended (the
"Act"), requires the Company's directors and executive officers and persons who
own more than ten percent of a registered class of the Company's equity
securities to file reports with the SEC regarding beneficial ownership of common
stock and other equity securities of the Company. To the Company's knowledge,
based solely on a review of copies of such reports furnished to the Company and
written representations that no other reports were required, during the fiscal
year ended December 31, 2001, all officers, directors and greater than ten
percent beneficial owners complied with the Section 16(a) filing requirements of
the Act in all instances with the exception of a filing with respect to the
disposition of common stock by James P. Reichmann by gift.
24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) The following consolidated financial statements of the Company and
its subsidiaries and report of independent auditors thereon are included as
pages F-1 through F-29 of this Annual Report on Form 10-K:
PAGE
Independent Auditors' Report F-1
Consolidated Balance Sheets - December 31, 2001 and 2000 F-2
Consolidated Statements of Operations - Years Ended
December 31, 2001, 2000 and 1999 F-3
Consolidated Statements of Common Shareholders' Equity and
Comprehensive Earnings - Years Ended December 31, 2001, 2000 and 1999 F-4
Consolidated Statements of Cash Flows - Years Ended
December 31, 2001, 2000 and 1999 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) The following supporting financial statement schedule and report of
independent auditors thereon are included as part of this Annual Report on Form
10-K:
PAGE
Independent Auditors' Report F-1
Schedule II - Valuation and Qualifying Accounts 31
All other Schedules are omitted because the required information is
inapplicable or information is presented in the Consolidated Financial
Statements or related notes.
(a)(3) EXHIBITS:
The following exhibits are incorporated by reference herein as part of
this Report as indicated:
Exhibit
Number Description
- ------- -----------
2.1 Asset Purchase Agreement, dated July 21, 1998, for the purchase of
assets of Quality Diagnostic Services, Inc. ("QDS") (incorporated by
reference to Exhibit 2 to the Matria Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998).
2.2 Purchase and Sale Agreement, dated December 21, 1998, by and between
Matria and Gainor Medical Management, L.L.C., with exhibits
(incorporated by reference to Exhibit 2.1 to the Company's Form 8-K
dated February 3, 1999 with those portions omitted for confidentiality
reasons filed separately with the Commission).
25
2.3 Asset Purchase Agreement, dated January 8, 2001, for the sale of
assets of Quality Diagnostic Services, Inc. ("QDS") among Card Guard
Technologies, Inc., Matria Healthcare, Inc., and QDS (incorporated by
reference to Exhibit 2.5 to the Matria Annual Report on Form 10-K for
the year ended December 31, 2000).
2.4 Amendment to Asset Purchase Agreement, dated February 1, 2001, for the
sale of assets of QDS among Card Guard Technologies, Inc., Matria
Healthcare, Inc., and QDS (incorporated by reference to Exhibit 2.6 to
the Matria Annual Report on Form 10-K for the year ended December 31,
2000).
3.1 Restated Certificate of Incorporation (incorporated by reference to
Exhibit 3.1 to the Matria Annual Report on Form 10-K for the year
ended December 31, 1995, Commission File No. 20619).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit 3 to
the Matria Quarterly Report on Form 10-Q for the quarter ended March
31, 2000).
3.3 Certificate of Amendment of Restated Certificate of Incorporation of
Matria dated December 5, 2000 (incorporated by reference to Exhibit
3.4 to the Matria Annual Report on Form 10-K for the year ended
December 31, 2000).
4.1 Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of 4% Series A Convertible Preferred
Stock dated January 15, 1999 (incorporated by reference to Exhibit 4.1
to the Company's Form 8-K dated February 3, 1999).
4.2 Certificate of Designations, Preferences and Relative, Participating,
Optional and Other Special Rights of 8% Series B Redeemable Preferred
Stock dated January 15, 1999 (incorporated by reference to Exhibit 4.2
to the Company's Form 8-K dated February 3, 1999).
4.3 Amended and Restated Rights Agreement, dated April 27, 1999 between
Matria and SunTrust Bank Atlanta (incorporated by reference to Exhibit
4 to the Matria Quarterly Report on Form 10-Q for the quarter ended
March 31, 1999).
4.4 First Amended and Restated Credit Agreement dated as of January 19,
1999 and Amended and Restated as of July 9, 2001 among the Registrant
and certain subsidiaries, as Borrowers and the lenders named therein
as the Lenders, First Union National Bank as the Administrative Agent
and UBS Warburg LLC, as the Syndication Agent, and arranged by First
Union Securities, Inc. (incorporated by reference to Exhibit 99.1 to
the Matria Current Report on Form 8-K dated July 19, 2001).
4.5 Indenture dated as of July 9, 2001 by and among the Registrant, the
Guarantors named therein and Wells Fargo Minnesota, National
Association as Trustee, relating to the Registrant's 11% Senior Notes
due 2008 (incorporated by reference to Exhibit 99.2 to the Matria
Current Report on Form 8-K dated July 19, 2001).
4.6 Registration Rights Agreement dated as of July 9, 2001 by and among
the Registrant, the Guarantors named therein and the Initial
Purchasers named therein, relating to the Registrant's 11% Senior
Notes due 2008 (incorporated by reference to Exhibit 99.3 to the
Matria Current Report on Form 8-K dated July 19, 2001).
4.7 Amendment No. 1 to Amended and Restated Rights Agreement, dated as of
October 5, 2001, between Matria and Sun Trust Bank Atlanta
(incorporated by reference to Exhibit 4(b) to the Matria Form 8-K/A
dated October 29, 2001).
4.8 Interest Rate Swap Agreement, dated July 18, 2001, between First Union
Bank and Matria (incorporated by reference to Exhibit 10 to the Matria
Form 10-Q for the quarter ended September 30, 2001).
26
*10.1 1996 Stock Incentive Plan (incorporated by reference to Appendix F-1
to the Joint Proxy Statement/Prospectus filed as a part of the
Company's Form S-4).
*10.2 1996 Directors' Non-Qualified Stock Option Plan (incorporated by
reference to Appendix F-11 to the Joint Proxy Statement/Prospectus
filed as a part of the Company's Form S-4).
*10.3 1996 Employee Stock Purchase Plan (incorporated by reference to
Appendix F-111 to the Joint Proxy Statement/Prospectus filed as a part
of the Company's Form S-4).
*10.4 Split-Dollar Life Insurance Agreement between the Company and Parker
H. Petit, effective January 1, 1997 (incorporated by reference to
Exhibit 10.12 to the Matria Annual Report on Form 10-K for the year
ended December 31, 1998).
*10.5 Split-Dollar Life Insurance Agreement between the Company and Donald
R. Millard, effective January 1, 1997 (incorporated by reference to
Exhibit 10.13 to the Matria Annual Report on Form 10-K for the year
ended December 31, 1998).
*10.6 Split-Dollar Life Insurance Agreement between the Company and Frank D.
Powers, effective January 1, 1997 (incorporated by reference to
Exhibit 10.14 to the Matria Annual Report on Form 10-K for the year
ended December 31, 1998).
*10.7 Split-Dollar Life Insurance Agreement between the Company and Thornton
A. Kuntz, Jr. effective January 8, 1998 (incorporated by reference to
Exhibit 10.15 to the Matria Annual Report on Form 10-K for the year
ended December 31, 1998).
*10.8 Split-Dollar Life Insurance Agreement between the Company and Roberta
L. McCaw, effective January 8, 1998 (incorporated by reference to
Exhibit 10.16 to the Matria Annual Report on Form 10-K for the year
ended December 31, 1998).
*10.9 Split-Dollar Life Insurance Agreement between the Company and Yvonne
V. Scoggins, effective January 8, 1998 (incorporated by reference to
Exhibit 10.17 to the Matria Annual Report on Form 10-K for the year
ended December 31, 1998).
*10.10 Severance Compensation and Restrictive Covenant Agreement dated as of
April 27, 1999 between the Company and Donald R. Millard (incorporated
by reference to Exhibit 10.12 to the Matria Quarterly Report on Form
10-Q for the quarter ended September 30, 1999).
*10.11 Severance Compensation and Restrictive Covenant Agreement dated as of
April 27, 1999 between the Company and Frank D. Powers (incorporated
by reference to Exhibit 10.13 to the Matria Quarterly Report on Form
10-Q for the quarter ended September 30, 1999).
*10.12 Severance Compensation and Restrictive Covenant Agreement dated as of
April 27, 1999 between the Company and Yvonne V. Scoggins
(incorporated by reference to Exhibit 10.14 to the Matria Quarterly
Report on Form 10-Q for the quarter ended September 30, 1999).
*10.13 Change in Control Severance Compensation and Restrictive Covenant
Agreement dated as of April 27, 1999 between the Company and Frank D.
Powers (incorporated by reference to Exhibit 10.16 to the Matria
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
*10.14 Change in Control Severance Compensation and Restrictive Covenant
Agreement dated as of April 27, 1999 between the Company and Yvonne V.
Scoggins (incorporated by reference to Exhibit 10.17 to the Matria
Quarterly Report on Form 10-Q for the quarter ended September 30,
1999).
27
*10.15 1997 Stock Incentive Plan incorporated by reference to Exhibit A to
Matria's Definitive Proxy Statement filed with the Commission on April
16, 1998.
*10.16 2000 Stock Incentive Plan (incorporated by reference to Exhibit A to
Matria's Definitive Proxy Statement filed with the Commission on April
14, 2000).
*10.17 2000 Director's Non-Qualified Stock Option Plan (incorporated by
reference to Matria's Definitive proxy Statement filed with the
Commission on April 14, 2000).
*10.18 Employment Letter Agreement between the Company and Jeffrey D.
Koepsell, dated May 16, 2000 (incorporated by reference to the
Company's Quarterly Report on From 10-Q for the quarter ended June 30,
2000).
*10.19 Amendment to Employment Letter Agreement between the Company and
Jeffrey D. Koepsell, dated May 18, 2000 (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2000).
*10.20 Amendment to the 1996 Directors' Non-Qualified Stock Option Plan
approved by Matria's stockholders on May 18, 1998 (incorporated by
reference to Exhibit 10.23 to the Matria Form 10-K for the year ended
December 31, 2000).
*10.21 Change in Control Severance Compensation and Restrictive Covenant
Agreement between Matria and Parker H. Petit, dated October 4, 2000
(incorporated by reference to Exhibit 10.24 to the Matria Form 10-K
for the year ended December 31, 2000).
*10.22 Promissory Note, dated October 12, 2000 (incorporated by reference to
Exhibit 10.25 to the Matria Form 10-K for the year ended December 31,
2000).
The following exhibits are filed as part of this Report:
2.5 Asset Purchase Agreement, effective 12:00 midnight (E.S.T.) on
February 6, 2002, among Matria, ChoicePoint Services, Inc. and
ChoicePoint Health Systems, Inc.
11.0 Computation of Earnings (Loss) per Share.
21.0 List of Subsidiaries.
23.0 Accountants' Consent.
24.0 Power of Attorney (included in signature page to this report).
*Management contract or compensatory plan or arrangement
(b) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K on November 16, 2001, which
reported under Item 9 (Regulation FD Disclosure) concerning Matria's letter to
shareholders on the Company's website at www.matria.com.
28
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.
MATRIA HEALTHCARE, INC.
March 28, 2002 By: /s/ Parker H. Petit
-----------------------------------------
Parker H. Petit
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ George W. Dunaway
-----------------------------------------
George W. Dunaway, Vice President--
Finance and Chief Financial Officer
(Principal Financial Officer)
/s/ Larry N. Brownlee
-----------------------------------------
Larry N. Brownlee
Corporate Controller
(Principal Accounting Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Parker H. Petit as his or her true and lawful
attorney-in-fact and agent, with full power of substitution and re-substitution,
for and in his or her name, place and stead, in any and all capacities, to sign
any and all amendments to this Annual Report on Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent full power and authority to do and to perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully and to
all intents and purposes as he or she might or would do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Parker H. Petit Chairman of the Board, March 28, 2002
- ---------------------------------- President and Chief Executive Officer
Parker H. Petit
/s/ Jeffrey D. Koepsell Director, Executive March 28, 2002
- ---------------------------------- Vice President and
Jeffrey D. Koepsell Chief Operating Officer
29
/s/ Guy W. Millner Director March 24, 2002
- ---------------------------------
Guy W. Millner
/s/ Carl E. Sanders Director March 28, 2002
- ---------------------------------
Carl E. Sanders
/s/ Thomas S. Stribling Director March 23, 2002
- ---------------------------------
Thomas S. Stribling
/s/ Jackie M. Ward Director March 28, 2002
- ---------------------------------
Jackie M. Ward
/s/ Donald W. Weber Director March 28, 2002
- ---------------------------------
Donald W. Weber
/s/ Morris S. Weeden Director March 28, 2002
- ---------------------------------
Morris S. Weeden
/s/ Frederick P. Zuspan, M.D. Director March 28, 2002
- ---------------------------------
Frederick P. Zuspan, M.D.
30
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
Additions
---------------------------
Balance at Charges to Charges to Balance at
Beginning Costs and Other End of
Description of Period Expenses Accounts Deductions Period
----------- --------- -------- -------- ---------- ------
Allowance for doubtful accounts
December 31, 1999 $17,005 7,193 2,089(1) 14,324 11,963
December 31, 2000 $11,963 7,043 -- 12,069 6,937
December 31, 2001 $ 6,937 7,575 -- 7,487 7,025
- ----------
(1) Represents beginning balances in allowance for doubtful accounts of
acquired companies.
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Matria Healthcare, Inc.:
We have audited the accompanying consolidated balance sheets of Matria
Healthcare, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of operations, common shareholders' equity and
comprehensive earnings, and cash flows for each of the years in the three-year
period ended December 31, 2001. In connection with our audits of the
consolidated financial statements, we also have audited the financial statement
schedule of valuation and qualifying accounts. These consolidated financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Matria Healthcare,
Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Atlanta, Georgia
February 15, 2002
F-1
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share amounts)
DECEMBER 31,
------------------------
ASSETS 2001 2000
--------- ---------
Current assets:
Cash and cash equivalents $ 1,983 $ 3,915
Short-term investments (note 15) 116 130
Trade accounts receivable, less allowances of $7,025 and
$6,937 at December 31, 2001 and 2000, respectively 52,054 39,969
Other receivables (note 14) 4,597 27,608
Inventories 21,306 17,035
Prepaid expenses 5,575 2,011
Deferred income taxes (note 5) 3,868 3,182
--------- ---------
Total current assets 89,499 93,850
Property and equipment, net (note 1.i) 18,722 15,644
Intangible assets, net (note 1.j) 109,634 119,486
Deferred income taxes (note 5) 24,715 27,872
Other assets (note 8) 18,053 11,998
--------- ---------
$ 260,623 $ 268,850
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt (notes 3 and 10) $ 615 $ 11,815
Accounts payable, principally trade 22,651 21,734
Accrued liabilities (notes 1.n and 14) 9,619 9,255
--------- ---------
Total current liabilities 32,885 42,804
Long-term debt, excluding current installments (notes 2, 3 and 10) 114,575 76,996
Other long-term liabilities 8,266 8,754
--------- ---------
Total liabilities 155,726 128,554
--------- ---------
Redeemable preferred stock, $.01 par value. Authorized 50,000 shares (note 6):
Series A convertible: issued and outstanding -- 10 shares at
December 31, 2000; redemption value of $10,000 -- 10,000
Series B: issued and outstanding -- 35 shares at December 31, 2000;
redemption value of $35,000 -- 31,446
--------- ---------
Total redeemable preferred stock -- 41,446
--------- ---------
Common shareholders' equity (note 7):
Common stock, $.01 par value. Authorized 25,000 shares; issued and
outstanding -- 8,927 and 8,777 at December 31, 2001 and 2000, respectively 89 88
Additional paid-in capital 290,070 288,900
Accumulated deficit (181,035) (186,082)
Accumulated other comprehensive loss, net of income taxes (692) (521)
Notes receivable and accrued interest from shareholder (3,535) (3,535)
--------- ---------
Total common shareholders' equity 104,897 98,850
--------- ---------
Commitments and contingencies (notes 8, 10 and 11)
--------- ---------
$ 260,623 $ 268,850
========= =========
See accompanying notes to consolidated financial statements.
F-2
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
---------------------------------------
2001 2000 1999
--------- --------- ---------
Revenues $ 263,983 $ 225,767 $ 231,739
Cost of revenues 145,685 116,179 118,305
Selling and administrative expenses 76,249 68,468 73,653
Provision for doubtful accounts 7,575 7,043 7,193
Amortization of intangible assets 9,827 9,803 9,439
Restructuring charges (note 9) -- 1,599 4,241
--------- --------- ---------
Operating earnings from continuing operations 24,647 22,675 18,908
Interest income 384 444 474
Interest expense (10,392) (8,600) (8,185)
Other income (expense), net (note 15) (639) 8,275 16,169
--------- --------- ---------
Earnings from continuing operations before income taxes 14,000 22,794 27,366
Income tax benefit (expense) (note 5) (6,075) (9,100) 4,000
--------- --------- ---------
Earnings from continuing operations 7,925 13,694 31,366
Earnings (loss) from discontinued operations, net of income taxes (note 14) (455) -- 2,640
Loss on disposal of discontinued operations, net of income taxes (note 14) (785) -- --
--------- --------- ---------
Net earnings 6,685 13,694 34,006
Redeemable preferred stock dividends (1,638) (3,200) (3,049)
Accretion of Series B redeemable preferred stock (225) (441) (420)
Net gain on repurchases of preferred stock 739 -- --
--------- --------- ---------
Net earnings available to common shareholders $ 5,561 $ 10,053 $ 30,537
========= ========= =========
Net earnings (loss) per common share (note 1.p):
Basic:
Continuing operations $ 0.78 $ 1.10 $ 3.05
Discontinued operations (0.14) -- 0.29
--------- --------- ---------
$ 0.64 $ 1.10 $ 3.34
========= ========= =========
Diluted:
Continuing operations $ 0.76 $ 1.05 $ 2.82
Discontinued operations (0.14) -- 0.26
--------- --------- ---------
$ 0.62 $ 1.05 $ 3.08
========= ========= =========
Weighted average shares outstanding:
Basic 8,748 9,139 9,151
========= ========= =========
Diluted 8,992 9,946 10,036
========= ========= =========
See accompanying notes to consolidated financial statements.
F-3
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
AND COMPREHENSIVE EARNINGS
(Amounts and shares in thousands)
Common stock Additional
---------------- Paid-in
Shares Amount Capital
------ ------ -------
Balance, December 31, 1998 9,103 $ 91 $ 280,858
Issuance of common stock:
Exercise of employee stock options 37 -- 309
Employee stock purchase plan 49 1 527
Conversion of subordinated debentures 4 -- 87
Tax benefit from exercise of employee stock options -- -- 7,710
Issuance of warrants on Series B redeemable preferred stock -- -- 4,415
Accretion on Series B redeemable preferred stock -- -- (420)
Dividends on redeemable preferred stock -- -- --
Net earnings -- -- --
Change in foreign currency translation adjustment -- -- --
Change in unrealized appreciation on available-for-sale securities -- -- --
----- ---- ---------
Balance, December 31, 1999 9,193 92 293,486
----- ---- ---------
Issuance of common stock:
Exercise of employee stock options 5 -- 65
Employee stock purchase plan 40 1 558
Conversion of subordinated debentures -- -- 5
Repurchase of common stock (460) (5) (4,728)
Fractional shares retired after reverse stock split (1) -- (45)
Accretion on Series B redeemable preferred stock -- -- (441)
Dividends on redeemable preferred stock -- -- --
Net earnings -- -- --
Change in foreign currency translation adjustment, net of
income taxes -- -- --
Change in unrealized appreciation on available-for-sale
securities, net of income taxes -- -- --
----- ---- ---------
Balance, December 31, 2000 8,777 88 288,900
----- ---- ---------
Issuance of common stock:
Exercise of employee stock options 171 2 3,510
Employee stock purchase plan 40 -- 380
Conversion of subordinated debentures 21 -- 411
Tax benefit from exercise of employee stock options -- -- 700
Repurchase of common stock (82) (1) (975)
Repurchase of warrants -- -- (3,370)
Accretion on Series B redeemable preferred stock -- -- (225)
Dividends on redeemable preferred stock -- -- --
Net gain on repurchase of preferred stock -- -- 739
Net earnings -- -- --
Change in foreign currency translation adjustment, net of
income taxes -- -- --
Change in unrealized appreciation on available-for-sale
securities, net of income taxes -- -- --
----- ---- ---------
Balance, December 31, 2001 8,927 $ 89 $ 290,070
===== ==== =========
Accumulated Other
Comprehensive Earnings (Loss)
-----------------------------
Accumulated Translation Unrealized
Deficit Adjustment Appreciation
------- ---------- ------------
Balance, December 31, 1998 $(227,533) $ -- $ --
Issuance of common stock:
Exercise of employee stock options -- -- --
Employee stock purchase plan -- -- --
Conversion of subordinated debentures -- -- --
Tax benefit from exercise of employee stock options -- -- --
Issuance of warrants on Series B redeemable preferred stock -- -- --
Accretion on Series B redeemable preferred stock -- -- --
Dividends on redeemable preferred stock (3,049) -- --
Net earnings 34,006 -- --
Change in foreign currency translation adjustment -- (537) --
Change in unrealized appreciation on available-for-sale securities -- -- 6,314
--------- ----- -------
Balance, December 31, 1999 (196,576) (537) 6,314
--------- ----- -------
Issuance of common stock:
Exercise of employee stock options -- -- --
Employee stock purchase plan -- -- --
Conversion of subordinated debentures -- -- --
Repurchase of common stock -- -- --
Fractional shares retired after reverse stock split -- -- --
Accretion on Series B redeemable preferred stock -- -- --
Dividends on redeemable preferred stock (3,200) -- --
Net earnings 13,694 -- --
Change in foreign currency translation adjustment, net of
income taxes -- (25) --
Change in unrealized appreciation on available-for-sale
securities, net of income taxes -- -- (6,273)
--------- ----- -------
Balance, December 31, 2000 (186,082) (562) 41
--------- ----- -------
Issuance of common stock:
Exercise of employee stock options -- -- --
Employee stock purchase plan -- -- --
Conversion of subordinated debentures -- -- --
Tax benefit from exercise of employee stock options -- -- --
Repurchase of common stock -- -- --
Repurchase of warrants -- -- --
Accretion on Series B redeemable preferred stock -- -- --
Dividends on redeemable preferred stock (1,638) -- --
Net gain on repurchase of preferred stock -- -- --
Net earnings 6,685 -- --
Change in foreign currency translation adjustment, net of
income taxes -- (164) --
Change in unrealized appreciation on available-for-sale
securities, net of income taxes -- -- (7)
--------- ----- -------
Balance, December 31, 2001 $(181,035) $(726) $ 34
========= ===== =======
Notes
Receivable Total
and Accrued Common
Interest from Shareholders' Comprehensive
Shareholder Equity Earnings (loss)
----------- ------ ---------------
Balance, December 31, 1998 $(3,535) $ 49,881
Issuance of common stock:
Exercise of employee stock options -- 309
Employee stock purchase plan -- 528
Conversion of subordinated debentures -- 87
Tax benefit from exercise of employee stock options -- 7,710
Issuance of warrants on Series B redeemable preferred stock -- 4,415
Accretion on Series B redeemable preferred stock -- (420)
Dividends on redeemable preferred stock -- (3,049)
Net earnings -- 34,006 $ 34,006
Change in foreign currency translation adjustment -- (537) (537)
Change in unrealized appreciation on available-for-sale securities -- 6,314 6,314
------- --------- --------
Balance, December 31, 1999 (3,535) 99,244 $ 39,783
======= ========= ========
Issuance of common stock:
Exercise of employee stock options -- 65
Employee stock purchase plan -- 559
Conversion of subordinated debentures -- 5
Repurchase of common stock -- (4,733)
Fractional shares retired after reverse stock split -- (45)
Accretion on Series B redeemable preferred stock -- (441)
Dividends on redeemable preferred stock -- (3,200)
Net earnings -- 13,694 $ 13,694
Change in foreign currency translation adjustment, net of
income taxes -- (25) (25)
Change in unrealized appreciation on available-for-sale
securities, net of income taxes -- (6,273) (6,273)
------- --------- --------
Balance, December 31, 2000 (3,535) 98,850 $ 7,396
======= ========= ========
Issuance of common stock:
Exercise of employee stock options -- 3,512
Employee stock purchase plan -- 380
Conversion of subordinated debentures -- 411
Tax benefit from exercise of employee stock options -- 700
Repurchase of common stock -- (976)
Repurchase of warrants -- (3,370)
Accretion on Series B redeemable preferred stock -- (225)
Dividends on redeemable preferred stock -- (1,638)
Net gain on repurchase of preferred stock -- 739
Net earnings -- 6,685 $ 6,685
Change in foreign currency translation adjustment, net of
income taxes -- (164) (164)
Change in unrealized appreciation on available-for-sale
securities, net of income taxes -- (7) (7)
------- --------- --------
Balance, December 31, 2001 $(3,535) $ 104,897 $ 6,514
======= ========= ========
See accompanying notes to consolidated financial statements.
F-4
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
YEARS ENDED DECEMBER 31,
--------------------------------------
2001 2000 1999
--------- -------- ---------
Cash Flows from Operating Activities:
Net earnings $ 6,685 $ 13,694 $ 34,006
Less, earnings (loss) from discontinued operations, net of income taxes (1,240) -- 2,640
--------- -------- ---------
Earnings from continuing operations 7,925 13,694 31,366
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 15,198 13,984 13,987
Amortization of debt discount and expenses 853 -- --
Provision for doubtful accounts 7,575 7,043 7,193
Deferred tax expense (benefit) 4,508 7,733 (4,150)
Gains on sales of investments -- (6,077) (17,349)
Changes in assets and liabilities, net of effect of acquisitions:
Trade accounts receivable (19,509) (5,583) (5,319)
Inventories (4,271) (6,735) (191)
Prepaid expenses (3,388) (347) (423)
Other current assets (1,552) 694 842
Intangible and other noncurrent assets (1,311) (3,451) (3,353)
Accounts payable 1,369 3,713 (5,667)
Accrued and other liabilities 550 (4,550) (4,458)
--------- -------- ---------
Net cash provided by continuing operations 7,947 20,118 12,478
Net cash provided by (used in) discontinued operations 3,056 (623) 710
--------- -------- ---------
Net cash provided by operating activities 11,003 19,495 13,188
--------- -------- ---------
Cash Flows from Investing Activities:
Purchases of property and equipment (8,386) (7,395) (5,128)
Purchases of property and equipment related to discontinued operations (17) (3,492) (2,233)
Proceeds from disposition of business 18,076 -- --
Proceeds from sales of short-term investments -- 7,298 23,579
Acquisition of businesses, net of cash acquired -- -- (93,022)
Investment in an affiliated company -- -- (2,680)
Proceeds from disposal of property and equipment -- -- 1,257
--------- -------- ---------
Net cash provided by (used in) investing activities 9,673 (3,589) (78,227)
--------- -------- ---------
Cash Flows from Financing Activities:
Proceeds from issuance of senior notes 111,940 -- --
Borrowings under credit agreement 36,000 23,000 108,000
Proceeds from issuance of debt 1,013 891 979
Principal repayments of long-term debt (127,738) (37,650) (41,552)
Proceeds from issuance of common stock 3,892 579 837
Repurchases of common stock and warrants (4,346) (4,733) --
Repurchase of redeemable preferred stock (40,931) -- --
Preferred stock dividend payments (2,438) (3,200) (2,249)
--------- -------- ---------
Net cash provided by (used in) financing activities (22,608) (21,113) 66,015
--------- -------- ---------
Effect of exchange rate changes on cash and cash equivalents -- (426) (537)
--------- -------- ---------
Net increase (decrease) in cash and cash equivalents (1,932) (5,633) 439
Cash and cash equivalents at beginning of year 3,915 9,548 9,109
--------- -------- ---------
Cash and cash equivalents at end of year $ 1,983 $ 3,915 $ 9,548
========= ======== =========
Supplemental disclosures of cash paid for:
Interest $ 9,428 $ 8,596 $ 6,325
========= ======== =========
Income taxes $ 1,164 $ 2,167 $ 457
========= ======== =========
Supplemental disclosure of noncash investing and financing activities:
Equipment acquired under capital lease obligations $ 63 $ 526 $ 707
========= ======== =========
See accompanying notes to consolidated financial statements.
F-5
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS
Prior to 1998, Matria Healthcare, Inc. ("Matria" or the "Company"),
a Delaware corporation, was primarily a nationwide provider of
women's health services. During 1998, Matria established itself as a
diversified provider of disease management. In July 1998, the
Company acquired Quality Diagnostic Services, Inc. ("QDS") and
entered the cardiovascular diagnostic market. In October 1998, the
Company entered the respiratory disease management market by signing
a licensing agreement with National Jewish Medical Research Center
("National Jewish") that gives Matria exclusive rights to market the
comprehensive asthma and chronic obstructive pulmonary disease
management programs developed by National Jewish. In 1998, the
Company expanded its existing diabetes-in-pregnancy program to
include the general diabetes population. In January 1999, the
Company significantly expanded its offering of diabetes supplies and
disease management services through the acquisitions of Gainor
Medical Management, L.L.C. ("Gainor Medical") and Diabetes
Management Systems, Inc. ("DMS"). See note 2 for a summary of
acquisitions, note 13 for a description of the revenues, operating
earnings, identifiable assets, depreciation and amortization and
capital expenditures of the Company's reportable business segments
and note 14 for a summary of dispositions of businesses, including
the sale of QDS in February 2001.
(b) BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States. In preparing the consolidated financial statements,
management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the date of the
consolidated balance sheets, and revenues, other income and expenses
for the periods. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of Matria
and all of its majority owned subsidiaries and partnerships. All
significant intercompany balances and transactions have been
eliminated in consolidation.
(c) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and interest-bearing
deposits. The Company considers all highly liquid debt instruments
with original maturities of three months or less to be cash
equivalents.
(d) SHORT-TERM INVESTMENTS
At December 31, 2001, short-term investments consist of the
Company's holdings in marketable equity securities. Under the
provisions of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities
("SFAS 115"), the Company classifies these short-term investments as
available-for-sale securities which are carried at fair value with
any unrealized gains and losses included in accumulated other
comprehensive earnings in common shareholders' equity. Unrealized
gains of $34 and $41 are included in common shareholders' equity in
the consolidated balance sheets at December 31, 2001 and 2000 (see
note 15).
F-6
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
(e) REVENUE RECOGNITION AND ALLOWANCES FOR UNCOLLECTIBLE ACCOUNTS
Revenues for the Women's Health and Other segments are generated by
providing services through patient service centers. Revenues from
these segments are recognized as the related services are rendered
and are net of contractual allowances and related discounts. The
Diabetes segment provides services through its patient service
centers, provides supplies to patients, and assembles, packages and
distributes lancing products to original equipment manufacturers.
Revenues for services are recognized when services are provided and
revenues from product sales are recognized when products are
shipped. Revenues from this segment are recorded net of contractual
and other discounts.
A significant portion of the Company's revenues is billed to
third-party reimbursement sources. Accordingly, the ultimate
collectibility of a substantial portion of the Company's trade
accounts receivable is susceptible to changes in third-party
reimbursement policies. A provision for doubtful accounts is made
for revenues estimated to be uncollectible and is adjusted
periodically based upon the Company's evaluation of current industry
conditions, historical collection experience, and other relevant
factors which, in the opinion of management, deserve recognition in
estimating the allowance for uncollectible accounts.
(f) CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially expose the Company to
concentrations of credit risk, consist primarily of accounts
receivable from third-party payors. The collectibility of accounts
receivable from third-party payors is directly affected by
conditions and changes in the insurance industry and governmental
programs, which are taken into account by the Company in computing
and evaluating its allowance for uncollectible accounts.
(g) INVENTORIES
Inventories, which consist primarily of disposable medical products,
drugs and patient supplies, are stated at the lower of cost
(first-in, first-out) or market (net realizable value).
(h) PREPAID ADVERTISING
In accordance with American Institute of Certified Public
Accountants Statement of Position 93-7 ("SOP 93-7"), direct-response
advertising and related costs for the Company's Diabetes segment are
capitalized and amortized to selling and administrative expense on a
straight-line basis over a two-year period following expenditure.
Management assesses the realizability of the amounts of
direct-response advertising costs reported as assets at each balance
sheet date by comparing the carrying amounts of such assets to the
estimated remaining future net benefits estimated to result directly
from such advertising.
Capitalized direct-response advertising costs, net of accumulated
amortization, of $3,377 and $305 were included in prepaid expenses
in the accompanying consolidated balance sheets at December 31, 2001
and 2000, respectively. The Company expenses in the period incurred
all other advertising and promotion costs that do not meet the
requirements for capitalization under SOP 93-7. Total advertising
expense was $1,109, $880 and $706 for years ended December 31, 2001,
2000 and 1999, respectively.
(i) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is provided primarily on
the straight-line method over the estimated useful lives of the
assets ranging from three to ten years. Amortization of leasehold
improvements and leased equipment is recorded over the shorter of
the lives of the related assets or the lease terms.
F-7
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
Property and equipment are summarized as follows:
DECEMBER 31,
--------------------
2001 2000
-------- -------
Machinery, equipment and fixtures $ 26,829 20,278
Medical equipment 15,759 18,623
Leasehold improvements 2,652 2,124
-------- -------
45,240 41,025
Less accumulated depreciation and amortization 26,518 25,381
-------- -------
$ 18,722 15,644
======== =======
(j) INTANGIBLE ASSETS
A summary of intangible assets follows:
DECEMBER 31,
--------------------
2001 2000
-------- -------
Goodwill $135,045 135,045
Other intangible assets 3,800 3,825
-------- -------
138,845 138,870
Less accumulated amortization 29,211 19,384
-------- -------
$109,634 119,486
======== =======
Intangible assets consist of goodwill and other intangible assets,
primarily resulting from the Company's acquisitions (see note 2).
The net unamortized balance of goodwill as of December 31, 2001 was
$107,514. In 2001, 2000 and 1999, goodwill was amortized using the
straight-line method over periods ranging from eight to 15 years.
Amortization expense related to goodwill in each of these years
totaled $9,267, $9,243 and $8,879, respectively.
Other intangible assets consist of customer lists and executive
noncompete agreements. The net unamortized balance of these
identifiable intangible assets as of December 31, 2001 was $2,120.
In 2001, 2000 and 1999, these costs were amortized on a
straight-line basis over periods ranging from five to ten years.
Amortization expense in each of these three years was $560.
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 141, Business
Combinations ("SFAS 141") and Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS
142"). SFAS 141 requires that the purchase method of accounting be
used for all business combinations initiated or completed after June
30, 2001 and specifies criteria intangible assets acquired in a
purchase method business combination must meet to be recognized and
reported apart from goodwill. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually in
accordance with the provisions of SFAS 142. SFAS 142 also requires
that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with Statement of
Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of ("SFAS 121").
F-8
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
The Company was required to adopt the provisions of SFAS 141
immediately and SFAS 142 effective January 1, 2002. SFAS 141 will
require upon adoption of SFAS 142 that the Company evaluate its
existing goodwill and intangible assets that were acquired in prior
purchase business combinations, and to make any necessary
reclassifications in order to conform with the new criteria in SFAS
141 for recognition apart from goodwill. Upon adoption of SFAS 142,
the Company will be required to reassess the useful lives and
residual values of all intangible assets acquired, and make any
necessary amortization period adjustments by March 31, 2002. In
addition, to the extent an intangible asset is identified as having
an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of
SFAS 142 within the first quarter of 2002. Any impairment loss will
be measured as of the date of adoption and recognized as the
cumulative effect of a change in accounting principle in the first
quarter of 2002.
The Company evaluated the fair values of the business segments
identified under the provisions of SFAS 141 and SFAS 142 and does
not anticipate any significant reclassifications, adjustments to
amortization periods or transitional impairment losses upon adoption
of these statements.
(k) LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
In August 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets ("SFAS 144"), which supersedes both SFAS 121 and
the accounting and reporting provisions of Accounting Principles
Board Opinion No. 30, Reporting the Results of Operations--Reporting
the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions ("Opinion 30") for the disposal of a segment of a
business (as previously defined in that Opinion). SFAS 144 retains
the fundamental provisions in SFAS 121 for recognizing and measuring
impairment losses on long-lived assets held for use and long-lived
assets to be disposed of by sale, while also resolving significant
implementation issues associated with SFAS 121. For example, SFAS
144 provides guidance on how a long-lived asset that is used as part
of a group should be evaluated for impairment, establishes criteria
for when a long-lived asset is held for sale, and prescribes the
accounting for a long-lived asset that will be disposed of other
than by sale. SFAS 144 retains the basic provisions of Opinion 30 on
how to present discontinued operations in the income statement but
broadens that presentation to include a component of an entity
(rather than a segment of a business).
The Company was required to adopt SFAS 144 on January 1, 2002.
Management does not expect the adoption of SFAS 144 for long-lived
assets held for use to have a material impact on the Company's
financial statements because the impairment assessment under SFAS
144 is largely unchanged from SFAS 121.
(l) INCOME TAXES
The Company accounts for income taxes using an asset and liability
approach. Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases
of existing assets and liabilities and net operating loss and tax
credit carryforwards. Additionally, the effect on deferred taxes of
a change in tax rates is recognized in earnings in the period that
includes the enactment date.
F-9
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
(m) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
DECEMBER 31, 2001
-----------------------
Carrying Fair
Amount Value
--------- -------
Senior notes (see notes 3 and 4) $ 115,090 126,270
Interest rate swap arrangement (see note 4) $ (639) (639)
The carrying amount of the senior notes includes an adjustment to
reflect the fair value of the portion of the senior notes included
in the interest rate swap arrangement (see note 4) and is net of the
unamortized discount. The estimated fair values of the above
financial instruments are based upon quoted market prices of
comparable financial instruments and the estimated amount that the
Company would receive to terminate the agreement at December 31,
2001, taking into account current interest rates. The Company's
other financial instruments approximate fair value due to the
short-term nature of those assets and liabilities.
(n) ACCRUED LIABILITIES
Accrued liabilities are summarized as follows:
DECEMBER 31,
-------------------
2001 2000
--------- -----
Accrued salaries, wages and incentives $ 3,003 2,466
Accrued interest 1,932 1,431
Income tax liability 1,787 672
Other 2,897 4,686
--------- -----
$ 9,619 9,255
========= =====
(o) STOCK OPTION PLANS
Prior to January 1, 1996, the Company accounted for its stock option
plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. As such, compensation
expense to be recognized over the related vesting period would
generally be determined on the date of grant only if the current
market price of the underlying stock exceeded the exercise price. On
January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"), which permits entities to recognize as
expense over the vesting period the fair value of all stock-based
awards on the date of grant. Alternatively, SFAS 123 also allows
entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net earnings (loss) and pro forma earnings
(loss) per share disclosures for employee stock option grants as if
the fair value-based method defined in SFAS 123 had been applied.
The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosures required by
SFAS 123 (see note 7).
(p) NET EARNINGS (LOSS) PER SHARE OF COMMON STOCK
Basic net earnings (loss) per common share are based on the weighted
average number of common shares outstanding. Diluted net earnings
(loss) per common share are based on the weighted average number of
common shares outstanding and dilutive potential common shares, such
as dilutive stock options and warrants, determined using the
treasury stock method, and dilutive convertible preferred shares,
determined using the if-converted method. All outstanding warrants
and convertible preferred stock were repurchased in July 2001 (see
note 6).
F-10
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
The computations for basic and diluted net earnings (loss) per
common share are as follows:
YEARS ENDED DECEMBER 31,
---------------------------------
2001 2000 1999
------- ------ ------
BASIC
Earnings from continuing operations $ 7,925 13,694 31,366
Discontinued operations:
Earnings (loss) from discontinued operations, net of income taxes (455) -- 2,640
Loss on disposal of discontinued operations, net of income taxes (785) -- --
------- ------ ------
Net earnings 6,685 13,694 34,006
Redeemable preferred stock dividends (1,638) (3,200) (3,049)
Accretion on Series B redeemable preferred stock (225) (441) (420)
Net gain on repurchases of preferred stock 739 -- --
------- ------ ------
Net earnings (loss) available to common shareholders $ 5,561 10,053 30,537
======= ====== ======
Weighted average number of common shares outstanding 8,748 9,139 9,151
======= ====== ======
Net earnings (loss) per common share:
Continuing operations $ 0.78 1.10 3.05
Discontinued operations (0.14) -- 0.29
------- ------ ------
$ 0.64 1.10 3.34
======= ====== ======
DILUTED
Net earnings (loss) available to common shareholders $ 5,561 10,053 30,537
Dividends on convertible preferred shares -- 400 381
------- ------ ------
Net earnings (loss) for diluted calculation $ 5,561 10,453 30,918
======= ====== ======
Shares:
Weighted average number of common shares outstanding 8,748 9,139 9,151
Shares issuable from assumed exercise of options and warrants 209 251 356
Convertible preferred stock 35 556 529
------- ------ ------
8,992 9,946 10,036
======= ====== ======
Net earnings (loss) per common share:
Continuing operations $ 0.76 1.05 2.82
Discontinued operations (0.14) -- 0.26
------- ------ ------
$ 0.62 1.05 3.08
======= ====== ======
(q) COMPREHENSIVE EARNINGS
Comprehensive earnings generally include all changes in equity
during a period except those resulting from investments by owners
and distributions to owners. For 2001, 2000 and 1999, comprehensive
earnings consist of net earnings, foreign currency translation
adjustments (net of income taxes) and changes in unrealized
appreciation on available-for-sale securities (net of income taxes).
(r) RECLASSIFICATIONS
Certain amounts in the 2000 and 1999 consolidated financial
statements have been reclassified to conform to presentations
adopted in 2001.
F-11
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
(2) ACQUISITIONS
Effective January 1, 1999, the Company acquired substantially all of the
assets of Gainor Medical for an initial purchase price of approximately
$134,000. The acquisition was accounted for under the purchase method of
accounting and resulted in the recognition of intangible assets of $3,800,
consisting of purchased U.S. customer lists and executive noncompete
agreements (amortized over five years), international customer lists
(amortized over ten years), and goodwill of $106,044 (amortized over 15
years). Results of its operations have been included in the Company's
consolidated results of operations effective January 1, 1999.
In connection with the acquisition of the Gainor Medical business, the
Company recognized a $25,015 deferred tax asset for the estimated tax
benefits of the net operating loss carryforwards to be realized in the
future as a result of the acquisition (see note 5).
The acquisition agreement also provided for an additional contingent
purchase price adjustment based on 1999 financial performance of the
Gainor Medical business. In 2000, an additional $13,719 of purchase price
was paid by the issuance of subordinated notes (see note 3).
At the closing of the transaction, the Company paid $83,758 of the
purchase price in cash, assumed approximately $1,242 in debt and issued
$45,000 in redeemable preferred stock and warrants of the Company (see
note 6). The transaction also included a cash adjustment payable by the
Company of approximately $6,573, one-half of which was paid at the closing
and the remaining one-half of which was paid during the second quarter of
1999.
The cash portion of the purchase price was financed partially through a
$125,000 five-year bank credit facility, which the Company entered into in
January 1999. The credit facility consisted of an $80,000 term loan
facility and a $45,000 revolving credit facility (see note 3).
In January 1998, the Company converted a $250 note receivable from DMS and
paid $500 cash to acquire a 10% equity interest in DMS. During 1998, the
Company made advances to fund the working capital of DMS totaling $1,335.
In January 1999, the Company converted the note receivable for these
advances and paid cash of $6,500 to acquire the remaining equity interests
of DMS. The acquisition was accounted for using the purchase method of
accounting and resulted in the recognition of $10,765 of goodwill, which
is being amortized over 15 years. Results of operations of this business
have been included in the Company's consolidated results of operations
effective January 1, 1999.
The following is a summary of the fair value of assets acquired and
consideration paid in connection with these acquisitions:
GAINOR DMS
-------- -----
Cash paid for the assets acquired, net of cash acquired $ 81,770 8,492
Preferred stock issued for assets acquired 45,000 --
Contingent consideration 13,719 --
Cash paid for acquisition costs 5,337 --
-------- -----
Fair value of assets acquired, including goodwill $145,826 8,492
======== =====
F-12
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
(3) LONG-TERM DEBT
Long-term debt is summarized as follows:
DECEMBER 31,
-------------------
2001 2000
-------- ------
Unsecured 11% senior notes, net of unamortized discount of
$7,549; interest payable semi-annually and maturing May 2008 $114,451 --
Secured term loan, variable interest at the LIBOR rate plus 2.5%;
repaid in 2001 -- 43,669
Secured revolving line of credit, variable interest at the LIBOR rate
plus 2.5%; repaid in 2001 -- 29,000
Subordinated acquisition note, interest at 8% payable quarterly;
interest at 4% payable annually; repaid in 2001 -- 13,963
Convertible subordinated debentures (net of unamortized discount \ of
$87 at December 31, 2000); interest at 8% payable annually; matured in
December 2001 -- 1,146
Capital lease obligations; interest ranging from approximately 7% to 13%
with various monthly payments and maturing at various
dates through December 2003 (note 10) 263 602
Other debt; interest at rates ranging from approximately 6% to 9%;
payable in monthly installments through May 2002 476 431
-------- ------
Total long-term debt 115,190 88,811
Less current installments 615 11,815
-------- ------
Long-term debt, excluding current installments $114,575 76,996
======== ======
On July 9, 2001, the Company issued $125,000 of 11% senior notes at a
discount of 6.5% from the principal amount. Interest is payable
semi-annually in arrears on May 1 and November 1. Among the covenants
under the bond indenture is a requirement to repurchase notes from the
Company's annual excess cash flow, as defined, or from the proceeds
received from asset sales.
The Company used the proceeds from the senior notes to complete the
securities transactions under the Securities Purchase Agreement with
Gainor Medical and to repay all amounts outstanding under the Company's
bank credit facilities. The securities transactions included the
repurchase of all outstanding preferred stock, common stock warrants and
subordinated notes held by Gainor Medical. The 12% subordinated notes were
repaid at their face value of $13,963, plus accrued interest. The Company
also retired one million common stock warrants with a book value of $4,415
for $3,370. The retirement of the warrants, an equity security, was not
reflected as a gain. See note 6 for a description of the preferred stock
transactions.
The Company repaid the entire $73,761 of outstanding bank debt as noted
above and also entered into an amended senior revolving credit facility.
The amended facility has a borrowing capacity of $30,000 with a three-year
final maturity. The amended facility is collateralized by accounts
receivable, inventories, property and equipment and certain other assets
of the Company. Borrowings under this agreement bear interest at the
Company's option of (i) prime plus 1.5% to 2.5% or (ii) the LIBOR rate
plus 2.5% to 3.5%. The facility requires a commitment fee payable
quarterly, in arrears, of 1.0% to 1.5%, based upon the unused portion.
There was no balance outstanding under this agreement as of December 31,
2001.
The senior notes indenture and the amended credit facility set forth a
number of covenants binding on the Company. Negative covenants in such
instruments limit the ability of the Company to, among other things, incur
indebtedness and liens, pay dividends, repurchase shares, enter into
merger agreements, make investments, engage in new business activities
unrelated to the Company's current business or sell assets. In addition,
under the amended credit facility, the Company is required to maintain
certain financial ratios. As of December 31, 2001, the Company is in
compliance with the financial covenants in its credit instruments.
F-13
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
In August 2001, the Company repurchased in the open market $3,000
principal amount of its outstanding senior notes at a cost of
approximately $2,828. Including the effects of unamortized discount and
debt issuance expenses, this transaction resulted in a charge of $134. As
of December 31, 2001, the consolidated balance sheet reflected $115,090,
composed of the outstanding note balance of $122,000, less an unamortized
discount of $7,549, plus the fair value adjustment of $639 (see note
1.m). Such repurchases in the open market are permitted under the bond
indenture and may be applied to reduce the amount required to be
repurchased, at 100% of the principal amount, under the annual excess cash
flow repurchase covenant. The August 2001 repurchase fully satisfied the
excess cash flow repurchase covenant for 2001. See note 16 for
supplemental guarantor and non-guarantor financial information provided in
connection with these senior notes.
Approximate aggregate minimum annual payments due on long-term debt for
the five years subsequent to December 31, 2001 are as follows:
2002 $ 615
2003 101
2004 23
2005 --
2006 --
Thereafter 122,000
-----------
Minimum annual payments 122,739
Less unamortized discount 7,549
-----------
$ 115,190
===========
(4) DERIVATIVE FINANCIAL INSTRUMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
("SFAS 133"). SFAS 133, which (as amended through issuance of Statement of
Financial Accounting Standards No. 137, Deferral of the Effective Date of
FASB Statement No. 133) is effective for 2001, requires all derivatives to
be recorded on the balance sheet at fair value and establishes accounting
treatment for certain hedge transactions.
Effective August 1, 2001, the Company entered into an interest rate swap
contract with a bank involving a notional amount of $60,000. This
transaction, which terminates in May 2008 if early termination rights are
not exercised, is considered to be a hedge against changes in the fair
value of the Company's fixed-rate debt obligation and is used to lower the
Company's overall borrowing costs. Under the arrangement, the bank will
pay the Company an 11% fixed rate of interest semi-annually in arrears on
May 1 and November 1. The Company will pay the bank semi-annually in
arrears on May 1 and November 1 a variable rate of interest based on the
three-month LIBOR rate plus 5.2%, compounded quarterly. The variable
rate for the period from November 1, 2001 to February 1, 2002 was 7.43%.
As of December 31, 2001, the interest rate swap agreement was reflected at
fair value of $639 (see note 1.m) on the Company's consolidated balance
sheet, and the related portion of fixed-rate debt being hedged was
reflected at an amount equal to the sum of its principal amount, less the
unamortized discount, plus an adjustment of $639, representing the fair
value of the portion of the debt obligation hedged by the interest rate
swap attributable to the interest rate risk. In addition, the change
during the period in the fair value of the interest rate swap agreement,
as well as the change in the adjusted carrying value of the related
portion of fixed-rate debt being hedged, have offsetting effects on net
interest expense in the consolidated condensed statements of operations
since the interest rate swap is fully effective. Interest expense was
reduced by $633 for the five months ended December 31, 2001 to reflect the
net swap payments received or due from the bank based on the lower
variable interest rates.
F-14
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
(5) INCOME TAXES
The provision (benefit) for income taxes consisted of:
YEARS ENDED DECEMBER 31,
---------------------------
2001 2000 1999
------ ----- ------
Current tax provision:
U.S. federal $ -- -- --
State and local 535 692 150
Non-U.S 1,032 675 --
------ ----- ------
Total current tax provision 1,567 1,367 150
------ ----- ------
Deferred tax provision:
U.S. federal 4,241 7,224 (4,000)
State and local 267 509 (150)
Non-U.S -- -- --
------ ----- ------
Total deferred tax provision 4,508 7,733 (4,150)
------ ----- ------
Total income tax expense (benefit) $6,075 9,100 (4,000)
====== ===== ======
Below is a reconciliation of the expected income tax expense (benefit) -
(based on the U.S. federal statutory income tax rate) to the actual income
taxes:
YEARS ENDED DECEMBER 31,
------------------------------
2001 2000 1999
------- ----- -------
Computed expected income tax expense (benefit) $ 4,760 7,978 10,202
Increase (decrease) resulting from:
State and local income taxes, net of federal benefit 529 781 1,188
Non-U.S. municipal taxes and tax rate differences 140 159 --
Nondeductible expenses 669 182 1,194
Change in effective tax rate -- -- (3,886)
Tax benefits realized as a result of acquisitions -- -- 25,015
Benefit of deductions attributable to stock options
credited to additional paid-in capital -- -- 7,710
Reduction in valuation allowance -- -- (45,339)
Other, net (23) -- (84)
------- ----- -------
Income tax expense (benefit) $ 6,075 9,100 (4,000)
======= ===== =======
At December 31, 1998, the Company had a deferred tax asset of
approximately $45,339 before an offsetting valuation allowance. The
valuation allowance was based on an assessment of the likelihood of
whether the deferred tax asset would be realized. The elimination of the
valuation allowance of $45,339 during 1999 was attributable to the
following items: (1) 1999 income which utilized $12,500 of net operating
losses; (2) an increase in deferred income taxes to include the state
income tax benefits of $(3,886); (3) a reduction of $25,015 based upon an
assessment of future operating earnings of the combined businesses in
conjunction with the acquisition of Gainor Medical (see note 2); (4) a
$7,710 credit to additional paid-in capital related to the operating loss
carryforward generated by the exercise of stock options; and (5) a $4,000
credit to income tax benefit on the consolidated statement of operations
as the Company believes now, more likely than not, that it will realize
the related deferred income tax assets.
F-15
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
At December 31, 2001 and 2000, the deferred income tax assets consist of
future tax benefits attributable to:
2001 2000
------- ------
Deferred income tax assets:
Current:
Allowance for doubtful accounts $ 3,289 2,432
Accruals and reserves not deducted for tax purposes 579 750
------- ------
3,868 3,182
------- ------
Non-current:
Accruals and reserves not deducted for tax purposes 957 1,287
Depreciation and amortization 1,712 1,959
Net operating loss carryforwards 18,597 21,045
Credit carryforwards 2,843 2,657
Other 606 924
------- ------
24,715 27,872
------- ------
Total deferred income tax assets $28,583 31,054
======= ======
At December 31, 2001, the Company had the following estimated credit and
operating loss carryforwards available for federal income tax reporting
purposes to be applied against future taxable income and tax liabilities:
GENERAL NET
YEAR OF BUSINESS OPERATING
EXPIRATION CREDITS LOSSES
---------- -------- ----------
2002 $ 38 --
2003 89 --
2004 43 --
2005 61 --
2006 151 --
2007 -- 29
2008 -- 1,011
2009 -- 1,296
2010 -- 11,364
2011 -- 32,093
2012 -- 1,824
2018 -- 414
2019 -- 354
2020 -- 436
2021 -- 462
--------- ------
$ 382 49,283
========= ======
The Company also has available alternative minimum tax ("AMT") credit
carryforwards of approximately $2,461 available to offset regular income
tax, if any, in future years. The AMT credit carryforwards do not expire.
The AMT net operating loss carryforward is approximately $40,145.
F-16
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
(6) REDEEMABLE PREFERRED STOCK
In connection with the purchase of the Gainor Medical business (see note
2), the Company designated 16,500 shares and issued 10,000 shares of 4%
Series A convertible redeemable preferred stock ("Series A CRPS"), and
designated 60,000 shares and issued 35,000 shares of 8% Series B
redeemable preferred stock ("Series B RPS") with attached warrants to
purchase 1,000,000 shares of the Company's common stock at $12.00 per
share.
In May 2001, the Company entered into a Securities Purchase Agreement with
Gainor Medical to repurchase all or part of the outstanding preferred
stock, common stock warrants and subordinated notes issued in connection
with the January 1999 acquisition. On June 29, 2001, in the first stage of
the transaction, the Company repurchased 7,500 shares of the 10,000 shares
of 4% Series A CRPS and 15,000 shares of the 35,000 shares of 8% Series B
RPS with a combined face value of $22,500 and a combined book value of
$21,070 for $18,931. The resulting gain of $2,139 was included in net
earnings available to common shareholders in the second quarter.
On July 9, 2001, in the second stage of the transaction, the Company
purchased the remaining 2,500 shares of Series A CRPS and 20,000 shares of
Series B RPS with a face value of $22,500 and a book value of $20,600 for
$22,000. This second stage resulted in a $1,400 loss included in net
earnings available to common shareholders in the third quarter and a net
gain of $739 from both transactions.
(7) COMMON SHAREHOLDERS' EQUITY
STOCK OPTION PLANS
During 2001, the Board of Directors of the Company adopted the 2001 Stock
Incentive Plan for employees, officers, independent contractors and
consultants of the Company. The 2001 Stock Plan has three components: a
stock option component, a stock bonus/stock purchase component and a stock
appreciation rights component. Under the terms of this plan, a total of
250,000 shares of common stock were reserved for issuance. The 2001 Stock
Incentive Plan contains a $100 limitation on the aggregate fair market
value of incentive stock options that become exercisable by an individual
in any calendar year. Additionally, the maximum number of shares of stock
with respect to which stock appreciation rights or options to acquire
stock may be granted, or sale or bonus grants of stock maybe made, to any
individual per calendar year shall not exceed 100,000 shares. The Stock
Option Committee shall determine the term of each option granted, provided
that the term shall not be for more than ten years. The options are
exercisable based on established performance goals, provided, however,
that they are exercisable in no less than two years and no more than four
years and expire after ten years.
During 2000, the Board of Directors of the Company adopted the 2000
Non-employee Director Stock Option Plan, which provides for the issuance
of non-qualified stock options to the Company's non-employee directors.
Under the terms of this plan, as amended in 2001, a total of 112,500
shares of common stock were reserved for issuance. The options are granted
with an exercise price equal to the fair market value of the Company's
common stock on the date of grant and vest monthly over 12 months from the
date of grant. The term of each option is ten years from the date of
grant.
Also during 2000, the Board of Directors of the Company adopted the 2000
Stock Incentive Plan for employees, officers, independent contractors and
consultants of the Company. The 2000 Stock Plan has three components: a
stock option component, a stock bonus/stock purchase component and a stock
appreciation rights component. Under the terms of this plan, a total of
550,000 shares of common stock were reserved for issuance. The Stock
Option Committee shall determine the term of each option granted, provided
that the term shall not be for more than ten years. The options are
exercisable based on established performance goals, provided, however,
that they are exercisable in no less than two years and no more than four
years and expire after ten years.
F-17
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
The Company has elected to adopt the disclosure-only provisions of SFAS
123, which require presentation of pro forma net earnings and pro forma
earnings per share as if the Company had accounted for its employee stock
options under the fair value method. For purposes of pro forma disclosure,
the estimated fair value of the options is amortized to expense over the
vesting period. Under the fair value method, the Company's net earnings
from continuing operations and earnings per common share from continuing
operations would have been as follows:
2001 2000 1999
--------- ----- ------
Pro forma net earnings from continuing operations
available to common shareholders $ 4,547 8,952 25,989
========= ===== ======
Pro forma basic net earnings per common share
from continuing operations $ 0.52 0.98 2.84
========= ===== ======
The weighted average fair value of the individual options granted during
2001, 2000 and 1999 is estimated at $9.12, $10.67 and $9.50, respectively,
on the date of grant. The fair values for those years were determined
using the Black-Scholes option-pricing model with the following
assumptions.
2001 2000 1999
------- ------- -------
Dividend yield None None None
Volatility 60% 57% 58%
Risk-free interest rate 4.55% 6.15% 5.54%
Expected life 5 Years 5 Years 5 Years
A summary of stock option transactions under these plans is shown below:
2001 2000 1999
------------------------ ------------------------ ----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- ------- ---------
Outstanding at beginning of year 1,048,344 $ 22.41 884,729 $ 23.16 806,280 $ 23.63
Granted 651,831 16.54 234,105 19.16 196,605 17.20
Exercised (171,476) 20.70 (16,875) 14.62 (39,586) 8.68
Canceled (90,228) 20.95 (53,615) 22.73 (78,570) 20.48
--------- --------- --------- --------- ------- ---------
Outstanding at end of year 1,438,471 $ 20.04 1,048,344 $ 22.41 884,729 $ 23.16
========= ========= ========= ========= ======= =========
Exercisable at end of year 643,601 $ 22.95 634,478 $ 24.67 499,078 $ 25.32
========= ========= ========= ========= ======= =========
The following table summarizes information concerning outstanding and
exercisable options at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
RANGE OF SHARES CONTRACTUAL EXERCISE SHARES EXERCISE
EXERCISE PRICE OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
------------------ ----------- ------------ -------- ----------- ----------
$ 7.50 - $ 10.00 3,542 8.6 $ 9.62 729 $ 8.93
$ 10.00 - $ 20.00 815,316 8.8 16.09 146,453 16.55
$ 20.00 - $ 30.00 546,404 5.5 23.95 433,210 22.29
$ 30.00 - $ 40.00 72,383 4.9 34.40 62,383 33.91
$ 40.00 - $126.00 826 0.7 111.79 826 111.79
--------- -------
1,438,471 643,601
========= =======
F-18
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
EMPLOYEE STOCK PURCHASE PLAN
The Company maintains an Employee Stock Purchase Plan (the "Purchase
Plan") to encourage ownership of its common stock by employees. The
Purchase Plan provides for the purchase of up to 125,000 shares of the
Company's common stock by eligible employees of the Company and its
subsidiaries. Under the Purchase Plan, the Company may conduct an offering
each fiscal quarter of its common stock to eligible employees. The
participants in the Purchase Plan can elect to purchase common stock at
the lower of 85% of the fair market value per share on either the first or
last business day of the quarter, limited to a maximum of either 10% of
the employee's compensation or 1,000 shares of common stock per quarter. A
participant immediately ceases to be a participant in the Purchase Plan
upon termination of his or her employment for any reason. During 2001,
2000 and 1999, respectively, 39,539, 39,755 and 48,469 shares of common
stock were issued under the Purchase Plan. Compensation costs related to
this plan as determined under SFAS 123 were insignificant to the Company's
consolidated statements of operations for the three years ended December
31, 2001.
SHAREHOLDERS' RIGHTS PLAN
In connection with the 1996 merger of Tokos Medical Corporation (Delaware)
and Healthdyne, Inc., Matria established a Shareholders' Rights Agreement.
If a person or group acquires beneficial ownership of 15% or more of the
Company's outstanding common stock or announces a tender offer or exchange
that would result in the acquisition of a beneficial ownership of 20% or
more of the Company's outstanding common stock, the rights detach from the
common stock and are distributed to shareholders as separate securities.
Each right entitles its holder to purchase one one-hundredth of a share (a
unit) of common stock, at a purchase price of $244 per unit. The rights,
which do not have voting power, expire on March 9, 2006 unless previously
distributed and may be redeemed by the Company in whole at a price of
$0.01 per right any time before and within ten days after their
distribution. If the Company is acquired in a merger or other business
combination transaction, or 50% of its assets or earnings power are sold
at any time after the rights become exercisable, the rights entitle a
holder to buy a number of common shares of the acquiring company having a
market value of twice the exercise price of the right. If a person
acquires 20% of the Company's common stock or if a 15% or larger holder
merges with the Company and the common stock is not changed or exchanged
in such merger, or engages in self-dealing transactions with the Company,
each right not owned by such holder becomes exercisable for the number of
common shares of the Company having a market value of twice the exercise
price of the right.
(8) EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) defined contribution plan for the benefit
of its employees. The Company's obligation for contributions under the
401(k) plan is limited to each participant's contribution but not more
than 3% of the participant's compensation. Discretionary Company
contributions are allowed under the plan. Contributions to the plan for
the years ended December 31, 2001, 2000 and 1999 were approximately $830,
$784 and $833, respectively.
During 1997, the Company established a split-dollar life insurance
contract for the benefit of a certain select group of senior management.
Under the terms of the contract, the participants or their beneficiaries
are entitled to the greater of the contract's cash surrender value or the
contract's death benefit, less insurance premiums paid by the Company.
Additionally, on the earlier date that occurs of: (i) the date the
employee reaches age 65; (ii) the date of the employee's death; or (iii)
the date of termination of the employee prior to the completion of ten
years of service, the Company has the right to be repaid an amount, up to
the cumulative amount of premiums paid, by which the cash surrender value
of the policy exceeds the employee's vested life insurance plan benefit.
During 2001, 2000 and 1999, the Company paid $2,754 in each year in
insurance premiums related to these split-dollar life insurance contracts.
At December 31, 2001 and 2000, total premiums paid by the Company of
$12,830 and $10,813, respectively, were recorded in "other assets" on the
consolidated balance sheets.
F-19
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
(9) RESTRUCTURING
During the second quarter of 2000, the Company incurred restructuring
expenses of $1,599 related to its decision to exit its clinical patient
record software business, Clinical-Management Systems, Inc. Of these
costs, $568 related to customer contract fulfillment costs, $518 related
to remaining software development costs, $312 related to payroll costs and
related involuntary severance of employees and $201 related to other costs
and expenses for the shutdown of the business.
During the third quarter of 1999, the Company began an assessment of the
cost structure of its Women's Health segment and decided that the number
of its monitoring centers could be significantly reduced without
compromising patient care or reducing services provided to patients,
physicians or payors. These cost-savings initiatives continued into the
fourth quarter of 1999 and resulted in total restructuring charges of
$4,241 in 1999. Of these costs, $3,201 related to future lease payments
and other related costs of closed facilities, $668 related to involuntary
severance of employees and $372 related to the write-down of capital
equipment.
(10) COMMITMENTS
The Company is committed under noncancelable lease agreements for
facilities and equipment. Future minimum operating lease payments and the
present value of the future minimum capital lease payments as of December
31, 2001 are as follows:
OPERATING CAPITAL
YEARS ENDING DECEMBER 31, LEASES LEASES
------------------------- ------------ ----------
2002 $ 5,469 155
2003 2,549 110
2004 1,151 23
2005 1,032 --
2006 868 --
Thereafter 1,392 --
------------ ----------
$ 12,461 288
============
Less interest 25
----------
Present value of future minimum capital
lease payments $ 263
==========
Amortization of leased assets is included in depreciation expense. Rental
expense for cancelable and noncancelable leases was approximately $5,747,
$6,673 and $7,460 for the years ended December 31, 2001, 2000 and 1999,
respectively.
(11) CONTINGENCIES
The Company and its subsidiaries are involved in various claims and
legal actions arising in the ordinary course of business. In the opinion
of management, based in part on the advice of counsel, the ultimate
disposition of these matters will not have a material adverse effect on
the Company's consolidated balance sheet, results of operations or
liquidity.
F-20
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
(12) QUARTERLY FINANCIAL INFORMATION - UNAUDITED
Presented below is a summary of the unaudited consolidated quarterly
financial information for the years ended December 31, 2001 and 2000.
QUARTER
----------------------------------------------
FOURTH THIRD SECOND FIRST
-------- ------ ------ ------
2001:
Revenues $ 69,680 68,097 64,838 61,368
Net earnings (loss)
Continuing operations 400 2,449 3,045 2,031
Discontinued operations (1,030) (210) -- --
-------- ------ ------ ------
Total (630) 2,239 3,045 2,031
======== ====== ====== ======
Net earnings (loss) per diluted common
share
Continuing operations 0.04 0.11 0.48 0.13
Discontinued operations (0.11) (0.02) -- --
-------- ------ ------ ------
Total (0.07) 0.09 0.48 0.13
======== ====== ====== ======
2000:
Revenues $ 56,390 57,434 58,197 53,746
Net earnings (loss)
Continuing operations 2,089 2,658 3,621 5,326
Discontinued operations (180) (195) (55) 430
-------- ------ ------ ------
Total 1,909 2,463 3,566 5,756
======== ====== ====== ======
Net earnings (loss) per diluted common
share
Continuing operations 0.13 0.19 0.28 0.44
Discontinued operations (0.02) (0.02) (0.01) 0.04
======== ====== ====== ======
Total 0.11 0.17 0.27 0.48
======== ====== ====== ======
The sum of the four quarterly net earnings (loss) per diluted common share
amounts may not equal the annual amount reflected on the consolidated
statements of operations due to rounding.
(13) BUSINESS SEGMENT INFORMATION
The Company's reportable business segments are the strategic business
units that offer different products and services. They are managed
separately and the Company evaluates performance based on operating
earnings of each respective business unit.
As of December 31, 2001, the Company's operations have been classified
into two reportable business segments: Diabetes and Women's Health. The
Diabetes segment has two components: diabetes disease management, and
medical device design, development and manufacturing services. The Women's
Health segment offers services designed to assist physicians and payors in
the cost-effective management of maternity patients, including:
specialized home nursing, risk assessment, patient education and
management, home uterine contraction monitoring, infusion therapy,
gestational diabetes management and other monitoring and clinical services
as prescribed by the patient's physician. The Other Segment include three
business segments that are below the quantitative threshold for
disclosure: respiratory disease management, clinical records software and
services (business was exited in the second quarter of 2000) and
infertility practice management services (sold during the third and fourth
quarters of 1999). In December 2000, the Board of Directors of the Company
approved the sale of the business and certain assets of its Cardiovascular
segment, a business that provided cardiac event monitoring, holter
monitoring and pacemaker follow-up services (see note 14). The results of
operations of this business segment are classified as discontinued
operations and are not included in the Company's segment information, but
are included in the reconciliations to consolidated amounts.
F-21
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Operating earnings of the
Diabetes segment have been reduced by the amortization of goodwill of
$8,703, $8,679 and $8,315 for the years ended December 31, 2001, 2000 and
1999, respectively. Operating earnings of the Women's Health segment have
been reduced by the amortization of goodwill of $564 in each year ended
December 31, 2001, 2000 and 1999. Operating earnings (loss) by business
segment excludes interest income and interest expense. An allocation of
Corporate expenses for shared services has been charged to the segments.
Summarized financial information as of and for the years ended December
31, 2001, 2000 and 1999 by business segment follows:
REVENUES OPERATING EARNINGS (LOSS)
-------------------------------- ----------------------------
2001 2000 1999 2001 2000 1999
-------- ------- ------- ------ ------ ------
Diabetes $157,479 114,694 110,529 15,668 9,729 11,402
Women's Health 104,234 109,716 109,986 16,887 24,292 15,566
Other 2,393 1,357 11,224 (60) (3,601) (2,409)
Intersegment sales (123) -- -- -- -- --
-------- ------- ------- ------ ------ ------
Total segments 263,983 225,767 231,739 32,495 30,420 24,559
General corporate -- -- -- (7,848) (7,745) (5,651)
Interest expense, net -- -- -- (10,008) (8,156) (7,711)
Other income (expense), net -- -- -- (639) 8,275 16,169
-------- ------- ------- ------ ------ ------
$263,983 225,767 231,739 14,000 22,794 27,366
======== ======= ======= ====== ====== ======
IDENTIFIABLE ASSETS DEPRECIATION AND AMORTIZATION
-------------------------------- -----------------------------
2001 2000 1999 2001 2000 1999
-------- ------- ------- ------ ------ ------
Diabetes $169,497 153,620 153,772 10,540 9,922 9,610
Women's Health 36,081 38,343 39,575 2,885 2,381 3,380
Other 330 764 2,462 95 151 571
General corporate 54,715 76,123 74,073 1,678 1,530 426
Net assets of discontinued operations -- -- 15,831 -- -- --
-------- ------- ------- ------ ------ ------
$260,623 268,850 285,713 15,198 13,984 13,987
======== ======= ======= ====== ====== ======
CAPITAL EXPENDITURES
--------------------------------
2001 2000 1999
-------- ------- -------
Diabetes $ 4,315 3,558 787
Women's Health 3,739 2,212 2,933
Other (94) 25 541
General corporate 426 1,600 867
-------- ------- -------
$ 8,386 7,395 5,128
======== ======= =======
The Company's revenues from operations outside the U.S. were approximately
15%, 16% and 16% of total revenues in 2001, 2000 and 1999, respectively.
No single customer accounted for 10% of consolidated net revenues in 2001,
2000 or 1999.
F-22
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
(14) DISPOSITIONS OF BUSINESSES
In February 2001, the Company completed the sale of the business and
certain assets of QDS and received cash proceeds totaling approximately
$18,000. The loss on disposal, net of income tax benefit of $485, is
estimated to be $785 and is recorded in the accompanying statements of
operations for the period ended December 31, 2001. The accounts receivable
of QDS, totaling approximately $8,800 at December 31, 2000, were excluded
from the sale and are included in "other receivables" on the consolidated
balance sheets at December 31, 2001 and 2000. As of December 31, 2001, an
accrued liability totaling $363 was recorded for estimated future salary
and severance costs of personnel retained to collect the accounts
receivable. The accompanying consolidated financial statements have been
restated to reflect QDS as a discontinued operation for all periods
presented.
The operating results of discontinued operations are as follows:
2001 2000 1999
------- ------ ------
Revenues $ -- 15,336 15,596
Earnings (loss) from operations, net of income tax benefit
of $275 in 2001 $ (455) -- 2,640
Loss on disposal of discontinued operations, net of
income tax benefit of $485 (785) -- --
------- ------ ------
Net earnings (loss) from discontinued operations $(1,240) -- 2,640
======= ====== =====
In 1999, the Company determined that its infertility business, National
Reproductive Medical Center, Inc. ("NRMC"), no longer fit the Company's
diversified disease management strategy. During the third and fourth
quarters of 1999, the Company sold the assets of these clinics and
realized cash proceeds of $1,257 and received notes from the buyers of
NRMC totaling $1,079. Due to the uncertainty of collection of the notes
and an accrual for future patient refunds, no gain or loss was recognized
on the sale of these assets in 1999. In 2000, the Company received $750 in
full settlement of notes receivable from one purchaser and recognized a
gain of $1,746 from the sale of these assets, which reflected the
realization of most of the proceeds and a re-assessment of remaining
obligations. As of December 31, 2001, an accrual for future patient
refunds and other costs totaling $77 was reflected in accrued liabilities.
(15) SALES OF SHORT-TERM INVESTMENTS
In connection with the 1998 acquisition of assets of QDS from Endeavor
Technologies, Inc. (subsequently named WebMD Corporation) ("WebMD"), the
Company invested $2,010 in 1998 in preferred stock of WebMD and received
options and warrants to purchase additional shares of WebMD for $2,680,
which were exercised in 1999. In 1999, the Company sold shares of WebMD
generating proceeds of $20,720 and a gain of $17,349, which was reflected
in "other income" in the consolidated statements of operations. In
2000, additional shares were sold generating proceeds of $7,298 and gains
of $6,077. No shares were sold in 2001. At December 31, 2001, the Company
had a remaining investment in WebMD of 16,423 shares.
(16) SUPPLEMENTAL GUARANTOR/NON-GUARANTOR FINANCIAL INFORMATION
Supplemental financial information is being provided in connection with
the Company's private offering of 11% senior notes (see note 3). The new
senior notes are unconditionally guaranteed by the Company and its
domestic subsidiaries. All guarantees are joint and several. Each of the
domestic and foreign subsidiaries is 100% owned by the Company.
F-23
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
The following financial information presents the consolidating condensed
balance sheets, statements of operations and cash flows of the Company,
the guarantor domestic subsidiaries on a combined basis and the
non-guarantor foreign subsidiaries on a combined basis.
CONSOLIDATING CONDENSED BALANCE SHEETS
DECEMBER 31, 2001
(Unaudited)
NON-
MATRIA GUARANTOR GUARANTOR
HEALTHCARE, DOMESTIC FOREIGN
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ------------ ------------ ------------ ------------
ASSETS
Cash and cash equivalents $ 1,319 535 129 -- 1,983
Short-term investments 116 -- -- -- 116
Trade accounts receivable, net 22,939 23,740 5,375 -- 52,054
Inventories 2,151 13,155 6,000 -- 21,306
Other current assets 5,885 7,119 1,036 -- 14,040
--------- ------- ------ -------- -------
Total current assets 32,410 44,549 12,540 -- 89,499
Property and equipment, net 11,254 6,985 483 -- 18,722
Intangible assets, net 2,682 101,974 4,978 -- 109,634
Investment in subsidiaries 106,952 -- -- (106,952) --
Deferred income taxes 24,715 -- -- -- 24,715
Other long-term assets 17,879 174 -- -- 18,053
--------- ------- ------ -------- -------
$ 195,892 153,682 18,001 (106,952) 260,623
========= ======= ====== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current installments of long-term debt $ 484 131 -- -- 615
Other current liabilities 9,942 16,612 5,716 -- 32,270
--------- ------- ------ -------- -------
Total current liabilities 10,426 16,743 5,716 -- 32,885
Long-term debt, excluding current
installments 108,015 21 6,539 -- 114,575
Intercompany (2,053) 18,499 (16,446) -- --
Other long-term liabilities 7,757 467 42 -- 8,266
--------- ------- ------ -------- -------
Total liabilities 124,145 35,730 (4,149) -- 155,726
Redeemable preferred stock -- -- -- -- --
Common shareholders' equity
Common stock 89 -- -- -- 89
Additional paid-in capital 290,070 101,974 4,978 (106,952) 290,070
Accumulated earnings (deficit) (218,916) 24,150 13,731 -- (181,035)
Other 504 (8,172) 3,441 -- (4,227)
--------- ------- ------ -------- -------
Total common shareholders' equity 71,747 117,952 22,150 (106,952) 104,897
--------- ------- ------ -------- -------
$ 195,892 153,682 18,001 (106,952) 260,623
========= ======= ====== ======== =======
F-24
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
CONSOLIDATING CONDENSED BALANCE SHEETS
DECEMBER 31, 2000
(Unaudited)
NON-
MATRIA GUARANTOR GUARANTOR
HEALTHCARE, DOMESTIC FOREIGN
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
ASSETS
Cash and cash equivalents $ 1,524 1,045 1,346 -- 3,915
Short-term investments 130 -- -- -- 130
Trade accounts receivable, net 27,134 10,278 2,557 -- 39,969
Other receivables 134 27,156 318 -- 27,608
Inventories 1,454 10,043 5,538 -- 17,035
Other current assets 4,747 440 6 -- 5,193
--------- ------- ------ -------- -------
Total current assets 35,123 48,962 9,765 -- 93,850
Property and equipment, net 11,217 3,903 524 -- 15,644
Intangible assets, net 3,247 110,764 5,475 -- 119,486
Investment in subsidiaries 116,214 -- -- (116,214) --
Deferred income taxes 26,408 -- 1,464 -- 27,872
Other long-term assets 11,879 119 -- -- 11,998
--------- ------- ------ -------- -------
$ 204,088 163,748 17,228 (116,214) 268,850
========= ======= ====== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current installments of long-term debt $ 11,712 103 -- -- 11,815
Other current liabilities 10,639 15,137 5,213 -- 30,989
--------- ------- ------ -------- -------
Total current liabilities 22,351 15,240 5,213 -- 42,804
Long-term debt, excluding current installments 70,384 73 6,539 -- 76,996
Intercompany (21,954) 37,181 (15,227) -- --
Other long-term liabilities 8,102 617 35 -- 8,754
--------- ------- ------ -------- -------
Total liabilities 78,883 53,111 (3,440) -- 128,554
Redeemable preferred stock 41,446 -- -- -- 41,446
Common shareholders' equity
Common stock 88 -- -- -- 88
Additional paid-in capital 288,900 110,739 5,475 (116,214) 288,900
Accumulated earnings (deficit) (205,661) 8,071 11,508 -- (186,082)
Other 432 (8,173) 3,685 -- (4,056)
--------- ------- ------ -------- -------
Total common shareholders' equity 83,759 110,637 20,668 (116,214) 98,850
--------- ------- ------ -------- -------
$ 204,088 163,748 17,228 (116,214) 268,850
========= ======= ====== ======== =======
F-25
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(Unaudited)
NON-
MATRIA GUARANTOR GUARANTOR
HEALTHCARE, DOMESTIC FOREIGN
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
Revenues $ 106,627 117,148 40,685 (477) 263,983
Cost of revenues 43,601 69,453 33,108 (477) 145,685
Selling and administrative expenses 52,209 19,534 4,506 -- 76,249
Provision for doubtful accounts 5,451 2,090 34 -- 7,575
Amortization of intangible assets 564 8,766 497 -- 9,827
--------- ------ ------ ------ -------
Operating earnings from
continuing operations 4,802 17,305 2,540 -- 24,647
Interest income (expense), net (9,615) 9 (402) -- (10,008)
Other income (expense), net (736) 5 92 -- (639)
--------- ------ ------ ------ -------
Earnings (loss) from continuing
operations before income taxes (5,549) 17,319 2,230 -- 14,000
Income tax expense 6,068 -- 7 -- 6,075
--------- ------ ------ ------ -------
Earnings (loss) from continuing
operations (11,617) 17,319 2,223 -- 7,925
Discontinued operations, net of taxes -- (1,240) -- -- (1,240)
--------- ------ ------ ------ -------
Net earnings (loss) $ (11,617) 16,079 2,223 -- 6,685
========= ====== ====== ====== =======
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(Unaudited)
NON-
MATRIA GUARANTOR GUARANTOR
HEALTHCARE, DOMESTIC FOREIGN
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
Revenues $ 111,065 79,590 36,416 (1,304) 225,767
Cost of revenues 40,716 47,002 29,765 (1,304) 116,179
Selling and administrative expenses 52,384 11,964 4,120 -- 68,468
Provision for doubtful accounts 5,641 1,370 32 -- 7,043
Amortization of intangible assets 564 8,788 451 -- 9,803
Restructuring charges (128) 1,727 -- -- 1,599
--------- ------ ------ ------ -------
Operating earnings from
continuing operations 11,888 8,739 2,048 -- 22,675
Interest income (expense), net (7,840) 62 (378) -- (8,156)
Other income (expense), net 8,188 50 37 -- 8,275
--------- ------ ------ ------ -------
Earnings from continuing operations
before income taxes 12,236 8,851 1,707 -- 22,794
Income tax expense 9,100 -- -- -- 9,100
--------- ------ ------ ------ -------
Earnings from continuing operations 3,136 8,851 1,707 -- 13,694
Discontinued operations, net of taxes -- -- -- -- --
--------- ------ ------ ------ -------
Net earnings $ 3,136 8,851 1,707 -- 13,694
========= ====== ====== ====== =======
F-26
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
CONSOLIDATING CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(Unaudited)
NON-
MATRIA GUARANTOR GUARANTOR
HEALTHCARE, DOMESTIC FOREIGN
INC. SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
----------- ------------ ------------ ------------ ------------
Revenues $ 110,547 84,250 37,272 (330) 231,739
Cost of revenues 39,729 55,862 23,044 (330) 118,305
Selling and administrative expenses 52,954 16,406 4,293 -- 73,653
Provision for doubtful accounts 5,945 1,245 3 -- 7,193
Amortization of intangible assets 564 8,391 484 -- 9,439
Restructuring charges 4,241 -- -- -- 4,241
--------- ------ ------ ---- -------
Operating earnings from
continuing operations 7,114 2,346 9,448 -- 18,908
Interest income (expense), net (7,560) 28 (179) -- (7,711)
Other income (expense), net 16,776 (570) (37) -- 16,169
--------- ------ ------ ---- -------
Earnings from continuing operations
before income taxes 16,330 1,804 9,232 -- 27,366
Income tax benefit (4,000) -- -- -- (4,000)
--------- ------ ------ ---- -------
Earnings from continuing operations 20,330 1,804 9,232 -- 31,366
Discontinued operations, net of taxes -- 2,640 -- -- 2,640
--------- ------ ------ ---- -------
Net earnings $ 20,330 4,444 9,232 -- 34,006
========= ====== ====== ==== =======
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2001
(Unaudited)
NON-
MATRIA GUARANTOR GUARANTOR
HEALTHCARE, DOMESTIC FOREIGN
INC. SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
----------- ------------ ------------ ------------
Cash Flows from Operating Activities:
Net cash provided by (used in) continuing operations $ 164 9,511 (1,728) 7,947
Net cash provided by discontinued operations -- 3,056 -- 3,056
--------- ------- ------ ---------
Net cash provided by (used in) operating activities 164 12,567 (1,728) 11,003
--------- ------- ------ ---------
Cash Flows from Investing Activities:
Purchases of property and equipment (4,071) (4,208) (124) (8,403)
Proceeds from disposition of business -- 18,076 -- 18,076
--------- ------- ------ ---------
Net cash provided by (used in) investing activities (4,071) 13,868 (124) 9,673
--------- ------- ------ ---------
Cash Flows from Financing Activities:
Proceeds from issuance of senior notes 111,940 -- -- 111,940
Borrowings under credit agreement 36,000 -- -- 36,000
Proceeds from issuance of debt 1,013 -- -- 1,013
Principal repayments of long-term debt (127,564) (174) -- (127,738)
Proceeds from issuance of common stock 3,892 -- -- 3,892
Repurchases of common stock and warrants (4,346) -- -- (4,346)
Repurchases of redeemable preferred stock (40,931) -- -- (40,931)
Preferred stock dividend payments (2,438) -- -- (2,438)
--------- ------- ------ ---------
Net cash used in financing activities (22,434) (174) -- (22,608)
--------- ------- ------ ---------
Effect of exchange rate changes on cash and cash equivalents -- -- -- --
Net change in intercompany balances 26,136 (26,771) 635 --
--------- ------- ------ ---------
Net decrease in cash and cash equivalents (205) (510) (1,217) (1,932)
Cash and cash equivalents at beginning of year 1,524 1,045 1,346 3,915
--------- ------- ------ ---------
Cash and cash equivalents at end of year $ 1,319 535 129 1,983
========= ======= ====== =========
F-27
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000
(Unaudited)
NON-
MATRIA GUARANTOR GUARANTOR
HEALTHCARE, DOMESTIC FOREIGN
INC. SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
----------- ------------ ------------ ------------
Cash Flows from Operating Activities:
Net cash provided by continuing operations $ 2,965 16,519 634 20,118
Net cash used in discontinued operations -- (623) -- (623)
-------- ------ ----- -----
Net cash provided by operating activities 2,965 15,896 634 19,495
-------- ------ ----- -----
Cash Flows from Investing Activities:
Purchases of property and equipment (3,961) (6,795) (131) (10,887)
Proceeds from sales short-term investments 7,298 -- -- 7,298
-------- ------ ----- -----
Net cash provided by (used in) investing activities 3,337 (6,795) (131) (3,589)
-------- ------ ----- -----
Cash Flows from Financing Activities:
Borrowings under credit agreement 23,000 -- -- 23,000
Proceeds from issuance of debt 891 -- -- 891
Principal repayments of long-term debt (37,492) (149) (9) (37,650)
Proceeds from issuance of common stock 579 -- -- 579
Repurchases of common stock (4,733) -- -- (4,733)
Preferred stock dividend payments (3,200) -- -- (3,200)
-------- ------ ----- -----
Net cash used in financing activities (20,955) (149) (9) (21,113)
-------- ------ ----- -----
Effect of exchange rate changes on cash and cash equivalents -- -- (426) (426)
Net change in intercompany balances 10,475 (9,529) (946) --
-------- ------ ----- -----
Net decrease in cash and cash equivalents (4,178) (577) (878) (5,633)
Cash and cash equivalents at beginning of year 5,702 1,622 2,224 9,548
-------- ------ ----- -----
Cash and cash equivalents at end of year $ 1,524 1,045 1,346 3,915
======== ====== ===== =====
F-28
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 AND 1999
(Amounts in thousands, except share and per share amounts)
CONSOLIDATING CONDENSED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
(Unaudited)
NON-
MATRIA GUARANTOR GUARANTOR
HEALTHCARE, DOMESTIC FOREIGN
INC. SUBSIDIARIES SUBSIDIARIES CONSOLIDATED
----------- ------------ ------------ ------------
Cash Flows from Operating Activities:
Net cash provided by (used in) continuing operations $ (595) 1,939 11,134 12,478
Net cash provided by discontinued operations -- 710 -- 710
--------- ------ ------ -------
Net cash provided by (used in) operating activities (595) 2,649 11,134 13,188
--------- ------ ------ -------
Cash Flows from Investing Activities:
Purchases of property and equipment (3,921) (3,255) (185) (7,361)
Proceeds from sales short-term investments 23,579 -- -- 23,579
Acquisition of businesses, net of cash acquired (93,022) -- -- (93,022)
Investment in affiliated company (2,680) -- -- (2,680)
Proceeds from disposal of property and equipment -- 1,257 -- 1,257
--------- ------ ------ -------
Net cash used in investing activities (76,044) (1,998) (185) (78,227)
--------- ------ ------ -------
Cash Flows from Financing Activities:
Borrowings under credit agreement 108,000 -- -- 108,000
Proceeds from issuance of debt 979 -- -- 979
Principal repayments of long-term debt (41,552) -- -- (41,552)
Proceeds from issuance of common stock 837 -- -- 837
Preferred stock dividend payments (2,249) -- -- (2,249)
--------- ------ ------ -------
Net cash provided by financing activities 66,015 -- -- 66,015
--------- ------ ------ -------
Effect of exchange rate changes on cash and cash equivalents -- -- (537) (537)
Net change in intercompany balances 8,819 (631) (8,188) --
--------- ------ ------ -------
Net decrease in cash and cash equivalents (1,805) 20 2,224 439
Cash and cash equivalents at beginning of year 7,507 1,602 -- 9,109
--------- ------ ------ -------
Cash and cash equivalents at end of year $ 5,702 1,622 2,224 9,548
========= ====== ====== =======
F-29