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SECURITIES AND EXCHANGE COMMISSION CONFORMED COPY
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, 1998 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
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained to the best
of Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
As of March 12, 1999, there were 36,468,834 shares of Common Stock outstanding.
The aggregate market value of the Common Stock of the Registrant held by
non-affiliates was approximately $106,120,563 based upon the closing sale price
on March 12, 1999.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders are incorporated by reference into Part III.
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MATRIA HEALTHCARE, INC.
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I ......................................................................
Item 1. Business.................................................. 3
Item 2. Properties................................................ 10
Item 3. Legal Proceedings......................................... 11
Item 4. Submission of Matters to a Vote of Security Holders ...... 12
PART II......................................................................
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters.......................... 13
Item 6. Selected Financial Data................................... 14
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 15
Item 7a. Quantitative and Qualitative Disclosures About
Market Risk.............................................. 22
Item 8. Financial Statements and Supplementary Data............... 22
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure................... 23
PART III.....................................................................
Item 10. Directors and Executive Officers of the Company........... 23
Item 11. Executive Compensation ................................... 23
Item 12. Security Ownership of Certain Beneficial
Owners and Management.................................... 23
Item 13. Certain Relationships and Related Transactions............ 23
PART IV......................................................................
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.................................. 24
SIGNATURES................................................................... 28
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PART I.
ITEM 1. BUSINESS.
GENERAL. 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.
The Company is engaged principally in the business of providing
women's health services, cardiovascular and respiratory disease management
services, infertility practice management, and diabetes supplies and services.
ACQUISITION OF BUSINESSES. On June 1, 1996, the Company exercised an
option and acquired the remaining ownership interest in National Reproductive
Medical Centers, Inc. ("NRMC"), a physician practice management services
business that manages infertility treatment centers in California, in which
Healthdyne had previously owned a minority interests.
Effective July 1, 1998, the Company acquired substantially all of the
assets of Quality Diagnostic Services, Inc., a Georgia-based company engaged in
the business of cardiac event monitoring, holter monitoring and pacemaker
follow-up.
Also in July 1998, the Company entered into a subcontract agreement
with National Jewish Medical and Research Center ("National Jewish"). Under the
terms of the subcontract agreement, the Company provides screening, enrollment
and call support services to participants in National Jewish's respiratory
disease management programs. On October 1, 1998, the Company acquired an
exclusive, five-year license to market and provide National Jewish's
respiratory disease management programs in North America.
On January 15, 1998, the Company acquired 10% of the outstanding stock
of Diabetes Management Services, Inc. ("DMS"), a South Carolina-based company
engaged in the sale of insulin pumps and diabetes 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. Effective
January 1, 1999, the Company acquired the remaining 90% ownership interest in
DMS.
Also effective January 1, 1999, Matria acquired substantially all of
the assets of Gainor Medical Management, L.L.C. ("Gainor Medical"), a Georgia
limited liability company engaged in the business of diabetes disease
management in the United States and Germany and the design, assembly, packaging
and distribution of microsampling products throughout the world.
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The integration of the operations of each of the recently acquired
businesses will require the dedication of management resources to achieve the
anticipated benefits of these acquisitions. The difficulties of integrating
these operations include the necessity of coordinating geographically separate
organizations, integrating personnel with diverse business backgrounds and
combining different corporate cultures. The process of integrating operations
could cause an interruption of, or loss of momentum in, the activities of the
combined businesses. The diversion of management's attention and any
difficulties encountered in connection with the integration of the combined
businesses' operations could have an adverse effect on the business, results of
operations or financial condition of Matria.
BUSINESS SEGMENTS AND GEOGRAPHIC AREAS. In 1998, the Company's
operations consisted of two reportable business segments: Women's Health and
Cardiovascular. With the acquisition of the stock of DMS and the assets of
Gainor Medical, the Company entered another business segment: Diabetes Supplies
and Services.
Information regarding net sales, operating income, and total assets of
each of the business segments in which the Company operated in fiscal years
1996 through 1998 is in Note 15 of Notes to Consolidated Financial Statements
on pages F-21 through F-22 of this report.
Women's Health. The Women's Health segment offers a wide range of
specialized services designed to assist physicians and payors in the cost
effective management of maternity patients. Services include specialized home
nursing, risk assessment, patient education and management, home uterine
contraction monitoring, infusion therapy, gestational diabetes management and
other monitoring and clinical services as prescribed by the patient's
physician. The Women's Health segment has 47 service centers throughout the
United States. Forty-one of the 47 sites are or are in the process of becoming
accredited as home care organizations by the Joint Commission on Accreditation
of Health Care Organizations. Although this segment maintains a dominant market
share, the industry continues to be vulnerable to several controversies
surrounding the home obstetrical care business, including academic debate as to
the efficacy of certain services and controversy over the "off-label" use of
certain tocolytic medications. See "Regulation and Healthcare Industry Changes"
below in this Item 1.
Cardiovascular. The Cardiovascular segment provides cardiac event
monitoring services, holter monitoring services and pacemaker follow-up to
patients throughout the United States from its headquarters in Marietta,
Georgia.
Other. The Other business segment has three components that are below
the threshold for reporting: respiratory disease management, infertility
practice management and clinical patient record software.
The respiratory disease management division (Respiratory Management
Services - "RMS"), which is in its early stages, provides respiratory disease
risk assessment, screening and case management services to patients throughout
the United States from its headquarters in Marietta, Georgia in conjunction
with National Jewish's facility located in Denver, Colorado.
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The infertility practice management business unit (NRMC) manages three
fertility clinics in California, which provide a broad spectrum of diagnostic
and therapeutic services to infertile couples from throughout the United
States, with particular emphasis on in-vitro fertilization and embryo transfer
procedures. This unit also makes its laboratory services available to other
infertility practices.
The clinical patient record software division (Clinical-Management
Systems, Inc. - "CMS") markets a proprietary automated patient record for
obstetricians and gynecologists. This division's business currently is confined
to the United States.
Diabetes Supplies and Services. The Diabetes Supplies and Services
segment has two components: diabetes disease management and microsampling
products, which are products used to obtain and test small samples of bodily
fluid.
The diabetes disease management division sells insulin, insulin pumps,
syringes, microsampling products and other prescription and non-prescription
drugs used by diabetics. The majority of this division's sales are made on a
mail-order basis. In addition, this division provides diabetes screening,
education and patient management services. This division serves patients in the
United States through its facilities in Roanoke, Virginia and Van Nuys,
California and in Germany through its facilities in Neumunster and Dresden,
Germany. Approximately 50% of this division's revenues are derived from its
German operations.
The Company's microsampling products division is the leading global
supplier of standard lancets, lancing devices and safety lancets. The Company
designs, assembles, packages and distributes products manufactured by Nissho
Corporation, a publicly-traded Japanese manufacturer and distributor of medical
equipment with a core competency in needle-based technology. This division
operates from facilities in McDonough, Georgia and Milton Keynes, England. Its
products are shipped primarily to North and South America, Europe and Asia.
Approximately 27% of this division's revenues are derived from sales outside of
the United States.
Because of the Company's dependence on foreign markets, deterioration
in foreign economic conditions and currency exchange rate fluctuations could
have a material adverse effect on the Company's business. Due to the foregoing
factors, as well as foreign local commercial and economic policies and
political uncertainties, the Company believes its activities outside of the
United States involve greater risk than its domestic business.
CUSTOMERS, SUPPLIERS AND THIRD-PARTY PAYORS. The Company markets its
women's health services, diabetes disease management services, cardiovascular
services and respiratory disease management services to patients, physicians,
other healthcare providers and third-party payors, primarily through its
employee sales force and independent sales representatives. Virtually all of
these businesses' revenues depend on reimbursement from third-party payors,
such as managed care companies and government-sponsored health insurance
programs. In 1998 approximately 94% and 6% of the Company's revenues from these
businesses were derived from private third-party payors and government payors,
respectively. Of the Gainor Medical diabetes disease management revenues in
1998, approximately 17% were derived from private third-party payors and
approximately 83% were derived from government payors. Third-party payors are
having greater control over patient access and increasingly use their
significant bargaining power to secure discounted
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rates and other concessions from providers. This trend, as well as other
changes in reimbursement rates, policies or payment practices by third-party
payors (whether initiated by the payor or legislatively mandated) could have an
adverse impact on the Company's disease management businesses.
The Company markets its clinical patient record software to physicians
using a sales force employed by CMS.
The Company markets the services of the fertility practices it manages
by advertising in various media in targeted markets and by presentation of
educational seminars to prospective patients. The Company from time to time
offers promotional programs under which qualified patients whose pregnancies do
not succeed are entitled to a refund of a portion of the Company's fees.
The microsampling division of the Diabetes Supplies and Services
segment markets its products through its employee sales force to original
equipment manufacturers of blood glucose and other point-of-care test kits as
well as mail order companies, kit companies and distributors that sell to the
acute care, alternate care and primary care markets. Three major original
equipment manufacturer customers represented approximately 86% of this
division's total sales in 1998. Although the Company believes its relationships
with these customers are strong, the loss of any of these major customers could
have a material adverse effect on this division's business. Additionally, this
division is highly dependent on its exclusive supply relationship with Nissho
Corporation, from which the division purchases virtually all of its products on
favorable payment terms. The exclusive supply agreement has approximately four
years remaining. Termination of the exclusive supply agreement or failure to
continue the exclusive supply agreement on the terms currently in effect would
have a material adverse effect on the Company's microsampling products
business, as would any interruption in the supply of products from Nissho
Corporation, whatever the cause.
SEASONALITY. The Women's Health segment's revenues tend to be
seasonal. Revenues typically begin to decrease 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. The
Company's other businesses do not reflect any significant degree of
seasonality.
TRADEMARKS, LICENSES AND PATENTS. The Company owns a number of
trademarks and service marks which, in the aggregate, are important to the
marketing and promotion of its products and services. The Company does not
believe, however, that any single trademark or service mark is material in
relation to the Company's business as a whole. The Company generally makes a
practice of protecting its most significant trademarks by registration.
The Company has licensed its respiratory disease management programs
from National Jewish. Insofar as the licensed programs are the cornerstone of
the Company's respiratory disease management programs, the license is material
to that portion of the Company's business. Additionally, the Company has an
exclusive, perpetual right to use and purchase from Respironics, Inc. the only
uterine contraction monitor that has received pre-market approval from the FDA
for home use in connection with pre-term labor. The
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Company's rights to the monitors are a material competitive advantage in
marketing the Company's uterine contraction monitoring services.
The Company does not possess any patents that are material to its
business, although the patents owned by Nissho Corporation with respect to
products distributed by the microsampling division are material to the
continued marketing of those products.
Also, the Company considers its clinical and disease management
programs to be proprietary and material to the portion of the Company's
business to which they relate.
Any impairment of the Company's rights in the intellectual property
described above could have a material adverse effect on the particular business
to which they relate.
COMPETITION. The medical industry is characterized by rapidly
developing technology and increased competition. In all its product and service
lines, the Company competes with companies, both large and small, located in
the United States and abroad. Competition is strong in all lines, without
regard to the number and size of the competing companies involved. Certain of
the Company's competitors and potential competitors have significantly greater
financial, technical and sales resources than the Company and may, in certain
locations, possess licenses or certificates that permit them to provide
products and services that the Company cannot currently provide.
Although both the Women's Health segment and the Cardiovascular
segment are the leading providers in their respective markets, with market
shares of approximately 85% and 15%, respectively, both they and the Company's
other disease management businesses compete with a vast and ever increasing
number of competitors. Competitors of the Company's disease management
businesses include national, regional and local home health agencies, hospitals
and physicians, as well as other companies devoted primarily to offering one or
more products or services similar or identical to those offered by the Company,
such as cardiac event monitoring, diabetes supplies or diabetes education. The
Company competes on a number of factors, including quality of care and service,
reputation within the medical community, geographical scope and price. The
Company believes that its clinical expertise and coordinated approach to
patient services have enabled it to compete effectively.
Competition in the microsampling division of the Company's Diabetes
Supplies and Services segment also is based on quality, service and price. In
addition, competition in research involving the development of new products and
the improvement of existing products is particularly significant. Competitors'
research efforts could lead to the obsolescence of some or all of the
microsampling division's products. The microsampling industry is highly
fragmented, with numerous competitors of all sizes. The quality of the
microsampling division's products, as well as its strong distribution system,
value-added approach to customer service and design and development expertise
have enabled the division to achieve its significant market share,
notwithstanding the highly-competitive environment in which it operates.
There can be no assurance that the Company will not encounter
increased or more effective competition in the future, which could limit the
Company's ability to maintain or
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increase its business or render some products and services offered by Matria
obsolete or non-competitive and which could adversely affect the Company's
operating results.
RESEARCH AND DEVELOPMENT. The microsampling division of the Diabetes
Supplies and Services segment maintains a dedicated research and development
staff at its headquarters in McDonough, Georgia. This division's research and
development activities are key factors in its ability to stay abreast of its
competition.
The Company's Women's Health, Cardiovascular and Other business
segments do not maintain separate research and development teams. Program
development and refinements result from the cooperative efforts of the
businesses' clinical, operating and marketing staff and these costs are charged
to earnings when incurred. The Company's clinical patient record software
division outsourced the development of its automated patient record. These
costs are recorded as intangible assets as incurred and are amortized over the
estimated useful life.
REGULATION AND HEALTH CARE INDUSTRY CHANGES. All of the Company's
businesses are subject to varying degrees of government regulation in the
countries in which they operate. There has been a trend in recent years both in
the United States and outside of the United States toward more stringent
regulation of, and enforcement of requirements applicable to, health care
providers and medical device manufacturers. The continuing trend of more
stringent regulatory oversight in health care, enforcement activities and
product clearance for medical devices has caused health care providers and
manufacturers to experience more uncertainty, greater risk, higher expenses and
longer approval cycles. At the present time, there are no meaningful
indications that this trend will change in the near or long term, in the United
States or abroad.
In the United States, regulation of the health care industry is
particularly pervasive. Many states require providers of home health services,
such as the Company's Women's Health segment, to be licensed as nursing or home
health agencies and to have medical waste disposal permits. In addition, the
operations of Matria's diabetes disease management business require Matria to
be licensed as a pharmacy in several states. Moreover, certain employees of the
Company are subject to state laws and regulations regarding the ethics and
professional practice of pharmacy and nursing. The Company may also be required
to obtain certification to participate in governmental payment programs, such
as Medicare and Medicaid. Some states have established Certificate of Need
("CON") programs regulating the establishment or expansion of healthcare
operations. The failure to obtain, renew or maintain any of the required
licenses, certifications or CONs could adversely affect the Company's disease
management businesses.
In addition, the Company's disease management businesses are subject
to various federal and state statutes regulating payments to or relationships
with referral sources. Penalties for violation of these statutes include
substantial fines and penalties, imprisonment and exclusion from participation
in governmental healthcare programs.
Moreover, many of the medical products distributed by the Company or
utilized by the Company for the provision of its services are classified as
medical devices under the Federal Food, Drug and Cosmetic Act (the "FDC Act")
and are subject to regulation by the FDA. In addition, some of the services
involve the provision of drugs or tests that are regulated by the
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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 pre-term labor.
In response to a petition filed by the National Women's Health Network, in
November 1997, 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
pre-term labor. In 1998, the Company received and 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 publicity concerning the
off-label use of terbutaline sulfate has adversely affected the Company's
Women's Health segment's business.
As a result of the increasingly complex regulatory environment for the
healthcare industry, the Company recently adopted a company-wide compliance
program, developed in accordance with federal guidelines.
Although the Company believes its operations as currently conducted
are in material compliance with existing applicable laws and regulations, there
can be no assurance that the Company will not become the subject of a
regulatory or other investigation or proceeding or that its interpretations of
applicable laws and regulations will not be challenged. The defense of any such
challenge could result in substantial cost to the Company and diversion of
management's time and attention. Thus, any such challenge could have a material
adverse effect on the Company's business, regardless of whether it ultimately
is sustained. Moreover, the Company believes that its businesses will continue
to be subject to increasing regulation, the scope and effect of which the
Company cannot predict.
The health care industry in the United States is experiencing a period
of extensive change due to economic forces, regulatory influences and political
initiatives. Market-driven reforms from forces within the industry are exerting
pressure on health care companies to reduce health care costs. These
market-driven changes are resulting in industry wide consolidation that is
expected to increase the downward pressure on health care companies' profit
margins, as larger buyer and supplier groups exert pricing pressures on health
care companies. In addition, from time to time federal and state legislatures
consider health care reform proposals. The ultimate timing or effect of
legislative efforts and market-driven reforms cannot be predicted, and these
initiatives may adversely impact Matria's business.
EMPLOYEES. The Company currently employs a total of approximately
1,125 full-time employees and over 102 regular part-time employees. In
addition, the Company employs an additional 796 part-time clinical employees to
provide, among other things, patient training and backup support on an "as
needed" basis. None of the Company's employees are represented by a union. The
Company considers its relationship with its employees to be satisfactory.
FORWARD-LOOKING STATEMENTS. This 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,
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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 of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are intended to be covered by the safe harbors
created thereby. Such forward-looking statements are not guarantees of future
performance and are subject to risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the Company to differ
materially from historical results or from any results expressed or implied by
such forward-looking statements. Such factors include, without limitation, (i)
changes in reimbursement rates, policies or payment practices by third party
payors, whether initiated by the payor or legislatively maintained; (ii) the
loss of major customers; (iii) termination of the Company's exclusive supply
agreement with Nissho Corporation or failure to continue the agreement on terms
currently in effect; (iv) impairment of the Company's rights in intellectual
property; (v) increased or more effective competition; (vi) new technologies
that render obsolete or non-competitive products and services offered by the
Company; (vii) changes in regulations applicable to the Company or the failure
to comply with existing regulations; (viii) future health care or budget
legislation or other health reform initiatives; (ix) increased future exposure
to professional negligence liability; (x) difficulties in successfully
integrating recently acquired businesses into the Company's operations and
uncertainties related to the future performance of such businesses; (xi) losses
due to foreign currency exchange rate fluctuations or deterioration of economic
conditions in foreign markets; and (xii) costs associated with Year 2000
compliance or problems associated with the Company's suppliers or payors
failure to detect and correct Year 2000 related systems failures. 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 104,000 square
feet. The facility is leased through February 28, 2003.
Additional properties also are leased for the other operations of
Matria. The Women's Health segment's patient service centers are typically
located in suburban office parks and range between 600 and 6,500 square feet of
space with an average of approximately 2,900 square feet. Total square footage
for these facilities is approximately 155,000 square feet. These facilities are
leased for various terms through 2003. The three NRMC clinics are located in
California, total approximately 29,000 square feet, and are leased pursuant to
agreements that expire on various dates through 2006.
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The Company's microsampling division maintains its headquarters in
McDonough, Georgia, where its facility consists of approximately 48,000 square
feet of office and warehouse space. The lease term on the facility expires in
2011. The microsampling division also leases approximately 1,177 square feet of
office space and warehouse space as needed in Milton Keynes, England under a
lease that can be terminated at anytime with six months written notice. The
Company's diabetes disease management division maintains its United States
headquarters in Roanoke, Virginia, where its facility consists of approximately
24,000 square feet of office and warehouse space, which is leased through 2000.
The division also leases approximately 3,200 square feet of office and
warehouse space in Van Nuys, California on a month to month basis. Outside the
United States, the division maintains leased facilities in Neumunster and
Dresden, Germany, consisting of approximately 3,200 and 6,500 square feet,
respectively. The leases expire in 1999 with an automatic one year renewal and
2005, respectively.
These facilities are generally in good condition, and Matria believes
that they are adequate for and suitable to its requirements.
ITEM 3. LEGAL PROCEEDINGS
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. In January 1999, the
Company settled this suit for an amount not exceeding the reserve established
by the Company therefor.
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. As did its predecessors, Matria
maintains insurance, including insurance covering professional and product
liability claims, with customary deductible amounts. There can be no assurance,
however, that (i) additional suits will not be filed in the future against
Matria, (ii) Matria's prior experience with respect to the disposition of its
litigation accurately indicates the results that will occur in pending or
future cases or (iii) adequate insurance coverage will be available at
acceptable prices for incidents arising or claims made in the future.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
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 51 President, Chief Executive Officer and
Chief Financial Officer
Frank D. Powers 50 Executive Vice President and
Chief Operating Officer
Thornton A. Kuntz, Jr. 45 Vice President-Administration
Roberta L. McCaw 43 Vice President-Legal, General Counsel
and Secretary
Yvonne V. Scoggins 49 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
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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 Vice President-Legal, General Counsel and Secretary
of the Company since April 23, 1998 and previously was Assistant General
Counsel and Assistant Secretary of the Company from December 15, 1997 to April
23, 1998, and Assistant General Counsel from July 1996 to December 1997. Prior
thereto, Ms. McCaw was a partner at 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 and Chief Financial Officer of Home
Nutritional Services, Inc., a former majority owned subsidiary of Healthdyne,
from February 1990 to April 1993.
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 12, 1999 was 3,167.
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 following table sets forth, for the calendar quarters indicated,
the high and low sales prices of Matria Common Stock from January 1, 1997
through December 31, 1998:
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CALENDAR QUARTER LOW HIGH
---------------- --- ----
1997
First $3.500 $7.500
Second 3.500 5.125
Third 3.563 6.250
Fourth 4.875 7.125
1998
First $4.750 $6.375
Second 3.500 6.500
Third 2.000 4.125
Fourth 1.625 3.750
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth selected consolidated financial data in
respect of the Company's continuing operations. The data should be read in
conjunction with Management's Discussion and Analysis and the financial
statements. The statement of operations data for the five years ended December
31, 1998 and the related balance sheet data have been derived from the audited
consolidated financial statements of the Company.
The selected financial information represents the financial
performance of Matria from March 1, 1996 through December 31, 1998 and, for all
prior periods, of Tokos (deemed for accounting purposes to be the acquiror of
Healthdyne in the Merger). 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.
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Years Ended December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands, except per share data)
Consolidated statements of operations:
Revenues $ 135,215 144,533 130,806 85,209 98,565
Operating expenses 116,413 122,630 122,686 83,990 96,640
Provision for doubtful accounts 6,662 6,599 7,591 5,251 7,042
Amortization of goodwill and other
intangibles 28,155 36,604 30,083 1,235 350
Asset impairment, restructuring,
severance and other charges 85,367 -- 22,525 6,756 --
--------- -------- -------- ------- -------
Loss from operations (101,382) (21,300) (52,079) (12,023) (5,467)
Interest income (expense), net (608) 483 824 333 50
Other income (expense), net 448 (85) 134 46 108
--------- -------- -------- ------- -------
Loss before income tax expense (101,542) (20,902) (51,121) (11,644) (5,309)
Income tax expense -- -- -- 150 550
--------- -------- -------- ------- -------
Net loss $(101,542) (20,902) (51,121) (11,794) (5,859)
========= ======== ======== ======= =======
Basic and diluted loss per share $ (2.78) (0.57) (1.58) (0.68) (0.34)
========= ======== ======== ======= =======
Weighted average shares outstanding 36,580 36,527 32,328 17,396 17,169
========= ======== ======== ======= =======
December 31,
------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
Consolidated balance sheet data:
Total assets $ 97,034 191,132 223,188 44,468 58,183
Long-term debt obligations, excluding
current maturities 18,385 1,712 2,499 2,078 2,593
Shareholders' equity 49,881 153,169 173,178 29,489 40,160
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
During 1998 and early 1999, the Company announced several strategic
actions to expand its business focus beyond managing the condition of pregnancy
into other disease management markets. These actions included: (i) the
acquisition in July 1998 of Quality Diagnostic Services, Inc. ("QDS"), a cardiac
event monitoring company; (ii) the completion of a licensing agreement in
October 1998 with National Jewish Medical and Research Center ("National
Jewish") to provide services in the respiratory disease management market; and
(iii) the acquisition in January 1999 of the business and assets of Gainor
Medical Management, L.L.C. ("Gainor") and
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Diabetes Management Services, Inc. ("DMS"), diabetes disease management
companies. Disease management is an emerging healthcare sector receiving a
heightened focus in the healthcare industry and the competition in this sector
is fragmented without a dominant leader. The Company's management is confident
that with the successful implementation of its expansion strategies, the
Company will become the dominant market leader in disease management and that
these strategies will result in significant revenue growth in 1999 and beyond.
On March 8, 1996, Tokos Medical Corporation ("Tokos") and Healthdyne,
Inc. ("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 minority ownership interest in
National Reproductive Medical ("NRMC"), and effective June 1, 1996, the Company
acquired the remaining ownership interest. The acquisition was accounted for
using the purchase method of accounting.
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, 1998 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, NRMC only
since June 1, 1996, and QDS only since July 1, 1998. 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 for 1998 decreased $9.318 million, or 6.4% from 1997,
primarily due to a 10.4% decline in revenues in the Women's Health segment. A
15.5% decrease in revenues from preterm labor management services, resulting
primarily from a decrease in prescriptions for these services, was partially
offset by growth in revenues from maternity education and assessment services
as well as the Diabetes in Pregnancy Program, which was initiated in the last
half of 1997. Effective July 1, 1998, the Company entered the Cardiovascular
business segment through the acquisition of QDS. Included in the Company's 1998
revenues are $6.644 million from QDS.
Revenues for 1997 increased $13.727 million, or 10.5%, from 1996,
primarily due to a $6.229 million (5.1%) increase in the Women's Health segment
and a $7.472 million increase in revenues resulting from additional revenues of
NRMC in 1997, the acquisition of which was effective June 1, 1996. The increase
in the Women's Health segment in 1997 was primarily due to the inclusion of
Healthdyne's revenues for an entire year in 1997 and additional revenues from
the introduction of the fetal fibronectin immunoassay (fFN) test, an in-vitro
diagnostic test used as an aid in assessing the risk of preterm delivery in
women. Revenues from this segment's preterm labor management services declined
$7.828 million (6.3%)
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in 1997 when compared to 1996 annualized, combined revenues of Tokos and
Healthdyne, Inc. for these services.
The Company entered into an agreement with the manufacturer of the fFN
test to relinquish all marketing rights to the test, effective August 31, 1998.
After this date, the Company no longer had revenues on sales of fFN tests.
Revenues from marketing these tests were $2.991 million, $3.636 million and
$738,000 in 1998, 1997, and 1996, respectively.
Cost of revenues as a percentage of revenues remained relatively
constant at 39.5% and 39.9%, in 1998 and 1997, respectively, decreasing from
42.7% in 1996. The reduction from 1997 was primarily due to decreases in costs
of revenues in the Women's Health segment from 41.0% in 1996 to 36.6% in 1997
and 36.9% in 1998, 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
effective June 1, 1996, whose costs of revenues as a percentage of revenues
were 63.2%, 66.3%, and 67.5% in 1998, 1997 and 1996, respectively.
Selling and administrative expenses as a percentage of revenues
increased to 46.6% in 1998 from 45.0% in 1997, due in part to increased
expenses associated with the Company's strategy to diversify into the disease
management market. These expenses declined as a percentage of revenue in 1997
from 51.1% in 1996, primarily due to synergies achieved as a result of the
Merger.
The Company provides for estimated uncollectible accounts as revenues
are recognized. The provision for doubtful accounts as a percentage of revenues
for the Women's Health and Cardiovascular segments was approximately 5% in 1998
and 1997 and 6% in 1996. 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. The provision for doubtful accounts for the infertility practice
management business is not significant as substantially all charges for patient
services are collected at the time services are provided.
In 1998, the Company recorded an $82.885 million asset impairment
charge of which $74.496 million was to write-down goodwill and intangible assets
relating to the Merger and $8.389 million was to write-down goodwill relating to
the acquisition of NRMC (see Note 3 to the consolidated financial statements).
Due to a decrease in pre-term labor management services in 1997, the Company
experienced a decline in pre-term labor management revenues. As part of its 1997
Business Assessment Plan, the Company assessed the future of this business and
expected revenue growth and profits to improve in 1998 and future years.
However, in 1998, revenues continued to decline due to negative market forces
which impacted the business. In addition, in 1998, the Company revised its
strategic plan to expand beyond maternity management. As a result, in the third
quarter of 1998, the Company determined that Healthdyne, Inc.'s estimated future
undiscounted cash flows were below the carrying value of its long-lived assets,
primarily goodwill. Accordingly, the Company adjusted the carrying value of
Healthdyne's long-lived assets and goodwill to their estimated fair value. The
estimated fair value was based on anticipated cash flows discounted at a rate
commensurate with the risk involved.
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As a result of NRMC's inability to achieve improvements specified in
the 1997 Business Assessment Plan, as well as continued operational issues,
including the termination of the founding physician in July 1998, NRMC's net
revenue declined approximately 17% in 1998, and operating losses were
approximately $761,000. As a result, in the fourth quarter of 1998, the Company
determined that NRMC's estimated future cash flows were below the carrying value
of its long-lived assets. Accordingly, the Company adjusted the carrying value
of NRMC's long-lived assets, primarily goodwill, to their estimated fair value
by recording an $8.389 million asset impairment charge. The estimated fair value
was based on anticipated cash flows discounted at a rate commensurate with the
risk involved.
The Company recorded a $2.482 million charge in 1998 for acquired
in-process research and development costs as a result of the acquisition of QDS
(see Note 2 to the consolidated financial statements).
In 1996, the Company charged to operations approximately $22.525
million of restructuring costs in connection with the Merger. 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 was made
obsolete as a result of the adoption of new systems, and $2.625 million related
to other miscellaneous Merger costs (see Note 11 to the consolidated financial
statements).
The Company did not record federal or state income tax benefits in
1998, 1997 or 1996. The tax net operating loss carryforwards of approximately
$90.000 million will be available to offset future taxable income, if any.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998 the Company had cash and short-term
investments of $11.968 million.
Net cash provided by operating activities was $4.931 million, compared
with $667,000 provided in 1997 and $10.823 million used in 1996. During 1998,
cash flow from operating activities was reduced by payments of $4.183 million
relating to severance costs of terminated employees and $1.328 million for
lump-sum payouts related to the termination of a pension plan. In 1997, cash
flow from operating activities was reduced by payments of $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 shareholder's lawsuit and $5.947 million related to the purchase of NRMC.
Net cash used in investing activities was $18.902 million in 1998,
compared to $3.090 million and $12.068 million provided in 1997 and 1996,
respectively. The decrease in 1998 is primarily due to $17.000 million cash
paid related to the acquisition of QDS and $4.587 million paid for investments
in strategic partners. Also in 1998, the Company had a $3.413 million increase
in capital expenditures from 1997, primarily relating to the upgrade of
computer systems as the Company positioned itself for expansion into new
markets.
The Company's accounts receivable days sales outstanding were 96 days
as of December 31, 1998 and 1997 and 73 days as of December 31, 1996. The
Company began
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19
reorganizing its reimbursement and verification processes during 1998 and
expects days sales outstanding to decline during 1999.
In 1997, the Company entered into a credit agreement with a leading
national banking organization for a $25.000 million secured line of credit. The
acquisition of QDS in July 1998 for $17.000 million cash (See Note 2 to the
consolidated financial statements) was financed primarily by borrowings under
this agreement, and the balance outstanding under this agreement as of December
31, 1998 was $16.659 million. In January 1999, the Company entered into a
$125.000 million, five-year secured credit facility and the existing credit
facility was terminated. The new credit facility consists of an $80.000 million
term loan and a $45.000 million revolving credit facility. In January 1999, the
Company borrowed $105.000 million under the facility and used $90.300 million
for cash payments related to the purchase of Gainor Medical and DMS (see Note 16
to the consolidated financial statements) and $14.700 million to repay existing
debt.
The acquisition agreement for the purchase of QDS provides for
additional cash payments of up to $6.000 million contingent upon 1999 revenues
of the Company's Cardiovascular segment. The acquisition agreement for Gainor
Medical provides for additional contingent purchase price of up to $35.000
million based upon 1999 financial performance. If earned, the Gainor Medical
contingent purchase price is payable by the issuance of subordinated notes to
the sellers in year 2000.
In February 1998, the Board of Directors of the Company approved the
purchase of up to ten percent of the Company's outstanding common stock. As of
December 31, 1998, 626,000 shares had been purchased for $2.397 million.
The Company believes that its current cash balances, expected cash
flows from operations and investing activities and amounts available under its
credit facilities will be sufficient to finance its current operations and
expansion initiatives.
NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting
Comprehensive Income." SFAS 130 established standards for reporting and display
of comprehensive income and its components. Comprehensive income generally
includes all changes in equity during a period except those resulting from
investments by owners and distribution to owners. The adoption of SFAS 130 had
no impact on the Company's consolidated financial statements.
Also in June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
About Segments of an Enterprise and Related Information." SFAS 131 established
standards for reporting information about operating segments in annual
financial statements and in interim financial reports to shareholders. The
Company adopted SFAS 131 in the first quarter of 1998.
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YEAR 2000 ISSUE
The Year 2000 issue refers generally to the data structure and
processing problem that may prevent systems from properly processing
date-sensitive information when the year changes to 2000. The Year 2000 issue
affects information technology ("IT") systems, such as computer programs and
various types of electronic equipment that process date information by using
only two digits rather than four digits to define the applicable year, and thus
may recognize a date using "00" as the Year 1900 rather than the Year 2000. The
issue also affects some non-IT systems, such as devices which rely on a
microcontroller to process date information. The Year 2000 issue could disrupt
a company's operations by generating erroneous data or causing system failures
or miscalculations.
The Company is involved in an extensive, ongoing program to identify
and correct problems arising from the Year 2000 issue. The program is broken
down into the following categories: (1) application systems; (2) hardware; (3)
monitoring equipment; and (4) computer applications of its significant
suppliers and significant payors.
The Company has evaluated the application systems in two parts: (1)
AS400 applications and (2) client server applications. The AS400 applications
are believed to be capable of functioning properly beyond the year 1999 at this
time. Although the Company originally had intended to replace its client server
applications in 1999, because that project will not be complete by year end
1999, the Company intends to remediate the existing client server application
systems in the second quarter of 1999, a process that the Company estimates
will take four months to complete.
Remediation and testing of the AS400 hardware is 100% complete, and
the remediation and testing of the Company's individual personal computers is
approximately 85% complete. The Company expects the remainder of remediation
and testing to be complete by April 1999.
In the first quarter of 1999, the Company completed its review of
embedded computer chips and software applications, which control certain
monitoring and other equipment. Remediation efforts are expected to be minor
and should be completed in the second quarter of 1999.
In 1998, the Company spent approximately $60,000 for software and
consulting fees associated with its initial Year 2000 evaluation. Budgeted
expenditures in 1999 total $100,000. The Company is primarily addressing all
Year 2000 issues with current staffing levels.
In the first quarter of 1999, the Company sent inquiries to its
significant suppliers and payors concerning the Year 2000 compliance of their
significant computer applications. The Company plans to send second requests
during the second quarter of 1999. The responses received to date do not
disclose any significant issues of non-compliance. The Company will continue to
evaluate Year 2000 risks with respect to such suppliers and payors as responses
are received. In that connection, it should be noted that substantially all of
the Company's 1998 and prior revenues were derived from reimbursement by
third-party payors, and that the Company is dependent upon such payors'
evaluation of their Year 2000 compliance status to assess such risks. If such
payors are incorrect in their evaluation of their own Year 2000 compliance
status, this could result in delays or errors in reimbursement to the Company,
the effects of which could be material to the Company.
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21
In light of its compliance efforts and based on the information
currently available, the Company believes that its risk associated with
problems arising from Year 2000 issues is not significant. However, because of
the many uncertainties associated with Year 2000 compliance issues, and because
the Company's assessment is necessarily based on information from third-party
payors and suppliers, there can be no assurance that the Company's assessment
is correct or that the Year 2000 issue will not have a material adverse effect
on the Company's business, results of operations, or financial condition. The
Company will continue with its assessment process as described above and, to
the extent that changes in such assessment require it, will attempt to develop
alternatives or modifications to its compliance plan described above. There
can, however, be no assurance that such compliance plan, as it may be changed,
augmented or modified from time to time, will be successful.
The SEC's recent guidance for Year 2000 disclosure calls for companies
to describe their most likely worst case Year 2000 scenarios. Notwithstanding
the aforementioned issues, the Company does not expect significant problems at
the turn of the century with internal conversions and remediation. However, the
most likely worst case scenario is that if third-party payors are not able to
reimburse the Company after the turn of the century, the Company would be
required to sustain operations through existing cash balances or through the
use of available borrowings under its credit facilities. Also, the Company
would be required to add additional staff during the time period leading up to
and immediately following January 1, 2000, in order to address any unexpected
Year 2000 issues.
FORWARD-LOOKING STATEMENTS. This Management's Discussion and Analysis
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 of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and are intended to be covered by the safe harbors
created thereby. Such forward-looking statements are not guarantees of future
performance and are subject to risks, uncertainties and other factors that may
cause the actual results, performance or achievements of the Company to differ
materially from historical results or from any results expressed or implied by
such forward-looking statements. Such factors include, without limitation, (i)
changes in reimbursement rates, policies or payment practices by third party
payors, whether initiated by the payor or legislatively maintained; (ii) the
loss of major customers; (iii) termination of the Company's exclusive supply
agreement with Nissho Corporation or failure to continue the agreement on terms
currently in effect; (iv) impairment of the Company's rights in intellectual
property; (v) increased or more effective competition; (vi) new technologies
that render obsolete or non-competitive products and services offered by the
Company; (vii) changes in regulations applicable to the Company or the failure
to comply with existing regulations; (viii) future health care or budget
legislation or other health
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reform initiatives; (ix) increased exposure to professional negligence
liability; (x) difficulties in successfully integrating recently acquired
businesses into the Company's operations and uncertainties related to the
future performance of such businesses; (xi) losses due to foreign currency
exchange rate fluctuations or deterioration of economic conditions in foreign
markets; and (xii) costs associated with Year 2000 compliance or problems
associated with the Company's or its suppliers' or payors failure to detect and
correct Year 2000 related systems failures; and (xiii) the risk factors
discussed from time to time in the Company's SEC reports, including but not
limited to, its Annual Report on Form 10-K for the year ended December 31,
1998. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to market risk from changes in interest rates
and foreign exchange rates.
The Company's primary interest rate risk relates to its variable rate
long term debt obligations. At December 31, 1998, the Company's total variable
rate long term debt obligations, including the current portion of those
obligations, was $16.659 million. A hypothetical 10% change in interest rates
applied to the December 31, 1998 outstanding balance of variable rate long term
debt obligations would not have a material impact on the Company's earnings or
cash flows over a one-year period. With the acquisition of Gainor Medical and
resultant increase in variable rate long term debt obligations, the Company's
interest rate risk will increase in future periods.
In the years 1998 and prior, the Company's business was confined to
the United States and, therefore, the Company did not have any exposure to
risks associated with fluctuations in foreign currency exchange rates. With the
acquisition of Gainor Medical, a significant portion of the Company's future
revenues may be designated in foreign currencies. In addition, the Company may
face currency exposure that arises from translating the results of its global
operations to the U.S. dollar at exchange rates that have fluctuated from the
beginning of the period. As a result, the Company's future earnings and cash
flows could be negatively impacted by fluctuations in foreign currency exchange
rates.
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:
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PAGE
Independent Auditors' Reports F-1
Consolidated Balance Sheets - December 31, 1998 and 1997 F-2
Consolidated Statements of Operations - Years Ended
December 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Shareholders' Equity - Years
Ended December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-7
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 1999 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, 1998, 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 Frederick P. Zuspan, M.D. and (ii) the purchase of Common Stock upon an
option exercise by Thornton A. Kuntz, Jr.
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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
Consolidated Balance Sheets - December 31, 1998 and 1997 F-2
Consolidated Statements of Operations - Years Ended
December 31, 1998, 1997 and 1996 F-3
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows - Years Ended
December 31, 1998, 1997 and 1996 F-5
Notes to Consolidated Financial Statements F-7
(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:
The following exhibits are incorporated by reference herein as part of
this Report as indicated:
EXHIBIT DESCRIPTION
NUMBER
2.1 Agreement and Plan of Merger, dated October 2, 1995, as
amended, between Healthdyne, Tokos and Registrant
(incorporated by reference to 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").
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2.2 Asset Purchase Agreement, dated July 21, 1998, for the
purchase of assets of Quality Diagnostic Services, Inc.
("QDS") (incorporated by reference to Exhibit 2 to the Matria
Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
2.3 Purchase and Sale Agreement, dated December 21, 1998, by
and between Matria and Gainor Medical Management, L.L.C.,
with exhibits (incorporated by reference to Exhibit 2.1 to
the Company's Form 8-K dated February 3, 1999 with those
portions omitted for confidentiality reasons filed separately
with the Commission).
3.1 Amended and Restated Certificate of Incorporation
(incorporated by reference to Appendix D to the Joint Proxy
Statement/Prospectus filed as part of the Company's Form
S-4).
3.2 Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Matria Annual Report on Form
10-K for the year ended December 31, 1995).
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
(incorporated by reference to Exhibit (4)(b) to the
Healthdyne Annual Report on Form 10-K for the year ended
December 31, 1986, Commission File No. 0-10647).
4.2 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
(incorporated by reference to Exhibit 4.3 to the Matria
Annual Report on Form 10-K for the year ended December 31,
1995).
4.3 Amendment No. 1 to Loan and Security Agreement, dated
April 27, 1998 between BankAmerica Business Credit, Inc. and
the Company (incorporated by reference to Exhibit 4.5 to the
Matria Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998).
4.4 Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of 4% Series
A Convertible Preferred Stock dated January 15, 1999
(incorporated by reference to Exhibit 4.1 to the Company's
Form 8-K dated February 3, 1999).
4.5 Certificate of Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of 8% Series
B Redeemable Preferred Stock dated January 15, 1999
(incorporated by reference to Exhibit 4.2 to the Company's
Form 8-K dated February 3, 1999).
4.6 Credit Agreement, dated January 19, 1999, among Matria,
certain other borrowers from time to time party thereto, the
banks and other financial institutions from time to time
party thereto, and First Union National Bank as
25
26
Administrative Agent (incorporated by reference to Exhibit
4.3 to the Company's Form 8-K dated February 3, 1999).
4.7 Loan and Security Agreement, dated September 15, 1997,
between BankAmerica Business Credit, Inc. and Matria
Healthcare, Inc. (incorporated by reference to Exhibit 4.4 to
the Matria Quarterly Report on Form 10-Q for the quarter
ended September 30, 1997).
10.1 Form of Rights Agreement between Registrant and SunTrust
Bank, Atlanta (incorporated by reference to Exhibit 10.1 to
the Company's Form S-4).
*10.2 1996 Stock Incentive Plan (incorporated by reference to
Appendix F-1 to the Joint Proxy Statement/Prospectus filed as
a part of the Company's Form S-4).
*10.3 1996 Directors' Non-Qualified Stock Option Plan
(incorporated by reference to Appendix F-11 to the Joint
Proxy Statement/Prospectus filed as a part of the Company's
Form S-4).
*10.4 1996 Employee Stock Purchase Plan (incorporated by
reference to Appendix F-111 to the Joint Proxy
Statement/Prospectus filed as a part of the Company's Form
S-4).
*10.5 Severance Compensation and Restrictive Covenant
Agreement, dated October 2, 1995, between Healthdyne and
Frank D. Powers (incorporated by reference to Exhibit 10.22
to the Company's Form S-4).
10.6 Form of Promissory Note with Tokos officers and related
Security Agreement (incorporated by reference to an Exhibit
to the Tokos Registration Statement on Form S-1 (Registration
No. 33-33340), Commission File No. 0-18320).
10.7 Agreement and Plan of Merger, dated June 24, 1996,
between National Reproductive Medical Centers, Inc. ("NRMC"),
Matria, NRMC Acquisition Corporation and certain NRMC
shareholders (incorporated by reference to Exhibit 2.1 to the
Matria Current Report on Form 8-K dated July 10, 1996).
10.8 Shareholders Agreement, dated February 28, 1995, among
Healthdyne, Inc. (a predecessor of Matria), certain
shareholders of National Reproductive Medical Centers, Inc.
("NRMC") and NRMC (incorporated by reference to Exhibit 99.3
to the Matria Current Report on Form 8-K dated July 10,
1996).
10.9 Letters, dated November 10 and November 17, 1997, between the
Company, 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.
(incorporated by reference to Exhibit 10.32 to the Matria
Annual Report on Form 10-K for the year ended December 31,
1997).
10.10 Settlement Agreement, dated March 3, 1998 between the
Company and Adeza Biomedical Corporation (incorporated by
reference to Exhibit 10.33 to the Matria
26
27
Annual Report on Form 10-K for the year ended December 31,
1997 with those portions omitted for confidentiality reasons
filed separately with the Commission).
10.11 Amendment to Rights Agreement effective December 21,
1998 (incorporated by reference to Exhibit 99 to the
Company's Form 8-K dated February 3, 1999).
The following exhibits are filed as part of this Report:
3.3 Bylaws, as amended.
*10.12 Split-Dollar Life Insurance Agreement between the Company and
Parker H. Petit, effective January 1, 1997.
*10.13 Split-Dollar Life Insurance Agreement between the Company and
Donald R. Millard, effective January 1, 1997.
*10.14 Split-Dollar Life Insurance Agreement between the Company and
Frank D. Powers, effective January 1, 1997.
*10.15 Split-Dollar Life Insurance Agreement between the Company and
Thornton A. Kuntz, Jr., effective January 8, 1998.
*10.16 Split-Dollar Life Insurance Agreement between the Company and
Roberta L. McCaw, effective January 8, 1998.
*10.17 Split-Dollar Life Insurance Agreement between the Company and
Yvonne V. Scoggins, effective January 8, 1998.
*10.18 Management Agreement between the Company and Lucor
Holdings, LLC, Mark J. Gainor and J. Michael Highland, dated
January 19, 1999.
10.19 Standstill Agreement between the Company and Mark J.
Gainor and SZ Investments, L.L.C., dated January 19, 1999.
21.0 List of Subsidiaries.
23.0 Accountants' Consents.
27.0 Financial Data Schedule. (For SEC use only)
(b) Reports on Form 8-K.
The Company filed two Current Reports on Form 8-K as
follows: (1) reporting the pending purchase of Gainor Medical
Management, L.L.C. ("Gainor") filed on December 23, 1998; and
(2) reporting the consummation of the purchase of Gainor
filed on February 3, 1999.
*Management contract or compensatory plan or arrangement
27
28
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MATRIA HEALTHCARE, INC.
March 26, 1999 By: /s/ Donald R. Millard
---------------------------------------
Donald R. Millard, Director, President,
Chief Executive Officer and Chief
Financial Officer (Principal Executive
and 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, 1999
- ----------------------------------
Parker H. Petit Director
/s/ Donald R. Millard Director, President March 26, 1999
- ---------------------------------- Chief Executive Officer
Donald R. Millard and Chief Financial
Officer (Principal
Executive and Financial
Officer)
/s/ Frank D. Powers Director, Executive March 26, 1999
- ---------------------------------- Vice President and
Frank D. Powers Chief Operating Officer
28
29
/s/ Rod E. Dammeyer Director March 29, 1999
- ----------------------------------
Rod E. Dammeyer
/s/ Mark J. Gainor Director March 29, 1999
- ----------------------------------
Mark J. Gainor
/s/ Carl E. Sanders Director March 26, 1999
- ----------------------------------
Carl E. Sanders
/s/ Jackie M. Ward Director March 26, 1999
- ----------------------------------
Jackie M. Ward
/s/ Morris S. Weeden Director March 26, 1999
- ----------------------------------
Morris S. Weeden
/s/ Frederick P. Zuspan Director March 26, 1999
- ----------------------------------
Frederick P. Zuspan, M.D.
29
30
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, 1996
Allowance for doubtful accounts $20,296 8,3001(1) 7,591 9,989 26,198
December 31, 1997
Allowance for doubtful accounts 26,198 -- 6,599 10,146 22,651
December 31, 1998
Allowance for doubtful accounts 22,651 2,8361 6,662 10,914 21,235
December 31, 1996
Reserves for patient service
equipment and supplies 2,030 -- -- 2,030 --
December 31, 1996
Reserves for patient monitoring devices 2,200 -- -- 2,200 --
- ---------------------------------
(1) Represents beginning balances in allowance for doubtful accounts of
acquired companies.
30
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Matria Healthcare, Inc.:
We have audited the accompanying consolidated balance sheets of Matria
Healthcare, Inc. and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1998.
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.
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 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, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
KPMG LLP
Atlanta, Georgia
February 19, 1999
F-1
32
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
DECEMBER 31,
---------------------
1998 1997
-------- -------
ASSETS
Current assets:
Cash and cash equivalents $ 9,109 9,086
Short-term investments 2,859 11,856
Trade accounts receivable, less allowances of $21,235 and
$22,651 at December 31, 1998 and 1997, respectively 37,311 39,601
Inventories 1,699 1,088
Prepaid expenses 1,642 1,566
Note receivable (note 16) 1,335 --
Other current assets 1,579 698
-------- -------
Total current assets 55,534 63,895
Property and equipment, net (note 4) 16,865 12,364
Intangible assets, less accumulated amortization of $612
and $68,630 at December 31, 1998 and 1997, respectively
(notes 2 and 3) 16,261 112,149
Cash surrender value of life insurance (note 9) 4,425 1,800
Other assets (note 2) 3,949 924
-------- -------
$ 97,034 191,132
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and obligations
under capital leases (notes 5 and 12) $ 718 884
Accounts payable, principally trade 8,939 5,712
Accrued liabilities (notes 2 and 6) 9,536 16,147
-------- -------
Total current liabilities 19,193 22,743
Long-term debt and obligations under capital leases, excluding
current installments (notes 5, 10, and 12) 18,385 1,712
Accrued benefit costs (note 9) 4,705 5,328
Other long-term liabilities 4,870 8,180
-------- -------
Total liabilities
47,153 37,963
-------- -------
Shareholders' equity (note 8):
Preferred stock, $.01 par value. Authorized 50,000
shares; none issued -- --
Common stock, $.01 par value. Authorized 100,000
shares; issued and outstanding 36,410 and 36,791 shares
at December 31, 1998 and 1997, respectively 364 368
Additional paid-in capital 280,585 282,327
Accumulated deficit (227,533) (125,991)
Notes receivable and accrued interest from shareholder (3,535) (3,535)
-------- -------
Total shareholders' equity 49,881 153,169
Commitments and contingencies (notes 9, 12, and 13)
-------- --------
$ 97,034 191,132
======== ========
See accompanying notes to consolidated financial statements.
F-2
33
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
---------- ------- -------
Revenues $ 135,215 144,533 130,806
Cost of revenues 53,385 57,610 55,911
Selling and administrative expenses 63,028 65,020 66,775
Provision for doubtful accounts 6,662 6,599 7,591
Amortization of intangible assets 28,155 36,604 30,083
Asset impairment charges (note 3) 82,885 -- --
Acquired in-process research and development (note 2) 2,482 -- --
Restructuring expenses (note 11) -- -- 22,525
---------- ------- -------
Operating loss (101,382) (21,300) (52,079)
Interest income 475 794 1,177
Interest expense (1,083) (311) (353)
Other income (expense), net 448 (85) 134
---------- ------- -------
Loss before income taxes (101,542) (20,902) (51,121)
Income taxes (note 7) -- -- --
---------- ------- -------
Net loss $ (101,542) (20,902) (51,121)
========== ======= =======
Basic and diluted net loss per common share $ (2.78) (0.57) (1.58)
========== ======= =======
Weighted average shares outstanding 36,580 36,527 32,328
========== ======= =======
See accompanying notes to consolidated financial statements.
F-3
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 SHAREHOLDER SHARES AMOUNT EQUITY
------ ------ --------- ----------- ------------ ------ ------ -----------
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
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 shareholder 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 debentures 3 -- 15 -- -- -- -- 15
Purchase and cancellation of treasury stock (156) (1) (931) -- -- -- -- (932)
Accrued interest on shareholder notes -- -- -- -- (121) -- -- (121)
Net loss -- -- -- (20,902) -- -- -- (20,902)
------ ----- ------- -------- ------ ---- ----- --------
Balance, December 31, 1997 36,791 368 282,327 (125,991) (3,535) -- -- 153,169
Issuance of common stock:
Exercise of options 121 1 272 -- -- -- -- 273
Employee Stock Purchase Plan 121 1 364 -- -- -- -- 365
Conversion of subordinated debentures 3 -- 13 -- -- -- -- 13
Purchase and cancellation of treasury stock (626) (6) (2,391) -- -- -- -- (2,397)
Net loss -- -- -- (101,542) -- -- -- (101,542)
------ ----- ------- -------- ------ ---- ----- --------
Balance, December 31, 1998 36,410 $ 364 280,585 (227,533) (3,535) -- $ -- 49,881
====== ===== ======= ======== ====== ==== ===== ========
See accompanying notes to consolidated financial statements.
F-4
35
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- ------- -------
Cash flows from operating activities:
Net loss $(101,542) (20,902) (51,121)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Asset impairment 82,885 -- --
Acquired in-process research and development 2,482 -- --
Depreciation and amortization 33,345 41,944 34,263
Provision for doubtful accounts 6,662 6,599 7,591
Other, net 146 218 1,500
(Increase) decrease in:
Trade accounts receivable (7,230) (16,770) (8,598)
Inventories (611) (221) 1,230
Prepaid expenses and other current assets (957) (547) 3,582
Other assets (2,398) 14 1,469
Increase (decrease) in:
Accounts payable 3,227 (774) 2,388
Accrued and other liabilities (11,078) (8,894) (3,127)
------- ------- -------
Net cash provided by (used in)
operating activities 4,931 667 (10,823)
------- ------- -------
Cash flows from investing activities:
Short-term investments 8,997 5,854 15,656
Acquisition of businesses, net of cash acquired (17,370) (249) (3,981)
Investment in affiliated companies (4,587) -- --
Purchases of property and equipment (5,942) (2,529) (3,868)
Proceeds from disposal of property and equipment -- 14 4,261
------- ------- -------
Net cash (used in) provided by
investing activities (18,902) 3,090 12,068
------- ------- -------
(Continued)
F-5
36
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
YEARS ENDED DECEMBER 31,
-------------------------------
1998 1997 1996
--------- ------- -------
Cash flows from financing activities:
Borrowings under credit agreement, net $ 16,659 -- --
Proceeds from issuance of debt 781 -- 1,542
Principal repayments of debt and obligations
under capital leases (1,627) (2,369) (4,501)
Proceeds from issuance of common stock 638 1,931 4,519
Purchase of treasury stock (2,397) (932) (420)
Other, net (60) (231) 123
-------- ------- -------
Net cash provided by (used in)
financing activities 13,994 (1,601) 1,263
-------- ------- -------
Net increase in cash and cash equivalents 23 2,156 2,508
Cash and cash equivalents at beginning of year 9,086 6,930 4,422
-------- ------- -------
Cash and cash equivalents at end of year $ 9,109 9,086 6,930
======== ======= =======
Supplemental disclosures of cash paid for:
Interest $ 1,161 311 382
======== ======= =======
Income taxes $ 10 -- --
======== ======= =======
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 $ 707 -- 292
======== ======= =======
See accompanying notes to consolidated financial statements.
F-6
37
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
(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. During 1998, Matria established
itself as a diversified provider of disease management. The
Company expanded its existing diabetes-in-pregnancy program to
include the general diabetes population. In July 1998, the Company
acquired Quality Diagnostic Services, Inc. ("QDS") and entered the
cardiovascular disease management market. In October 1998, the
Company entered the respiratory disease management market by
signing a licensing agreement with National Jewish Medical
Research Center ("National Jewish") that gives Matria exclusive
rights to market the comprehensive asthma and chronic obstructive
pulmonary disease ("COPD") management programs developed by
National Jewish.
(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 contractual allowances and related
discounts. A significant portion of the Company's revenues are
billed to third-party reimbursement sources. Accordingly, the
ultimate collectibility of a substantial portion of the Company's
trade accounts receivable is susceptible to changes in third-party
reimbursement policies.
A provision for doubtful accounts is made for revenues estimated
to be uncollectible and is adjusted periodically based upon the
Company's evaluation of current industry conditions, historical
collection experience, and other relevant factors which, in the
opinion of management, deserve recognition in estimating the
allowance for uncollectible accounts.
(Continued)
F-7
38
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
(D) CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of accounts
receivable from third-party payors. The collectibility of accounts
receivable from third-party payors is directly affected by
conditions and changes in the insurance industry and governmental
programs, which are taken into account by the Company in computing
and evaluating its allowance for uncollectible accounts.
(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 $51, $67, and $(131) are
included in the consolidated statements of operations for the
years ended December 31, 1998, 1997, and 1996, respectively.
(G) INVENTORIES
Inventories, which consist primarily of drugs and patient
supplies, 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.
(I) INTANGIBLE ASSETS
A summary of intangible assets follows:
DECEMBER 31,
--------------------
1998 1997
-------- --------
Goodwill $ 11,150 172,239
Other intangible assets 5,723 8,540
-------- -------
16,873 180,779
Less accumulated amortization 612 68,630
-------- -------
Total $ 16,261 112,149
======== =======
(Continued)
F-8
39
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
Intangible assets consist of goodwill and other intangible assets.
Goodwill is being amortized using the straight-line method over
periods ranging from 5 to 15 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 (see note 3).
Other intangible assets consist of customer lists, trade names,
work force, purchased software, and covenants not to compete.
These costs are being amortized on a straight-line basis over
periods ranging from 4 to 15 years.
(J) LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the
provisions of Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of. 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 (see note 3).
Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(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 as if the fair-value based method defined in SFAS
123 had been applied. The Company has elected to continue to apply
the provisions of APB Opinion No. 25 and provide the pro forma
disclosures required by SFAS 123 (see note 8).
(L) INCOME TAXES
The Company accounts for income taxes using an asset and liability
approach. Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted
statutory tax rates applicable to future years to differences
between the financial statement carrying amounts and the tax bases
of existing assets and liabilities and net operating loss and
credit carryforwards. Additionally, the effect on deferred taxes
of a change in tax rates is recognized in earnings in the period
that includes the enactment date.
(Continued)
F-9
40
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
Investment and research and experimental tax credits are accounted
for by the flow-through method.
(M) 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, determined using the
treasury stock method. 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.
(N) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income. SFAS 130 established standards for reporting and display
of comprehensive income and its components. Comprehensive income
generally includes all changes in equity during a period except
those resulting from investments by owners and distribution to
owners. There was no impact on the Company's consolidated
financial statements with the adoption of SFAS 130 as the Company
has no elements of comprehensive income other than net income
(loss).
(O) SEGMENT REPORTING
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131 ("SFAS 131"), Disclosures About
Segments of an Enterprise and Related Information. SFAS 131
established standards for reporting information about operating
segments in annual financial statements and in interim financial
reports to shareholders (see note 15).
(P) RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 consolidated financial
statements have been reclassified to conform to presentations
adopted in 1998.
(2) ACQUISITIONS
On July 21, 1998, Matria purchased certain assets of Quality Diagnostic
Services, Inc. ("QDS"), a cardiac event monitoring company, a Georgia
corporation and wholly owned subsidiary of Endeavor Technologies, Inc.,
subsequently named WebMD, for $17,000 in cash with potential additional
payments contingent on QDS's revenues reaching certain levels in 1999.
The assets purchased include intellectual property, accounts receivable,
and contract rights. The acquisition was accounted for in accordance with
the purchase method of accounting with the results of operations of the
business acquired included in the consolidated financial statements from
the effective date of the acquisition, July 1, 1998. The acquisition
resulted in acquired in-process research and development of $2,482;
(Continued)
F-10
41
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
intangibles of $3,846, including customer lists, noncompete agreements,
trade names, and work force; and goodwill of $8,029, which is being
amortized over 15 years. Any additional payments made will be accounted
for as additional goodwill and amortized over the remaining life of the
assets. In connection with the acquisition, the Company made a $2,010
preferred stock investment in WebMD.
Unaudited pro forma results of operations for the years ended December
31, 1998 and 1997 as if QDS had been acquired January 1, 1997 follows:
1998 1997
-------- -------
Revenues $140,433 151,624
Net loss (102,792) (23,731)
Net loss per share (2.81) (.65)
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 in the consolidated financial statements 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 which was being amortized over five
years. In the third quarter of 1998, based on operating and specific
market indicators, the Company determined that future undiscounted cash
flows were below the carrying value of the goodwill and intangible assets
related to the Merger and recorded a $74,496 asset impairment charge (see
note 3).
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 $1,036 remained at December 31, 1998 and is included in accrued
liabilities.
In February 1995, Healthdyne converted a $250 note receivable from
National Reproductive Medical Center, Inc. ("NRMC"), a California
fertility clinic, into an 11% equity ownership in NRMC. In June 1996, the
Company exercised an option to acquire the remaining ownership interest
in NRMC. This acquisition was accounted for using the purchase method of
accounting with the results of operations of the business acquired
included in the consolidated financial statements from the effective date
of the acquisition. The acquisition resulted in excess of cost over net
assets acquired of approximately $15,053. In the fourth quarter of 1998,
the Company determined that estimated future undiscounted cash flows were
below the carrying value of its long-lived assets and recorded an $8,389
asset impairment charge (see note 3).
(Continued)
F-11
42
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
The following is a summary of assets acquired, liabilities assumed, and
consideration paid in connection with these acquisitions:
QDS HEALTHDYNE NRMC
-------- ------------ --------
Fair value of assets acquired, including goodwill $ 17,370 221,435 17,970
Cash paid for the assets acquired, net of cash acquired (17,000) -- (5,447)
Common stock issued for the assets acquired -- (182,996) (7,121)
Acquisition costs paid (370) (3,700) (250)
-------- -------- -------
Liabilities assumed $ -- 34,739 5,152
======== ======== =======
(3) ASSET IMPAIRMENT CHARGES
The Company recorded a $74,496 asset impairment charge to write down
goodwill and intangible assets relating to the 1996 merger of Tokos
Medical Corporation and Healthdyne, Inc. in the third quarter of 1998.
Due to a decrease in pre-term labor management services in 1997, the
Company experienced a decline in pre-term labor management revenues. As
part of its 1997 Business Assessment Plan, the Company assessed the
future of this business and expected revenue growth and profits to
improve in 1998 and future years. However, in 1998, revenues continued to
decline due to negative market forces which impacted the business. In
addition, in 1998, the Company revised its strategic plan to expand
beyond maternity management. As a result, in the third quarter of 1998,
the Company determined that Healthdyne Inc.'s estimated future
undiscounted cash flows were below the carrying value of its long-lived
assets and related goodwill. Accordingly, the Company adjusted the
carrying value of Healthdyne Inc.'s long-lived assets and goodwill to
their estimated fair value. The estimated fair value was based on
anticipated net cash flows discounted at a rate commensurate with the
risk involved. The operations of Tokos Medical Corporation and
Healthdyne, Inc. are included in the Women's Health operating segment
(see note 15).
As a result of NRMC's inability to achieve improvements specified in the
1997 Business Assessment Plan, as well as continued operational issues,
including the termination of the founding physician in July 1998, NRMC's
net revenue declined approximately 17% in 1998, and an operating loss was
incurred. As a result, in the fourth quarter of 1998, the Company
determined that NRMC's estimated future cash flows were below the
carrying value of its long-lived assets and related goodwill.
Accordingly, the Company adjusted the carrying value of NRMC's long-lived
assets and goodwill, to their estimated fair value by recording an $8,389
asset impairment charge. The estimated fair value was based on
anticipated net cash flows discounted at a rate commensurate with the
risk involved. The operations of NRMC are included in Other Segments (see
note 15).
(Continued)
F-12
43
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
(4) PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows:
DECEMBER 31,
--------------------
1998 1997
-------- --------
Medical equipment $ 25,923 19,608
Machinery, equipment, and fixtures 18,488 13,668
Leasehold improvements 2,692 2,416
-------- -------
47,103 35,692
Less accumulated depreciation and amortization 30,238 23,328
-------- -------
$ 16,865 12,364
======== =======
(5) LONG-TERM DEBT
Long-term debt is summarized as follows:
DECEMBER 31,
----------------
1998 1997
------ ------
Secured revolving line of credit, interest at the LIBOR rate
plus 2.75%; outstanding principal balance plus all accrued
but unpaid interest, payable September 2000 (see below) $16,659 --
Convertible subordinated debentures (net of discount of $60
and $88 at December 31, 1998 and 1997, 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 1,249 1,234
Unsecured, noninterest-bearing obligations incurred in
connection with buyout of physician-owned companies;
payable at various dates through June 1999 111 456
Capital lease obligations; interest ranging from 3% to 20%
with various monthly payments and maturing at various
dates through October 2001 998 718
Note payable to equipment financing company; interest
at 10% per annum, paid off in 1998 -- 99
Other debt; interest at rates ranging from approximately 6% to
10%; payable in monthly installments through January 1999 86 89
------- -----
Total long-term debt 19,103 2,596
Less current installments 718 884
------- -----
Long-term debt, excluding current installments $18,385 1,712
======= =====
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% (8.25% at
December 31, 1998). There were $16,659 in borrowings outstanding under
this agreement at December 31, 1998. This agreement was terminated in
January 1999 (see note 16).
(Continued)
F-13
44
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
Approximate aggregate minimum annual payments due on long-term debt for
the five years subsequent to December 31, 1998 are as follows:
1999 $ 718
2000 16,903
2001 1,457
2002 21
2003 4
-------
$19,103
=======
(6) ACCRUED LIABILITIES
Accrued liabilities are summarized as follows:
DECEMBER 31,
------------------
1998 1997
------- ------
Accrued salaries, wages, and incentives $ 1,750 6,806
Accrued severance 1,036 2,602
Accrued restructuring costs 500 559
Deferred revenue 4,374 3,561
Other 1,876 2,619
------- ------
$ 9,536 16,147
======= ======
(7) INCOME TAXES
The provision for income taxes includes income taxes currently payable
and those deferred because of temporary differences between the financial
statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future and any increase or decrease
in the valuation allowance for deferred income tax assets.
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
taxes:
YEARS ENDED DECEMBER 31,
--------------------------------------------
1998 1997 1996
------------- ----------- ------------
Computed expected income tax benefit $ (35,540) (7,316) (17,892)
(Increase) decrease resulting from:
Losses in excess of allowable carrybacks 796 132 7,529
Nontaxable municipal interest income (83) (244) (385)
Nondeductible expenses 39,563 7,428 10,748
Reduction in valuation allowance (4,624) -- --
Other, net (112) -- --
---------- -------- ----------
$ -- -- --
========== ======== ==========
(Continued)
F-14
45
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
At December 31, 1998, 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
---------- ---------- ----------
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
2018 -- 3,228
------ ------
$ 531 90,615
====== ======
The net operating loss carryforward of $90,615 includes deductions of
approximately $19,276 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 $1,392 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 $78,974.
At December 31, 1998 and 1997, the Company had deferred tax assets of
approximately $45,339 and $49,963, 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 $4,624 during 1998 was equal to
the decrease in the deferred tax asset.
(Continued)
F-15
46
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
At December 31, 1998 and 1997, deferred income taxes consist of future
tax benefits attributable to:
1998 1997
------- -------
Deferred income tax assets:
Allowance for doubtful accounts $ 1,062 1,894
Accruals and reserves not deducted for tax purposes 3,167 6,490
Depreciation and amortization 6,943 8,246
Net operating loss carryforwards 31,715 30,618
Credit carryforwards 1,923 2,197
Contribution carryforward 445 518
Other 84 --
------- -------
Total 45,339 49,963
Less valuation allowance (45,339) (49,963)
------- -------
Net deferred income tax asset $ -- --
======= =======
(8) 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.
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 and expire
after ten 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 under the fair value method of that statement. For purposes of
pro forma disclosure, the estimated fair
(Continued)
F-16
47
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
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:
1998 1997 1996
---------- ------- --------
Net loss $ (102,479) (22,530) (52,279)
========== ======= =======
Loss per share $ (2.80) (.62) (1.62)
========== ======= =======
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 was not fully reflected until 1998.
The weighted average fair value of the individual options granted during
1998, 1997, and 1996 is estimated at $2.48, $3.22, and $3.03,
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.
1998 1997 1996
-------- -------- --------
Dividend yield None None None
Volatility 50% 46% 40%
Risk-free interest rate 5.15% 6.25% 6.25%
Expected life 5 Years 5 Years 5 Years
A summary of stock option transactions under these plans is shown below:
1998 1997 1996
------------------------ ------------------------- --------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- ---------- ---------
Outstanding at beginning of year 2,905,383 $ 6.23 3,088,501 $ 6.00 2,032,429 $5.97
Assumed from Healthdyne
option plans -- -- -- -- 1,108,888 3.34
Granted 931,518 5.01 974,150 6.51 919,920 8.14
Exercised (121,472) 2.25 (500,261) 2.95 (838,881) 4.47
Canceled (490,309) 6.71 (657,007) 8.03 (133,855) 7.57
--------- -------- --------- ------ ---------- -----
Outstanding at end of year 3,225,120 $ 5.91 2,905,383 $ 6.23 3,088,501 $6.00
========= ======== ========= ====== ========== =====
Exercisable at year-end 1,985,068 $ 5.99 1,638,263 $ 5.61 2,262,627 $5.18
========== ======== ========= ====== ========== =====
(Continued)
F-17
48
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1998:
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-$5.00 554,430 4.24 $ 3.27 434,095 $ 3.18
$5.00-$10.00 2,659,803 7.66 6.41 1,540,086 6.71
$10.00-$20.00 7,587 1.19 11.46 7,587 11.46
$20.00-$30.00 3,300 3.66 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 1998, 1997, and 1996, respectively, 120,532, 110,967, and 33,357
shares of common stock were issued under the Purchase Plan. Compensation
cost related to this plan determined under SFAS 123 was insignificant to
the Company's consolidated statements of operations for the three years
ended December 31, 1998.
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.
(Continued)
F-18
49
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
(9) EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) defined contribution plan for the benefit
of its employees. The Company's obligation for contributions under the
401(k) plan is limited to each participant's contribution but not more
than 3% of the participant's compensation. Discretionary Company
contributions are allowed under the plan. Contributions to the plan for
the years ended December 31, 1998, 1997, and 1996 were approximately
$814, $607, and $652, 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
this 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 participants who chose the
lump-sum payout were paid approximately $1,328 on January 2, 1998.
During 1998, the Company entered into split-dollar life insurance
contracts with additional members of senior management. These contracts
operate in the same manner as the contracts entered into in 1997.
On the earlier date that occurs of: (i) the date the employee reaches age
65; (ii) the date of the employee's death; or (iii) the date of
termination of the employee prior to the completion of ten years of
service, the Company has the right to be repaid an amount, up to the
amount of premiums paid, by which the cash surrender value of the policy
exceeds the employee's vested life insurance plan benefit.
During 1998 and 1997, the Company paid $2,640 and $1,928, respectively,
in insurance premiums. At December 31, 1998 and 1997, respectively, the
cash value of life insurance policies was $4,425 and $1,800 and the
related liability was $4,705 and $4,000. Insurance premium expense was
$521 and $320 in 1998 and 1997, respectively.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses financial instruments in the normal course of business.
The carrying values of cash equivalents, short-term investments, accounts
receivable, accounts payable, and accrued liabilities approximate fair
value due to the short-term maturities of these assets and liabilities.
The Company estimates that the carrying amounts 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.
(11) 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
(Continued)
F-19
50
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
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. Remaining accrued restructuring
charges are $500 at December 31, 1998, which 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
========
(12) 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, 1998 are as follows:
OPERATING CAPITAL
YEARS ENDING DECEMBER 31, LEASES LEASES
-------------------------- ---------- ----------
1999 $ 6,563 601
2000 4,814 293
2001 4,152 232
2002 3,514 15
2003 956 4
2004 and thereafter 948 --
--------- ------
$ 20,947 1,145
=========
Less interest (147)
------
Present value of future minimum
capital lease payments $ 998
======
Amortization of leased assets is included in depreciation expense.
Rental expense for cancelable and noncancelable leases was approximately
$6,500, $6,100, and $5,200 for the years ended December 31, 1998, 1997,
and 1996, respectively.
(13) 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.
(Continued)
F-20
51
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
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
continued to distribute fFN during a transition period which ended on
August 31, 1998.
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, Home Nutritional Services, Inc. ("HNS"), and alleged 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
were 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. On December 30, 1998, the Company agreed to settle
the suit for a nominal amount.
(14) QUARTERLY FINANCIAL INFORMATION - UNAUDITED
Presented below is a summary of the unaudited consolidated quarterly
financial information for the years ended December 31, 1998 and 1997.
QUARTER
--------------------------------------------------------------
FOURTH THIRD SECOND FIRST
----------- --------- ---------- ----------
1998:
Revenues $ 34,817 34,107 33,473 32,818
Net loss (6,443) (84,156) (5,295) (5,648)
Net loss per common share (.18) (2.31) (.14) (.15)
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)
(15) BUSINESS SEGMENT INFORMATION
The Company's reportable business segments are the strategic business
units that offer different products and services. They are managed
separately, and the Company evaluates performance based on operating
earnings of the respective business unit.
The Company's operations have been classified into two reportable
business segments, Women's Health and Cardiovascular. The Women's Health
segment offers services designed to assist physicians and payors in the
cost effective management of maternity patients including: specialized
home nursing; risk assessment; patient education and management; home
uterine contraction monitoring; infusion therapy; gestational diabetes
management; and other monitoring and clinical services as prescribed by
(Continued)
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52
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
the patient's physician. The Cardiovascular segment provides cardiac
event monitoring, holter event monitoring and pace maker follow-up
services. The Other Segments include three business segments that are
below the quantitative threshold for disclosure: respiratory disease
management; infertility services; and clinical record software and
services.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. There are no
intersegment sales and operating earnings (loss) by business segment
excludes interest income, interest expense, and corporate expenses.
Summarized financial information by business segment follows:
REVENUES OPERATING EARNINGS (LOSS)
-------------------------------- ----------------------------------
1998 1997 1996 1998 1997 1996
---------- --------- --------- ---------- --------- ---------
Women's Health $ 115,147 128,489 122,261 (8,584) (12,924) (23,367)
Cardiovascular 6,644 -- -- (1,136) -- --
Other Segments 13,424 16,044 8,545 (4,917) (3,871) (2,540)
---------- --------- --------- ---------- -------- ---------
Total segments 135,215 144,533 130,806 (14,637) (16,795) (25,907)
General corporate -- -- -- (3,860) (4,505) (3,647)
Asset impairment charges (note 3) -- -- -- (82,885) -- --
Restructuring expenses -- -- -- -- -- (22,525)
Interest income (expense), net -- -- -- (608) 483 824
Other income (expense), net -- -- -- 448 (85) 134
---------- --------- --------- --------- -------- ---------
Consolidated revenues and
loss before income taxes $ 135,215 144,533 130,806 (101,542) (20,902) (51,121)
========== ========= ========= ========= ======== =========
IDENTIFIABLE ASSETS DEPRECIATION AND AMORTIZATION
-------------------------------- --------------------------------
1998 1997 1996 1998 1997 1996
---------- --------- --------- --------- ------ --------
Women's Health $ 57,011 150,627 176,464 29,150 38,151 32,110
Cardiovascular 14,383 -- -- 1,054 -- --
Other Segments 6,582 17,084 18,725 3,041 3,664 2,005
General corporate 19,058 23,421 27,999 100 129 148
---------- --------- --------- --------- ------- --------
Consolidated assets, deprecia-
tion, and amortization $ 97,034 191,132 223,188 33,345 41,944 34,263
========== ========= ========= ========= ======== ========
CAPITAL EXPENDITURES
--------------------------------
1998 1997 1996
---------- ------- --------
Women's Health $ 2,828 1,460 1,743
Cardiovascular 1,912 -- --
Other Segments 406 298 1,779
General corporate 796 771 346
---------- ------- --------
Consolidated capital expenditures $ 5,942 2,529 3,868
========= ======= ========
The Company's revenues from outside the United States were less than 1%
of total revenues. No single customer accounted for 10% of consolidated
net revenue in 1998, 1997, or 1996.
(Continued)
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53
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1998, 1997, and 1996
(16) SUBSEQUENT EVENTS
Effective January 1, 1999, the Company completed an acquisition of
substantially all of the assets of Gainor Medical Management, L.L.C.
("Gainor Medical"), for a purchase price of approximately $130 million.
The acquisition will be accounted for under the purchase method of
accounting and will result in goodwill of approximately $137 million. The
acquisition agreement also provides for additional contingent purchase
price of up to $35 million based on 1999 financial performance. The
assets acquired included the outstanding capital stock of and membership
interests and other equity interests in the subsidiaries of Gainor
Medical.
At the closing of the transaction, the Company paid $83.8 million of the
purchase price in cash, assumed approximately $1.2 million in debt and
issued $45 million in redeemable preferred stock and warrants of the
Company. The transaction also included a cash adjustment payable by the
Company of approximately $6.6 million, one-half of which was paid at the
closing and the remaining one-half of which is payable on April 1, 1999.
If earned, the contingent purchase price is payable by the issuance of
subordinated notes in the year 2000.
The cash portion of the purchase price was financed partially through a
$125 million five-year bank credit facility, which the Company entered
into in January 1999. The credit facility consists of an $80 million term
loan facility and a $45 million revolving credit facility. Borrowings
under this agreement bear interest at the LIBOR rate plus 1.5% to 2.5%.
In January 1998, the Company converted a $250 note receivable from
Diabetes Management Systems, Inc. ("DMS") and paid $500 cash to acquire a
10% equity interest in DMS. During 1998, the Company made advances to
fund the working capital of DMS totaling $1,335. In January 1999, the
Company converted the notes receivable for these advances and paid cash
of $6,500 to acquire the remaining equity interests of DMS. The
acquisition will be accounted for using the purchase method of
accounting. Results of operations of this business will be included in
the Company's consolidated results of operations effective January 1,
1999. DMS had revenues of $9,900 and operating losses of $969 in the
12-month period ended December 31, 1998 (unaudited). Included in DMS 1998
revenues were $1,700 of sales to the Company.
The following unaudited pro forma consolidated results of operations are
presented as if the Gainor Medical acquisition had been made at the
beginning of the periods presented. The effect of the DMS acquisition is
not significant and, accordingly, has been excluded from the pro forma
presentation:
1998 1997
----------- --------
Revenues $ 213,615 185,413
Net loss (107,255) (32,871)
Net loss available to common shareholders (110,455) (36,071)
Net loss per common share (3.02) (0.99)
The pro forma consolidated results of operations include adjustments to
give effect to amortization of goodwill and interest expense on
acquisition debt, together with related income tax effects. The unaudited
pro forma amounts are not necessarily indicative of the results of
operations that would have occurred had the purchase been made at the
beginning of the periods presented or the future results of the combined
operations.
F-23