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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002
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 (I.R.S. Employer
incorporation or organization) Identification No.)
1850 Parkway Place
Marietta, Georgia 30067
(Address of principal executive offices)
(Zip Code)
(770) 767-4500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
The number of shares outstanding of the issuer's only class of common
stock, $.01 par value, together with associated common stock purchase rights, as
of August 1, 2002 was 9,141,207.
MATRIA HEALTHCARE, INC.
QUARTERLY REPORT ON FORM 10-Q
JUNE 30, 2002
TABLE OF CONTENTS
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements.........................................3
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................19
Item 3. Quantitative and Qualitative Disclosures About Market Risk..26
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................27
SIGNATURES ...................................................................28
Part I--Financial Information
Item 1. Financial Statements
Matria Healthcare, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Amounts in thousands, except per share amounts)
(Unaudited)
June 30, December 31,
ASSETS 2002 2001
--------- ------------
Current assets:
Cash and cash equivalents ..................................... $ 2,526 1,983
Short-term investments ........................................ 92 116
Trade accounts receivable, less allowances of $7,120 and
$7,025 at June 30, 2002 and December 31, 2001, respectively 52,211 52,054
Inventories ................................................... 20,677 21,306
Prepaid expenses and other current assets ..................... 17,654 14,040
------- -------
Total current assets ....................................... 93,160 89,499
Property and equipment, less accumulated depreciation of $29,889 and
$26,518 at June 30, 2002 and December 31, 2001, respectively .... 25,109 18,722
Intangible assets, less accumulated amortization of $29,717 and
$29,211 at June 30, 2002 and December 31, 2001, respectively .... 112,777 109,634
Deferred income taxes .............................................. 25,402 24,715
Other assets ....................................................... 19,804 18,053
------- -------
$276,252 260,623
======= =======
See accompanying notes to consolidated condensed financial statements.
Matria Healthcare, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Amounts in thousands, except per share amounts)
(Unaudited)
June 30, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001
----------------- -----------------
Current liabilities:
Current installments of long-term debt.......................... $ 1,549 615
Accounts payable, principally trade ............................ 24,620 22,651
Accrued liabilities ............................................ 9,956 9,619
------ ------
Total current liabilities ................................... 36,125 32,885
Long-term debt, excluding current installments ...................... 117,224 114,575
Other long-term liabilities ......................................... 8,191 8,266
------- -------
Total liabilities ........................................... 161,540 155,726
------- -------
Common shareholders' equity:
Common stock, $.01 par value. Authorized 25,000 shares:
issued and outstanding -- 9,190 and 8,927 shares
at June 30, 2002 and December 31, 2001, respectively......... 92 89
Additional paid-in capital ..................................... 294,929 290,070
Accumulated deficit ............................................ (180,138) (181,035)
Accumulated other comprehensive loss ........................... (171) (692)
Notes receivable and accrued interest from shareholder ......... -- (3,535)
-------- -------
Total common shareholders' equity ......................... 114,712 104,897
-------- -------
$ 276,252 260,623
========= =======
See accompanying notes to consolidated condensed financial statements.
Matria Healthcare, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
(Amounts in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
2002 2001 2002 2001
------------- ------------ ------------ ------------
Revenues .................................................... $69,403 64,838 134,591 126,206
Cost of revenues ............................................ 41,154 35,025 77,810 68,475
Selling and administrative expenses ......................... 23,868 18,770 44,604 36,606
Provision for doubtful accounts ............................. 2,086 1,995 3,928 3,773
Amortization of intangible assets ........................... 140 2,456 280 4,913
------ ------ ------ ------
Operating earnings ................................... 2,155 6,592 7,969 12,439
Interest expense, net ....................................... (3,274) (1,518) (6,501) (3,225)
Other income (expense), net ................................. (82) 21 29 (738)
------ ------ ------ ------
Earnings (loss) before income taxes .................. (1,201) 5,095 1,497 8,476
Income tax expense (benefit) ................................ (480) 2,050 600 3,400
------ ------ ------ ------
Net earnings (loss) .................................. (721) 3,045 897 5,076
Preferred stock dividend requirements ....................... -- (796) -- (1,596)
Accretion of preferred stock ................................ -- (109) -- (218)
Gain on repurchase of preferred stock ....................... -- 2,139 -- 2,139
------ ------ ------ ------
Net earnings (loss) available to common shareholders $ (721) 4,279 897 5,401
======= ====== ====== ======
Net earnings (loss) per common share:
Basic ................................................. $ (0.08) $ 0.49 $ 0.10 $ 0.62
====== ====== ====== ======
Diluted ............................................... $ (0.08) $ 0.48 $ 0.10 $ 0.61
====== ====== ====== ======
Weighted average shares outstanding:
Basic ................................................. 9,055 8,721 9,012 8,735
====== ====== ====== ======
Diluted ............................................... 9,055 9,056 9,229 9,003
======= ====== ====== ======
See accompanying notes to consolidated condensed financial statements.
Matria Healthcare, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
Six Months Ended
June 30,
-----------------------------
2002 2001
-------------- -------------
Cash Flows from Operating Activities:
Net earnings ......................................................... $ 897 5,076
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization .................................. 3,518 7,528
Amortization of debt discount and expenses ..................... 686 --
Provision for doubtful accounts ................................ 3,928 3,773
Deferred tax expense (benefit) ................................. (273) 2,558
Non-cash loss on settlement of note receivable from shareholder 2,508 --
Proceeds from termination of interest rate swap agreement ...... 2,380 --
Changes in assets and liabilities:
Trade accounts receivable ................................... (5,327) (9,337)
Inventories ................................................. 772 (239)
Prepaid expenses and other current assets ................... (3,287) (2,874)
Non current assets .......................................... (2,167) (1,041)
Accounts payable ............................................ 2,648 (380)
Accrued and other liabilities ............................... (445) (1,788)
----- -----
Net cash provided by continuing operations ............... 5,838 3,276
Net cash provided by discontinued operations ............. 577 1,505
----- -----
Net cash provided by operating activities .............. 6,415 4,781
----- -----
Cash Flows from Investing Activities:
Purchases of property and equipment .................................. (8,776) (4,123)
Purchases of property and equipment related to discontinued operations -- (17)
Acquisition of businesses, net of cash acquired ...................... (774) --
Proceeds from disposition of business ................................ -- 18,076
------ ------
Net cash provided by (used in) investing activities .... (9,550) 13,936
------ ------
Cash Flows from Financing Activities:
Borrowings under credit agreement .................................... 8,500 33,562
Proceeds from issuance of debt ....................................... 1,462 1,013
Principal repayments of long-term debt ............................... (9,184) (33,965)
Proceeds from issuance of common stock ............................... 1,858 174
Repurchases of common stock .......................................... -- (976)
Repurchase of preferred stock ........................................ -- (18,931)
Preferred stock dividend payments .................................... -- (1,971)
------ ------
Net cash provided by (used in) financing activities .... 2,636 (21,094)
------ ------
Effect of exchange rate changes on cash and cash equivalents ............ 1,042 (579)
------ ------
Net increase (decrease) in cash and cash equivalents ... 543 (2,956)
Cash and cash equivalents at beginning of year .......................... 1,983 3,915
------ ------
Cash and cash equivalents at end of period .............................. $ 2,526 959
====== ======
Supplemental disclosures of cash paid for:
Interest .............................................................. $ 5,953 3,536
====== ======
Income taxes .......................................................... $ 413 474
====== ======
See accompanying notes to consolidated condensed financial statements.
Notes to Consolidated Condensed Financial Statements
(Amounts in thousands, except share and per share amounts)
(Unaudited)
1. General
The consolidated condensed financial statements as of June 30, 2002 and for
the three and six months ended June 30, 2002 and 2001 are unaudited. In the
opinion of management, all adjustments, consisting of normal recurring accruals,
necessary for fair presentation of the consolidated financial position and
results of operations for the periods presented have been included. The
consolidated condensed balance sheet for December 31, 2001 was derived from
audited financial statements, but does not include all disclosures required by
accounting principles generally accepted in the United States. The results for
the three-month and six-month periods ended June 30, 2002 are not necessarily
indicative of the results for the full year ending December 31, 2002.
The consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and related notes
included in the Annual Report on Form 10-K of Matria Healthcare, Inc. ("Matria"
or the "Company") for the year ended December 31, 2001.
2. Comprehensive Earnings
Comprehensive earnings generally include all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. For the Company, comprehensive earnings consist of net earnings, foreign
currency translation adjustments (net of income taxes) and changes in unrealized
appreciation on available-for-sale securities (net of income taxes).
Comprehensive earnings (loss) for the three-month and six-month periods ended
June 30, 2002 were $(155) and $1,418, respectively, and for the corresponding
periods in 2001 were $2,882 and $4,660, respectively.
3. Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
June 30, 2002
---------------------------
Carrying Fair
Amount Value
------------- -------------
Senior notes, net of unamortized discount ............... $114,583 113,460
Interest rate swap arrangement .......................... $ 273 273
The carrying amount of the senior notes is net of the unamortized discount
and includes an adjustment to reflect the fair value of the portion of the
senior notes hedged by the $60,000 notional amount interest rate swap
arrangement. The estimated fair values of the above financial instruments are
based upon the quoted market price of the senior notes and the estimated amount
that the Company would have paid to terminate the interest rate swap agreement
at June 30, 2002, considering interest rates at that time.
In June 2002, the Company terminated the $60,000 notional amount interest
rate swap agreement and received proceeds from the counterparty bank of $2,380.
At the same time, the Company entered into a new interest rate swap arrangement
with this bank in the notional amount of $60,000.
In August 2002, the Company terminated the June 2002 interest rate swap
arrangement and received proceeds from the counterparty bank of $1,150. The
$3,530 of gains from the second and third quarter 2002 terminations of the
interest rate swap agreements will be amortized as a reduction of interest
expense over the remaining term of the senior notes (through May 2008). The
Company is no longer a party to any interest rate swap agreement or other hedge
against changes in the fair value of the Company's fixed rate debt obligation.
The Company's other financial instruments approximate fair value due to the
short-term nature of those assets and liabilities.
4. 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 are classified into two reportable business
segments: Health Enhancement and Women's Health. The Health Enhancement segment
has three components: (i) diabetes disease management, (ii) respiratory disease
management, and (iii) medical device design and manufacturing services. The
Women's Health segment offers services designed to assist physicians and payors
in the cost effective management of maternity patients including: specialized
home nursing; risk assessment; patient education, case and disease management;
home uterine contraction monitoring; infusion therapy; gestational diabetes and
hypertension management; and other monitoring and clinical services as
prescribed by the patient's physician.
The accounting policies of the segments are the same as those for the
consolidated entity. Operating earnings of the Health Enhancement and Women's
Health segments were reduced by amortization of goodwill of $4,351 and $282,
respectively, for the six months ended June 30, 2001. As discussed in note 5, no
amortization of goodwill was recorded for the six months ended June 30, 2002.
Severance and related costs of $1,392 and $391 were incurred in the Health
Enhancement and Women's Health segments, respectively, during the six months
ended June 30, 2002. Operating earnings by business segment exclude interest
income and interest expense. An allocation of Corporate expenses for shared
services has been charged to the segments.
Summarized financial information as of and for the three-month and
six-month periods ended June 30, 2002 and 2001 by business segment follows:
Revenues Earnings (loss) before
income taxes
------------------------------- -------------------------
Three Months Ended June 30, 2002 2001 2002 2001
--------------- -------------- ----------- -----------
Health Enhancement $44,084 38,024 3,449 3,895
Women's Health 25,327 26,857 3,649 4,612
Intersegment sales (8) (43) -- --
------ ------ ----- -----
Total segments 69,403 64,838 7,098 8,507
General corporate -- -- (4,943) (1,915)
Interest expense, net -- -- (3,274) (1,518)
Other income, net -- -- (82) 21
------ ------ ----- -----
Consolidated revenues and earnings
(loss) before income taxes $69,403 64,838 (1,201) 5,095
======= ====== ===== =====
Revenues Earnings before income
taxes
------------------------------- ------------------------
Six Months Ended June 30, 2002 2001 2002 2001
--------------- -------------- ----------- -----------
Health Enhancement $84,783 73,943 7,351 7,499
Women's Health 49,819 52,386 7,513 8,876
Intersegment sales (11) (123) -- --
------- ------- ------ ------
Total segments 134,591 126,206 14,864 16,375
General corporate -- -- (6,895) (3,936)
Interest expense, net -- -- (6,501) (3,225)
Other income, net -- -- 29 (738)
------- ------- ------ ------
Consolidated revenues and earnings
before income taxes $134,591 126,206 1,497 8,476
======== ======= ===== ======
Identifiable assets
-------------------------------
June 30, December 31,
2002 2001
--------------- --------------
Health Enhancement $183,741 169,818
Women's Health 34,747 36,081
General corporate 57,764 54,724
------- -------
Consolidated assets $276,252 260,623
======== =======
The Company's revenues from operations outside the U.S. were approximately
17% and 14% of total revenues for the three-month periods ended June 30, 2002
and 2001, respectively; and 17% and 15% of total revenues for the six-month
periods ended June 30, 2002 and 2001, respectively. No single customer accounted
for 10% of consolidated net revenue in any of these periods.
5. Implementation of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141") and Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets ("SFAS 142"). SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated or
completed after June 30, 2001 and specifies criteria intangible assets acquired
in a purchase method business combination must meet to be recognized and
reported apart from goodwill. SFAS 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually in accordance with the provisions of
SFAS 142. SFAS 142 also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("SFAS 121").
The Company adopted the provisions of SFAS 141 in 2001 and SFAS 142
effective January 1, 2002. SFAS 141 required, upon adoption of SFAS 142, that
the Company evaluate its existing goodwill and intangible assets that were
acquired in prior purchase business combinations and make any necessary
reclassifications in order to conform with the new criteria in SFAS 141 for
recognition apart from goodwill. Upon adoption of SFAS 142, the Company also was
required to reassess the useful lives and residual values of all intangible
assets acquired, and to make any necessary amortization period adjustments.
During the first quarter of 2002, the Company evaluated the fair values of
the business segments identified under the provisions of SFAS 141 and SFAS 142
and concluded that no impairment of recorded goodwill exists. The carrying
values of goodwill as of June 30, 2002 and December 31, 2001 were as follows:
Health Women's
Enhancement Health Total
----------------- --------------- ----------------
Carrying value at December 31, 2001 ......... $ 104,832 2,682 107,514
Additional goodwill from acquisition (note 7) 3,649 -- 3,649
Tax benefit of additional deductible goodwill (226) -- (226)
--------- ----- -------
Carrying value at June 30, 2002 ............. $ 108,255 2,682 110,937
========= ====== =======
In connection with the adoption of SFAS 142, the Company also reassessed
the useful lives, residual values and the classification of its identifiable
intangible assets and determined that they continue to be appropriate. The
components of identifiable intangible assets were as follows:
June 30, December 31,
2002 2001
---------------- ------------------
Gross carrying amounts:
Patient lists ....... $ 3,300 3,300
Non-compete agreement 500 500
------ -----
3,800 3,800
Accumulated amortization (1,960) (1,680)
------ -----
$ 1,840 2,120
====== =====
Amortization expense for the six months ended June 30, 2002 was $280 and is
estimated to be $560 for the year ended December 31, 2002. Estimated
amortization expense for the five succeeding years is as follows:
2003 $ 560
2004 200
2005 200
2006 200
2007 200
The reconciliation of reported net earnings adjusted for the adoption of
SFAS 142 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------
2002 2001 2002 2001
------------ ----------- ---------------------
Net earnings (loss) available to common shareholders
As reported ................................................. $ (721) 4,279 897 5,401
Add back: Goodwill amortization, net of tax ................ -- 1,384 -- 2,775
---- ----- --- -----
Adjusted net earnings (loss) available to common shareholders $ (721) 5,663 897 8,176
==== ===== === =====
Net earnings (loss) per common share
Basic:
As reported ................................................. $ (0.08) 0.49 0.10 0.62
Add back: Goodwill amortization, net of tax ................. -- 0.16 -- 0.32
---- ---- ---- ----
Adjusted net earnings (loss) per common share ............... $ (0.08) 0.65 0.10 0.94
==== ==== ==== ====
Diluted:
As reported ................................................. $ (0.08) 0.48 0.10 0.61
Add back: Goodwill amortization, net of tax ................. -- 0.15 -- 0.31
---- ---- ---- ----
Adjusted net earnings (loss) per common share ............... $ (0.08) 0.63 0.10 0.92
==== ==== ==== ====
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections ("SFAS 145"). SFAS 145 rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements. It also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. SFAS 145 amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. It also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. SFAS 145 had
no impact on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring) ("Issue 94-3"). The principal difference between SFAS 146
and Issue 94-3 relates to its requirements for recognition of a liability for a
cost associated with an exit or disposal activity. This Statement requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue 94-3, a liability for an
exit cost as defined in Issue 94-3 was recognized at the date of an entity's
commitment to an exit plan. A fundamental conclusion reached by the FASB in SFAS
146 is that an entity's commitment to a plan, by itself, does not create a
present obligation to others that meets the definition of a liability.
Therefore, SFAS 146 eliminates the definition and requirements for recognition
of exit costs in Issue 94-3. It also establishes that fair value is the
objective for initial measurement of the liability. The provisions of SFAS 146
are effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged.
6. Supplemental Guarantor/Non-Guarantor Financial Information
Supplemental financial information is being provided in connection with the
Company's senior notes. The senior notes are unconditionally guaranteed by the
Company and its domestic subsidiaries. All guarantees are joint and several.
Each of the domestic and foreign subsidiaries is 100% owned by the Company.
The following financial information presents the consolidating condensed
balance sheets, statements of operations and cash flows of the Company, the
guarantor domestic subsidiaries on a combined basis and the non-guarantor
foreign subsidiaries on a combined basis.
Consolidating Condensed Balance Sheets
June 30, 2002
(Unaudited)
Matria Guarantor Non-Guarantor
Healthcare, Domestic Foreign
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
----------------------------------------------------------------------------
ASSETS
Cash,cash equivalents and short-term investments $ 1,976 634 8 -- 2,618
Trade accounts receivable, net ............... 21,156 24,486 6,569 -- 52,211
Inventories .................................. 2,235 11,735 6,707 -- 20,677
Other current assets ......................... 7,212 9,540 902 -- 17,654
------ ------ ------ -------- --------
Total current assets .................... 32,579 46,395 14,186 -- 93,160
Property and equipment, net .................. 10,810 13,671 628 -- 25,109
Intangible assets, net ....................... 2,682 105,217 4,878 -- 112,777
Investment in subsidiaries ................... 110,095 -- -- (110,095) --
Deferred income taxes ........................ 25,402 -- -- -- 25,402
Other long-term assets ....................... 19,727 77 -- -- 19,804
------- ------- ------ -------- -------
$ 201,295 165,360 19,692 (110,095) 276,252
======= ======= ====== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current installments of long-term debt ....... $ 1,526 23 -- -- 1,549
Other current liabilities .................... 9,887 17,760 6,929 -- 34,576
-------- ------ ----- -------- -------
Total current liabilities ............... 11,413 17,783 6,929 -- 36,125
Long-term debt, excluding current installments 111,764 10 5,450 -- 117,224
Intercompany ................................. 585 16,684 (17,269) -- --
Other long-term liabilities .................. 7,422 622 147 -- 8,191
-------- ------ ------ -------- -------
Total liabilities ....................... 131,184 35,099 (4,743) -- 161,540
-------- ------ ------ -------- -------
Common Shareholders' equity
Common stock ................................. 92 -- -- -- 92
Additional paid-in capital ................... 294,929 105,217 4,878 (110,095) 294,929
Accumulated earnings (deficit) ............... (228,609) 33,216 15,255 -- (180,138)
Other ........................................ 3,699 (8,172) 4,302 -- (171)
-------- ------- ------ -------- -------
Total common shareholders' equity ....... 70,111 130,261 24,435 (110,095) 114,712
-------- ------- ------ -------- -------
$ 201,295 165,360 19,692 (110,095) 276,252
======== ======= ====== ======== =======
Consolidating Condensed Balance Sheets
December 31, 2001
(Unaudited)
Matria Guarantor Non-Guarantor
Healthcare, Domestic Foreign
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
---------------------------------------------------------------------------------
ASSETS
Cash, cash equivalents and short-term investments $ 1,435 535 129 -- 2,099
Trade accounts receivable, net .................. 22,939 23,740 5,375 -- 52,054
Inventories ..................................... 2,151 13,155 6,000 -- 21,306
Other current assets ............................ 5,885 7,119 1,036 14,040
------ ------ ------ ------ ------
Total current assets ....................... 32,410 44,549 12,540 -- 89,499
Property and equipment, net ..................... 11,254 6,985 483 -- 18,722
Intangible assets, net .......................... 2,682 101,974 4,978 -- 109,634
Investment in subsidiaries ...................... 106,952 -- -- (106,952) --
Deferred income taxes ........................... 24,715 -- -- -- 24,715
Other long-term assets .......................... 17,879 174 -- -- 18,053
------- ------- ------ ------- -------
$ 195,892 153,682 18,001 (106,952) 260,623
======= ======= ====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current installments of long-term debt .......... $ 484 131 -- -- 615
Other current liabilities ....................... 9,942 16,612 5,716 -- 32,270
------ ------ ----- ------- -------
Total current liabilities .................. 10,426 16,743 5,716 -- 32,885
Long-term debt, excluding current installments .. 108,015 21 6,539 -- 114,575
Intercompany .................................... (2,053) 18,499 (16,446) -- --
Other long-term liabilities ..................... 7,757 467 42 -- 8,266
------- ------ ------ ------- -------
Total liabilities .......................... 124,145 35,730 (4,149) -- 155,726
------- ------ ------ ------- -------
Common shareholders' equity
Common stock .............................. 89 -- -- -- 89
Additional paid-in capital ................. 290,070 101,974 4,978 (106,952) 290,070
Accumulated earnings (deficit) ............. (218,916) 24,150 13,731 -- (181,035)
Other ...................................... 504 (8,172) 3,441 -- (4,227)
------- ------- ------ ------- -------
Total common shareholders' equity .......... 71,747 117,952 22,150 (106,952) 104,897
------- ------- ------ ------- -------
$ 195,892 153,682 18,001 (106,952) 260,623
======= ======= ====== ======= =======
Consolidating Condensed Statements of Operations
For the Six Months Ended June 30, 2002
(Unaudited)
Matria Guarantor Non-Guarantor
Healthcare, Domestic Foreign
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------
Revenues .......................... $ 49,819 62,526 22,257 (11) 134,591
Cost of revenues .................. 21,005 38,739 18,077 (11) 77,810
Selling and administrative expenses 29,222 13,118 2,264 -- 44,604
Provision for doubtful accounts ... 2,501 1,427 -- -- 3,928
Amortization of intangible assets . -- 180 100 -- 280
------ ------ ------ ------ -------
Operating earnings (loss) .... (2,909) 9,062 1,816 -- 7,969
Interest expense, net ............. (6,282) (8) (211) -- (6,501)
Other income (expense), net ....... 93 12 (76) -- 29
------ ------ ------ ------ -------
Earnings (loss) before income
taxes ............................. (9,098) 9,066 1,529 -- 1,497
Income tax expense ................ 595 -- 5 -- 600
------ ----- ----- ------ -------
Net earnings (loss) .......... $ (9,693) 9,066 1,524 -- 897
====== ===== ===== ====== =======
Consolidating Condensed Statements of Operations
For the Six Months Ended June 30, 2001
(Unaudited)
Matria Guarantor Non-Guarantor
Healthcare, Domestic Foreign
Inc. Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------
Revenues .......................... $53,655 53,778 19,257 (484) 126,206
Cost of revenues .................. 21,589 31,873 15,497 (484) 68,475
Selling and administrative expenses 25,984 8,584 2,038 -- 36,606
Provision for doubtful accounts ... 2,740 1,030 3 -- 3,773
Amortization of intangible assets.. 282 4,383 248 -- 4,913
------ ------ ------ ------ ------
Operating earnings ............. 3,060 7,908 1,471 -- 12,439
Interest income (expense), net .... (3,024) 2 (203) -- (3,225)
Other income (expense), net ....... (756) 4 14 -- (738)
------ ------ ------ ------ ------
Earnings (loss) before income taxes (720) 7,914 1,282 -- 8,476
Income tax expense ................ 3,400 -- -- -- 3,400
------ ------ ------ ------ ------
Net earnings (loss)............. $ (4,120) 7,914 1,282 -- 5,076
====== ====== ====== ====== ======
Consolidating Condensed Statements of Cash Flows
For the Six Months Ended June 30, 2002
(Unaudited)
Matria Guarantor Non-Guarantor
Healthcare, Domestic Foreign
Inc. Subsidiaries Subsidiaries Consolidated
-----------------------------------------------------------
Net cash provided by (used in) continuing operations $ (4,321) 9,066 1,093 5,838
Net cash provided by discontinued operations.......... -- 577 -- 577
----- ----- ----- -----
Net cash provided by (used in)operating activities (4,321) 9,643 1,093 6,415
----- ----- ----- -----
Cash Flows from Investing Activities:
Purchases of property and equipment.................. (1,881) (6,650) (245) (8,776)
Acquisition of business, net of cash acquired ....... (274) (500) -- (774)
----- ----- ----- -----
Net cash used in investing activities ............ (2,155) (7,150) (245) (9,550)
----- ----- ----- -----
Cash Flows from Financing Activities:
Borrowings under credit agreement ................... 8,500 -- -- 8,500
Proceeds from issuance of debt ...................... 1,462 -- -- 1,462
Principal repayments of long-term debt .............. (7,977) (118) (1,089) (9,184)
Proceeds from issuance of common stock .............. 1,858 -- -- 1,858
----- ----- ----- -----
Net cash provided by (used in)financing activities 3,843 (118) (1,089) 2,636
----- ----- ----- -----
Effect of exchange rate changes on cash and cash equivalents -- -- 1,042 1,042
Net change in intercompany balances ...................... 3,198 2,276) (922) --
----- ----- ----- -----
Net increase (decrease) in cash and cash equivalents 565 99 (121) 543
Cash and cash equivalents at beginning of year............ 1,319 535 129 1,983
----- ----- ----- -----
Cash and cash equivalents at end of period................ $ 1,884 634 8 2,526
===== ===== ===== =====
Consolidating Condensed Statements of Cash Flows
For the Six Months Ended June 30, 2001
(Unaudited)
Matria Guarantor Non-Guarantor
Healthcare, Domestic Foreign
Inc. Subsidiaries Subsidiaries Consolidated
------------------------------ ------------------------------
Cash Flows from Operating Activities:
Net cash provided by (used in) continuing operations $ (2,255) 6,721 (1,190) 3,276
Net cash provided by discontinued operations ....... -- 1,505 -- 1,505
----- ----- ----- -----
Net cash provided by (used in) operating activities (2,255) 8,226 (1,190) 4,781
----- ----- ----- -----
Cash Flows from Investing Activities:
Purchases of property and equipment ............... (2,786) (1,357) 3 (4,140)
Proceeds from disposition of business ............. -- 18,076 -- 18,076
----- ------ ------ ------
Net cash provided by (used in)investing activities (2,786) 16,719 3 13,936
----- ------ ------ ------
Cash Flows from Financing Activities:
Borrowings under credit agreement ................. 33,562 -- -- 33,562
Proceeds from issuance of debt ................... 1,013 -- -- 1,013
Principal repayments of long-term debt ............ (33,915) (50) -- (33,965)
Proceeds from issuance of common stock ............ 174 -- -- 174
Repurchases of common stock ....................... (976) -- -- (976)
Repurchase of preferred stock ..................... (18,931) -- -- (18,931)
Preferred stock dividend payments ................. (1,971) -- -- (1,971)
------ ------ ------ ------
Net cash used in financing activities ........... (21,044) (50) -- (21,094)
------ ------ ------ ------
Effect of exchange rate changes on cash and cash
equivalents ............................................ -- -- (579) (579)
Net change in intercompany balances .................... 24,398 (25,389) 991 --
------ ------ ------ ------
Net decrease in cash and cash equivalents ....... (1,687) (494) (775) (2,956)
Cash and cash equivalents at beginning of year ......... 1,524 1,045 1,346 3,915
------ ------ ------ ------
Cash and cash equivalents at end of period ............. $ (163) 551 571 959
====== ====== ====== ======
7. Acquisitions
On April 29, 2002, the Company entered into a purchase and sale agreement
to acquire Quality Oncology, Inc. ("QO"), a national provider of cancer disease
management services, for consideration valued for financial statement purposes
at approximately $20,000. Under the terms of the agreement, it is estimated that
the Company will pay $3,000 (less previously paid advances and deposits of
$2,000) in cash and issue approximately 888,000 shares of common stock.
Additional financial consideration will be paid in 2004 based upon 2003
operating results. Management estimates that the additional consideration will
be between $20,000 and $30,000, although the amount could be more or less
depending on 2003 performance. The acquisition is expected to be completed late
in the third quarter of 2002. LifeMetrix, Inc., the parent company of QO, can
terminate the purchase and sale agreement if the average closing price of the
Company's common stock during the ten-day trading period ending three days prior
to the closing date is less than $15 per share. On August 12, 2002, the closing
price of the Company's common stock was $7.35 per share.
Effective June 14, 2002, the Company acquired MarketRing.com
("MarketRing"), a healthcare information technology company. The purchase price
was paid by the issuance of approximately 296,000 shares of common stock valued
at $3,781 (based on average closing price of the Company's common stock during
the three-day trading period ended June 14, 2002). In addition, the Company may
issue up to 27,500 shares of common stock upon the exercise of MarketRing stock
options assumed and a warrant issued by the Company in connection with the
acquisition. The Company has recorded goodwill of $3,649 related to this
acquisition. However, at this time, the Company has not completed its final
assessment of the allocation of the purchase price in order to determine whether
a portion of the purchase price may be allocated to identifiable intangible
assets or deferred tax assets. The Company's financial statements include the
operations of MarketRing commencing on June 14, 2002.
8. Long-Term Debt
The Company has a senior revolving credit facility with a borrowing
capacity of $30,000. The facility is collateralized by accounts receivable,
inventories, property and equipment and certain other assets of the Company.
Borrowings under this agreement bear interest at the Company's option of (i)
prime plus 1.5% to 2.5% or (ii) the LIBOR rate plus 2.5% to 3.5%. The facility
requires a commitment fee payable quarterly, in arrears, of 1.0% to 1.5%, based
upon the unused portion. The Company currently is in default of the fixed charge
coverage ratio and leverage ratio covenants of the loan agreement governing this
facility and, therefore, is unable to draw on the facility. The Company does not
have any outstanding borrowings under this facility and does not currently
anticipate any need for borrowing. The Company is in discussions with its
lenders, but there can be no assurance that the Company will be able to obtain a
waiver of the non-compliance on terms acceptable to the Company. The Company is
also considering alternatives to its existing facility.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Matria Healthcare Inc. ("the Company") is a leading provider of
comprehensive, integrated disease management services to patients, physicians,
health plans and employers. Matria's strategy is to focus on providing
cost-saving solutions for five of the most costly chronic diseases and medical
conditions in the nation: diabetes, obstetrical conditions, respiratory
disorders, cancer and cardiovascular disease. The Company's disease management
programs seek to lower healthcare costs and improve patient outcomes through a
broad range of disease management, mail-order supply and clinical services.
In April 2002, the Company further expanded its offerings of services by
signing an agreement to acquire Quality Oncology, Inc. ("QO"), a national
provider of cancer disease management programs. The acquisition of QO is
expected to be completed late in the third quarter of 2002 (see "Liquidity and
Capital Resources" below). The Company also entered into a vendor management
agreement allowing it to offer cancer disease management services provided by QO
on a contract basis to certain agreed upon customers. Also in April 2002, the
Company introduced its cardiovascular disease management program, which includes
the management of patients afflicted with Coronary Artery Disease, Congestive
Heart Failure and hypertensive disorders. Effective June 14, 2002, the Company
acquired MarketRing.com ("MarketRing"), a healthcare information technology
company. MarketRing has certain proprietary technology that the Company has
previously licensed and currently utilizes with its TRAX (Trade Mark) disease
management system. The Company intends to utilize this technology to facilitate
the development of sophisticated website portals for patients, physicians,
payors and employers under its current and future disease management contracts.
In February 2001, the Company sold the business and certain assets of
Quality Diagnostic Services, Inc. ("QDS"), a cardiac event monitoring company.
The Company's consolidated financial statements reflect QDS as a discontinued
operation.
Beginning in 2002, the Company modified its reporting segments into Health
Enhancement and Women's Health. The Health Enhancement segment is comprised of
the Company's diabetes and respiratory disease management programs and the new
cancer and cardiovascular service offerings.
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 in the Company's Annual Report on Form
10-K for the year ended December 31, 2001, as filed with the Securities and
Exchange Commission. The historical results of operations are not necessarily
indicative of the results that will be achieved by the Company during future
periods.
Results of Operations
Revenues increased $4.6 million, or 7.0%, and $8.4 million, or 6.6%, for
the three-month and six-month periods ended June 30, 2002 compared to the same
periods in 2001. This increase resulted from strong growth in the Health
Enhancement segment, where revenues increased $6.1 million, or 15.9%, and $10.8
million, or 14.7%, for the three-month and six-month periods. Revenues in the
Women's Health segment decreased $1.5 million, or 5.7%, and $2.6 million, or
4.9%, for the three-month and six-month periods due primarily to a decline in
the patient census for preterm labor management services, combined with a change
in the patient therapy mix.
Cost of revenues as a percentage of revenues increased to 59.3% for the
three-month period ended June 30, 2002 from 54.0% for the same period in 2001.
For the six-month period, the percentage increased to 57.8% in 2002 from 54.3%
in 2001. The increase was primarily the result of the variance in revenues noted
above, since the cost of revenues as a percentage of revenues of the Health
Enhancement segment is higher than this percentage for the Women's Health
segment. Also, the cost of revenues as a percentage of revenues in the Health
Enhancement segment increased due to inefficiencies of the expanded packaging
operations of Facet Technologies in advance of the installation of a new
automated production line. The cost of revenues as a percentage of revenues in
the Women's Health segment has increased in 2002 due to a significant price
increase in one of the primary drugs used in its preterm labor management
program.
Selling and administrative expenses for the three-month period ended June
30, 2002 included a one-time, non-cash charge of $2.5 million related to the
retirement of a $3.5 million note receivable from a shareholder (a former
executive of Matria predecessor Tokos Medical). The note, which matured on June
30, 2002, stipulated that the balance could be settled in full by surrender of
collateral consisting of 125,000 shares of the Company's common stock,
generating a charge equal to the difference between the book value of the note
and the closing market value on June 30, 2002 of the 125,000 shares. Excluding
this item, selling and administrative expenses as a percentage of revenues
increased to 30.8% from 28.9% for the three-month period ended June 30, 2002
compared to the same period in 2001. This increase was due primarily to a
$500,000 charge for severance and related expenses and due to increases in the
Health Enhancement segment where direct-response advertising expenses and costs
related to customer service increased to support higher revenue levels. For the
six-month period, the percentage increased to 31.3% from 29.0%, also due to $1.8
million of year-to-date severance and related expenses and due to the
direct-response advertising and customer service costs. Selling and
administrative expenses as a percentage of revenue decreased slightly in the
Women's Health segment during the quarter and year-to-date.
The Company provides for estimated uncollectible accounts as revenues are
recognized. The provision for doubtful accounts as a percentage of revenues in
the Health Enhancement segment was approximately 2% for the three-month and
six-month periods ended June 30, 2002 and 2001. The provision for doubtful
accounts as a percentage of revenues in the Women's Health segment was
approximately 5% for the three-month and six-month periods of 2002 and 2001. The
provision is adjusted periodically based upon the Company's quarterly evaluation
of historical collection experience, recoveries of amounts previously provided,
industry reimbursement trends and other relevant factors.
Amortization of intangible assets decreased in 2002 by $2.3 million for the
three-month period and $4.6 million for the six-month period compared to 2001
due to the discontinuance of amortization of goodwill resulting from the
adoption of SFAS 142 in January 2002 (see "New Accounting Standards" below where
discussed).
Net interest expense increased by $1.8 million, or 113%, for the
three-month period and by $3.3 million, or 97%, for the six-month period ended
June 30, 2002 compared to the same periods in 2001 due to a higher average
outstanding debt balance and higher interest rates resulting from the 11% senior
notes issued on July 9, 2001. The proceeds from this offering were used to repay
all amounts outstanding under the Company's former bank credit facility and to
repurchase the subordinated acquisition notes, all shares of preferred stock
(and thereby eliminate their dividend requirements) and common stock warrants.
This increase is net of the benefit of $563,000 and $1.1 million, respectively,
for the three-month and six-month periods of 2002 from the interest rate swap
arrangement (discussed below in "Liquidity and Capital Resources"). The weighted
average interest rates (including debt discount and expense amortization) on
outstanding indebtedness for the six-month periods ended June 30, 2002 and 2001
were 11.31% and 8.28%, respectively.
Other income (expense) for the six months ended June 30, 2001 included a
$737,000 charge to reduce the carrying value amounts related to the Company's
split dollar life insurance program. This non-cash expense was the result of
declines in the stock market.
Liquidity and Capital Resources
As of June 30, 2002, the Company had cash and short-term investments of
$2.6 million. Net cash provided by continuing operations was $5.8 million for
the six months ended June 30, 2002 compared to $3.3 million for the same period
of 2001. This increase in cash flows from continuing operations resulted from
improved cash flows related to changes in accounts receivable and accounts
payable and from proceeds related to the termination of an interest rate swap
agreement. The Company's total accounts receivable days' sales outstanding were
68 days' sales as of June 30, 2002, consisting of 63 days' sales for the Health
Enhancement segment and 75 days' sales for the Women's Health segment. Lower net
earnings (adjusted to exclude non-cash charges) negatively impacted cash flows
from continuing operations.
Effective August 2001, the Company entered into an interest rate swap
transaction with a bank involving a notional amount of $60 million. In June
2002, the Company terminated this agreement and received proceeds from the
counterparty bank of approximately $2.4 million. At the same time, the Company
entered into a new interest rate swap arrangement with this bank in the notional
amount of $60 million. As of June 30, 2002, the interest rate swap agreement was
reflected at fair value of $273,000 payable to the bank on the Company's
consolidated condensed balance sheet, and the related portion of fixed-rate debt
being hedged was reflected at its net carrying value less an adjustment of
$273,000, representing the change in fair value of the debt obligation
attributable to the interest rate risk.
In August 2002, the Company terminated the June 2002 interest rate swap
arrangement and received proceeds from the counterparty bank of approximately
$1.1 million. The cash proceeds of $3.5 million from the second and third
quarter 2002 terminations of the interest rate swap agreements will be amortized
into income as a reduction of interest expense over the remaining term of the
senior notes (through May 2008). The Company is no longer a party to any
interest rate swap agreement or other hedge against changes in the fair value of
the Company's fixed rate debt obligation.
Net cash provided by discontinued operations of QDS were $577,000 and $1.5
million for the six months ended June 30, 2002 and 2001, respectively. These
amounts represent collections of accounts receivable, less payments of salary
costs of personnel retained to collect the accounts receivable and other accrued
liabilities. As of June 30, 2002, the Company's balance sheet reflected
approximately $1.3 million of accounts receivable that remain to be collected.
Net cash provided by (used in) investing activities totaled $(9.6) million
for the six months ended June 30, 2002 compared to $13.9 million for the same
period of 2001. The 2001 amount included $18.1 million of proceeds from the sale
of the business and certain assets of QDS. Capital expenditures for the six
months ended June 30, 2002 and 2001 totaled $8.8 million and $4.1 million,
respectively, relating primarily to the replacement and enhancement of computer
information systems. The Company expects to expend approximately $12 million for
capital items in 2002.
In February 2002, the Company acquired substantially all of the assets of
ChoicePoint Health Systems, Inc. ("ChoicePoint") for $650,000 in cash. In June
2002, the Company received $143,000 from ChoicePoint under a guarantee of
collection of acquired accounts receivable.
On June 14, 2002, the Company acquired MarketRing. The purchase price was
paid by the issuance of approximately 296,000 shares of common stock valued at
approximately $3.8 million (based on average closing price of the Company's
common stock during the three-day trading period ended June 14, 2002). In
addition, the Company may issue up to 27,500 shares of common stock upon the
exercise of MarketRing stock options assumed and a warrant issued by the Company
in connection with the acquisition. The Company has recorded goodwill of
approximately $3.6 million related to this acquisition. However, at this time,
the Company has not completed its final assessment of the allocation of the
purchase price in order to determine whether a portion of the purchase price may
be allocated to identifiable intangible assets or deferred tax assets.
For the six months ended June 30, 2002, proceeds of $1.9 million were
received from participants under the Company's stock purchase and stock option
plans.
The Company has a senior revolving credit facility with a borrowing
capacity of $30.0 million. The facility is collateralized by accounts
receivable, inventories, property and equipment and certain other assets of the
Company. Borrowings under this agreement bear interest at the Company's option
of (i) prime plus 1.5% to 2.5% or (ii) the LIBOR rate plus 2.5% to 3.5%. The
facility requires a commitment fee payable quarterly, in arrears, of 1.0% to
1.5%, based upon the unused portion. The Company currently is in default of the
fixed charge coverage ratio and leverage ratio covenants of the loan agreement
governing this facility and, therefore, is unable to draw on the facility. The
Company does not have any outstanding borrowings under this facility and does
not currently anticipate any need for borrowing. The Company is in discussions
with its lenders, but there can be no assurance that the Company will be able to
obtain a waiver of the non-compliance on terms acceptable to the Company. The
Company is also considering alternatives to its existing facility.
In April 2002, the Company entered into a purchase and sale agreement to
acquire QO for approximately $20 million. Under the terms of the agreement, it
is estimated that the Company will pay $3 million (less previously paid advances
and deposits of $2 million) in cash and issue approximately 888,000 shares of
common stock. Additional consideration will be paid in 2004 based upon 2003
operating results. Management estimates that the additional consideration will
be between $20 million and $30 million, although the amount could be more or
less depending on 2003 performance. The additional consideration will be
payable, at the Company's option, in cash, common stock or a combination of the
two, provided that at least $10 million or 20% of the amount, whichever is
lower, will be paid in cash. The acquisition is expected to be completed late in
the third quarter of 2002. LifeMetrix, Inc., the parent company of QO, can
terminate the purchase and sale agreement if the average closing price of the
Company's common stock during the ten-day trading period ending three days prior
to the closing date is less than $15 per share. On August 12, 2002, the closing
price of the Company's common stock was $7.35 per share.
The Company believes that its cash, other liquid assets, and operating cash
flows, taken together, will provide adequate resources to fund ongoing operating
requirements and planned capital expenditures. The Company intends to maintain a
revolving credit facility to serve as a supplemental source of financing for
other business opportunities.
Critical Accounting Estimates
A critical accounting estimate meets two criteria: (1) it requires
assumptions about highly uncertain matters; and (2) there would be a material
effect on the financial statements from either using a different, also
reasonable, amount within the range of the estimate in the current period or
from reasonably likely period-to-period changes in the estimate. The Company's
critical accounting estimates are as follows:
Revenue Recognition and Allowances for Uncollectible Accounts. Revenues for
the Women's Health segment are generated by providing services through patient
service centers. Revenues from these segments are recognized as the related
services are rendered and are net of contractual allowances and related
discounts. The Health Enhancement segment provides services through its patient
service centers, provides supplies to patients primarily on a mail-order basis,
and assembles, packages and distributes lancing products to original equipment
manufacturers. Revenues for services are recognized when services are provided
and revenues from product sales are recognized when products are shipped (at
which point risk of ownership passes to the customer). Revenues from this
segment are recorded net of contractual and other discounts.
The Company's clinical services and supply business are reimbursed on a
fee-for-service or per item basis. Other aspects of disease management, however,
are paid for primarily on the basis of monthly fees for each member of a health
plan identified with a particular chronic disease or condition under contract or
enrolled in the Company's program or on a case-rate basis. Some of the contracts
for these services provide that a portion of the Company's fees is at risk,
subject to the Company's performance against financial cost savings and clinical
criteria. Fees earned under these contracts are determined through periodic
settlements with the customer based on the Company's performance against these
criteria. Actual performance under the terms of these contracts is assessed
monthly and revenue is recognized on an estimated basis in the period the
services are provided. Monthly estimates of revenues do not attempt to predict
future changes in performance levels under these contracts. Currently, less than
5% of the Company's revenues are at risk under these arrangements.
A significant portion of the Company's revenues is billed to third-party
reimbursement sources. Accordingly, the ultimate collectibility of a substantial
portion of the Company's trade accounts receivable is susceptible to changes in
third-party reimbursement policies. A provision for doubtful accounts is made
for revenues estimated to be uncollectible and is adjusted periodically based
upon the Company's evaluation of current industry conditions, historical
collection experience, and other relevant factors which, in the opinion of
management, deserve recognition in estimating the allowance for uncollectible
accounts.
Goodwill and Other Intangible Assets. See "New Accounting Standards" below
for a description of two new accounting pronouncements which have significantly
changed the Company's accounting for goodwill and other intangible assets in
2002 and beyond. As of June 30, 2002, the Company had unamortized goodwill of
$110.9 million and unamortized intangible assets of $1.8 million, which
represented 41% of total assets. Under the new accounting standards, goodwill is
no longer being amortized to expense, but instead will be tested for impairment
at least annually. Other intangible assets are continuing to be amortized over
their respective estimated useful lives and will be reviewed periodically for
impairment.
In testing for impairment, the Company will evaluate the fair value of the
acquired companies to which the goodwill and other intangibles relate and
determine whether changed circumstances indicate that any portion of the
carrying value of the goodwill or other intangible assets may no longer be
recoverable.
Accounting for Income Taxes. The Company accounts for income taxes using an
asset and liability approach. Deferred income taxes are recognized for the tax
consequences of "temporary differences" by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities and net
operating loss and tax credit carryforwards. Additionally, the effect on
deferred taxes of a change in tax rates is recognized in earnings in the period
that includes the enactment date.
The tax expense for the six months ended June 30, 2002 was $600,000, but
the related tax liability will be largely offset by available net operating
losses from prior years. Cash outflows in the first six months of 2002 for
income taxes totaled $413,000, being comprised of state and foreign taxes for
jurisdictions where net operating losses were not available. As of December 31,
2001, the Company's remaining net operating losses of $49.3 million, the tax
effect of which is reflected in the deferred tax asset, will be available to
offset future tax liabilities.
The above listing is not intended to be a comprehensive list of all of the
Company's accounting policies and estimates. In many cases, the accounting
treatment of a particular transaction is specifically dictated by generally
accepted accounting principles, with no need for management's judgment in their
application. There are also areas in which management's judgment in selecting
any available alternative would not produce a materially different result.
Senior management periodically discusses the application and disclosure of these
critical accounting estimates with the audit committee of the board of
directors. See note 1 of Notes to Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001, which
contains additional accounting policies and other disclosures required by
generally accepted accounting principles.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, Business Combinations
("SFAS 141") and Statement of Financial Accounting Standards No. 142, Goodwill
and Other Intangible Assets ("SFAS 142"). SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated after June
30, 2001 and specifies criteria intangible assets acquired in a purchase method
business combination must meet to be recognized and reported apart from
goodwill. SFAS 142 requires that goodwill and intangible assets with indefinite
useful lives no longer be amortized, but instead be tested for impairment at
least annually in accordance with the provisions of SFAS 142. SFAS 142 also
requires that intangible assets with estimable useful lives be amortized over
their respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with Statement of Financial Accounting
Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of ("SFAS 121").
The Company adopted the provisions of SFAS 141 in 2001 and SFAS 142
effective January 1, 2002. SFAS 141 required, upon adoption of SFAS 142, that
the Company evaluate its existing goodwill and intangible assets that were
acquired in prior purchase business combinations and make any necessary
reclassifications in order to conform with the new criteria in SFAS 141 for
recognition apart from goodwill. Upon adoption of SFAS 142, the Company also was
required to reassess the useful lives and residual values of all intangible
assets acquired, and to make any necessary amortization period adjustments.
As of January 1, 2002, the date of adoption of SFAS 142, the Company had
unamortized goodwill of $107.5 million and unamortized identifiable intangible
assets of $2.1 million, all of which were subject to the transition provisions
of SFAS 141 and SFAS 142. During the first quarter of 2002, the Company
evaluated the fair values of the business segments identified under the
provisions of SFAS 141 and SFAS 142 and concluded that no impairment of recorded
goodwill exists. As a result, no amortization of goodwill was recorded for the
six months ended June 30, 2002. Amortization expense related to goodwill was
$4.6 million for the six months ended June 30, 2001. Also, the Company
reassessed the useful lives, residual values and the classification of
identifiable intangible assets and determined that they continue to be
appropriate. Amortization expense related to identifiable intangible assets was
$280,000 for both the six months ended June 30, 2002 and 2001.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13 and Technical Corrections ("SFAS 145"). SFAS 145 rescinds FASB
Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an
amendment of that Statement, FASB Statement No. 64, Extinguishments of Debt Made
to Satisfy Sinking-Fund Requirements. It also rescinds FASB Statement No. 44,
Accounting for Intangible Assets of Motor Carriers. SFAS 145 amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. It also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. SFAS 145 had
no impact on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities ("SFAS
146"). SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force Issue No. 94-3, Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring) ("Issue 94-3"). The principal difference between SFAS 146
and Issue 94-3 relates to its requirements for recognition of a liability for a
cost associated with an exit or disposal activity. This Statement requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under Issue 94-3, a liability for an
exit cost as defined in Issue 94-3 was recognized at the date of an entity's
commitment to an exit plan. A fundamental conclusion reached by the FASB in SFAS
146 is that an entity's commitment to a plan, by itself, does not create a
present obligation to others that meets the definition of a liability.
Therefore, SFAS 146 eliminates the definition and requirements for recognition
of exit costs in Issue 94-3. It also establishes that fair value is the
objective for initial measurement of the liability. The provisions of SFAS 146
are effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged.
Forward-Looking Information
This Form 10-Q contains forward-looking statements and information that are
based on the Company's beliefs and assumptions, as well as information currently
available to the Company. From time to time, the Company and its officers,
directors or employees may make other oral or written statements (including
statements in press releases or other announcements) that contain
forward-looking statements and information. Without limiting the generality of
the foregoing, the words "believe", "anticipate", "estimate", "expect",
"intend", "plan", "seek" and similar expressions, when used in this Report and
in such other statements, are intended to identify forward-looking statements.
All statements that express expectations and projections with respect to future
matters, including, without limitation, statements relating to growth, new lines
of business and general optimism about future operating results, are
forward-looking statements. All forward-looking statements and information in
this Report are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are intended to be covered by the safe
harbors created thereby. Such forward-looking statements are not guarantees of
future performance and are subject to risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company to
differ materially from historical results or from any results expressed or
implied by such forward-looking statements. Such factors include, without
limitation: (i) changes in reimbursement rates, policies or payment practices by
third-party payors, whether initiated by the payor or legislatively maintained;
(ii) the loss of major customers or failure to receive recurring orders from
customers of the mail-order supply business; (iii) termination of the Company's
exclusive supply agreement with Nipro Corporation or failure to continue the
agreement on the terms currently in effect; (iv) impairment of the Company's
rights in intellectual property; (v) increased or more effective competition;
(vi) new technologies that render obsolete or non-competitive products and
services offered by the Company, including the development of improved glucose
monitoring products that eliminate the need for consumable testing supplies;
(vii) the ability of the Company to effectively integrate new technologies, such
as those included in the systems infrastructure project and automated packing
systems of the Health Enhancement segment; (viii) technology failures causing
delayed, incomplete data or flawed data analysis; (ix) changes in laws or
regulations applicable to the Company or failure to comply with existing laws
and regulations; (x) future healthcare or budget legislation or other health
reform initiatives; (xi) increased exposure to professional negligence
liability; (xii) difficulties in successfully integrating recently acquired
businesses into the Company's operations and uncertainties related to the future
performance of such businesses; (xiii) losses due to foreign currency exchange
rate fluctuations or deterioration of economic or political conditions in
foreign markets; (xiv) changes in company-wide or business unit strategies; (xv)
the effectiveness of the Company's advertising, marketing and promotional
programs and changes in patient therapy mix; (xvi) market acceptance of the
Company's current and future disease management products; (xvii) inability to
successfully manage the Company's growth; (xviii) acquisitions that strain the
Company's financial and operational resources; (xix) inability to effect
estimated cost savings and clinical outcomes improvements or to reach agreement
with the Company's disease management customers with respect to the same; (xx)
inability to accurately forecast performance under the Company's disease
management contracts; (xxi) inability of the Company's disease management
customers to provide timely and accurate data that is essential to the operation
and measurement of the Company's performance under its disease management
contracts; (xxii) increases in interest rates and general economic conditions
and (xxiii) the risk factors discussed from time to time in the Company's SEC
reports, including but not limited to, its Annual Report on Form 10-K for the
year ended December 31, 2001. Many of such factors are beyond the Company's
ability to control or predict, and readers are cautioned not to put undue
reliance on such forward-looking statements. The Company disclaims any
obligation to update or review any forward-looking statements contained in this
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, except as may be required by the Company's
disclosure obligations in filings it makes with the SEC under federal securities
laws.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk from foreign exchange rates. The
Company's non-U.S. operations with sales denominated in other than U.S. dollars
(primarily in Germany) generated approximately 13% of total revenues in the six
months ended June 30, 2002. In the normal course of business, these operations
are exposed to fluctuations in currency values. Management does not consider the
impact of currency fluctuations to represent a significant risk, and as such has
chosen not to hedge its foreign currency exposure. A 10% change in the dollar
exchange rate of the euro would impact annual net earnings by approximately
$320,000.
PART II--OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2. Purchase and Sale Agreement dated April 29, 2002, among the Company,
LifeMetrix, Inc. and Quality Oncology, Inc. (incorporated by reference to
Appendix A to the Prospectus/Proxy Statement/Solicitation Statement filed as
part of the Company's Registration Statement No. 333-90944 on Form S-4 filed
June 21, 2002).
4. Waiver and First Amendment to First Amended and Restated Credit
Agreement dated June 13, 2002, among the Registrant and certain Lenders named
therein, Wachovia Bank, National Association as the Administrative Agent and
Harris Trust and Savings Bank as Co-Agent.
10.1 MarketRing.com, Inc. 1999 Stock Option and Stock Appreciation Rights
Plan effective September 30, 1999.*
10.2 MarketRing.com, Inc. Amendment No. 1 to 1999 Stock Option and Stock
Appreciation Rights Plan dated July 14, 2000.*
10.3 Change in Control Severance Compensation and Restrictive Covenant
Agreement between the Registrant and Parker H. Petit effective February 19,
2002, as executed in the second quarter 2002.
10.4 Change in Control Severance Compensation and Restrictive Covenant
Agreement between the Registrant and Jeffrey D. Koepsell effective February 19,
2002, as executed in the second quarter 2002.
10.5 Change in Control Severance Compensation and Restrictive Covenant
Agreement between the Registrant and George W. Dunaway effective February 19,
2002, as executed in the second quarter 2002.
10.6 Agreement and Plan of Merger dated May 30, 2002 among the Company,
MRDC Acquisition Corp. and MarketRing.com, Inc.
11. Computation of Earnings per Share
(b) Reports on Form 8-K
The Company filed Current Reports on Form 8-K on April 29, 2002 announcing
the Company's agreement to acquire Quality Oncology (as amended by a Form 8-K/A
filed the same day) and on April 30, 2002 reporting a conference call with
related slide presentation to discuss the acquisition of Quality Oncology.
*Assumed by the Company.
SIGNATURES
Pursuant to the requirements 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.
August 13, 2002 By: /s/ Parker H. Petit
Parker H. Petit
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
/s/ George W. Dunaway
George W. Dunaway, Vice President--
Finance and Chief Financial Officer
(Principal Financial Officer)