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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
- ----- Act of 1934 for the fiscal year ended December 31, 1997 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
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
--- ---
As of March 11, 1998, there were 36,833,627 shares of Common Stock outstanding.
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates was approximately $224,301,206 based upon the closing sale price
on March 11, 1998.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for the 1998 Annual
Meeting of Shareholders are incorporated by reference into Part III.
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.
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MATRIA HEALTHCARE, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 19
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
PART III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10. Directors and Executive Officers of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 12. Security Ownership of Certain Beneficial
Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
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PART I.
ITEM 1. BUSINESS.
Certain of the statements made in this Item 1 and in other portions of
this Report and in documents incorporated by reference herein constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). 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, those
discussed in "Business - Factors Affecting Future Performance" herein. See
"Business - Factors Affecting Future Performance - Risks Associated with
Forward-Looking Statements."
INTRODUCTION. Matria Healthcare, Inc., a Delaware corporation
("Matria" or the "Company"), was incorporated on October 4, 1995 for the
purpose of the merger (the "Merger") of Tokos Medical Corporation (Delaware), a
Delaware corporation ("Tokos"), and Healthdyne, Inc., a Georgia corporation
("Healthdyne"), with and into Matria. The effective date of the Merger was
March 8, 1996. Prior to the Merger, Matria had no material assets or
liabilities and its then outstanding shares of common stock, par value $0.01
per share ("Matria Common Stock"), were held exclusively by Tokos and
Healthdyne. As a result of the Merger, the operations and assets of Tokos and
Healthdyne were consolidated into Matria, and each share of common stock of
Tokos and Healthdyne outstanding on the effective date of the Merger was
exchanged for one share of Matria Common Stock.
Matria is the leading provider of specialized obstetrical home
healthcare services that assist physicians in the management of high risk
pregnancies. In addition, Matria provides home healthcare services for the
management of other complicated obstetrical and gynecological conditions, such
as pregnancy induced hypertension. Matria's services are designed to achieve
improved medical outcomes at significant cost savings through the reduction of
patient hospitalization. Services offered by Matria include screening to
assist in the identification of women who may be at risk of complications
during pregnancy; maternal risk assessment and prenatal education for
asymptomatic patients; fetal fibronectin testing for use by physicians to
predict the likelihood of preterm delivery; daily management and education of
high risk patients; administration and supervision of a range of home infusion
therapies for obstetrical and gynecological conditions; and specialty
obstetrical and gynecological nursing.
On June 1, 1996, the Company exercised an option and acquired the
remaining 85% ownership interest in National Reproductive Medical Centers, Inc.
("NRMC"), a multi-site provider of infertility treatment services headquartered
in California. Founded in 1987 and operating as "Pacific Fertility Centers",
NRMC provides a broad spectrum of diagnostic and therapeutic services to
infertile couples with particular emphasis on in-vitro fertilization and embryo
transfer procedures. The transaction, valued at $12.8 million, was paid for in
a combination of cash and Matria Common Stock. The option to acquire NRMC was
obtained by Healthdyne prior to the Merger.
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Effective December 13, 1997, the Company entered into an Agreement
with Control Diabetes Services, Inc. ("CDS"), a subsidiary of Eli Lily & Co.
in the business of providing diabetes patient self-management training and
education services to the general diabetes population. Under the terms of the
Agreement, which covers nine metropolitan areas, Matria is the preferred
provider of diabetes education services to CDS's managed care customers and has
rights to market on its own behalf CDS's ADA-certified diabetes education
program and to use CDS's unique Dia-TracTM outcome tracking and reporting
software.
On January 15, 1998, the Company acquired ten percent (10%) of the
outstanding stock of Diabetes Management Services, Inc. ("DMS"), a South
Carolina-based company engaged in the sale of insulin pumps and supplies as
well as providing diabetes education and management services. The Company also
acquired an option to purchase the balance of the outstanding stock of DMS at a
formula price and agreed to provide working capital for DMS's growth and
expansion. The Company has subcontracted its obligations under its agreement
with CDS to DMS.
The Company's newest business unit is a clinical software subsidiary,
Clinical-Management Systems, Inc. ("CMS"), which provides clinical practice
management systems and services.
SERVICES. The Company offers a comprehensive range of specialized
home healthcare and risk assessment and clinical services designed to assist
physicians in managing high risk pregnancies and numerous other obstetrical and
gynecological conditions more cost effectively. Substantially all of the
Company's revenues are derived from these services. In 1997, the Company
expanded its services to include the provision of diabetes education services
to the general diabetes population.
High Risk Pregnancy Management. The Company offers multiple levels of
high risk pregnancy management services to assist physicians in the early
detection of preterm labor and the management of complicated pregnancies.
These levels are designed to meet various patient acuity levels and range from
low intensity surveillance to comprehensive obstetrical home care. Each level
includes one or more of the following: the identification of women who may be
at risk for complications during pregnancy; the development of a program of
care for each patient; the education of the patient as to symptoms associated
with preterm labor; skilled perinatal nursing assessments of the patient's
condition; and the use of perinatal nurses specializing in obstetrics to
administer and manage various therapies.
A physician who chooses to utilize the Company's preterm labor
management services will prescribe the level of service offered by the Company
that the physician believes is appropriate for the patient's acuity level. The
patient is assigned to a perinatal nurse located in one of the Company's
patient service centers. This nurse is generally the patient's primary contact
for the duration of her treatment plan, which typically lasts four to seven
weeks depending on the level of service prescribed and the patient's delivery
date. At the time of the assignment, the nurse contacts the patient to discuss
the physician's treatment plan and instruct her in the use of any device that
has been prescribed by her physician. The nurse educates the patient with
regard to symptoms associated with preterm labor, the methods to detect such
symptoms and proper methods of care to minimize complications during pregnancy.
The nurse contacts the patient on an as needed or daily basis depending on the
program prescribed to assess her condition, including any symptoms
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of preterm labor, to provide emotional support and counseling and to encourage
compliance with the physician's treatment plan. Through the daily contact with
the patient and the frequent assessment of symptoms associated with preterm
labor, the Matria nurse obtains information that assists the prescribing
physician in the early detection and treatment of preterm labor.
In order to assist physicians in determining the most appropriate
treatment level for patients, the Company also markets a laboratory test,
developed with the assistance of the Company by Adeza Biomedical Corporation
("Adeza"), that can be utilized by physicians as an aid in determining the
likelihood of preterm labor commencing within a given time period from the date
of the test. The test, which is FDA approved, measures the existence of fetal
fibronectin, a protein present at various times in all pregnancies ("fFN"), in
the vagina of the patient and based thereon predicts the likelihood of delivery
within a 14 day time period. See Item 3 "Legal Proceedings" for a description
of litigation commenced against the Company by Adeza in connection with this
product. The litigation was settled in 1998. Under the terms of the
settlement agreement, the Company will cease to market fFN tests as of August
31, 1998.
Physicians may also prescribe labor inhibiting drugs known as
tocolytics for patients who are symptomatic and in need of some form of
intervention. The Company provides supervision, including pharmaceutical
support, and administration of this therapy regime to patients as an
alternative to hospitalization. Frequently, this therapy involves delivery of
the drugs by micro infusion pump. The Company monitors the patient's reactions
to the therapy on an on-going basis. Nurses report any change in patient
status to the patient's physician, as well as provide the physician with
periodic reports during the course of the therapy.
Other Obstetrical and Gynecological Services. The Company provides a
broad range of skilled nursing, infusion therapy and patient management
services on a homecare basis for a variety of obstetrical and gynecological
conditions, including pregnancy induced hypertension and gestational diabetes.
Such conditions may be treated with on-going nursing assessment and focused
education at various levels of frequency and intensity, other patient
management and diagnostic services, and blood and urine testing.
Maternal Risk Assessment and Prenatal Education Services. Through its
comprehensive MaternaLink TM Program, the
Company offers a comprehensive risk assessment and patient education program
designed to reduce maternity related costs by providing expectant mothers with
focused education and psychological support and identifying pregnancies that
may be high risk. The Company sells the program to employers, managed care
organizations, health plans and other third-party payors or administrators who
make it available to their respective employees, insureds or members who are
pregnant. Through interviews with the expectant mother, the Company collects
data about the woman, her family/medical history and other circumstances that
might affect her pregnancy. Based on this information, the nurse provides the
woman with education regarding her specific risks, if any, and recommends
appropriate behavior modifications that may facilitate a healthy outcome.
Relevant information collected by the Company is summarized in reports and
provided to the participant's healthcare provider and case manager. Results of
program utilization and effect are summarized for the client in periodic
reports. The Company, working in conjunction with HMO's and other managed care
organizations, demonstrated reported improved patient outcomes and documented
cost savings from its MaternaLinkTM program.
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Infertility Services. Through its wholly-owned subsidiary, NRMC,
Matria provides a broad spectrum of diagnostic and therapeutic services to
infertile couples with particular emphasis on in-vitro fertilization and embryo
transfer procedures.
General Diabetes Services. With its strategic alliance with CDS, the
Company began to provide diabetes education services to the general diabetes
population. Since the date of its Agreement with CDS, the Company has provided
such services to CDS's managed care customers. The Company intends to expand
its provision of services to the general diabetes population in the Third
Quarter of 1998.
PATIENT CARE INFORMATION SYSTEMS. Due to the acute nature of high
risk pregnancies, physicians, pharmacists and perinatal nurses must have prompt
access to a patient's medical history, current clinical status and treatment
plan. Matria's predecessor companies made substantial investments in the
development of information systems to support healthcare professionals in
detecting obstetrical complications, as well as in developing and implementing
individualized treatment plans for their patients. In addition, they created
systems to track patient outcomes and summarize data regarding patient care.
Matria has integrated and enhanced these systems.
In addition to monitoring devices to assess the patient's daily
condition, Matria has a data information system designed to assist managed care
organizations and physician groups in tracking outcomes and summarize data
regarding maternity-related care. This system consists of proprietary software
and processes that collect information about maternity related access, care,
utilization and satisfaction. Methodologies for analyzing data and presenting
information include the use of varied data collection tools, implementation of
a relational data base and design and customization of reports to meet client
requirements.
CLINICAL PRACTICE MANAGEMENT SYSTEMS. Through its wholly owned
subsidiary, CMS, the Company has developed and markets an automated patient
record for obstetricians and gynecologists. The system helps physicians ensure
complete accurate patient records by replacing the manual process of gathering
and transcribing patient data with a fully automated PC-based system. CMS
began marketing to physician practices in July 1997 and installed its first
office system in the Third Quarter of 1997.
SERVICE LOCATIONS. Matria has approximately 36 service centers
throughout the United States and a number of additional sites of service. All
of the patient service centers operate in accordance with policies, procedures
and objectives established by Matria.
JCAHO Accreditation. Matria is continuing the process substantially
completed by its predecessor companies of having a majority of its service
centers accredited by the Joint Commission on Accreditation of Health Care
Organizations ("JCAHO"). Matria is still in the process of reaccreditating the
centers in Matria's name.
MARKETING AND SALES. Matria markets its services and products through
a dedicated direct sales force to physicians, other healthcare providers,
management service organizations and third-party payors. Matria also maintains
a group of clinical support specialists and a dedicated team of managed care
account managers to support and assist the direct sales force in these efforts.
In its patient services business, Matria stresses the
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clinical experience of its personnel, the quality of its clinical services, and
the cost and clinically effective nature of its therapies when compared to
hospitalization.
Matria has a number of contractual and other arrangements with medical
professionals, institutions and third-party payors. These arrangements
include agreements with prepaid health plans under which Matria provides
services to the plans' members at discounted prices, and agreements with
medical professionals and institutions under which Matria provides certain
services, including reimbursement management and billing and collection
services.
REIMBURSEMENT. A significant portion of the Company's revenues are
affected directly by the reimbursement policies of third-party payors, such as
private insurance programs and state Medicaid programs. Matria attempts to
focus its marketing efforts on developing private pay accounts. In general,
these accounts pay at a higher rate than government payment programs. Changes
in the funding available from either third-party or government payors or in
their reimbursement policies could have an adverse impact on the Company's
business.
Private insurance companies, including HMO's, are the primary source
of reimbursement for Matria, which assumed a substantial number of formal and
informal contractual relationships previously held by Tokos and Healthdyne with
these entities. During 1997, government payors accounted for approximately 7%
of Matria's revenues. Reimbursement for uterine activity monitoring is
currently available from approximately one-half of the 50 state Medicaid
programs.
Matria assists its patients in obtaining reimbursement from their
insurance companies or other third-party payors. Generally, Matria contacts
the patient's insurance company or other third-party payor before the
commencement of services in order to determine the patient's coverage and the
percentage of charges that the payor will reimburse. Matria's reimbursement
specialists then evaluate the patient's insurance to determine the proper
procedures for submission of reimbursable claims for payment. Matria typically
obtains an assignment of benefits from the patient that enables Matria to file
claims for its services with the third-party payor. In most cases, third-party
payors reimburse Matria directly for the portion of the charges the payor
recognizes.
HEALTHCARE LEGISLATION. Legislative efforts continue at the federal
and state levels to control rising healthcare costs. Recently, federal
initiatives have been considered in the context of federal budget legislation.
President Clinton's fiscal year 1998 budget proposal would generally reduce
payments to Medicare and Medicaid providers and grant states broader authority
to establish Medicaid managed care systems. In addition, a number of states
are considering or have enacted healthcare reforms, including reforms through
Medicaid demonstration projects. These involve mandatory statewide managed
care programs for Medicaid beneficiaries under which payment is made to
providers through negotiated or capitated rates, as opposed to traditional
fee-for-service or fee schedule payments. There can be no assurance that
future health care or budget legislation or other health reform initiatives at
the state or federal levels will not have an adverse effect on the business of
the Company.
REGULATION. Participants in the healthcare industry, including
providers of services such as those offered by Matria, are subject to extensive
federal, state and local regulation
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relating to, among other things, licensure, conduct of operations and the
addition of facilities and services, and there can be no assurance that future
regulatory changes will not have a material adverse effect on the results of
operations or financial condition of the Company. As a provider of services to
patients under various government programs, including certain state Medicaid
programs, Matria is subject to the federal fraud and abuse laws. These laws
prohibit among other things, (i) any bribe, kickback, rebate, or payment of any
other remuneration in return for the referral of patients covered under federal
healthcare programs including Medicare or Medicaid, and (ii) the submission of
false claims. Violations of these provisions may result in civil and criminal
penalties and exclusion from participation in federal healthcare programs.
The broad language of the anti-kickback statute has been interpreted
by certain courts and governmental enforcement agencies in a manner that could
impose liability on healthcare providers for engaging in a wide variety of
business transactions. Limited "safe harbor" regulations exempt certain
practices from enforcement action under the prohibitions. However, these safe
harbors are only available to transactions that fall entirely within the
narrowly defined guidelines.
In recent years, the federal government has significantly increased
the resources allocated to enforce the fraud and abuse laws. For example, the
Office of the Inspector General, in cooperation with other federal agencies,
announced a program, Operation Restore Trust, under which it is scrutinizing
the activities of home health agencies, durable medical equipment suppliers,
skilled nursing facilities, and hospices in California, Florida, Illinois, New
York and Texas, states in which Matria has significant operations. The
Administration has announced plans to expand Operation Restore Trust to all 50
states. Private insurers and various state enforcement agencies also have
increased their scrutiny of healthcare claims in an effort to identify and
prosecute fraudulent and abusive practices. Matria maintains an internal
regulatory compliance review program and from time to time retains special
counsel to provide advice on compliance with such laws and regulations.
However, no assurance can be given that the practices of Matria, if reviewed,
would be found to be in compliance with such laws, as such laws ultimately may
be interpreted.
In 1995, the so-called "Stark II Law" went into effect. Stark II
imposes civil penalties and exclusions for certain specified referrals by
physicians to entities with which they have a financial relationship (subject
to specified exceptions). In January 1998 the Healthcare Finance
Administration issued proposed regulations relating to referrals for services
other than clinical laboratory services subject to the self-referral
prohibitions.
In addition, several states in which Matria operates have laws that
prohibit certain direct or indirect payments or fee-splitting arrangements
between healthcare providers if such arrangements are designed to induce or
encourage the referral of patients to a particular provider. Other states have
enacted or are considering legislation that either prohibits "physician
self-referral" arrangements or requires physicians to disclose any financial
interest they may have with a healthcare provider that such physicians
recommend to their patients. Possible sanctions for violations of these
restrictions include loss of licensure and civil and criminal penalties. Such
statutes and proposed legislation vary from state to state and seldom have been
interpreted by the courts or regulatory agencies. Strict enforcement of these
regulations is likely. In part as a result of these changes, Matria's
predecessor companies and, to a lesser extent, Matria have terminated various
partnerships, S corporations and other arrangements in which they were involved
in an attempt to ensure
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that physician referrals would not be precluded by these statutory
prohibitions. Although substantially reduced from prior periods, Matria
retains certain select financial relationships with physicians who may refer,
or be in a position to refer, patients for services. Matria believes that these
financial relationships meet applicable exceptions permitting referrals by such
physicians. Matria may be required to further modify these arrangements, or
forced to discontinue accepting referrals from such physicians if the laws are
subsequently interpreted to prohibit these relationships.
Most of the medical products utilized by Matria 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. In
addition, some of the services that Matria offers involve the provision of
drugs that are regulated by the FDA under the FDC Act. Although these medical
devices and drugs are labeled for specific indications and conditions of use
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 for such "off-label" indications under the
"practice of medicine". For example, terbutaline sulfate is labeled for the
treatment of asthma but is frequently prescribed by obstetricians as a
tocolytic for the treatment of preterm labor. See Item 3 "Legal Proceedings"
for a discussion of a Petition filed with the FDA by the National Women's
Health Network ("NWHN") concerning the use of subcutaneous terbutaline for the
treatment of preterm labor in the home. In response to the petition, the FDA
issued a letter to physicians reiterating that the use of terbutaline sulfate
has not been approved by the FDA for the management of preterm labor. The
Company has responded to a request from the FDA for information regarding the
Company's promotion of terbutaline sulfate for off-label uses. The Company
believes that its activities comply with all applicable laws and guidelines.
Any action by the FDA that limits the ability of Matria to offer a high risk
pregnancy management service involving medical devices (including tests) or the
administration of drugs for uses for which labeling has not been approved by
the FDA could have a material adverse effect on the results of operations or
financial condition of Matria.
In certain states, the provision of infusion services and other
nursing services to patients in their homes and the laboratory services related
to fFN are subject to state home healthcare licensing and/or certificate of
need ("CON") requirements in the case of nursing services and laboratory
licensing in the case of fFN testing. The Company is engaged in an ongoing
effort to obtain information from state regulatory agencies on the application
of new and existing licensing and CON provisions applicable to its business
activities. The Company is not a licensed laboratory for purposes of
performing actual fFN laboratory analysis and relies upon Adeza and other
licensed laboratories to perform this process on its behalf. When applicable,
Matria also may be required either to obtain a license or other regulatory
approval before it renders nursing services directly in the home or to
affiliate with other licensed agencies in connection with the delivery of such
services. Although generally a standard aspect of conducting a healthcare
business, compliance with applicable requirements in certain instances can be
both burdensome and costly. Violation of these state statutes can result in
substantial fines and other penalties. The Company believes that it has
obtained or is in the process of obtaining licenses or establishing
affiliations with licensed entities for each facility for which licensing is
required. This is an area of increasing legislative activity, and there can be
no assurance that the Company will not become subject to regulatory and
licensing statutes in other states in which it operates.
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In addition, Matria is subject to laws and regulations that relate to
business corporations in general, including antitrust laws, occupational health
and safety laws and environmental laws. None of these laws and regulations has
had a material adverse effect on the Company's business or competitive position
or has required material capital expenditures on the part of the Company.
Failure to comply with these laws or regulations applicable to the
Company could adversely affect Matria's ability to continue to provide, or to
receive reimbursement for, its products and services and could also subject
Matria and its officers to penalties. Changes in laws or interpretations of
existing laws or regulations could have a material adverse effect on
permissible activities of Matria, the relative costs of doing business and the
amount of reimbursement by government and other third-party payors. In
addition, laws and regulations are often adopted to regulate new products,
services and industries. Matria is unable to predict what legislation or
regulations, if any, may be adopted in the future relating to the Company's
business or the healthcare industry, including third-party reimbursement, or
what effect any such legislation or regulations may have on Matria.
COMPETITION. The home obstetrical care services market in which
Matria competes is a relatively new market. As a result of the Merger, Matria
believes that it is both the leading provider (based on annual level of sales)
of home obstetrical care and the largest entity in this market whose services
are devoted almost exclusively to home obstetrical care. In substantially all
of the metropolitan areas in which Matria maintains centers competition exists
from a number of local regional or national companies. Matria actually
provides the patient services for several regional and national companies on a
subcontract basis, which offers Matria the opportunity to participate with
these more diversified service providers in contracting with certain
third-party payors who prefer to contract with a single source for all homecare
services.
The principal competitive factors for Matria are the therapies
offered, the expertise of its clinical employees, the ability to provide prompt
and reliable service, the price at which the services are offered and the
regulatory requirements of the FDA. The Company believes that it generally
competes favorably with respect to these factors.
RECENT CONTROVERSIES. The operations of Matria may be affected by
several controversies surrounding the home obstetrical care business. There
has been, and continues to be, debate within the medical community about how to
decrease the incidence of prematurity, which is a major cause of the high U.S.
infant mortality rate. Matria believes that increased surveillance of women at
risk of developing preterm labor can assist the physician in early diagnosis of
preterm labor and help improve the medical outcomes of complicated pregnancies.
Matria provides a comprehensive range of services to assist the physician in
this surveillance, including fFN testing, perinatal nursing, obstetrical
pharmacy services and tocolytic therapy. A significant portion of these
services includes the use of home uterine activity monitoring devices. In
September 1992, an eight member committee of the American College of
Obstetricians and Gynecologists ("ACOG") published an opinion stating, among
other things, that the use of home uterine activity monitoring devices has not
been shown to prevent prematurity; while the committee opinion represented a
more recent review of existing literature, there was essentially no change from
its 1989 opinion regarding the independent benefit of home uterine activity
monitoring. Since that time, the FDA has approved the uterine activity
monitors utilized by Matria (the only provider of home obstetrical care with
devices given pre-market approval by the FDA) as safe and effective for
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the prediction of the onset of preterm labor in women with a history of a
previous preterm delivery. Although Matria does not believe that either home
uterine activity monitoring or any other diagnostic device can, in and of
itself, improve therapeutic outcomes (e.g., a mammogram cannot prevent breast
cancer), it does believe that monitoring can assist the physician in the early
detection of preterm labor. See Item 3 "Legal Proceedings" for a discussion of
a Petition filed by the NWHN.
RESEARCH AND DEVELOPMENT. Matria's research and development strategy
is to develop new and more cost-effective service procedures for providing
obstetrical care to patients in the home environment, as well as to develop an
office- based patient record and clinical management system for use by
physicians in the management of their patients.
EMPLOYEES. The Company currently employs a total of approximately 749
full-time employees and over 95 regular part-time employees. In addition, the
Company employs an additional 825 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.
PATENTS, TRADEMARKS AND LICENSES. Matria utilizes a number of
trademarks including, without limitation, System 37(R) and MaternaLink(TM), and
considers the same to be important to the marketing and promotion of its
services. Matria does not believe that it possesses any patents that are
material to its business, although the patent possessed by Adeza for the use of
the fFN Test may be deemed to be material to the continued marketing of that
product. Matria's business depends and will likely continue to depend on trade
secret protection to strengthen its proprietary position. Matria requires its
employees to execute appropriate confidentiality agreements in connection with
their employment. There can be no assurance that these agreements will not be
breached or that Matria will have adequate remedies for such breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information or that Matria can
meaningfully protect its rights in unpatented proprietary information.
Litigation may be necessary to protect trade secrets or "know-how" owned by
Matria, which could result in substantial costs to, and might have a material
adverse effect on, Matria.
FACTORS AFFECTING FUTURE PERFORMANCE.
REIMBURSEMENT. A significant portion of the Company's revenues are
affected directly by the reimbursement policies of third-party payors, such as
private insurance programs and state Medicaid programs. During 1997,
approximately 93% of the Company's revenue was derived from private insurance
programs and approximately 7% from government payors. Any change by
third-party or government payors in reimbursement amounts or practices could
have a material adverse effect on the Company's business, operating results and
financial condition.
Reimbursement for uterine activity monitoring is currently available
from approximately one-half of the 50 state Medicaid programs. Although the
Company seeks to comply with applicable Medicaid reimbursement regulations,
there can be no assurance that the Company would be found in compliance in all
respects with such regulations. In addition, reimbursement from Medicaid for
certain services is subject to audit and retroactive adjustment. Retroactive
adjustments made to prior years could have a material adverse effect on the
Company's business, financial condition and results of operations.
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12
The Company has focused its marketing efforts on developing private
pay accounts, which generally pay at higher rates than government payment
programs. Private insurance companies, including HMO's, are the primary source
of reimbursement for Matria, which assumed a substantial number of formal and
informal contractual relationships previously held by Tokos and Healthdyne with
these entities. The trend within the healthcare industry to deliver quality
healthcare services in a more cost-effective manner had an impact on the
Company's predecessors and is expected to continue to have an impact on the
Company. Driven by employers and third-party payors, as well as by legislation
and regulation, prices for services provided to patients, in general, are being
reduced, cost-effective preventative health care is being stressed and
vertically integrated networks of care providers (some of whom are accepting
the insurance risk of providing care through capitation contracts with
third-party payors) are being established. The Company anticipates that this
trend will continue and is attempting to focus its efforts on services, some of
which are offered in conjunction with third-party payors, that it believes can
benefit from this new environment. There can be no assurance, however, that
either additional changes or presently unforeseen consequences from this trend
may not develop.
COLLECTION OF ACCOUNTS RECEIVABLE. The home healthcare industry is
generally characterized by long collection cycles for accounts receivable due
to the complex and time consuming requirements for obtaining reimbursement from
private and governmental third-party payors. The Company is experiencing an
increase in the length of time required to collect receivables owed by managed
care organizations and other payors. The Company has implemented stronger
controls in the distribution of products and services and has devoted increased
resources to collection activities in an effort to obtain timely payment for
the Company's products and services. There can be no assurance that these
efforts will be successful. A continuation of the lengthening of the amount of
time required to collect accounts receivable from managed care organizations and
other payors could have a material effect on the Company's business, financial
condition or results of operations.
REGULATION. Participants in the healthcare industry, including
providers of services such as those offered by Matria, are subject to extensive
federal, state and local regulation relating to, among other things, licensure,
conduct of operations and the addition of facilities and services, and there
can be no assurance that future regulatory changes will not have a material
adverse effect on the results of operations or financial condition of the
Company. As a provider of services to patients under various government
programs, including certain state Medicaid programs, Matria is subject to the
federal fraud and abuse laws. These laws prohibit among other things, (i) any
bribe, kickback, rebate, or payment of any other remuneration in return for the
referral of patients covered under federal healthcare programs including
Medicare or Medicaid, and (ii) the submission of false claims. Violations of
these provisions may result in civil and criminal penalties and exclusion from
participation in federal healthcare programs.
The broad language of the anti-kickback statute has been interpreted
by certain courts and governmental enforcement agencies in a manner that could
impose liability on healthcare providers for engaging in a wide variety of
business transactions. Limited "safe harbor" regulations exempt certain
practices from enforcement action. However, this protection is only available
with respect to transactions that fall entirely within the narrowly defined
criteria of the safe harbors.
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In recent years, the federal government has significantly increased the
resources allocated to enforce the fraud and abuse laws. For example, the
Office of Inspector General, in cooperation with other federal agencies,
announced a program, Operation Restore Trust, under which it initially
scrutinized the activities of home health agencies, durable medical equipment
suppliers, skilled nursing facilities, and hospices in California, Florida,
Illinois, New York and Texas, states in which Matria has significant
operations. Since the start of the program, the Administration has added 12
more states and has announced plans to expand Operation Restore Trust to all 50
states. Private insurers and various state enforcement agencies also have
increased their scrutiny of healthcare claims in an effort to identify and
prosecute fraudulent and abusive practices. Matria maintains an internal
regulatory compliance review program and from time to time retains special
counsel to provide advice on compliance with applicable laws and regulations.
However, no assurance can be given that the practices of Matria, if reviewed,
would be found to be in compliance with such laws, as such laws ultimately may
be interpreted.
In 1995, the so-called "Stark II Law" went into effect. Stark II
imposes civil penalties and exclusions for certain specified referrals by
physicians to entities with which they have a financial relationship (subject
to specified exceptions). In January 1998, the Healthcare Financing
Administration issued proposed regulations relating to referrals for services
(other than clinical laboratory services) which are subject to the self-referral
prohibitions.
In addition, several states in which Matria operates have laws that
prohibit certain direct or indirect payments or fee-splitting arrangements
between healthcare providers if such arrangements are designed to induce or
encourage the referral of patients to a particular provider. Other states have
enacted or are considering legislation that either prohibits "physician
self-referral" arrangements or requires physicians to disclose any financial
interest they may have with a healthcare provider that such physicians
recommend to their patients. Possible sanctions for violations of these
restrictions include loss of licensure and civil and criminal penalties. Such
statutes and proposed legislation vary from state to state, and existing laws
have seldom been interpreted by the courts or regulatory agencies. Strict
enforcement of these restrictions is likely. In part as a result of these
changes, Matria's predecessor companies and Matria have terminated various
partnerships, and other arrangements with physicians in an attempt to ensure
that referrals by such physicians would not be precluded by these statutory
prohibitions. Although substantially reduced from prior periods, Matria
retains certain select financial relationships with physicians who may refer,
or be in a position to refer, patients for services. Matria believes that these
financial relationships meet applicable exceptions permitting referrals by such
physicians. Matria may be required to further modify these arrangements, or
forced to discontinue accepting referrals from such physicians, if the laws are
subsequently interpreted to prohibit these relationships.
Most of the medical products utilized by Matria 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. In
addition, some of the services that Matria offers involve the provision of
drugs or tests that are regulated by the FDA under the FDC Act. Although these
medical devices, drugs and tests 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 for such "off-label" indications under the
"practice of medicine" doctrine. For example, terbutaline sulfate is labeled
for the treatment of asthma but is frequently prescribed by obstetricians as a
tocolytic for the treatment of preterm labor. See Item 3
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"Legal Proceedings" for a discussion of a Petition filed with the FDA by the
National Women's Health Network ("NWHN") concerning the use of subcutaneous
terbutaline for the treatment of preterm labor in the home. In response to the
petition, the FDA issued a letter to physicians reiterating that the use of
terbutaline sulfate has not been approved by the FDA for the management of
preterm labor. The Company has received and responded to a request from the
FDA for information regarding the Company' promotion of terbutaline sulfate for
off-label uses. The Company believes that its activities comply with all
applicable laws and guidelines. Any action by the FDA that limits the ability
of Matria to offer a high risk pregnancy management service involving medical
devices or the administration of drugs or tests for indications for which they
have not been labeled could have a material adverse effect on the results of
operations or financial condition of Matria.
In certain states, the provision of infusion services and other
nursing services to patients in their homes and the laboratory services related
to fFN are subject to state home healthcare licensing and/or certificate of
need ("CON") requirements in the case of nursing services and laboratory
licensing in the case of fFN testing. The Company is engaged in an ongoing
effort to obtain information from state regulatory agencies on the application
of new and existing licensing and CON provisions applicable to its business
activities. The Company is not a licensed laboratory for purposes of
performing actual fFN laboratory analysis and relies upon Adeza and other
licensed laboratories to perform this process on its behalf. When applicable,
Matria also may be required either to obtain a license or other regulatory
approval before it renders nursing services directly in the home or to
affiliate with other licensed agencies in connection with the delivery of such
services. Although generally a standard aspect of conducting a healthcare
business, compliance with applicable requirements in certain instances can be
both burdensome and costly. Violation of these state statutes can result in
substantial fines and other penalties. The Company believes that it has
obtained or is in the process of obtaining licenses or establishing
affiliations with licensed entities for each facility for which licensing is
required. This is an area of increasing legislative activity, and there can be
no assurance that the Company will not become subject to regulatory and
licensing statutes in other states in which it operates.
In addition, Matria is subject to laws and regulations that relate to
business corporations in general, including antitrust laws, occupational health
and safety laws and environmental laws. None of these laws and regulations has
had a material adverse effect on the Company's business or competitive position
or has required material capital expenditures on the part of the Company.
Failure to comply with these laws or regulations applicable to the
Company could adversely affect Matria's ability to continue to provide, or to
receive reimbursement for, its products and services and could also subject
Matria and its officers to penalties. Changes in laws or interpretations of
existing laws or regulations could have a material adverse effect on
permissible activities of Matria, the relative costs of doing business and the
amount of reimbursement by government and other third-party payors. In
addition, laws and regulations are often adopted to regulate new products,
services and industries. Matria is unable to predict what legislation or
regulations, if any, may be adopted in the future relating to the Company's
business or the healthcare industry, including third-party reimbursement, or
what effect any such legislation or regulations may have on Matria.
HEALTHCARE REFORM. Legislative efforts continue at the federal and
state levels to control rising healthcare costs. Recently, federal initiatives
have been considered in the
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context of federal budget legislation. President Clinton's fiscal year 1998
budget proposal would generally reduce payments to Medicare and Medicaid
providers and grant states broader authority to establish Medicaid managed care
systems. In addition, a number of states are considering or have enacted
healthcare reforms, including reforms through Medicaid demonstration projects.
These involve mandatory statewide managed care programs for Medicaid
beneficiaries under which payment is made to providers through negotiated or
capitated rates, as opposed to traditional fee-for- service or fee schedule
payments. There can be no assurance that future healthcare or budget
legislation or other health reform initiatives at the state or federal levels
will not have an adverse effect on the business of the Company.
RISKS RELATIVE TO THE CORPORATE PRACTICE OF MEDICINE. Business
corporations are legally prohibited in many states from providing or holding
themselves out as providers of medical care. Although the Company has
structured its operations to comply with the corporate practice of medicine
laws of states in which it operates and will seek to structure its operations
in the future to comply with the laws of any state in which it seeks to
operate, there can be no assurance that, given varying and uncertain
interpretations of such laws, the Company would be found to be in compliance
with restrictions on the corporate practice of medicine in such states. A
determination that the Company is in violation of applicable restrictions on
the practice of medicine in any state in which it operates could have a
material adverse effect on the Company's business if the Company were unable to
restructure its operations to comply with the requirements of such state. Such
regulations may limit the states in which the Company can operate, thereby
inhibiting future expansion of the Company into potential markets in other
states.
CORPORATE EXPOSURE TO PROFESSIONAL LIABILITIES. Due to the nature of
its business, the Company may be the subject of medical malpractice claims,
with the attendant risk of substantial damage awards. The most significant
source of potential liability in this regard is the alleged negligence of
nurses placed by the Company in home healthcare settings. There can be no
assurance that a future claim or claims will be within the scope of the
Company's insurance coverage or not exceed the limits of available insurance
coverage, or that such coverage will continue to be available at acceptable
costs.
DEPENDENCE ON INTELLECTUAL PROPERTY. Matria utilizes a number of
trademarks including, without limitation, System 37(R) MaternaLink(TM) and
considers the same to be important to the marketing and promotion of its
services. Matria does not believe that it possesses any patents that are
material to its business, although the patent possessed by Adeza for the use of
the fFN Test may be deemed to be material to the continued marketing of that
product. Matria's business does depend and will likely continue to depend on
trade secret protection to strengthen its proprietary position. Matria
requires its employees to execute appropriate confidentiality agreements in
connection with their employment. There can be no assurance that these
agreements will not be breached or that Matria will have adequate remedies for
such breach. Furthermore, no assurance can be given that competitors will not
independently develop substantially equivalent proprietary information or that
Matria can meaningfully protect its rights in unpatented proprietary
information. Litigation may be necessary to protect trade secrets or
"know-how" owned by Matria, which could result in substantial costs to, and
might have a material adverse effect on, Matria.
COMPETITION. The home obstetrical care services market in which
Matria competes is a relatively new market. As a result of the Merger, Matria
believes that it is both the leading
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provider (based on annual level of sales) of home obstetrical care and the
largest entity in this market whose services are devoted almost exclusively to
home obstetrical care. In substantially all of the metropolitan areas in which
Matria maintains centers competition exists from a number of local, regional or
national companies. Matria actually provides the patient services for several
regional and national companies on a subcontract basis, which offers Matria the
opportunity to participate with these more diversified service providers in
contracting with certain third-party payors who prefer to contract with a
single source for all home care services.
The principal competitive factors for Matria are the therapies
offered, the expertise of its clinical employees, the ability to provide prompt
and reliable service, the price at which the services are offered and the
regulatory requirements of the FDA. The Company believes that it generally
competes favorably with respect to these factors.
DEPENDENCE ON RELATIONSHIPS WITH REFERRAL SOURCES. The growth and
profitability of the Company depends on its ability to establish and maintain
close working relationships with referral sources, including payors, physicians
and other healthcare professionals. There can be no assurance that the Company
will be able to maintain existing referral sources or develop and maintain new
referral sources. The loss of any significant existing referral sources or the
failure to develop any new referral sources could have a material adverse
effect on the Company's business, operating results and financial condition.
RISKS ASSOCIATED WITH ACQUISITIONS. The Company may grow through
acquisitions of additional healthcare and complementary businesses. If the
Company does pursue the acquisition of a business, the Company expects to face
competition for acquisition candidates, which may limit the number of
acquisition opportunities and may lead to higher acquisition prices. There can
be no assurance that the Company will be able to identify, acquire or manage
profitably additional businesses or to integrate any acquired businesses into
the Company without substantial costs, delays or other operational or financial
problems. Further, acquisitions involve a number of risks, including possible
adverse effects on the Company's operating results, diversion of management's
attention, failure to retain key personnel of the acquired business and risks
associated with unanticipated events or liabilities, some or all of which could
have a material adverse effect on the Company's business. In addition, future
acquisitions may result in dilutive issuances of equity securities, incurring
additional debt, large one-time write-offs and the creation of goodwill or
other intangible assets that could result in amortization expense. These
factors could have a material adverse effect on the Company's business,
operating results and financial condition.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS. This 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 forward-looking
statements and information in this Form 10-K are forward-looking statements
within the meaning of Section 27A of the Securities Act and
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Section 21E of the Securities Exchange Act 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, those discussed above. 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
Report or in any statement referencing the risk factors and other cautionary
statements set forth in this Report, whether as a result of new information,
future events or otherwise.
ITEM 2. PROPERTIES.
Matria's principal executive and administrative offices are located at
1850 Parkway Place, Marietta, Georgia, and total approximately 99,400 square
feet. The facility is leased through February 28, 2003. The lease provides
for annual rental payments of $2.063 million.
Additional properties also are leased for the other operations of
Matria. Matria's patient service centers are typically located in suburban
office parks and range between 600 and 6,500 square feet of space with an
average of approximately 3,500 square feet. Total square footage for these
facilities is approximately 126,000 square feet. These facilities are leased
for various terms through 2001 at aggregate annual rental of approximately
$2.200 million. The Company terminated the lease for the former corporate
headquarters of Tokos in Santa Ana, California effective December 31, 1997 and
relocated its occupants to smaller, more appropriate facilities.
In 1996, Matria relinquished or sublet a number of facilities as a
part of the consolidation of the business operations of Tokos and Healthdyne.
Matria believes that it has adequate facilities for the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
A complaint, filed by Adeza in the Superior Court of Santa Clara
County, California, was served on Matria on March 7, 1997. The complaint
alleges that Matria breached an Exclusive Marketing Agreement, dated December
31, 1991, as amended (the "Agreement"), between Adeza and Tokos and was filed
in an attempt to terminate the Agreement. Under the Agreement, Tokos invested
$10 million to assist Adeza in the development of a test to predict the
likelihood of the onset of preterm labor utilizing a fetal fibronectin
immunoassay ("fFN Test"). On March 3, 1998, Matria and Adeza settled this
litigation. Under the terms of the settlement, Matria will relinquish its fFN
distribution rights and equity stake in Adeza for the ability to recoup its
investment (from payments based upon future sales of fFN). Matria will
continue to distribute the test for a six-month transition period. The
settlement enables Matria to focus its energies on its core business, without
the expense and distraction of ongoing litigation.
A complaint, filed by The Lindner Fund, Inc. in the Eastern District
of Missouri, was served on February 3, 1995 against Healthdyne and its former
subsidiary, Home Nutritional Services, Inc. ("HNS"), alleging that The Lindner
Fund would not have sold its investment in HNS on February 8, 1994 had
Healthdyne and HNS disclosed the potential sale of HNS. Damages have been
requested in the amount of $1,050,900, representing the aggregate difference
between the price received upon the sale of such stock by The Lindner Fund and
the $7.85 per share price paid by W.R. Grace & Co. on April 6, 1994 for HNS.
Healthdyne denied the allegations set forth in the complaint and Matria is
defending the matter vigorously.
On July 17, 1996, the NWHN filed a Petition with the FDA and issued a
press release alleging that terbutaline, although widely prescribed by
physicians for the off-label use as a tocolytic, was unsafe when administered
subcutaneously in the home. The Company strongly disputed the assertions of
the NWHN and filed a response to the Petition with the FDA and commenced
litigation against the NWHN. Matria voluntarily dismissed the litigation
against NWHN on November 26, 1997 so that Matria's intentions on the issues of
women's health care would not be misinterpreted and to avoid further expenses
related to the matter. The NWHN filed a motion seeking sanctions against
Matria on December 2, 1997. The Court dismissed the motion for lack of
jurisdiction on February 3, 1998. The NWHN did not appeal the dismissal of its
motion.
In addition to the foregoing, 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. Matria maintains, as did its
predecessors, insurance, including insurance covering professional and product
liability claims, with customary deductible amounts and has been indemnified by
Healthdyne Technologies, Inc., a former subsidiary of Healthdyne, with respect
to any claim relating to equipment manufactured and sold by Healthdyne
Technologies, regardless of the date of manufacture of the equipment in
question or whether the claim arose before or after the May 22, 1995 spin-off
of Healthdyne Technologies. 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 in the future.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The directors of the Company are divided into three classes. The
class comprised of Messrs. Parker H. Petit, Frank D. Powers, and Morris S.
Weeden will continue to serve until the 1998 annual meeting of stockholders and
until their successors are elected and qualified. The class comprised of
Messrs. Donald R. Millard and Carl E. Sanders will continue to serve until the
1999 annual meeting and until their successors are elected and qualified.
At the Annual Meeting of Stockholders of the Company held on December
15, 1997 (the "Meeting"), the following directors were elected, each of whom
will serve until the 2000 annual meeting of stockholders and until his or her
successor is elected and qualified:
Affirmative Withheld
Nominee Votes Votes
- ---------------------------------------------------------------------
Jackie M. Ward 29,619,062 1,708,058
Frederick P. Zuspan, M.D. 29,597,491 1,729,629
In addition, the following proposal was approved at the Meeting:
Approval of the Company's 1997 Stock Incentive Plan authorizing the
Company to grant options, stock bonuses and rights to purchase up to 1,800,000
shares of the Company's Common Stock to such employees, officers, independent
contractors and consultants of the Company as the Board of Directors or Stock
Option Committee shall, from time to time, designate.
Affirmative Votes Negative Votes Abstentions
- -----------------------------------------------------------------------------------------
25,169,485 4,809,546 1,348,089
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
---- --- -------------------------
Donald R. Millard 50 President, Chief Executive Officer and
Chief Financial Officer
Frank D. Powers 49 Executive Vice President and
Chief Operating Officer
Thornton A. Kuntz, Jr. 44 Vice President-Administration
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Roberta L. McCaw 42 Assistant General Counsel and
Assistant Secretary
Yvonne V. Scoggins 48 Vice President, Chief Accounting Officer
and Treasurer
The executive officers of the Company are elected annually and serve
at the pleasure of the Board of Directors.
Mr. Millard has served as President, Chief Executive Officer and Chief
Financial Officer since October 20, 1997 and previously was Senior Vice
President-Finance, Chief Financial Officer and Treasurer of the Company from
March 8, 1996 to October 20, 1997. Prior thereto, he served as Vice
President-Finance and Chief Financial Officer of Healthdyne from July 1987 to
March 1996 and, in addition, was Treasurer of Healthdyne from March 1990 to
March 1996.
Mr. Powers has been Executive Vice President and Chief Operating
Officer since October 20, 1997 and previously was Executive Vice President of
the Company from March 8, 1996 to October 20, 1997. Prior thereto, he served
as President of Healthdyne Maternity Management, a subsidiary of Healthdyne,
from October 1989 until March 1996, and as President of Healthdyne's Home Care
Group from November 1986 to October 1989. In addition, he was President of
Healthdyne's Home Care Products Division from September 1984 to November 1986
and Corporate Controller of Healthdyne from January 1983 to September 1984.
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.
Ms. McCaw has been Assistant General Counsel and Assistant Secretary
of the Company since December 15, 1997 and previously was Assistant General
Counsel from July 1996 to December 1997. Prior thereto, Ms. McCaw was a
partner in Tyler, Cooper & Alcorn, a Connecticut based law firm, from January
1990 to July 1996.
Ms. Scoggins has been Vice President, Chief Accounting Officer and
Treasurer of the Company since December 15, 1997 and previously was Vice
President and Controller from March 8, 1996 to December 15, 1997. Prior
thereto, Ms. Scoggins 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, Chief Financial Officer of Home
Nutritional Services, Inc., a former majority owned subsidiary of Healthdyne,
from February 1990 to April 1993.
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PART II
ITEM 5. MARKET FOR 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 record holders as of March 11, 1998, was 3,286.
Trading in Matria Common Stock did not take place prior to the
effective date of the Merger except for the initial purchase of a limited
number of shares by Tokos and Healthdyne as part of the Company's
incorporation.
Neither Matria nor its predecessors paid any cash dividends with
respect to their respective common stocks and Matria does not intend to declare
any dividends in the near future. The Company is a party to a Loan and
Security Agreement that contains covenants restricting the payment of dividends
on the Company's Common Stock. Matria is a party to an indenture assumed from
Healthdyne relating to subordinated debentures that contains provisions
restricting the payment of cash dividends during the continuation of a default
in the payment of interest on the subordinated debentures.
The high and low sales price of Matria Common Stock from March 11,
1996 (the first day that trading occurred), through March 31, 1996, was $9.75
and $7.50, respectively. In addition, the following table sets forth, for the
remaining calendar quarters indicated in 1996 and 1997, the high and low sales
prices of Matria Common Stock.
CALENDAR QUARTER LOW HIGH
---------------- --- ----
1996
Second $7.375 $9.25
Third 6.50 8.75
Fourth 4.625 8.375
1997
First $3.50 $7.50
Second 3.50 5.125
Third 3.5625 6.25
Fourth 4.875 7.125
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information represents the financial
performance of Matria from March 1, 1996 through December 31, 1997 and, for all
prior periods, of Tokos (deemed for accounting purposes to be the acquiror of
Healthdyne in the Merger) and is derived from, and should be read in
conjunction with, the historical consolidated financial statements of Matria
and Tokos and the related notes thereto. For all practical purposes, Matria
did not engage in business prior to the effective date of the Merger, and the
results of Tokos are not necessarily indicative of Matria's future performance.
Years Ended December 31,
--------------------------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- ------- ------ -------
(In thousands, except per share data)
Consolidated statements of operations:
--------------------------------------
Revenues $144,533 130,806 85,209 98,565 120,837
Operating expenses 122,630 122,686 83,990 96,640 117,460
Provision for doubtful accounts 6,599 7,591 5,251 7,042 13,656
Amortization of goodwill and other
intangibles 36,604 30,083 1,235 350 187
Restructuring, severance and other charges -- 22,525 6,756 -- 14,000
-------- ------- ------- ------- -------
165,833 182,885 97,232 104,032 145,303
-------- ------- ------- ------- -------
Loss from operations (21,300) (52,079) (12,023) (5,467) (24,466)
Interest income, net 483 824 333 50 39
Other income (expense), net (85) 134 46 108 --
-------- ------- ------- ------ -------
Loss before income tax expense (20,902) (51,121) (11,644) (5,309) (24,427)
Income tax expense -- -- 150 550 1,956
-------- ------- ------- ------ -------
Net loss $(20,902) (51,121) (11,794) (5,859) (26,383)
======== ======= ======= ====== =======
Basic and diluted loss per share $ (0.57) (1.58) (0.68) (0.34) (1.53)
======== ======= ======= ====== =======
Weighted average shares outstanding 36,527 32,328 17,396 17,169 17,240
======== ======= ======= ====== =======
December 31,
----------------------------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In thousands)
Consolidated balance sheet data:
--------------------------------
Total assets $191,132 223,188 44,468 58,183 69,959
Long-term debt obligations, excluding
current maturities 1,712 2,499 2,078 2,593 3,348
Shareholders' equity 153,169 173,178 29,489 40,160 46,875
22
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Certain of the statements made in this Item 7 and in other portions of
the Report and in documents incorporated by reference herein constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Exchange Act. 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, those discussed in "Business - Risk
Factors" herein. See "Business - Factors Affecting Future Performance - Risks
Associated with Forward-Looking Statements."
GENERAL.
On March 8, 1996, Tokos and Healthdyne merged with and into the
Company, which was created solely for the purpose of the Merger. The Merger was
accounted for using the purchase method of accounting, and Tokos was deemed to
be the acquiror since its shareholders received approximately 51% of the newly
issued shares of Matria Common Stock.
In March 1995, Healthdyne acquired a 15% ownership interest in NRMC,
and effective June 1, 1996, the Company acquired the remaining 85%. The
acquisition was accounted for using the purchase method of accounting.
The Company's present operations and future prospects may be
influenced by several factors, including developments in the healthcare
industry, third-party reimbursement policies and practices, and changes in
regulatory requirements or the manner in which such requirements are enforced.
As a result of the increasing cost of health care in the United States and
overall efforts to reduce or control government and corporate spending,
government and third- party payors are becoming increasingly focused on
promoting cost-effective healthcare services, and payors, in particular, have
become more involved in decisions regarding diagnosis and treatment to ensure
that care is delivered in a cost-effective manner.
A substantial portion of the Company's current revenues are derived
directly from third-party payors for services rendered to patients by the
Company. The financial performance of all healthcare companies, including the
Company, could be adversely affected by the financial condition of certain
governmental and private payors and by their continuing efforts to reduce
healthcare costs by lowering reimbursement rates, increasing medical reviews of
invoices for services and negotiating for reduced contract rates. The Company
and its predecessor companies have responded to these developments by
attempting to emphasize cost-effective therapies and procedures, pre-qualifying
insurance coverage prior to the delivery of services and educating third-party
payors on the benefits of the Company's home therapies. Although reduction in
the reimbursement rates that the Company receives for services rendered could
have an adverse impact on the Company, the Company is hopeful that the overall
cost-effective nature of treatment in the home (as compared to
hospitalization), coupled with the potential benefits to be derived from
prenatal care, will be recognized and encouraged by any new healthcare
initiatives.
23
24
The Company's revenues from its preterm labor management business tend
to be seasonal. Revenues typically begin to decline with the onset of the
holiday season starting with Thanksgiving causing the first quarter revenues of
each year to be less than those of the fourth quarter of the previous year.
Over the previous four-year period the decline in revenues from the fourth to
first quarters has averaged 7%. Management believes that the Company's
quarterly revenues will continue to be impacted by this seasonality. In
addition, a letter from the Food and Drug Administration to physicians,
reiterating that the use of terbutaline sulfate for the management of preterm
labor is an "off-label" use, caused the Company to refocus the efforts of its
sales force to educating physicians and payors on clinical and regulatory
issues, which has had a negative impact on the Company's revenues in the first
quarter of 1998.
The trend within the healthcare industry to deliver quality healthcare
services in a more cost-effective manner had an impact on the Company's
predecessors and is expected to continue to have an impact on the Company.
Driven by employers and third-party payors, as well as by legislation and
regulation, prices for services provided to patients, in general, are being
reduced, cost-effective preventative health care is being stressed and
vertically integrated networks of care providers (some of whom are accepting
the insurance risk of providing care through capitation contracts with
third-party payors) are being established. Matria anticipates that this trend
will continue and is attempting to focus its efforts on services, some of which
are offered in conjunction with third-party payors, which it believes can
benefit from this new environment. There can be no assurance, however, that
either additional changes or presently unforeseen consequences from this trend
may not develop.
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 on Form 10-K for the year ended December 31, 1997 as filed with the
Securities and Exchange Commission (the "Commission"). The results of the
Company include the results of Healthdyne only since March 1, 1996 and NRMC
only since June 1, 1996 and also include certain costs and expenses associated
with the Merger. 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 $13.727 million or 10.5% in 1997 and $45.597
million or 53.5% in 1996. The decline in revenues experienced by Tokos
throughout 1995, which was primarily a result of decreases in preterm labor
management patient service days, continued throughout 1996 and early 1997;
however, it was offset by the additional Healthdyne revenues included in the
Company's revenues from March 1, 1996 and by the additional NRMC revenues
included in the Company's revenues from June 1, 1996.
Additional revenues were also realized in 1997 and 1996 ($3.636
million and $738,000, respectively) from the marketing of the fetal fibronectin
immunoassay (fFN), a new in vitro diagnostic test used as an aid in assessing
the risk of preterm delivery in women. Through a marketing agreement entered
into by Tokos in 1991, the Company had exclusive rights to market this test in
the United States, Canada and Puerto Rico. The Company began marketing the
test in 1996 as a means of predicting whether preterm delivery was likely in
women with symptoms associated with preterm labor. In March 1998, the Company
24
25
entered into a settlement agreement with the manufacturer of the tests in the
litigation over the exclusive rights to distribute the test (See Item 3 -
"Legal Proceedings" herein). Under the terms of the settlement, the Company
has agreed to relinquish its distribution rights and equity interest in Adeza
in exchange for the opportunity to recoup its investment over time, from
payments based upon future sales of the product. As a result, following a six
month transition period, revenues on sales of fFN are expected to be
substantially reduced.
Cost of revenues as a percent of revenues for 1997 decreased to 39.9%
from 42.7% and 41.1% in 1996 and 1995, respectively. The reductions of costs
of revenues as a percentage of the preterm labor management business to 36.5%
in 1997 from 40.9% in 1996 and 41.1% in 1995 were primarily achieved through
consolidation of service sites and operating efficiencies related to the
Merger. These reductions were partially offset by the inclusion of the results
of operations of NRMC in 1996 and 1997, whose costs of revenues as a percentage
of revenues were 66.3% in 1997 and 67.5% in 1996.
Selling and administrative expenses declined as a percentage of
revenues in 1997 to 44.9% from 50.8% and 56.9% in 1996 and 1995, respectively,
primarily due to synergies achieved as a result of the Merger.
Excluding the amortization of the additional goodwill and other
intangibles associated with the Merger ($32.613 million per year for the first
three years and $29.946 million per year for two additional years), the Company
achieved annualized cost savings on a quarterly run rate basis compared to the
historical combined costs of Tokos and Healthdyne of approximately $28.000
million in 1996, primarily as a result of reductions of patient services center
expenses in overlapping geographic locations, elimination of duplicate
facilities including corporate headquarters, and synergies in staff and
functional areas. Additional annualized cost savings in excess of $12.000
million were achieved in 1997.
As a result of the Merger and the acquisition of NRMC, a large
percentage of the assets reflected on the Company's balance sheet are
intangible assets or goodwill (as opposed to tangible assets such as cash,
accounts receivable, inventory and equipment). At December 31, 1997, the
Company's total assets were $191.132 million, of which $112.149 million, or
58.7% of total assets, were goodwill and intangibles. The amortization or any
future write-down of such goodwill and intangibles by the Company, if required,
could have a material adverse effect on the results of operations of the
Company.
The Company provides for estimated uncollectable accounts as revenues
are recognized. The provision for doubtful accounts as a percentage of
revenues for the preterm labor management business was approximately 5% in 1997
and 6% in 1996 and 1995. 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. Therefore, the provision rate could vary on a quarterly
basis. NRMC collects substantially all charges for patient services at the
time services are provided. Therefore, the provision for doubtful accounts for
NRMC is not significant.
During 1995, as Tokos' revenues continued to decline, specific
decisions were made and communicated by management related to cost reduction
efforts. The cost reduction plan consisted of reductions in the workforce
(comprised of personnel within information systems, reimbursement,
administrative support and to a lesser extent clinical services) and
25
26
termination of several facility leases. In connection with these cost
reduction activities, Tokos incurred $2.456 million of restructuring costs in
1995. In connection with the Merger, the Company incurred approximately
$22.525 million of restructuring costs which were charged to operations in
1996. Of these costs, approximately $12.000 million related to involuntary
severance and relocation of employees, $2.500 million related to the
consolidation of facilities, $5.400 million related to the write-down of
software and equipment that will be obsolete as a result of the adoption of new
systems, and $2.625 million related to other miscellaneous Merger related
costs.
Tokos recorded income tax expense of $150,000 related to state
franchise taxes in 1995. No state franchise tax has been recorded in 1996 or
1997. Neither Tokos in 1995 nor the Company in 1996 and 1997 recorded federal
or state income tax benefits. The net tax operating loss of approximately
$87.000 million will be available to offset future taxable income, if any.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997 the Company had cash and short-term
investments of $20.942 million.
Net cash provided by operating activities was $6.521 million for 1997,
compared with $4.833 million provided in 1996 and $3.314 million provided in
1995. In 1997, net cash flow from operating activities was reduced by $9.759
million for Merger related costs. In 1996, net cash flow was reduced by
payments of $14.720 million for Merger related costs, $5.345 million for the
settlement of a former Tokos shareholders lawsuit and $5.947 million related to
the purchase of NRMC. Net cash used in investing activities was $2.764
million, $3.588 million and $2.222 million in 1997, 1996 and 1995,
respectively. The decrease in 1997 is primarily due to less acquisition
activity. The increase in 1996 is primarily due to the increase in capital
expenditures relating to the upgrade of clinical computer systems at the
Company's sites of service and cash paid related to the acquisition of NRMC.
It is anticipated that the Company's capital expenditures in 1998 will exceed
those in 1997 by approximately $1.000 million primarily for continued
development of computer systems, including clinical and reimbursement systems.
During 1995, Tokos purchased certain physician-owned companies for which it
originally provided services and during 1995 and the first quarter of 1996,
Healthdyne purchased the minority interest in certain affiliated partnerships.
Notes issued in connection with these acquisitions have a balance outstanding
of $456,000 at December 31, 1997. The remaining balances are to be paid
through June 1999.
In July 1995, Tokos reached a $10.000 million settlement, subject to
court approval, with the plaintiffs in a class action securities lawsuit.
Tokos accrued an aggregate liability, net of insurance proceeds, of $5.750
million for its portion of the settlement. Prior to the Merger, Tokos paid
$750,000 toward the settlement. Final court approval of the settlement was
received in June 1996 and in July 1996 the Company made the final $5.000
million payment in cash, together with accrued interest of $344,623.
The Company incurred substantial costs in connection with the Merger.
These costs include: (i) restructuring costs incurred by the Company of
approximately $22.525 million, consisting of $12.000 million relating to
severance costs and relocations of employees, $2.500 million of lease
termination costs for duplicate facilities, $5.400 million for the write-
26
27
off of computer equipment and $2.625 million for other Merger-related expenses;
(ii) additional liabilities incurred by Healthdyne as a result of the Merger of
approximately $9.350 million, consisting of $9.150 million relating to
severance costs of terminated employees and $200,000 for patient service
centers specifically identified to be closed; and (iii) transaction costs of
approximately $3.700 million, consisting of $2.275 million for investment
banking fees, $1.000 million for legal and accounting fees and $425,000 for
other costs such as document printing and mailing and filing fees. As of
December 31, 1997 the remaining liability for these estimated costs was
approximately $5.000 million of which approximately $3.000 will be paid in the
first half of 1998. Additionally, the Company may be required to make
additional severance payments of approximately $2.549 million in accordance
with employment agreements with certain officers of Healthdyne.
During 1997, the Company terminated a nonqualified defined benefit
plan and allowed existing participants to either receive a lump-sum payment or
to rollover their future benefit into a split-dollar life insurance contract
whereby 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. The net present value of the future
cash payments by the Company for the participants' split-dollar contract is
approximately $4.000 million. The participants who chose the lump-sum payout
were paid approximately $1.328 million on January 2, 1998.
In 1997, the Company entered into a credit agreement with a leading
national banking organization for a $25.000 million secured line of credit that
is available for general corporate purposes. There were no amounts outstanding
at December 31, 1997.
The Company believes that its current cash balances, expected cash
flows from operations and investing activities and amounts available under the
credit agreement will be sufficient to finance its current operations and fund
any expansion of the business for the foreseeable future.
NEW ACCOUNTING STANDARDS
In June 1997, Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 130, Reporting Comprehensive
Income ("SFAS No. 130"). SFAS No 130 requires companies to display, with the
same prominence as other financial statements, the components of comprehensive
income. SFAS No. 130 requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier
periods provided for comparative purposes is required. The Company's financial
statements will include the disclosure of comprehensive income in accordance
with the provisions of SFAS No. 130 beginning the first quarter of 1998.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information ("SFAS No. 131"). SFAS No. 131 requires that an enterprise
disclose certain information about operating segments. SFAS No. 131 is
effective for financial statements for periods beginning after December 15,
1997. The Company will evaluate the need for such disclosures at that time.
27
28
YEAR 2000 ISSUE
Many existing computer programs use only two digits to identify a year
in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not
corrected, many computer applications could fail or create erroneous results by
or at the year 2000.
The Company is currently in the process of assessing its computer
software programs to determine their ability to function properly in the year
2000 and thereafter, and is in the process of modifying or replacing certain
time- sensitive software programs to avoid a potential temporary inability to
process transactions or engage in other normal business activities. The
project is estimated to be completed well in advance of December 31, 1999,
which is prior to any anticipated significant impact on the Company's operating
systems from the Year 2000 issues. The costs of the project to date and the
estimated costs to complete are not expected to be significant to the Company's
consolidated financial position or results of operations. The Company believes
that, upon completion of its ongoing project, the Year 2000 issues will not
pose significant operational problems for its computer systems.
Forward - Looking Information
This Management's Discussion and Analysis contains forward-looking
statements including statements concerning expected increases in revenues
arising from the Merger, expected increased revenues arising from the marketing
of fetal fibronectin immunoassay, expected synergies arising from the Merger,
the effect of goodwill on the Company's results of operations, capital
expenditures to be made in the future and the adequacy of the Company's sources
of cash to finance its current and future operations. These forward-looking
statements involve a number of risks and uncertainties. In addition to the
factors discussed above, among other factors that could cause actual results to
differ materially are the following: business conditions and growth in the home
healthcare industry and the general economy; competitive factors, such as the
possible entry of large diversified healthcare companies into the obstetrical
home healthcare business; new technologies and pricing pressures; changes in
third-party reimbursement policies and practices and regulatory requirements
applicable to the Company's business; the continued availability for sale of
existing products and services; management decisions to pursue new product
lines or lines of business which involve additional costs, risks or capital
expenditures; and the risk factors listed 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, 1997.
28
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
Not applicable
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-23 of this Annual Report on Form 10-K:
PAGE
Independent Auditors' Reports F-1
F-1A
Consolidated Balance Sheets - December 31, 1997 and 1996 F-2
Consolidated Statements of Operations - Years Ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity - Years
Ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows - Years Ended
December 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-9
30
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, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits. The accompanying consolidated
financial statements of Matria Healthcare, Inc. for the year ended December 31,
1995 were audited by other auditors whose report thereon dated February 22, 1996
expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1997 and 1996 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the years in the
two-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
March 6, 1998
F-1
31
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
December 31,
------------------
Assets 1997 1996
------ ---- ----
Current assets:
Cash and cash equivalents (note 9) $ 9,086 6,930
Short-term investments (note 9) 11,856 17,710
Trade accounts receivable, less allowances of $22,651 and
$26,198 at December 31, 1997 and 1996, respectively 39,601 29,456
Inventories 1,088 867
Prepaid expenses and other current assets 2,264 1,628
-------- -------
Total current assets 63,895 56,591
Property and equipment, net (note 3) 12,364 15,220
Excess of cost over net assets of businesses acquired,
less accumulated amortization of $63,741 and $29,804 at
December 31, 1997 and 1996, respectively (note 2) 108,498 142,126
Intangible assets, less accumulated amortization of $4,889 and
$2,222 at December 31, 1997 and 1996, respectively (note 2) 3,651 5,973
Other assets (note 8) 2,724 3,278
-------- -------
$191,132 223,188
======== =======
See accompanying notes to consolidated financial statements
F-2
32
December 31,
--------------------
Liabilities and Shareholders' Equity 1997 1996
------------------------------------ ---- ----
Current liabilities:
Current installments of long-term debt and obligations
under capital leases (notes 4, 9, and 11) $ 884 2,521
Accounts payable, principally trade 5,712 6,486
Accrued liabilities (note 5) 16,147 25,559
--------- --------
Total current liabilities 22,743 34,566
Long-term debt and obligations under capital leases, excluding
current installments (notes 4, 9, and 11) 1,712 2,499
Accrued benefit costs (note 8) 5,328 4,096
Other long-term liabilities 8,180 8,849
--------- --------
Total liabilities 37,963 50,010
--------- --------
Shareholders' equity (note 7):
Preferred stock, $.01 par value. Authorized 50,000
shares; none issued -- --
Common stock, $.01 par value. Authorized 100,000
shares; issued and outstanding 36,791 and 36,333 shares
at December 31, 1997 and 1996, respectively 368 363
Additional paid-in capital 282,327 281,318
Accumulated deficit (125,991) (105,089)
Notes receivable and accrued interest from officers (3,535) (3,414)
--------- --------
Total shareholders' equity 153,169 173,178
Commitments and contingencies (notes 8, 11, and 12)
--------- --------
$ 191,132 223,188
========= ========
F-3
33
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
Years ended December 31,
------------------------
1997 1996 1995
---- ---- ----
Revenues $ 144,533 130,806 85,209
Cost of revenues 57,610 55,911 35,017
Selling and administrative expenses 64,864 66,493 48,460
Provision for doubtful accounts 6,599 7,591 5,251
Research and development expenses 156 282 513
Amortization of goodwill and intangibles 36,604 30,083 1,235
Restructuring expenses (note 10) -- 22,525 2,456
Settlement of litigation (note 12) -- -- 4,300
--------- -------- -------
Operating loss (21,300) (52,079) (12,023)
Interest income 794 1,177 848
Interest expense (311) (353) (515)
Other income (expense), net (85) 134 46
--------- -------- -------
Loss before income tax expense (20,902) (51,121) (11,644)
Income tax expense (note 6) -- -- 150
--------- -------- -------
Net loss $ (20,902) (51,121) (11,794)
========= ======== =======
Basic and diluted net loss per common share $ (.57) (1.58) (.68)
========= ======== =======
Weighted average shares outstanding 36,527 32,328 17,396
========= ======== =======
See accompanying notes to consolidated financial statements.
F-4
34
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Amounts and shares in thousands)
Notes
receivable
Common stock Additional and accrued Treasury stock Total
----------------- paid-in Accumulated interest from ---------------- shareholders'
Shares Amount capital deficit officers Shares Amount equity
------ ------ ------- ------- -------- ------- ------ ------
Balance, December 31, 1994 17,411 $ 17 86,519 (42,126) (3,492) (156) $(758) 40,160
Issuance of common stock -
exercise of options 250 1 1,089 -- -- -- -- 1,090
Issuance of treasury stock to
employee stock purchase plan
and other stock awards -- -- -- (48) -- 44 219 171
Acceptance of note receivable
from officer -- -- -- -- (80) -- -- (80)
Payment on note receivable
from officers -- -- -- -- 122 -- -- 122
Accrued interest on officer notes -- -- -- -- (180) -- -- (180)
Net loss -- -- -- (11,794) -- -- -- (11,794)
------ ---- ------- ------- ------ ---- ----- --------
Balance, December 31, 1995 17,661 18 87,608 (53,968) (3,630) (112) (539) 29,489
Issuance of common stock:
Acquisition of Healthdyne, Inc. 17,007 170 182,826 -- -- -- -- 182,996
Exercise of options 839 7 4,298 -- -- -- -- 4,305
Employee Stock Purchase Plan 33 -- 214 -- -- -- -- 214
Conversion of subordinated
debentures 9 -- 43 -- -- -- -- 43
Acquisition of National Reproductive
Medical Center, Inc. 899 9 7,112 -- -- -- -- 7,121
Payment on debt resulting from
acquisition of minority interest
in partnerships 40 -- 335 -- -- -- -- 335
(Continued)
F-5
35
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Amounts and shares in thousands)
Notes
receivable
Common stock Additional and accrued Treasury stock Total
----------------- paid-in Accumulated interest from ---------------- shareholders'
Shares Amount capital deficit officers Shares Amount equity
------ ------ ------- ------- -------- ------- ------ ------
Change in par value of common stock -- $ 159 (159) -- -- -- $ -- --
Purchase of treasury stock -- -- -- -- -- (43) (420) (420)
Cancellation of treasury stock (155) -- (959) -- -- 155 959 --
Payment on note receivable from officers -- -- -- -- 350 -- -- 350
Accrued interest on officer notes -- -- -- -- (134) -- -- (134)
Net loss -- -- -- (51,121) -- -- -- (51,121)
------- ----- -------- -------- ------ ---- ----- --------
Balance, December 31, 1996 36,333 363 281,318 (105,089) (3,414) -- -- 173,178
Issuance of common stock:
Exercise of options 500 5 1,471 -- -- -- -- 1,476
Employee Stock Purchase Plan 111 1 454 -- -- -- -- 455
Conversion of subordinated debenture 3 -- 15 -- -- -- -- 15
Purchase and cancellation of treasury
stock (156) (1) (931) -- -- -- -- (932)
Accrued interest on officer notes -- -- -- -- (121) -- -- (121)
Net loss -- -- -- (20,902) -- -- -- (20,902)
------- ----- -------- -------- ------ ---- ----- --------
Balance, December 31, 1997 36,791 $ 368 282,327 (125,991) (3,535) -- $ -- 153,169
======= ===== ======== ======== ====== ==== ===== ========
See accompanying notes to consolidated financial statements.
F-6
36
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
Years ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
Cash flows from operating activities:
Net loss $(20,902) (51,121) (11,794)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 41,944 34,263 6,019
Provision for doubtful accounts 6,599 7,591 5,251
Settlement of shareholder litigation -- -- 4,300
Reserve for patient service equipment, patient
monitoring devices, and investments in other
healthcare entities -- -- 625
Accrued interest on officer notes (121) (134) (180)
Write-off of intangible assets 196 990 --
Loss on sale of fixed assets 30 493 --
Minority interest in net earnings of partnerships 113 151 --
Other -- -- 145
(Increase) decrease in:
Short-term investments 5,854 15,656 235
Trade accounts receivable (16,770) (8,598) 795
Inventories (221) 1,230 (96)
Prepaid expenses and other current assets (547) 3,582 1,022
Other assets 14 1,469 (615)
Increase (decrease):
Accounts payable (774) 2,388 (693)
Accrued and other liabilities (8,894) (3,127) (1,700)
-------- ------- -------
Net cash provided by operating activities 6,521 4,833 3,314
-------- ------- -------
Cash flows from investing activities:
Acquisition of businesses and physician-owned
companies, net of cash acquired (249) (3,981) (865)
Purchases of property and equipment (2,529) (3,868) (1,357)
Proceeds from disposal of property and equipment 14 4,261 --
-------- ------- -------
Net cash used in investing activities (2,764) (3,588) (2,222)
-------- ------- -------
(Continued)
F-7
37
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
Years ended December 31,
----------------------------
1997 1996 1995
---- ---- ----
Cash flows from financing activities:
Proceeds from issuance of long-term debt $ -- 1,542 --
Principal repayments of long-term debt and obligations
under capital leases (2,369) (4,501) (7,122)
Proceeds from issuance of common stock 1,931 4,519 1,210
Purchase of treasury stock (932) (420) --
Treasury stock issued -- -- 219
Treasury stock contributions to employee stock purchase plan -- -- (168)
Acceptance of note receivable from officers -- -- (80)
Proceeds from payments on notes receivable from officers -- 350 122
Distributions to minority interest in partnerships (231) (227) --
------- ------ ------
Net cash provided by (used in) financing activities (1,601) 1,263 (5,819)
------- ------ ------
Net increase (decrease) in cash and cash
equivalents 2,156 2,508 (4,727)
Cash and cash equivalents at beginning of year 6,930 4,422 9,149
------- ------ ------
Cash and cash equivalents at end of year $ 9,086 6,930 4,422
======= ====== ======
Supplemental disclosures of cash paid for:
Interest $ 311 382 341
======= ====== ======
Income taxes $ -- -- 96
======= ====== ======
Supplemental disclosures of noncash investing and financing activities:
Common stock issued for payment on debt
resulting from acquisition of minority
interest of partnerships $ -- 335 --
======= ====== ======
Equipment acquired under capital lease obligations $ -- 292 604
======= ====== ======
See accompanying notes to consolidated financial statements.
F-8
38
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1997, 1996, and 1995
(1) Summary of Significant Accounting Policies
(a) Business
On March 8, 1996, Tokos Medical Corporation (Delaware) - ("Tokos")
and Healthdyne, Inc. ("Healthdyne") merged with and into Matria
Healthcare, Inc. ("Matria" or the "Company"), a Delaware corporation
created solely for the purpose of the merger. Pursuant to the terms
of the Agreement and Plan of Merger, dated October 2, 1995, as
amended, each share of Tokos and Healthdyne common stock outstanding
on March 8, 1996 was exchanged for one share of Matria common stock.
Based on the outstanding shares of the respective companies, Tokos
shareholders received approximately 51% of the combined shares of
Matria common stock (see note 2).
The Company is a nationwide provider of specialized obstetrical home
healthcare, home pregnancy monitoring, and risk assessment services
which assist physicians and payors in the management of high-risk
pregnancies and numerous other obstetrical and gynecological
conditions. The Company also provides diagnosis and treatment of
fertility disorders.
(b) Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. 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 income and expenses for the periods. Actual
results could differ from those estimates.
The consolidated financial statements include the accounts of Matria
Healthcare, Inc. and all of its majority owned subsidiaries and
partnerships. All significant intercompany balances and transactions
have been eliminated in consolidation.
(c) Revenues and Allowances for Uncollectible Accounts
Revenues are generated from the Company's own patient service centers
and fees from patient service operations managed by the Company.
Revenues are recognized as the related services are rendered and are
net of estimated contractual allowances which the Company makes and
adjusts from time to time to reflect its estimates, based on
historical collection experience, including recoveries in excess of
amounts previously estimated, of the difference between amounts
billed and amounts which it has or expects to receive in full
settlement from primary third-party payors, secondary payors, and
patients. Accordingly, the ultimate collectibility of a substantial
portion of the Company's trade accounts receivable is susceptible to
changes in third-party reimbursement policies.
(Continued)
F-9
39
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
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.
(d) Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, short-term investments, and accounts receivable from
third-party payors. The Company invests its available cash in debt
instruments of the United States Government and municipal bonds. The
Company has established guidelines relative to diversification and
maturities that maintain safety and liquidity. These guidelines are
periodically reviewed and modified to take advantage of trends in
yields and interest rates. 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.
(e) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and interest-bearing
deposits. For purposes of the statements of cash flows, the Company
considers all highly liquid debt instruments with original maturities
of three months or less to be cash equivalents.
(f) Short-Term Investments
Short-term investments consist of United States Government and
municipal bonds. Under the provisions of Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, the Company classifies its short-term
investments as trading securities which are carried at fair value
with any unrealized gains and losses included in earnings. Unrealized
gains (losses) of $67, $(131), and $101 are included in the
consolidated statements of operations for the years ended December
31, 1997, 1996, and 1995, respectively.
(g) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
(h) 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.
(Continued)
F-10
40
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(i) Excess of Cost Over Net Assets of Businesses Acquired
The excess of cost over net assets of businesses acquired (goodwill)
is being amortized using the straight-line method over periods
ranging from 5 to 20 years. At each balance sheet date, the Company
assesses the recoverability of goodwill by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the
acquired operation. The amount of goodwill impairment, if any, is
measured based upon projected discounted future operating cash flows
using a discount rate reflecting the Company's average cost of funds.
(j) Intangible Assets
Intangible assets consist of purchased software and covenants not to
compete. These costs are being amortized on a straight-line basis
over a period of three years.
(k) 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 made in 1995 and future years 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 disclosure provisions of
SFAS 123 (see note 7).
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed
Of
The Company adopted the provisions of SFAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of, on January 1, 1996. This Statement requires that
long-lived assets and certain identifiable intangibles be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less costs
to sell.
(Continued)
F-11
41
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(m) 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. Additionally, the effect on deferred taxes of
a change in tax rates is recognized in earnings in the period that
includes the enactment date.
Investment and research and experimental tax credits are accounted
for by the flow-through method.
(n) Net Loss Per Share of Common Stock
On December 31, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, Earnings Per Share ("SFAS 128"), which
prescribes the calculation methodology and financial reporting
requirements for basic and diluted earnings per share. Basic earnings
(loss) per common share available to common shareholders are based on
the weighted-average number of common shares outstanding. Diluted
earnings (loss) per common share available to common shareholders are
based on the weighted-average number of common shares outstanding and
dilutive potential common shares, such as dilutive stock options. The
computation of diluted net loss per share of common stock was
antidilutive in each of the periods presented; therefore, the amounts
reported for basic and diluted are the same.
(o) Reclassifications
Certain amounts in the 1996 and 1995 consolidated financial
statements have been reclassified to conform to presentations adopted
in 1997. Included in these reclassifications are the assets and
liabilities of a subsidiary to be sold in 1998 which have been
reclassified to prepaid expenses and other current assets in the
accompanying consolidated balance sheets.
(2) Acquisitions
As discussed in note 1(a), on March 8, 1996, Tokos and Healthdyne merged
with and into Matria (the "Merger") with Tokos deemed to be the acquirer
since Tokos shareholders received the majority of Matria common stock.
The purchase price of Healthdyne was based upon the number of shares of
Healthdyne common stock (including options to purchase shares of
Healthdyne common stock) outstanding on the date the Merger was
consummated and the average trading value of Tokos common stock for two
trading days immediately prior to and two trading days immediately after
the announcement date of the Merger. 17,007,000 shares of Matria common
stock with a value of $182,996 were issued to Healthdyne shareholders.
The Merger was accounted for in accordance with the purchase method of
accounting with the results of operations of the business acquired
included from the effective date of the acquisition. The acquisition
resulted in purchased software of $5,000, executive noncompete agreements
of $3,000, and excess of cost over net assets acquired of $149,731.
(Continued)
F-12
42
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
The purchased fair value of the net tangible assets of Healthdyne
included $9,150 of estimated severance payments for Healthdyne employees
resulting from the Merger, and $200 of facilities costs for patient
service centers specifically identified to be closed. Accrued severance
costs of $2,073 remained at December 31, 1997, of which $1,036 is
current.
In February 1995, Healthdyne converted a $250 note receivable from
National Reproductive Medical Center, Inc. ("NRMC"), a California
fertility clinic, into 14,280 shares of NRMC's Series C convertible
preferred stock and acquired an additional 57,120 shares of NRMC's Series
C convertible preferred stock for $1,000. Using a conversion ratio of
preferred to common stock of 1:1, the 71,400 shares acquired constituted
approximately 11.11% of the fully diluted common shares of NRMC. In June
1996, the Company exercised an option to acquire the remaining
outstanding stock of NRMC for $5,697 in cash and 899,000 shares of Matria
common stock with a value of $7,121 on the date of acquisition. This
acquisition was accounted for using the purchase method of accounting
with the results of operations of the business acquired included from the
effective date of the acquisition. The acquisition resulted in excess of
cost over net assets acquired of approximately $15,053. In 1997, the
Company incurred additional acquisition costs of $189 related to NRMC
which were recorded as an increase in excess of cost over net assets
acquired.
Unaudited pro forma results of operations for the year ended December 31,
1996 as if Healthdyne and NRMC had been acquired January 1, 1996 are as
follows:
Revenues $ 147,732
Net loss (58,011)
Net loss per share (1.63)
The following is a summary of assets acquired, liabilities assumed, and
consideration paid in connection with these 1996 acquisitions:
Healthdyne NRMC
---------- -------
Fair value of assets acquired, including goodwill $ 221,435 17,970
Cash paid for the assets acquired, net of cash acquired -- (5,447)
Common stock issued for the assets acquired (182,996) (7,121)
Acquisition costs paid (3,700) (250)
--------- -------
Liabilities assumed $ 34,739 5,152
========= =======
The Company had previously entered into agreements with certain
physician-owned companies to provide its basic core high-risk pregnancy
and related healthcare services to the patients of the companies for a
fee. During 1997, 1996, and 1995, the Company purchased certain of these
physician-owned companies for $60, $611, and $1,094 in cash and $60,
$179, and $1,475 in notes payable, respectively. These acquisitions were
accounted for using the purchase method of accounting with the results of
operations of the businesses acquired included from the effective date of
the acquisitions. The acquisitions resulted in excess of cost over net
assets acquired of approximately $120 and $746 in 1997 and 1996,
respectively.
(Continued)
F-13
43
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(3) Property and Equipment
Property and equipment are summarized as follows:
December 31,
------------------
1997 1996
------- ------
Rental assets $17,556 17,493
Machinery, equipment, and fixtures 15,720 13,926
Leasehold improvements 2,416 1,794
------- ------
35,692 33,213
Less accumulated depreciation and amortization 23,328 17,993
------- ------
$12,364 15,220
======= ======
(4) Long-Term Debt
Long-term debt is summarized as follows:
December 31,
---------------
1997 1996
---- ----
Convertible subordinated debentures and note (net of discount of $88 and
$128 at December 31, 1997 and 1996, respectively); interest at 8%
payable annually; maturing on December 31, 2001; convertible into the
Company's common stock at $4.90 per share; redeemable
by the Company at face value $1,234 1,294
Unsecured, noninterest-bearing obligations incurred in
connection with buyout of physician-owned companies;
payable at various dates through June 1999 456 1,631
Capital lease obligations; interest ranging from 3% to 20%
with various monthly payments and maturing at various
dates through October 2001 718 1,303
Note payable to equipment financing company; interest
at 10% per annum, payable in monthly installments
through July 1998 99 376
Unsecured promissory note issued in connection with buyout
of minority partnership interest; paid in 1997 -- 200
Other debt; interest at rates ranging from approximately 6% to
10%; payable in monthly installments through January 1998 89 216
------ -----
Total long-term debt 2,596 5,020
Less current installments 884 2,521
------ -----
Long-term debt, excluding current installments $1,712 2,499
====== =====
(Continued)
F-14
44
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
In September 1997, the Company entered into a secured revolving line of
credit with a commercial lender. Under the terms of this credit facility,
the Company can borrow up to $25,000 based upon the value of eligible
collateral as defined in the credit agreement. Borrowings under this
agreement bear interest at the Company's option, of (i) the reference
rate of the Bank plus 0.5% or (ii) the LIBOR rate plus 2.75%. At December
31, 1997, there were no outstanding borrowings under this agreement.
Approximate aggregate minimum annual payments due on long-term debt for
the five years subsequent to December 31, 1997 are as follows:
1998 $ 884
1999 410
2000 50
2001 1,252
2002 --
------
$2,596
======
(5) Accrued Liabilities
Accrued liabilities are summarized as follows:
December 31,
-----------------------
1997 1996
------- ------
Accrued salaries, wages, and incentives $ 6,806 4,220
Accrued severance 1,036 4,597
Accrued restructuring costs 2,125 9,359
Deferred revenue 3,561 3,402
Other 2,619 3,981
------- ------
$16,147 25,559
======= ======
(6) Income Taxes
The components of income tax expense are as follows:
Years ended December 31,
--------------------------------
1997 1996 1995
------- ----- ----
Current expense:
Federal $ -- -- --
State -- -- 150
------- ----- ---
Total income tax expense $ -- -- 150
======= ===== ===
(Continued)
F-15
45
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
Below is a reconciliation of the expected income tax benefit (based on
the U.S. Federal statutory income tax rate of 35%) to the actual income
tax expense:
Years ended December 31,
1997 1996 1995
Computed expected income tax benefit $(7,316) (17,892) (4,076)
Increase (decrease) resulting from:
Losses in excess of allowable carrybacks 132 7,529 4,022
Nontaxable municipal interest income (244) (385) --
Nondeductible expenses 7,428 10,748 --
State income taxes, net of Federal benefit -- -- 98
Other, net -- -- 106
------- ------- ------
$ -- -- 150
======= ======= ======
At December 31, 1997, 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 credit loss
- ---------- --------- ---------
1998 $ 283 94
1999 100 523
2000 79 990
2001 97 1,537
2002 43 3,252
2003 61 2,922
2004 151 6,198
2005 -- 7,137
2007 -- 4,475
2008 -- 7,266
2009 -- 15,241
2010 -- 7,182
2011 -- 29,015
2012 -- 1,649
------- ------
$ 814 87,481
======= ======
(Continued)
F-16
46
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
The net operating loss carryforward of $87,481 includes deductions of
approximately $16,484 related to the exercise of stock options which will
be credited to additional paid-in capital when recognized. A portion of
the net operating loss ($15,600) is limited, by the Internal Revenue Code
Section 382, to an annual utilization of $2,300. The total net operating
loss is limited to an annual utilization of approximately $17,000. The
Company also has available alternative minimum tax (AMT) credit
carryforwards of approximately $1,383 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 $79,348.
At December 31, 1997 and 1996, the Company had deferred tax assets of
approximately $49,963 and $52,843, respectively, before valuation
allowances. The valuation allowance is based on the likelihood that a
substantial portion of the deferred tax asset will not be realized. The
decrease in the valuation allowance of $2,880 during 1997 was equal to
the decrease in the deferred asset.
At December 31, 1997 and 1996, deferred income taxes consist of future
tax benefits attributable to:
1997 1996
---- ----
Deferred income tax assets:
Allowance for doubtful accounts $ 1,894 4,564
Accruals and reserves not deducted for tax purposes 6,490 8,629
Depreciation and amortization 8,246 7,524
Net operating loss carryforwards 30,618 29,057
Credit carryforwards 2,197 2,631
Contribution carryforward 518 438
-------- -------
Total 49,963 52,843
Less valuation allowance (49,963) (52,843)
-------- -------
Net deferred tax asset $ -- --
======== =======
(7) Shareholders' Equity
Stock Option Plans
Prior to the Merger, the Company maintained a stock option plan for the
benefit of key employees and directors under which options granted
expired ten years from the date of grant. In connection with the
Merger, the Company assumed options outstanding under the Healthdyne
option plans. Both the Company's options and Healthdyne's options
outstanding on the date of the Merger became fully vested. All other
terms and conditions of the options remained the same as they were
prior to the Merger. As of the date of the Merger, the Company adopted
two stock option plans for the benefit of key employees and nonemployee
directors. A total of 1,250,000 shares of the Company's common stock
have been authorized for issuance under these plans. Stock options
granted under these plans are exercisable in equal amounts over three
years and expire in ten years.
(Continued)
F-17
47
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
During 1997, the Board of Directors of the Company adopted the 1997
Stock Option Plan for key employees, officers, independent contractors,
and consultants of the Company. The 1997 Stock Option Plan has three
components: a stock option component, a stock bonus/stock purchase
component, and a Stock Appreciation Right component. A total of
1,800,000 shares of the Company's common stock have been authorized for
issuance under this Plan. The Stock Option Committee shall determine
the term of each option granted under the Plan, provided, however, that
the term does not exceed ten years. These options are exercisable based
upon established performance goals, provided, however, that they are
not exercisable in less than two years or more than four years. In
addition, during 1997, the Board of Directors of the Company granted
nonplan options to purchase 479,150 shares of common stock to certain
nonexecutive employees.
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its stock options. Under APB Opinion
No. 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized. However, SFAS 123,
requires presentation of pro forma net earnings (loss) and pro forma
earnings (loss) per share as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1994, under
the fair value method of that statement. 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 loss and loss per share would have been increased as
follows:
1997 1996 1995
---- ---- ----
Net loss $ (22,530) (52,279) (12,218)
============= ======= =========
Loss per share $ (.62) (1.62) (.70)
============= ======= =========
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, and the options generally have a three-year vesting
period, the pro forma effect will not be fully reflected until 1998.
The weighted-average fair value of the individual options granted
during 1997, 1996, and 1995 is estimated at $3.22, $3.03, and $2.52,
respectively, on the date of grant. The fair values for those years
were determined using a Black-Scholes option-pricing model with the
following assumptions.
1997 1996 1995
---- ---- ----
Dividend yield None None None
Volatility 46% 40% 51%
Risk-free interest rate 6.25% 6.25% 6.00%
Expected life 5 Years 5 Years 3 Years
(Continued)
F-18
48
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
A summary of stock option transactions under these plans is shown
below:
1997 1996 1995
---------------------- -------------------- --------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------- ---------- --------- --------- --------- ---------
Outstanding at beginning of year 3,088,501 $ 6.00 2,032,429 $ 5.97 2,152,844 $ 5.68
Assumed from Healthdyne option plans - - 1,108,888 3.34 - -
Granted 974,150 6.51 919,920 8.14 670,500 6.37
Exercised (500,261) 2.95 (838,881) 4.47 (250,273) 3.43
Canceled (657,007) 8.03 (133,855) 7.57 (540,642) 6.62
--------- ---- --------- ---- --------- ----
Outstanding at end of year 2,905,383 $ 6.23 3,088,501 $ 6.00 2,032,429 $ 5.97
========= ==== ========= ==== ========= ====
Exercisable at year-end 1,638,263 $ 5.61 2,262,627 $ 5.18 202,913 $ 3.41
========= ==== ========= ==== ========= ====
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1997:
Options outstanding Options exercisable
---------------------------------------------- ------------------------
Weighted-average Weighted- Weighted-
Range of remaining average average
exercise Shares contractual exercise Shares exercise
price outstanding life (years) price exercisable price
------------- ----------- ------------------- --------- ----------- ---------
$ .67-$5.00 550,572 2.84 $ 2.94 544,909 $ 2.96
$5.00-$10.00 2,340,999 8.13 6.96 1,079,542 6.83
$10.00-$20.00 10,512 2.17 11.33 10,512 11.33
$20.00-$30.00 3,300 4.66 27.95 3,300 27.95
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 500,000 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 1997, 1996, and 1995, respectively, 110,967, 33,357, and
33,680 shares of common stock were issued under the Purchase Plan.
Compensation cost related to this plan determined under SFAS 123 had an
insignificant effect on the pro forma net loss and pro forma loss per
share disclosed above.
(Continued)
F-19
49
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
Shareholder Rights Plan
In connection with the Merger, 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 $61 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 $.01 per right any time
before and within 10 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 the lesser of (i) one-half of each
participant's contributions but not more than 2.5% of the participant's
compensation or (ii) 20% of the Company's pretax earnings before
consideration of this contribution. Discretionary Company contributions
are allowed under the plan. Contributions to the plan for the years ended
December 31, 1997, 1996, and 1995 were approximately $607, $652, and
$-0-, respectively.
During 1996, the Company established a nonqualified defined benefit
pension plan for the benefit of a certain select group of senior
management. The benefits are based on the employee's compensation during
the three calendar years in which the individual's base salary is the
highest and actual years of service.
During 1997, the Company terminated the nonqualified defined benefit
pension plan and allowed existing participants to either receive a
lump-sum payment or roll over their investment into a split-dollar life
insurance contract whereby 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.
The net present value of the future cash payments by the Company for the
participants' split-dollar contracts is approximately $4,000. The
participants who chose the lump-sum payout were paid approximately $1,328
on January 2, 1998.
(Continued)
F-20
50
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
During 1997, the Company paid $1,928 in insurance premiums, of which the
Company recorded an asset of $1,800 for the cash surrender value of the
life insurance contracts and $128 as insurance premium expense.
(9) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments, requires that the Company disclose
estimated fair values for its financial instruments. Fair value
estimates, methods, and assumptions are set forth below for the Company's
financial instruments.
(a) Cash and Short-Term Investments
The carrying amount approximates fair value because of the
short maturity of these instruments or because they are marked
to market.
(b) Long-Term Debt
The Company estimates that the carrying amount of the Company's
long-term debt approximates the fair value based on the current
rates offered to the Company for debt of the same remaining
maturities.
(10) Restructuring
During 1996, in connection with the Merger, the Company incurred
restructuring charges of $22,525 related to severance costs for 278
involuntarily terminated employees in the executive, sales, clinical
service, and administrative support functions. Also, lease terminations
and other facilities-related exit costs arising from closing duplicate
patient service centers and consolidation of two corporate headquarters
were incurred. In addition, computer and patient service equipment was
determined to be incompatible with nursing station software to be used by
Matria and computer hardware and software was determined to be obsolete
by adoption of new systems. Accrued restructuring charges are $2,797 at
December 31, 1997, of which $2,125 is current.
A summary of the components of the 1996 restructuring charges follows:
Employee severance $10,750
Relocation 1,250
Duplicate/excess facility costs 2,500
Write-off of excess/obsolete equipment 5,400
Other 2,625
-------
$22,525
=======
(Continued)
F-21
51
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
During 1995, the Company incurred restructuring costs of $2,456 related
to cost reduction efforts as the Company's revenues continued to decline.
The cost reduction plan consisted of reductions in the Company's
workforce of approximately 105 employees in the information systems,
reimbursement, administrative, and clinical service functions, and
termination of several facilities.
A summary of the components of the 1995 restructuring charges follows:
Employee severance $1,834
Facility closing 332
Other 290
------
$2,456
======
(11) 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, 1997 are as follows:
Operating Capital
Years ending December 31, leases leases
------------------------ ------------ -------
1998 $ 5,376 421
1999 4,645 321
2000 3,774 54
2001 3,208 19
2002 2,901 -
2003 and thereafter 1,701 -
--------- -----
$ 21,605 815
=========
Less interest 97
-----
Present value of future minimum
capital lease payments $ 718
=====
Amortization of leased assets is included in depreciation expense.
Rental expense for cancelable and noncancelable leases was approximately
$6,100, $5,200, and $3,600 for the years ended December 31, 1997, 1996,
and 1995, respectively.
(Continued)
F-22
52
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(12) 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.
In March 1997, Adeza Biomedical Corporation ("Adeza") initiated
litigation against the Company alleging that the Company breached the
Exclusive Marketing Agreement, dated as of December 31, 1991, as amended
(the "Agreement") between the Company and Adeza under which the Company
was granted the exclusive marketing rights to Adeza's fetal fibronectin
immunoassay test ("fFN"). On March 3, 1998, the Company settled its
dispute with Adeza. Under the terms of the settlement, the Company agreed
to relinquish its rights under the Agreement and its equity interest in
Adeza in exchange for a right to recoup a portion of its investment in
Adeza and the product, based on future sales of fFN. The Company will
continue to distribute fFN during a transition period ending on August
31, 1998.
In July 1995, the Company reached a $10,000 settlement with the
plaintiffs in a class action securities suit. The Company's cost of
settlement, after adjustment for insurance proceeds directly deposited in
an escrow account pursuant to the settlement, was $5,750. The Company
paid $750 in 1995 and the remaining $5,000 in 1996. The charge to income
in 1995 of $4,300 was in addition to the aggregate amount of $1,450 which
had been previously accrued in selling and administrative expenses.
A complaint was filed on February 1, 1995 by The Lindner Fund, Inc. in
the Eastern District of Missouri against Healthdyne and its former
subsidiary HNS alleging that The Lindner Fund would not have sold its
investment in HNS on February 8, 1994 had Healthdyne and HNS disclosed
the potential sale of HNS. Damages have been requested in the amount of
$1,051, representing the aggregate difference between the price received
upon the sale of such stock by The Lindner Fund and the $7.85 per share
price paid by W. R. Grace & Co. on April 6, 1994 for HNS. Healthdyne
denied the allegations set forth in the complaint and Matria is currently
defending the matter vigorously.
(13) Quarterly Financial Information - Unaudited
Presented below is a summary of the unaudited consolidated quarterly
financial information for the years ended December 31, 1997 and 1996.
Quarter
---------------------------------------------------------------
Fourth Third Second First
-------- ------- -------- ---------
1997:
Revenues $ 37,101 36,540 36,362 34,530
Net loss (4,141) (4,898) (5,516) (6,347)
Net loss per common share (.11) (.13) (.15) (.17)
1996:
Revenues $ 36,205 35,799 34,716 24,086
Net loss (14,120) (7,344) (8,566) (21,091)
Net loss per common share (.39) (.20) (.25) (.96)
F-23
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10-13.
The information contained under the heading "Management of the
Company" in the Company's definitive proxy materials for its 1998 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 nonaffiliates, 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, 1997, 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 late filings
with respect to two transactions relating to (i) the purchase of Common Stock
by Frank D. Powers and (ii) the disposition of Common Stock by transfer to an
Exchange Fund by Parker H. Petit.
29
54
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-23 of this Annual Report on Form 10-K:
PAGE
Independent Auditors' Reports F-1
F-1A
Consolidated Balance Sheets - December 31, 1997 and 1996 F-2
Consolidated Statements of Operations - Years Ended
December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows - Years Ended
December 31, 1997, 1996 and 1995 F-7
Notes to Consolidated Financial Statements F-9
(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:
Independent Auditors' Report.
Schedule II - Valuation and Qualifying Accounts.
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:
30
55
The following exhibits are incorporated by reference herein as part of
this Report as indicated:
EXHIBIT
NUMBER DESCRIPTION
2 Agreement and Plan of Merger, dated October 2, 1995, as amended, between Healthdyne, Tokos and
Registrant (included as Appendix A to the Joint Proxy Statement/Prospectus filed as part of the
Company's Registration Statement No. 333-00781 on Form S-4 (Registration No. 333-00781) filed
February 7, 1996 (the "Form S-4") and incorporated herein by reference).
3.1 Amended and Restated Certificate of Incorporation (included as Appendix D to the Joint Proxy
Statement/Prospectus filed as a part of the Company's Form S-4 and incorporated herein by
reference).
3.2 Bylaws (included as Appendix E to the Joint Proxy Statement/Prospectus filed as part of the
Company's Form S-4 and incorporated herein by reference).
4.1 Indenture dated as of December 1, 1986, between Healthdyne and National Bank of Georgia, trustee,
for 8% Convertible Subordinated Indentures due December 31, 2001 (filed as Exhibit (4)(b) to the
Healthdyne Annual Report on Form 10-K for the year ended December 31, 1986 and incorporated herein
by reference).
10.1 Form of Rights Agreement between Registrant and SunTrust Bank, Atlanta (filed as Exhibit 10.1 to
the Company's Form S-4 and incorporated herein by reference).
10.2 1996 Stock Incentive Plan (included as Appendix F-I to the Joint Proxy Statement/Prospectus filed
as a part of the Company's Form S-4 and incorporated herein by reference).
10.3 1996 Directors' Non-Qualified Stock Option Plan (included as Appendix F-II to the Joint Proxy
Statement/Prospectus filed as a part of the Company's Form S-4 and incorporated herein by
reference).
10.4 1996 Employee Stock Purchase Plan (included as Appendix F-III to the Joint Proxy
Statement/Prospectus filed as a part of the Company's Form S-4 and incorporated herein by
reference).
10.5 Corporate Services Agreement, dated as of April 21, 1995, between Healthdyne and Healthdyne
Technologies (filed as Exhibit 10.21 to the Technologies Form 8-K and incorporated herein by
reference).
10.6 Tax Indemnification Agreement, dated as of April 21, 1995, between Healthdyne and Healthdyne
Technologies (filed as Exhibit 10.20 to the Technologies Form 8-K and incorporated herein by
reference).
10.7 Tax Sharing Agreement, dated as of March 31, 1993, between Healthdyne and Healthdyne Technologies
(filed as an Exhibit to the Registration Statement on Form S-1 of Healthdyne Technologies
(Registration No. 33-60708), dated April 6, 1993, and incorporated herein by reference).
10.8 Agreement Concerning Taxes, dated as of April 21, 1995, between Healthdyne, Healthdyne
Technologies and Health Scan Products, Inc. (filed as an exhibit to the Technologies Form 8-K, and
incorporated herein by reference).
31
56
10.9 OEM Design and Manufacturing Agreement, dated as of April 21, 1995, between Healthdyne and
Healthdyne Technologies (filed as Exhibit 10.22 to the Technologies Form 8-K and incorporated
herein by reference).
10.10 Distribution Agreement, dated as of October 20, 1995, between Healthdyne and Healthdyne
Information Enterprises, Inc. ("HIE") (filed as Exhibit 2.1 to Amendment No. 1 to the Registration
Statement on Form S-1 of HIE (Registration No. 33-96478) dated October 24, 1995 (the "HIE Form S-
1"), and incorporated herein by reference).
10.11 Tax Indemnity Agreement, dated as of October 20, 1995, between Healthdyne and HIE (filed as
Exhibit 10.2 to Amendment No. 1 to the HIE Form S-1 and incorporated herein by reference).
10.12 Tax Disaffiliation Agreement, dated as of October 20, 1995, between Healthdyne and HIE (filed as
Exhibit 10.3 to Amendment No. 1 to the HIE Form S-1 and incorporated herein by reference).
10.13 Severance Compensation and Restrictive Covenant Agreement, dated October 2, 1995, between
Healthdyne and Frank D. Powers (filed as Exhibit 10.22 to the Company's Form S-4 and incorporated
herein by reference).
10.14 Form of Healthdyne Executive Non-qualified Retirement Plan and Trust (filed as Exhibit (10) (qq)
to the Healthdyne Annual Report on Form 10-K for the year ended December 31, 1994 and incorporated
herein by reference).
10.15 Exclusive Marketing Agreement, dated December 31, 1991, between Tokos and Adeza Biomedical
Corporation (filed as an Exhibit to the Tokos Annual Report on Form 10-K dated March 27, 1992 with
those portions omitted for confidentiality reasons filed separately with the Commission and
incorporated herein by reference).
10.16 Form of Tokos Executive Non-qualified Retirement Plan and Trust (filed as Exhibit 10.29 to the
Company's Form S-4 and incorporated herein by reference).
10.17 Amended and Restated Severance Compensation and Restrictive Covenant Agreement, dated October 2,
1995, between Healthdyne and Donald R. Millard (filed as Exhibit (10)(fff) to the Healthdyne
Quarterly Report on Form 10-Q for the period ended September 30, 1995 and incorporated herein by
reference).
10.18 Form of Promissory Note with Tokos officers and related Security Agreement (filed as an Exhibit to
the Tokos Registration Statement on Form S-1 (Registration No. 33-33340) and incorporated herein
by reference).
10.19 Agreement and Plan of Merger, dated June 24, 1996, between National Reproductive Medical Centers,
Inc. ("NRMC"), Matria, NRMC Acquisition Corporation and certain NRMC shareholders (filed as
Exhibit 2.1 to the Matria Current Report on Form 8-K dated July 10, 1996).
10.20 Shareholders Agreement, dated February 28, 1995, among Healthdyne, Inc. (a predecessor of Matria),
certain shareholders of National Reproductive Medical Centers, Inc. ("NRMC") and NRMC (filed as
Exhibit 99.3 to the Matria Current Report on Form 8-K dated July 10, 1996).
10.21 Amendment No. 1 dated May 8, 1996 to Exclusive Marketing Agreement, dated December 31, 1991,
between Tokos and Adeza Biomedical Corporation (filed as
32
57
Exhibit 10.31 to the Matria Annual Report on Form 10-K
for the year ended December 31, 1996).
4.4 Loan and Security Agreement, dated September 15, 1997
between BankAmerica Business Credit, Inc. and Matria
Healthcare, Inc. (filed as Exhibit 4.4 to the Matria
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).
The following exhibits are incorporated by reference herein from the
Company's Annual Report on Form 10-K for the year ended December 31, 1995 as
part of this Report:
3.1 Restated Certificate of Incorporation.
4.3 Supplemental Indenture dated March 7, 1996, between the
Company and SouthTrust Estate & Trust Company of Georgia,
N.A., Trustee to Indenture, dated December 1, 1986, for 8%
Convertible Subordinated Debentures due December 31, 2001.
The following exhibits are filed as part of this Report:
10.32 Letters, dated November 10 and November 17, 1997, between
Matria Healthcare, Inc., Healthdyne Technologies, Inc. and
Respironics, Inc. amending the Corporate Services
Agreement and Tradename License Agreement, both dated
April 25, 1995 between Healthdyne, Inc. and Healthdyne
Technologies, Inc.
10.33 Settlement Agreement, dated March 3, 1998 between the
Company and Adeza Biomedical Corporation (Confidential
Treatment Requested).
21.0 List of Subsidiaries.
23.0 Accountants' Consents.
27.0 Financial Data Schedule (for SEC use only).
(b.) Reports on Form 8-K.
None.
33
58
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 26, 1998 By: /s/ Donald R. Millard
---------------------------------------
Donald R. Millard, Director, President,
Chief Executive Officer and Chief
Financial Officer (Principal Financial
Officer)
/s/ Yvonne V. Scoggins
--------------------------------------
Yvonne V. Scoggins, Vice President,
Chief Accounting Officer and Treasurer
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Donald R. Millard as his or
her true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, 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 l0-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 26, 1998
- ------------------- Director
Parker H. Petit
/s/ Donald R. Millard Director, President March 26, 1998
- --------------------- Chief Executive Officer
Donald R. Millard and Chief Financial
Officer (Principal
Executive, Financial
and Accounting Officer)
/s/ Frank D. Powers Director, Executive March 26, 1998
- ------------------- Vice President and
Frank D. Powers Chief Operating Officer
34
59
/s/ Carl E. Sanders Director March 26, 1998
- ------------------------------------------
Carl E. Sanders
/s/ Jackie M. Ward Director March 26, 1998
- -----------------------------------------
Jackie M. Ward
/s/ Morris S. Weeden Director March 26, 1998
- --------------------------------------
Morris S. Weeden
/s/ Frederick P. Zuspan Director March 26, 1998
- ---------------------------------------
Frederick P. Zuspan, M.D.
35
60
MATRIA HEALTHCARE, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
Additions
---------
Balance at Charges to
beginning Charges to costs and Net Balance at
Description of period other accounts expenses Deductions end of period
----------- --------- -------------- -------- ---------- -------------
December 31, 1995
Allowance for contractual adjustments
and doubtful accounts $12,900 12,6961 5,251 10,551 20,296
December 31, 1996
Allowance for contractual adjustments
and doubtful accounts 20,296 8,3002 7,591 9,989 26,198
December 31, 1997
Allowance for contractual adjustments
and doubtful accounts 26,198 -- 6,599 10,146 22,651
December 31, 1995
Reserves for patient service
equipment and supplies 2,030 -- -- -- 2,030
December 31, 1996
Reserves for patient service
equipment and supplies 2,030 -- -- 2,030 --
December 31, 1995
Reserves for patient monitoring devices 2,200 -- -- -- 2,200
December 31, 1996
Reserves for patient monitoring devices 2,200 -- -- 2,200 --
_________________________________
1 Represents restatement of December 31, 1995 allowance balance resulting
from reclass of contra accounts receivable balance from gross accounts
receivable to the allowance for doubtful accounts.
2 Represents beginning balances in allowance for doubtful accounts of acquired
companies.
36