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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934 (Fee Required) For the fiscal year ended December 31, 1995,
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 (No Fee Required) For the transition period from
________________________ to _______________________
COMMISSION FILE NO. 0-20619
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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 30067
Marietta, Georgia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (770) 423-4500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Common Stock Purchase Rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days:
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K [ ].
As of March 11, 1996, there were 34,662,602 shares of Common Stock outstanding,
and the aggregate market value of the Common Stock of the Registrant held by
non-affiliates was approximately $ 297,451,046 based upon the closing sale
price of such stock on that date.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's Proxy Statement/Prospectus from Registration
Statement No. 333-00781 on Form S-4 filed February 7, 1996 and Registrant's Form
8-K/A, dated March 29, 1996, are incorporated by reference into Parts I, III,
and IV.
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MATRIA HEALTHCARE, INC.
1995 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
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.................................. 11
PART II.......................................................................................................
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters.................................................... 12
Item 6. Selected Financial Data............................................................. 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................................... 14
Item 8. Financial Statements and Supplementary Data......................................... 20
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure............................................. 20
PART III......................................................................................................
Item 10. Directors and Executive Officers ................................................... 21
Item 11. Executive Compensation ............................................................. 21
Item 12. Security Ownership of Certain Beneficial
Owners and Management.............................................................. 21
Item 13. Certain Relationships and Related Transactions...................................... 21
PART IV.......................................................................................................
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................................................ 22
SIGNATURES.................................................................................................... 27
</TABLE>
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PART I.
ITEM 1. BUSINESS.
INTRODUCTION. Matria Healthcare, Inc., a Delaware corporation ("Matria"
or the "Company"), was incorporated on October 4, 1995 for the purpose of the
merger (the "Merger") of Tokos Medical Corporation (Delaware), a Delaware
corporation ("Tokos"), and Healthdyne, Inc., a Georgia corporation
("Healthdyne"), with and into Matria. The effective date of the Merger was
March 8, 1996. Prior to the Merger, Matria had no material assets or
liabilities and its then outstanding shares of common stock, par value $0.01
per share ("Matria Common Stock"), were held exclusively by Tokos and
Healthdyne. As a result of the Merger, the operations and assets of Tokos and
Healthdyne were consolidated into Matria, and each share of common stock of
Tokos and Healthdyne outstanding on the effective date of the Merger was
exchanged for one share of Matria Common Stock.
Matria is a leading provider of specialized obstetrical home healthcare
services which assist physicians in the management of high risk pregnancies. In
addition, Matria provides home healthcare services for the management of other
complicated obstetrical and gynecological conditions, such as pregnancy induced
hypertension. Matria's services are designed to achieve improved medical
outcomes at significant cost savings through the reduction of patient
hospitalization. Services offered by Matria include screening to assist in the
identification of women who may be at risk of complications during pregnancy;
maternal risk assessment and prenatal education for asymptomatic patients;
daily management and education of high risk patients; administration and
supervision of a range of home infusion therapies for obstetrical and
gynecological conditions; and specialty obstetrical and gynecological nursing.
As the successor to Tokos, Matria has the exclusive marketing rights in
the United States and Canada to a proprietary immunoassay for fetal fibronectin
developed and patented by Adeza Biomedical Corporation, a California
corporation ("Adeza"), and approved by the United States Food and Drug
Administration ("FDA") as a reliable marker for preterm delivery in symptomatic
patients.
SERVICES. The Company offers a comprehensive range of specialized home
healthcare and risk assessment services designed to assist physicians in
managing high risk pregnancies and numerous other obstetrical and gynecological
conditions more cost effectively. Substantially all of the Company's revenues
are derived from these services.
High Risk Pregnancy Management. The Company offers multiple levels of
high risk pregnancy management services to assist physicians in the early
detection of preterm labor and the management of complicated pregnancies. These
levels are designed to meet various patient acuity levels and range from low
intensity surveillance to comprehensive obstetrical home care. Each level
includes one or more of the following: the identification of women who may be
at risk for complications during pregnancy; the development of a program of
care for each patient; the education of the patient as to symptoms associated
with preterm labor; skilled perinatal nursing assessments of the patient's
condition; and the use of perinatal nurses and pharmacists specializing in
obstetrics to administer and manage various therapies.
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A physician who chooses to utilize the Company's preterm labor
management services will prescribe the level of service offered by the Company
that the physician believes is appropriate for the patient's acuity level. The
patient is assigned to a perinatal nurse located in one of the Company's
patient service centers. This nurse is generally the patient's primary contact
for the duration of her treatment plan which typically lasts four to seven
weeks depending on the level of service prescribed and the time period until
delivery. At the time of the assignment, the nurse contacts the patient to
discuss the physician's treatment plan and instruct her in the use of any
device if one has been prescribed by her physician. The nurse will educate the
patient with regard to symptoms associated with preterm labor, the methods to
detect such symptoms, and proper methods of care to minimize complications
during pregnancy. The nurse contacts the patient on an as needed or daily basis
depending on the program prescribed to assess her condition, including any
symptoms of preterm labor, to provide emotional support and counseling, and to
encourage compliance with the physician's treatment plans. Through the daily
contact with the patient and the frequent assessment of symptoms associated
with preterm labor, the Matria nurse obtains information that assists the
prescribing physician in the early detection and treatment of preterm labor.
Physicians may also prescribe labor inhibiting drugs known as
tocolytics for patients that are symptomatic and in need of some form of
intervention. The Company provides supervision including pharmaceutical
support, and administration of this therapy regime to patients as an
alternative to hospitalization. Frequently, this therapy involves delivery of
the drugs by micro infusion pump. The Company monitors the patient's reactions
to the therapy on an on-going basis. Nurses report any change in patient status
to the patient's physician, as well as provide the physician with periodic
reports during the course of the therapy.
Other Obstetrical and Gynecological Services. The Company provides a
comprehensive range of skilled nursing, infusion therapy and patient management
services on a home care basis for a variety of obstetrical and gynecological
conditions, including pregnancy induced hypertension and gestational diabetes.
Such conditions may be treated with on- going nursing assessment and focused
education at various levels of frequency and intensity, other patient
management and diagnostic services, and blood and urine testing.
Maternal Risk Assessment and Prenatal Education Services. The Company,
through its comprehensive MaternaLinkTM Program, offers a comprehensive risk
assessment and patient education program designed to reduce maternity related
costs by providing expectant mothers with focused education and psychological
support and identifying pregnancies that may be high risk. The Company sells
the program to employers, managed care organizations, health plans and other
third-party payors or administrators who make it available to their respective
employees, insureds or members who are pregnant. Through interviews with the
expectant mother, the Company collects data about the woman, her family/medical
history and other circumstances that might affect her pregnancy. Based on this
information, the nurse provides the woman with education regarding her specific
risks, if any, and recommends appropriate behavior modifications that may
facilitate a healthy outcome. Relevant information collected by the Company is
summarized in reports and provided to the participant's healthcare provider and
case manager. Results of program utilization and effect are summarized for the
client in periodic reports. Both Tokos and Healthdyne, working in conjunction
with HMO's and other managed care organizations, reported improved patient
outcomes and documented cost savings prior to the Merger from their respective
BabyLinks(R) and BabySteps(R) Programs which serve as the foundation for
MaternaLinkTM.
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Other Managed Care Services. The Company is developing service
offerings designed to meet the needs of managed care organizations and provider
networks who render care for such organizations. Managed care organizations
have grown substantially in terms of the percentage of the population that is
covered by such plans, and in terms of their influence over decisions regarding
the utilization of healthcare services. The Company is developing managed care
services that support patients throughout the entire maternal-newborn episode
of care. It also offers data and outcome analysis and other consulting services
to assist managed care organizations to better understand how their resources
are allocated and where savings can be realized.
PATIENT CARE INFORMATION SYSTEMS. Due to the acute nature of high risk
pregnancies, physicians, pharmacists and perinatal nurses must have prompt
access to a patient's medical history, current clinical status and treatment
plan. Tokos and Healthdyne, Matria's predecessor companies, made substantial
investments in the development of information systems to support healthcare
professionals in detecting obstetrical complications, as well as in developing
and implementing individualized treatment plans for their patients. In
addition, they created systems to track patient outcomes and summarize data
regarding patient care. Matria intends to integrate and enhance these systems.
In addition to monitoring devices to access the patient's daily
condition, Matria has a data information system designed to assist managed care
organizations and physician groups in tracking outcomes and summarize data
regarding maternity-related care. This system consists of proprietary software
and processes that collect information about maternity related access, care,
utilization and satisfaction. Methodologies for analyzing data and presenting
information include the use of varied collection data tools, implementation of
a relational data base design and customization of reports to meet client
requirements.
SERVICE LOCATIONS. As of the effective date of the Merger, Tokos and
Healthdyne had approximately 83 service centers throughout the United States
and a number of additional sites of service. Matria is presently in the process
of consolidating a number of the centers in order to avoid duplication in a
given geographic area and to benefit form the synergies created through the
Merger. Matria expects to reduce the number of service centers to approximately
37 plus a number of additional sites of service during the year and to add new
centers only on an as needed basis. All of the patient service centers operate
in accordance with policies, procedures and objectives established by Matria.
JCAHO Accreditation. Both Tokos and Healthdyne sought to have their
service centers accredited by the Joint Commission on Accreditation of Health
Care Organizations ("JCAHO") and had substantially completed the process at the
time of the Merger. Matria intends to continue the procedure and is currently
in the process of requesting either the transfer of the existing accreditation
or the reaccreditation of the centers in Matria's name. Matria hopes to have
the process substantially completed by year end.
MARKETING AND SALES. Matria markets its services through a dedicated
direct sales force to physicians, other healthcare providers, management
service organizations and third-party payors. Matria also maintains a group of
clinical support specialists and a dedicated team of managed care account
managers to support and assist the direct sales force in these efforts. In its
patient services business, Matria stresses the clinical experience of its
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personnel, the quality of its clinical services, and the cost and clinically
effective nature of its therapies when compared to hospitalization.
Matria has a number of contractual and other arrangements with medical
professionals, institutions and third- party payors. These arrangements include
agreements with prepaid health plans under which Matria provides services to
members of the organization at discounted prices, and agreements with medical
professionals and institutions under which Matria provides certain services,
including reimbursement management and billing and collection services.
REIMBURSEMENT. A significant portion of the Company's revenues are
affected directly by the reimbursement policies of third-party payors, such as
private insurance programs and state Medicaid programs. Matria attempts to
focus its marketing efforts on developing private pay accounts. In general,
these accounts pay at a higher rate than government payment programs. Changes
in the funding available from either third party or government payors or in
their reimbursement policies could have an adverse impact on the Company's
business.
Private insurance companies, including HMO's, are the primary source of
reimbursement for Matria, which assumed a substantial number of formal and
informal contractual relationships previously held by Tokos and Healthdyne with
these entities. During 1995, government payors accounted for approximately 6%
of Healthdyne's and 5% of Tokos' revenues. Reimbursement for uterine activity
monitoring is presently available from approximately one-half of the 50 state
Medicaid programs.
Matria assists its patients in obtaining reimbursement from their
insurance companies or other third-party payors. Generally, Matria contacts the
patient's insurance company or other third-party payors before the commencement
of services in order to determine the patient's coverage and the percentage of
charges that the payor will reimburse. Matria's reimbursement specialists then
evaluate the patient's insurance to determine the proper procedures for
submissions of reimbursable claims. Matria typically obtains an assignment of
benefits from the patient that enables Matria to file claims for its services
with the third-party payor. In most cases, third-party payors pay Matria
directly for the reimbursable portions of its charges.
REGULATION. Participants in the healthcare industry, including
providers of services such as those offered by Matria, are subject to extensive
federal, state and local regulation relating to, among other things, licensure,
conduct of operations and the addition of facilities and services, and there
can be no assurance that future regulatory changes will not have a material
adverse effect on the results of operations or financial condition of the
Company. As a provider of services to patients under various government
programs, including certain state Medicaid programs, Matria is subject to the
federal fraud and abuse laws. These laws prohibit any bribe, kickback, rebate,
or payment of other remuneration of any sort in return for the referral of
Medicare or Medicaid patients, and the submission of false claims. Violations
of these provisions may result in civil and criminal penalties and exclusion
from participation in the Medicare and Medicaid programs.
The broad language of the anti-kickback provisions of the fraud and
abuse laws has been interpreted by certain courts and governmental enforcement
agencies in a manner which could impose liability on healthcare providers for
engaging in a wide variety of
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business transactions. Limited "safe harbor" regulations exempt certain
practices from enforcement action under the prohibitions. However, these safe
harbors are only available to transactions which fall entirely within the
narrowly defined guidelines.
Recently, the federal government implemented a policy to increase
significantly the resources allocated to enforce the fraud and abuse laws. The
Office of the Inspector General, in cooperation with other federal agencies,
has announced its intention to scrutinize the activities of home health
agencies, durable medical equipment suppliers and skilled nursing facilities in
California, Florida, Illinois, New York and Texas, states in which Matria has
significant operations. Private insurers and various state enforcement agencies
also have increased their scrutiny of healthcare claims in an effort to
identify and prosecute fraudulent and abusive practices. Matria maintains an
internal regulatory compliance review program and from time to time retains
special counsel to provide advice on compliance with such laws and regulations.
However, no assurance can be given that the practices of Matria, if reviewed,
would be found to be in compliance with such laws, as such laws ultimately may
be interpreted.
In 1993, Congress enacted the so-called "Stark Law," which imposes
civil penalties and exclusions for referrals by physicians to certain entities
with which they have a financial relationship (subject to specified
exceptions). In addition, several states in which Matria operates have laws
that prohibit certain direct or indirect payments or fee- splitting
arrangements between healthcare providers if such arrangements are designed to
induce or encourage the referral of patients to a particular provider. Other
states have enacted or are considering legislation that either prohibits
"physician self-referral" arrangements or requires physicians to disclose any
financial interest they may have with a healthcare provider that such
physicians recommend to their patient. Possible sanctions for a violation of
these restrictions include loss of licensure and civil and criminal penalties.
Such statutes and proposed legislation vary from state to state and seldom have
been interpreted by the courts or regulatory agencies. Strict enforcement of
these regulations is likely. Matria has certain financial relationships with
physicians who may refer, or be in a position to refer, patients for services.
Although Matria believes that these financial relationships meet applicable
exceptions permitting referrals by such physicians, if the laws are
subsequently interpreted to prohibit these relationships, Matria may be
required to further modify these arrangements or to discontinue accepting
referrals from such physicians.
The federal budget reconciliation legislation, which was vetoed by the
President, would have established new fraud and abuse sanctions and penalties
but would have made the Stark prohibitions on physician self-referrals less
restrictive in certain respects. It is not clear whether similar legislation
will become law, or if enacted, what impact such legislation would have on the
services that are offered by Matria, but the elimination of certain
self-referral restrictions could create additional competitive pressures on the
operations of providers of home healthcare, including Matria.
Matria's obstetrical management services utilizing its home uterine
activity monitors account for a substantial portion of its revenues. These
monitors are classified as medical devices under the Federal Food, Drug and
Cosmetic Act (the "FDC Act") and are subject to regulation by the FDA.
Currently, Matria is the only home obstetrical care service provider with
uterine activity monitoring devices - Genesis(R), System 37(R) and CareFoneTM -
that have been approved by the FDA for use, in conjunction with standard high
risk care, for the daily at-home measurement of uterine activities in preterm
pregnancies for women with a previous
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pre-term delivery. In addition, the Term Guard I(R) and Term Guard II(R)
devices obtained by Matria from Tokos are cleared by the FDA for use on
obtaining uterine activity data associated with the onset of full term labor
outside the hospital setting. As a part of the practice of medicine, physicians
may and do prescribe the devices for indications for which the devices are not
labeled, such as for use in detecting preterm labor in general. As a result,
any actions by the FDA which limit the use of such devices or otherwise require
Matria to change its business practices regarding the use of such devices could
have a material adverse effect on the results of operations or financial
condition of Matria.
In addition, some of the services that Matria offers involve the
provision of drugs that are regulated by the FDA under the FDC Act. While these
drugs are labeled for specific indications and cannot be promoted for any other
indications, physicians may and do prescribe the drugs for indications that
have not been approved by the FDA. For example, terbutaline is labeled for the
treatment of asthma but is frequently prescribed by obstetricians as a
tocolytic for the treatment of preterm labor. In May 1993, the FDA Fertility
and Maternal Health Drugs Advisory Committee met to discuss the safety and
efficacy of terbutaline for tocolysis. The Committee recommended that the
manufacturers of terbutaline apply for approval of the drug for the treatment
of preterm labor. Any action by the FDA that limits the ability of Matria to
offer a high risk pregnancy management service involving the administration of
drugs for indications for which the drugs have not been labeled could have a
material adverse effect on the results of operations or financial condition of
Matria.
A variety of regulatory actions are available to the FDA in order to
ensure that regulated firms comply with the provisions of the FDC Act. Although
Matria does not anticipate any enforcement action against it, the commencement
of any such action against Matria which limits the manner in which Matria
conducts its business could have an adverse impact on Matria.
In certain states, the provision of infusion services and other nursing
services to patients in their homes is subject to state home healthcare
licensing and/or certificate of need ("CON") requirements. Matria provides
these types of services. The Company is engaged in an ongoing effort to obtain
information from state regulatory agencies on the application of new and
existing licensing and CON provisions applicable to its business activities.
When applicable, Matria may be required either to obtain a license or other
regulatory approval before it renders these services directly in the home or to
affiliate with other licensed agencies in connection with the delivery of the
nursing services. Although generally a routine aspect of conducting a
healthcare business, compliance with these requirements in certain instances
can be both burdensome and costly. Violation of these state statutes can result
in substantial fines and other penalties. The Company believes that it has
obtained or is in the process of obtaining licenses or consents to the transfer
of licenses from Tokos or Healthdyne, for each facility for which licensing is
required. This is an area of increasing legislative activity, and there can be
no assurance that the Company will not become subject to regulatory and
licensing statutes in other states in which it operates.
In addition, Matria is subject to laws and regulations which relate to
business corporations in general, including antitrust laws, occupational health
and safety laws and environmental laws. None of these laws and regulations has
had a material adverse effect
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on the Company's business or competitive position or required material capital
expenditures on the part of the Company.
Failure to comply with these regulations or laws could adversely affect
Matria's ability to continue to provide, or to receive reimbursement for, its
products and services and could also subject Matria and its officers to
penalties. Changes in these laws or interpretations of existing regulations or
laws could have a material adverse effect on permissible activities of Matria,
the relative costs of doing business and the amount of reimbursement by
government and other third-party payors. In addition, laws and regulations
often are adopted to regulate new products, services and industries. There can
be no assurance that either the states or the federal government will not
impose additional regulations upon the Company's activities which might
adversely affect its results of operations or financial condition.
Matria is unable to predict what legislation, if any, may be enacted in
the future relating to the Company's business or the healthcare industry,
including third-party reimbursement, or what effect any such legislation may
have on Matria.
COMPETITION. The home obstetrical care services market in which Matria
competes is a relatively new market with a growing number of local, regional
and national companies providing these home obstetrical care services. As a
result of the Merger, Matria believes that it is the largest of these companies
whose services are devoted exclusively to home obstetrical care, but
competition exists in substantially all of the metropolitan areas in which
Matria maintains centers.
The principal competitive factors for Matria are the therapies offered,
the expertise of its clinical employees, the ability to provide prompt and
reliable service, the price at which the services are offered, and the
regulatory requirements of the FDA. The Company believes that it generally
competes favorably with respect to these factors.
RECENT CONTROVERSIES. The operations of Tokos and Healthdyne were and
Matria's operations may be affected by several controversies surrounding the
home obstetrical care business. There has been, and continues to be, debate
within the medical community about how to decrease the incidence of
prematurity, which is a major cause of the high U.S. infant mortality rate.
Matria believes that increased surveillance of women at risk of developing
preterm labor can assist the physician in early diagnosis of preterm labor and
help improve the medical outcomes of complicated pregnancies. Matria provides a
comprehensive range of services to assist the physician in this surveillance,
including perinatal nursing, obstetrical pharmacy services and tocolytic
therapy. A significant portion of these services includes the use of home
uterine activity monitoring devices. In September 1992, an eight member
committee of the American College of Obstetricians and Gynecologists ("ACOG")
published an opinion stating, among other things, that the use of home uterine
activity monitoring devices has not been shown to prevent prematurity; while
the committee opinion represented a more recent review of existing literature,
there was essentially no change from its 1989 opinion regarding the independent
benefit of home uterine activity monitoring. Since that time, the FDA has
approved the uterine activity monitors utilized by Matria as safe and effective
for the prediction of the onset of preterm labor in women with a history of a
previous preterm delivery. While Matria does not believe that either home
uterine activity monitoring or any other diagnostic device can in and of itself
improve therapeutic outcomes (e.g., a mammogram cannot prevent breast cancer),
it does believe that monitoring can assist the physician in the early detection
of preterm labor.
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RESEARCH AND DEVELOPMENT. Both Tokos and Healthdyne reduced their
research and development activities in recent years. However, both companies
initiated and funded certain independent clinical research studies concerning
preterm labor.
Matria's research and development strategy is to continue the
development efforts of Tokos and Healthdyne to develop new and more
cost-effective devices and service procedures for providing obstetrical care to
patients in the home environment.
EMPLOYEES. As of the effective date of the Merger, Matria had
approximately 1,431 full-time and regularly scheduled part-time employees, of
which 398 were registered nurses or pharmacists. As part of the consolidation
efforts arising out of the Merger, Matria is currently in the process of
reducing its employees by the equivalent of approximately 400 full time
employees and expects the process to be substantially completed by the
beginning of the third quarter of 1996.
PATENTS, TRADEMARKS AND LICENSES. Matria intends to utilize a number of
the trademarks previously registered by Tokos and Healthdyne, including,
without limitation, System 37(R), Term Guard(R) and Genesis(R), as well as a
number of trademarks and service marks of its own, including Matria(TM) and
MaternaLink(TM), and considers the same to be important to the marketing and
promotion of its services. Matria does not believe that it possesses any
patents which are material to its business. Matria's business does depend and
will likely continue to depend on trade secret protection to strengthen its
proprietary position. Matria requires and its predecessors required their
employees to execute appropriate confidentiality agreements in connection with
their employment. There can be no assurance that these agreements will not be
breached or that Matria will have adequate remedies for such breach.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary information or that Matria can
meaningfully protect its rights in unpatented proprietary technology.
Litigation may be necessary to protect trade secrets or "know-how" owned by
Matria, which could result in substantial costs to, and might have a material
adverse effect on, Matria.
ITEM 2. PROPERTIES.
Matria's principal executive and administrative offices are located at
1850 Parkway Place, Marietta, Georgia, and total approximately 94,700 square
feet. The facility is leased through February 28, 1997. The lease provides for
annual rental payments of $2,063,000.
Additional properties, including the former corporate headquarters of
Tokos in Santa Ana, California, also are leased for the other operations of
Matria. These facilities, which total approximately 337,820 square feet of
space, are leased for various terms through 1999 at aggregate annual rentals of
$3,540,000. Matria's patient service centers are typically located in suburban
office parks and range between 600 and 6,500 square feet of space with an
average of approximately 2,500 square feet. Lease terms are typically three
years or less.
Matria intends to relinquish or sublet a number of these facilities as
a part of the consolidation of the business operations of Tokos and Healthdyne.
Matria believes that it has adequate facilities for the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
In July 1995, Tokos reached a $10 million settlement with the
plaintiffs in a class action securities suit entitled In re Tokos Medical
Corporation Securities Litigation filed in the United States District Court for
Central District of California. The settlement resolved actions against Tokos
and certain of its officers and directors brought in November 1992 and March
1993. The plaintiffs alleged that Tokos made false and misleading statements
about its business and results of operations in violation of federal securities
laws and common law fraud and negligent misrepresentation standards. Tokos'
cost of the settlement was $5.75 million in cash and stock, which is net of
insurance proceeds. Tokos paid $750,000 in cash prior to the Merger, with the
remaining $5.0 million to be paid in cash or by the issuance of Tokos Common
Stock. In the settlement, Tokos denied any wrongdoing or liability. The terms
of the settlement must be approved by the court before the settlement is
effective.
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"), alleging that The Lindner Fund would
not have sold its investment in HNS on February 8, 1994 had Healthdyne and HNS
disclosed the potential sale of HNS. Damages have been requested in the amount
of $1,050,900, representing the aggregate difference between the price received
upon the sale of such stock by The Lindner Fund and the $7.85 per share price
paid by W.R. Grace & Co. on April 6, 1994 for HNS. Healthdyne denied the
allegations set forth in the complaint and Matria is currently defending the
matter vigorously.
In addition to the foregoing, Matria is subject, and in certain
instances is a party to, various legal claims and actions incidental to the
businesses of Tokos and Healthdyne and their respective subsidiaries, including
product liability claims and to a lesser extent professional liability claims.
Matria maintains, as did Tokos and Healthdyne, insurance, including insurance
covering professional and product liability claims, with customary deductible
amounts, and has been indemnified by Healthdyne Technologies, Inc., a former
subsidiary of Healthdyne ("Healthdyne Technologies"), with respect to any claim
relating to equipment manufactured and sold by Healthdyne Technologies,
regardless of the date of manufacture of the equipment in question or whether
the claim arises before or after the May 22, 1995 spin-off of Healthdyne
Technologies. There can be no assurance, however, that (i) additional suits
will not be filed in the future against Matria, (ii) the prior experience of
Tokos and Healthdyne with respect to the disposition of its litigation
accurately indicates the results that will occur in pending or future cases, or
(iii) adequate insurance coverage will be available at acceptable prices for
incidents arising in the future.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Matria's Common Stock is traded in the over the counter market and is
quoted on the Nasdaq National Market ("NASDAQ") under the symbol "MATR". The
approximate number of record holders as of the effective date of the Merger was
3,734.
Trading in Matria Common Stock did not take place prior to the
effective date of the Merger except for the initial purchase of a limited
number of shares by Tokos and Healthdyne as part of the Company's
incorporation.
Neither Matria nor its predecessors, Tokos and Healthdyne, paid any
cash dividends with respect to their respective common stocks. Matria is a
party to an indenture assumed from Healthdyne relating to subordinated
debentures that contains provisions restricting the payment of cash dividends
during the continuation of a default in the payment of interest on the
subordinated debentures.
The high and low sales price of Matria Common Stock from March 11, 1996
(the first day of trading after the effective date of the Merger) through March
22, 1996 was $ 9 and $ 7 7/16, respectively. The high and low sales prices for
Healthdyne Common Stock and Tokos Common Stock, respectively, for the last two
fiscal years is hereby incorporated by reference to the Company's Registration
Statement on Form S-4 (Registration No. 333-00781) filed in connection with the
Merger (the "Matria Form S-4").
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<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information represents for the periods
indicated the financial performance of Tokos (deemed for accounting purposes to
be the acquiror of Healthdyne in the Merger) and is derived from, and should be
read in conjunction with, the historical consolidated financial statements of
Tokos and the related notes thereto incorporated by reference into this
Form-10-K. 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.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Consolidated statements of income:
----------------------------------
Net patient service revenues $ 87,502 $100,696 $120,837 $159,887 $125,147
Operating expenses 87,478 99,014 117,647 128,395 98,085
Provision for doubtful accounts 5,251 7,042 13,656 17,056 13,288
Settlement of litigation 4,300 -0- -0- -0- -0-
Restructuring, severance and other charges
2,456 -0- 14,000 -0- -0-
Transaction expenses -0- -0- -0- 2,982 955
Purchased marketing rights -0- -0- -0- -0- 8,000
-------- -------- -------- -------- --------
99,485 106,056 145,303 148,433 120,328
-------- -------- -------- -------- --------
Income (loss) from operations (11,983) (5,360) (24,466) 11,454 4,819
Interest income (expense), net 339 51 39 39 134
-------- -------- -------- -------- --------
Income (loss) before taxes (11,644) (5,309) (24,427) 11,493 4,953
Income taxes 150 550 1,956 5,030 2,505
-------- -------- -------- -------- --------
Net Income (loss) $(11,794) $ (5,859) $(26,383) $ 6,463 $ 2,448
======== ======== ======== ======== ========
Earnings (loss) per common and common
equivalent share $ (0.68) $ (0.34) $ (1.53) $ 0.37 $ 0.14
======== ======== ======== ======== ========
Weighted average number of common and
common equivalent shares outstanding
17,396 17,169 17,240 17,568 17,382
======== ======== ======== ======== ========
December 31,
----------------------------------------------------------------------
1995 1994 1993 1992 1991
------ ---- ---- ---- ------
(In thousands)
Consolidated balance sheet data:
--------------------------------
Total assets $ 44,583 $ 58,390 $ 69,959 $ 99,886 $ 86,964
Long-term obligations, excluding current
maturities 2,124 2,593 3,348 5,182 5,035
Stockholders' equity 29,489 40,160 46,875 74,952 60,490
</TABLE>
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<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF TOKOS.
GENERAL.
On March 8, 1996, Tokos Medical Corporation ("Tokos") and Healthdyne,
Inc. (Healthdyne") merged with and into Matria Healthcare, Inc., a Delaware
corporation ("Matria") 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, among Tokos, Healthdyne and Matria, each share of common stock
outstanding on March 8, 1996 of Tokos and Healthdyne was exchanged for one
share of Matria Common Stock. Matria issued approximately 17,007,000 shares of
Common Stock to the former Healthdyne shareholders and approximately 17,655,000
shares to Tokos shareholders. The Merger will be accounted for using the
purchase method of accounting, and Tokos will be deemed to be the acquiror
since its shareholders received approximately 51% of the newly issued shares of
Matria Common Stock.
Matria's present operations and future prospects may be influenced by
several factors, including developments in the healthcare industry, third-party
reimbursement policies and practices, and changes in regulatory requirements or
the manner in which such requirements are enforced. As a result of the
increasing cost of health care in the United States and overall efforts to
reduce or control government and corporate spending, government and third-party
payors are becoming increasingly focused on promoting cost-effective healthcare
services, and payors, in particular, have become more involved in decisions
regarding diagnosis and treatment to ensure that care is delivered in a
cost-effective manner.
Substantially all of Matria's current revenues are derived directly
from third-party payors for services rendered to patients by Matria. The
financial performance of all healthcare companies, including Matria, could be
adversely affected by the financial condition of certain governmental and
private payors and by their continuing efforts to reduce healthcare costs by
lowering reimbursement rates, increasing medical reviews of invoices for
services and negotiating for reduced contract rates. Matria and its predecessor
companies have responded to these developments by attempting to emphasize
cost-effective therapies and procedures, pre-qualifying insurance coverage
prior to the delivery of services and educating third-party payors on the
benefits of Matria's home therapies. Although reduction in the reimbursement
rates that Matria receives for services rendered could have an adverse impact
on Matria, Matria is hopeful that the overall cost-effective nature of
treatment in the home (as compared to hospitalization), coupled with the
potential benefits to be derived from prenatal care, will be recognized and
encouraged by any new healthcare initiatives.
The trend within the healthcare industry to deliver quality healthcare
services in a more cost-effective manner has had an impact on Matria's
predecessor companies and is expected to continue to have an impact on Matria.
Driven by employers and third-party payors, as well as by legislation and
regulation, prices for services provided to patients, in general, are being
reduced, cost-effective preventative health care is being stressed and
vertically integrated networks of care providers (some of whom are accepting
the insurance risk of providing care through capitation contracts with
third-party payors) are being
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<PAGE> 15
established. Matria anticipates that this trend will continue and is attempting
to focus its efforts on services, some of which are offered in conjunction with
third-party payors, which it believes can benefit from this new environment.
There can be no assurance, however, that either additional changes or presently
unforeseen consequences from this trend may not develop.
The following discussion of the results of operations and financial
condition of Tokos, as the acquiror in the Merger, should be read in
conjunction with consolidated financial statements and related notes of Tokos
and Healthdyne incorporated into this Annual Report on Form 10-K for the year
ended December 31, 1995 as filed with the Securities and Exchange Commission
(the "Commission"). Since neither the results of Healthdyne are reflected in
the following discussion, nor the synergies expected to be achieved from the
Merger, the historical results of operations and financial condition of Tokos
are not necessarily indicative of the results that will be achieved by Matria
during future periods.
RESULTS OF OPERATIONS.
For the Year Ended December 31, 1995
For the year ended December 31, 1995, Tokos had net revenues of $87.5
million and a net loss of $11.8 million ($.68 per share), compared with net
revenues of $100.7 million and a net loss of $5.9 million ($.34 per share) for
the preceding year.
Of the $11.8 million loss for 1995, $4.3 million ($.25 per share)
resulted from a settlement with the plaintiffs in the class action securities
suit entitled In re Tokos Medical Corporation Securities Litigation. The charge
to income of $4.3 million during the quarter ended June 30, 1995 is in addition
to an aggregate amount of $1.45 million which had been charged to general and
administrative expenses in 1994. Tokos agreed to settle the securities class
action lawsuit to avoid further dilution of corporate resources, including
management time and focus, as well as to avoid further legal costs and
uncertainties associated with taking the case to trial.
The $13.2 million decrease in net revenues, or 13.1%, for 1995 from
1994 primarily resulted from a decrease in preterm labor management patient
service days. The decrease in preterm labor management patient service days
resulted from reduced physician referrals and shorter average days on service
per patient. Due to the increasing role of managed care entities in clinical
decision-making, Tokos redirected its sales efforts in order to assist in a
transition from a specialty homecare provider to a broader maternal-newborn
managed care organization. The redirected sales efforts included more resources
being focused on third-party payor customers and initiatives and less on the
physician-driven business. For example, as positions were vacated they were
filled by individuals with more managed care experience. Other individuals
were recruited to focus chiefly on leads for risk products, shared risk
arrangements and multi-product sales. Other employees were cross-trained and
moved from a physician focus to managed care. With the Merger, Matria believes
that it is important to continue efforts to develop new managed care
initiatives, but also to continue the type of physician sales force efforts
that have been successful for Healthdyne.
15
<PAGE> 16
Revenues at Matria will increase in 1996 as a result of the addition of
Healthdyne's revenues to the revenues of Tokos (Healthdyne's 1995 revenues were
$69.6 million). Additional revenues are expected in 1996 from the marketing of
a new product, the fetal fibronectin immunoassay, an in vitro diagnostic device
used as an aid in assessing the risk of preterm delivery within 7 to 14 days
from the time of sample collection in women with symptoms of preterm labor.
Through a marketing agreement entered into by Tokos in 1991 Matria has
exclusive rights to market this product in the United States and Canada. In
September 1995, the FDA approved a Pre-Market Approval Application for this
product. Matria expects to begin marketing the product during the second
quarter of 1996.
Cost of patient services at Tokos increased to 79.8% of net revenues
for 1995 compared with 76.7% of net revenues for 1994. Although a decrease in
absolute dollars was achieved through further consolidation of service sites
and other cost reduction activities, revenue levels continued to decline at a
faster rate than expenses.
General and administrative expenses decreased $3.0 million to $17.1
million (19.6 % of net revenues) for 1995 compared with $20.2 million (20.0% of
net revenues) for 1994. The decrease in absolute dollars primarily relates to
expense reductions implemented by Tokos due to the decline in its net revenues,
in addition to a reduction in legal fees related to the settlement of the
shareholder lawsuit.
Excluding the amortization of the additional goodwill and other
intangibles associated with the Merger (approximately $30 million per year for
five years), Matria expects to achieve annualized cost savings from the
combined costs of Tokos and Healthdyne of approximately $30 million by 1997
primarily as a result of reductions of patient services center expenses in
overlapping geographic locations, elimination of duplicate facilities including
corporate headquarters, and synergies in staff and functional areas. However,
no assurance can be given that difficulties will not be encountered in
integrating the operations of Tokos and Healthdyne or that the full benefits
and attendant cost savings expected from such the integration will be realized
or achieved in the expected time frame.
As a result of the Merger, a large percentage of the assets reflected
on Matria's balance sheet will be intangible assets or goodwill (as opposed to
tangible assets such as cash, accounts receivable, inventory and equipment). At
December 31, 1995, on a pro forma basis reflecting consummation of the Merger
on that date, Matria's total assets would have been approximately $263.7
million, on which approximately $153.6 million, or 58.2% of total assets, would
have been goodwill. In addition, the amortization or any future write-down of
such goodwill by Matria could have a material adverse effect on the results of
operations of Matria.
Tokos provided and Matria will provide for estimated uncollectable
accounts as revenues are recognized. The provision for doubtful account as a
percentage of net revenues was 6.0% for 1995 compared with 7.0% for 1994. 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.
Research and development expenses at Tokos were $513,000 for 1995
compared to $1.6 million for 1994. This decrease primarily resulted from
decisions to eliminate equipment development activities, and to significantly
reduce its clinical research and systems development activities.
16
<PAGE> 17
During 1995, as Tokos' revenues continued to decline, specific
decisions were made and communicated by management related to cost reduction
efforts. The cost reduction plan consisted of reductions in the workforce of
approximately 105 employees, comprised of personnel within information systems,
reimbursement, administrative support and to a lesser extent clinical service,
and termination of several facility leases. In connection with these cost
reduction activities, Tokos incurred in 1995, $2.5 million in expenses. $1.8
million related to involuntary severance costs of affected employees, $332,000
related to the consolidation of facilities and $290,000 in other related costs.
Tokos recorded income tax expenses of $150,000 related to state
franchise taxes in 1995. Tokos recorded no federal and state income tax
benefits in 1994 and 1995. The operating loss will be available to offset
future taxable income, if any.
For the Year Ended December 31, 1994
Net revenues at Tokos decreased 16.7% to $100.7 million in 1994
compared with $120.8 million in 1993. The decrease in net revenues primarily
resulted from a decline in preterm labor management patient service days and a
shift in patient service mix. The decline in patient service days was primarily
the result of reduced physician referrals and shorter average days on service
per patient. A shift in service mix to patients receiving less intensive
preterm labor management services and other homecare services, which generate
less revenue per patient day than higher intensive infusion therapies, also
contributed to the revenue decline.
Cost of patient services at Tokos remained relatively constant as a
percentage of net revenues at 76.7% in 1994 compared with 76.5% in 1993. The
cost of patient services decreased $15.2 million during 1994 in response to
lower revenue levels.
General and administrative expenses at Tokos increased as a percentage
of net revenue to 20.0% in 1994 compared with 18.9% in 1993. General and
administrative expenses decreased $2.7 million during 1994 in response to
expense reductions due to the decline in net revenues; however, since net
revenues declined at a faster rate than expenses during 1994 and became a
higher percentage of net revenues. Certain costs such as corporate facilities
and essential administrative personnel, insurance and depreciation are
relatively fixed by their nature and could not be reduced as quickly as revenue
decreased.
Tokos provided, and Matria will provide, for estimated uncollectable
accounts as revenues are recognized. The provisions for doubtful accounts as a
percentage of net revenues was reduced to 7.0% in 1994 compared with 11.3% in
1993. The percentage provision decreased in 1994 compared to 1993 primarily as
a result of improved collections on revenues generated under contractual
agreements and as a result of improved insurance clearance and billing
processes. The percentages of net revenue generated under contractual
arrangements were 80% in 1993 and 85% in 1994. The provision rate was adjusted
periodically based upon Tokos' 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.
Research and development expenses were $1.6 million in 1994 compared
with $2.4 million in 1993. This decrease primarily resulted from Tokos'
decision to eliminate all
17
<PAGE> 18
equipment development activities and reduce ongoing clinical research and
systems development activities.
During the second and fourth quarters of 1993, Tokos' Board of
Directors approved plans to restructure operations in response to significant
declines in revenue and the uncertainties surrounding the changing healthcare
environments affecting the business. Tokos recorded restructuring charges
totaling $14.0 million in 1993 related to those decisions to restructure its
operations by, among other things, reducing the number of its monitoring
centers, centralizing patient intake and claims administration, reducing
in-house manufacturing and product development activities, and changing its
strategy regarding support of certain patient service equipment and patient
monitoring devices. The restructuring charges included $10.6 million in cash
expenses, of which $5.7 million related to involuntary severance costs of more
than 360 full and part-time employees, $3.5 million related to costs associated
with the consolidation of certain administrative functions and 22 monitoring
sites, as well as reduction of manufacturing activities, and $1.4 million
related to other restructuring costs. Actual cash expenditures during 1993
totaled $4.5 million, with the remaining $6.1 million paid in 1994.
During 1994, $5.5 million in restructuring charges were expended with a
remaining accrual at December 31, 1994 of $628,000. The amounts expended
include $3.3 million related to involuntary severance costs and $2.2 million
related to costs associated with the consolidation of certain administrative
functions and monitoring sites. Certain reclassifications of those amounts have
been made within the restructuring categories from those previously reported,
none of which are significant. The impact of restructuring activities
implemented during 1993 resulted in reductions of operating costs of
approximately $18.0 million in 1994 compared with 1993.
Tokos incurred $550,000 of income tax expense in 1994 compared with
$2.0 million in 1993. Income tax expense recorded in 1994 resulted from
provisions for state franchise taxes and for potential settlement of the
examination by the Internal Revenue Service ("IRS") for the 1991, 1990, and
1989 tax years. During 1994, Tokos recorded no federal and state income tax
benefits.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31,1995 Tokos had cash and short-term investments of
$8.0 million and Healthdyne had cash and short-term investments of $35.8
million.
Net cash provided by operating activities at Tokos was $4.7 million for
1995, compared with $6.8 million for 1994. Operating cash flow at Tokos
decreased in 1995 compared with 1994 primarily due to the increase in the net
loss for the year. Net cash used by Tokos in investing activities declined to
$2.5 million in 1995 from $2.6 million in 1994. During 1995, Tokos purchased
approximately 56% of the physician-owned companies for which it originally
provided services for an aggregate purchase price of $2.6 million consisting of
cash of $1.1 million and notes payable of $1.5 million. During late 1994 and
1995 Tokos completed the purchase of approximately 96% of those entities. The
notes issued in connection with these acquisitions aggregate $3.1 million and
have a balance outstanding of $2.2 million at December 31, 1995. The remaining
balances are to be paid at various times over the next one to four years.
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<PAGE> 19
In July 1995, Tokos reached a $10.0 million settlement with the
plaintiffs in a class action securities suit. Tokos has accrued an aggregate
liability, net of insurance proceeds, of $5.75 million for its portion of the
settlement. Tokos has paid $750,000 cash with the remaining $5.0 million
payable by Matria in cash or by the issuance of Matria Common Stock in 1996.
Tokos made capital expenditures of approximately $2.0 million during
1995 primarily for the purchases of computer and general office equipment used
in its corporate offices and clinical sites of service. Such capital
expenditures consisted of agreements to purchase equipment under capital lease
obligations of $604,000 and cash purchases of $1.4 million. At December 31,
1995 Tokos had no material commitments for capital expenditures and with the
Merger with Healthdyne in 1996, Matria does not expect to have significant
additions of capital expenditures in future periods.
Payments of long term debt of $7.1 million in 1995 were primarily
payment of debt related to the acquisition of the physician-owned companies,
payment of amounts due to Adeza Biomedical Corporation ("Adeza"), and payments
of capital leases. In 1991, Tokos acquired from Adeza the exclusive rights to
market Adeza's fetal fibronectin immunoassay in the United States and Canada
pursuant to a Marketing Agreement. In January 1995, Adeza received notification
from the FDA that its Pre-Market approval ("PMA") application for fetal
fibronectin immunoassay was accepted for filing and Tokos paid Adeza $2.5
million of the remaining $4.0 million outstanding obligation. In October 1995,
Adeza received final approval of its PMA application and the remaining $1.5
million was paid. Matria and Adeza are currently engaged in discussions to
effect modification to their Marketing Agreement. Adeza and Matria have
discussed a number of proposals that would resolve the outstanding contractual
disagreements, but to date, the parties have not reached agreement on any of
these proposals. Further, there can be no assurance that the negotiations
currently underway will result in an agreement that satisfactorily resolves the
outstanding issues between the Matria and Adeza. Moreover, failure to reach an
agreement with Adeza could have an adverse effect on the timing of the
introduction by Matria of fetal fibronectin into the market and Matria's
ability to derive revenues from sales of this product.
Matria will incur substantial costs in connection with the Merger.
These costs include (i) restructuring costs to be incurred by Tokos of
approximately $14.1 million, consisting of $4.1 million relating to severance
costs of terminated employees, $2.5 million of lease termination costs for
duplicate facilities $5.3 million for the write-off of computer equipment and
$2.2 million for other Merger-related expenses, (ii) additional liabilities to
be incurred by Healthdyne as a result of the Merger of approximately $9.4
million, consisting of $9.2 million relating to severance costs of terminated
employees and $200,000 for patient service centers specifically identified to
be closed; and (iii) transaction costs of approximately $3.8 million,
consisting of $2.3 million for investment banking fees, $1.0 million for legal
and accounting fees and $490,000 for other costs such as document printing and
mailing and filing fees.
Additionally, Matria may be required to make additional severance
payments of approximately $7.9 million in accordance with employment agreements
with certain officers of Tokos and Healthdyne, and may be required to place in
trust approximately $3.2 million under a retirement benefit awards program for
such officers.
Matria believes that its current cash balances, including those
acquired from Healthdyne, and expected cash flows from operations and investing
activities, along with
19
<PAGE> 20
amounts available under the $10.0 million line of credit assumed from Tokos
will be sufficient to finance its current operations for at least the next
twelve months.
This Management's Discussion and Analysis contains forward-looking
statements including statements concerning expected increases in revenues
arising from the Merger, expected increased revenues arising from the marketing
of fetal fibronectin immunoassay, expected synergies arising from the Merger,
the effect of goodwill on the Company's results of operations, capital
expenditures to be made in the future and the adequacy of Matria's sources of
cash to finance its current and future operations. These forward-looking
statements involve a number of risks and uncertainties. In addition to the
factors discussed above, among other factors that could cause actual results to
differ materially are the following: business conditions and growth in the home
healthcare industry and the general economy; competitive factors, such as the
possible entry of large diversified healthcare companies into the obstetrical
home healthcare business, new technologies and pricing pressures; changes in
third-party reimbursement policies and practices and regulatory requirements
applicable to the Company's business; management decisions to pursue new
product lines or lines of business which involve additional costs, risks or
capital expenditures; and the risk factors listed from time to time in the
Company's SEC reports, including but not limited to, this Annual Report on Form
10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
At December 31, 1995, Matria had no material assets or operations.
Accordingly, and because Tokos was deemed the acquiror in the Merger, the
financial statements of Tokos and its subsidiaries and the independent
auditor's report thereon are incorporated herein by reference to the Report on
Form 8-K, dated March 7, 1996, filed by the Company on March 22, 1996 and
amended by Form 8-K/A, dated March 29, 1996 (the "Form 8-K").
In addition, reference is made to the financial statements of
Healthdyne (deemed the acquired company in the Merger) which are incorporated
herein by reference to the Form 8-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
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<PAGE> 21
PART III
ITEMS 10-13.
The information required to be provided by Items 10 through 13 of Form
10-K is set forth under the following captions of the Matria Form S-4 and is
hereby incorporated herein by reference: "Description of Tokos - Executive
Compensation" and "Certain Transactions"; "Description of Healthdyne -
Executive Compensation" and "Certain Transactions"; "The Merger Agreement -
Treatment of Stock Options and Convertible Securities"; "The Merger-Interests
of Certain Persons in the Merger"; and, "Operation, Management and Business of
Newco After the Merger-Management of Newco" and "Newco Principal Stockholders."
Matria provided no compensation to any director or executive officer on
1995. Matria has assumed, however, and is responsible for all outstanding
obligations of either Tokos and Healthdyne to their respective directors and
executive officers, including those who are directors and executive officers of
Matria. These include the assumption of all outstanding stock options under the
predecessors' stock option plans, severance agreements, and retirement awards,
all as described in the information incorporated herein by reference.
In addition to reimbursement for their out-of-pocket expenses,
non-employee directors of Matria receive a quarterly retainer of $3,000, or
$12,000 per annum, plus $1,000 for each meeting of the Board of Directors or
any meeting of a Committee of the Board of Director held on a date separate
from a meeting date of the Board. Non-employee directors of the Company are
eligible to participate in the Company's 1996 Director Non-Qualified Stock
Option Plan, which provides for the annual grants to each non-employee director
of options to purchase 5,000 shares of Matria Common Stock. Options under this
plan are outstanding for a period of ten years and vest in equal monthly
installments over a twelve month period from the date of grant.
Executive officers of the Company are eligible to participate in the
Company's 1996 Stock Incentive Plan and the Company's Employee Stock Purchase
Plan. Options under the 1996 Stock Incentive Plan may be incentive options or
non- qualified options with or without stock appreciation rights, are granted
at the discretion, of and on such terms as are approved by, the Stock Option
Committee of the Board of Directors; provided, however, that all options must
be granted at the fair market value of the underlying Matria Common Stock on
the date of grant. Shares of Matria Common Stock may be purchased by employees
through a payroll deduction plan of up to ten percent (10%) of the employees
base salary under the 1996 Employee Stock Purchase Plan at a price equal to
eighty-five percent (85%) of the lower of the price of Matria Common Stock on
the first or last day of the calendar quarter.
Section 16(a) of the Securities Exchange Act of 1934 as amended (the
"Act") requires the Company's directors, executive officers and persons who own
more than ten percent of a registered class of the Company's equity securities
file with the SEC regarding beneficial ownership of Matria Common Stock and
other equity securities of Matria. To the Company's knowledge, based solely on
a review of copies of such reports furnished to the Company, all officers,
directors and greater than ten percent beneficial owners complied with the
Section 16 (a) filing requirements of the Act during 1995.
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<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(A)(1) The financial statements of Tokos and Healthdyne and their
respective subsidiaries and the respective reports of independent auditors
thereon are incorporated by reference herein from the Report on Form 8-K, dated
March 8, 1996 and filed on March 22, 1996, as amended by Form 8-K/A, dated
March 29, 1996. A copy of such financial statements are filed herewith as
Exhibits 99.0 and 99.1.
(A)(2) The following supporting financial statement schedule is
included as part of this Annual Report on Form 10-K:
Schedule II - Valuation and Qualifying Accounts - Tokos Medical
Corporation (Delaware).
All other Schedules are omitted because the required information is
inapplicable or the 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:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
NUMBER
<S> <C>
2 Agreement and Plan of Merger, dated October 2, 1995, as amended, between Healthdyne,
Tokos and Registrant (included as Appendix A to the Joint Proxy Statement/Prospectus
filed as part of the Company's Registration Statement No. 333-00781 on Form S-4
(Registration No. 333-00781) filed February 7, 1996 (the "Form S-4") and incorporated
herein by reference).
3.1 Amended and Restated Certificate of Incorporation (included as Appendix D to the Joint
Proxy Statement/Prospectus filed as a part of the Company's Form S-4 and incorporated
herein by reference).
3.2 Bylaws (included as Appendix E to the Joint Proxy Statement/Prospectus filed as part
of the Company's Form S-4 and incorporated herein by reference).
4.1 Indenture dated as of December 1, 1986, between Healthdyne and National Bank of
Georgia, trustee, for 8% Convertible Subordinated Indentures due December 31, 2001
(filed as Exhibit (4)(b) to the Healthdyne Annual Report on Form 10-K for the year
ended December 31, 1986 and incorporated herein by reference).
4.2 Form of Supplemental Indenture between Registrant and SouthTrust Estate & Trust
Company of Georgia, N.A., Trustee, to Debenture, dated as of December 1, 1986, for 8%
Convertible Subordinated Indentures due December 31, 2001 (filed as Exhibit 4.2 to the
Company's Form S-4 and incorporated herein by reference).
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C>
10.1 Form of Rights Agreement between Registrant and SunTrust Bank, Atlanta (filed as
Exhibit 10.1 to the Company's Form S-4 and incorporated herein by reference).
10.2 1996 Stock Incentive Plan (included as Appendix F-I to the Joint Proxy
Statement/Prospectus filed as a part of the Company's Form S-4 and incorporated herein
by reference).
10.3 1996 Directors' Non-Qualified Stock Option Plan (included as Appendix F-II to the
Joint Proxy Statement/Prospectus filed as a part of the Company's Form S-4 and
incorporated herein by reference).
10.4 1996 Employee Stock Purchase Plan (included as Appendix F-III to the Joint Proxy
Statement/Prospectus filed as a part of the Company's Form S-4 and incorporated herein
by reference).
10.5 Distribution Agreement, dated as of April 21, 1995, between Healthdyne and Healthdyne
Technologies (filed as Exhibit 10.18 to the Healthdyne Technologies Current Report on
Form 8-K, dated May 1, 1995 (the "Technologies Form 8-K"), and incorporated herein by
reference).
10.6 Amendment to Distribution Agreement, dated as of May 4, 1995, between Healthdyne and
Healthdyne Technologies (filed as Exhibit (10)(xx) to the Healthdyne Quarterly Report
on Form 10-Q for the period ended March 31, 1995 and incorporated herein by
reference).
10.7 Corporate Services Agreement, dated as of April 21, 1995, between Healthdyne and
Healthdyne Technologies (filed as Exhibit 10.21 to the Technologies Form 8-K and
incorporated herein by reference).
10.8 Tax Indemnification Agreement, dated as of April 21, 1995, between Healthdyne and
Healthdyne Technologies (filed as Exhibit 10.20 to the Technologies Form 8-K and
incorporated herein by reference).
10.9 Tax Sharing Agreement, dated as of March 31, 1993, between Healthdyne and Healthdyne
Technologies (filed as an Exhibit to the Registration Statement on Form S-1 of
Healthdyne Technologies (Registration No. 33-60708), dated April 6, 1993, and
incorporated herein by reference).
10.10 Agreement Concerning Taxes, dated as of April 21, 1995, between Healthdyne, Healthdyne
Technologies and Health Scan Products, Inc. (filed as an exhibit to the Technologies
Form 8-K, and incorporated herein by reference).
10.11 Trademark License Agreement, dated as of April 21, 1995, between Healthdyne and
Healthdyne Technologies (filed as Exhibit 10.23 to the Technologies Form 8-K and
incorporated herein by reference).
10.12 OEM Design and Manufacturing Agreement, dated as of April 21, 1995, between Healthdyne
and Healthdyne Technologies (filed as Exhibit 10.22 to the Technologies Form 8-K and
incorporated herein by reference).
10.13 Management and Transition Agreement, dated as of July, 1, 1995, between Healthdyne and
Healthdyne Technologies (filed as Exhibit 10.25 to the Technologies Quarterly Report
on Form 10-Q, dated June 30, 1995 and incorporated herein by reference).
</TABLE>
23
<PAGE> 24
<TABLE>
<S> <C>
10.14 Distribution Agreement, dated as of October 20, 1995, between Healthdyne and
Healthdyne Information Enterprises, Inc. ("HIE") (filed as Exhibit 2.1 to Amendment
No. 1 to the Registration Statement on Form S-1 of HIE (Registration No. 33-96478)
dated October 24, 1995 (the "HIE Form S-1"), and incorporated herein by reference).
10.15 Tax Indemnity Agreement, dated as of October 20, 1995, between Healthdyne and HIE
(filed as Exhibit 10.2 to Amendment No. 1 to the HIE Form S-1 and incorporated herein
by reference).
10.16 Tax Disaffiliation Agreement, dated as of October 20, 1995, between Healthdyne and HIE
(filed as Exhibit 10.3 to Amendment No. 1 to the HIE Form S-1 and incorporated herein
by reference).
10.17 Corporate Services Agreement, dated as of October 20, 1995, between Healthdyne and HIE
(filed as Exhibit 10.1 to Amendment No. 1 to the HIE Form S-1 and incorporated herein
by reference).
10.18 License Agreement, dated October 20, 1995, between Healthdyne and HIE (filed as
Exhibit 10.4 to Amendment No. 1 to the HIE Form S-1 and incorporated herein by
reference).
10.19 Secured Note Collateral Agreement, Restricted Stock Purchase Agreement and Secured
Promissory Note, each dated as of July 1, 1981, between Healthdyne and Parker H. Petit
(filed as exhibits to Registration Statement No. 2-74494 and incorporated herein by
reference).
10.20 Amendment to Secured Promissory Note, dated as of July 1, 1981, between Healthdyne and
Parker H. Petit (filed as Exhibit (10)(g) to the Healthdyne Annual Report on 10-K for
the year ended December 31, 1985 and incorporated herein by reference).
10.21 Amendments to Secured Promissory Note and Secured Note Collateral Agreement, dated as
of July 1, 1981, between Healthdyne and Parker H. Petit (filed as exhibits to the
Healthdyne Annual Report on 10-K for the year ended December 31, 1986 and incorporated
herein by reference).
10.22 Severance Compensation and Restrictive Covenant Agreement, dated October 2, 1995,
between Healthdyne and Frank D. Powers (filed as Exhibit 10.22 to the Company's Form
S-4 and incorporated herein by reference).
10.23 Form of Healthdyne Executive Non-qualified Retirement Plan and Trust (filed as Exhibit
(10) (qq) to the Healthdyne Annual Report on Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
10.24 Amendment No. 1 to Employment Agreement, dated as of October 2, 1995, between Tokos
and Robert F. Byrnes (filed as Exhibit 10.24 to the Company's Form S-4 and
incorporated herein by reference).
</TABLE>
24
<PAGE> 25
<TABLE>
<S> <C>
10.25 Amendment No. 1 to Employment Agreement, dated as of October 2, 1995, between Tokos
and Nicholas A. Mione (filed as Exhibit 10.25 to the Company's Form S-4 and
incorporated herein by reference).
10.26 Amendment No. 1 to Employment Agreement, dated as of October 2, 1995, between Tokos
and Terry Bayer (filed as Exhibit 10.26 to the Company's Form S-4 and incorporated
herein by reference).
10.27 Memorandum of Understanding, dated July 31, 1995, between Tokos, Tokos Medical
Corporation (California), Robert F. Byrnes, Craig T. Davenport and Nicholas A. Mione,
and plaintiffs in the Tokos Medical Corporation Securities Litigation (filed as
Exhibit 10.27 to the Company's Form S-4 and incorporated herein by reference).
10.28 Exclusive Marketing Agreement, dated December 31, 1991, between Tokos and Adeza
Biomedical Corporation (filed as an Exhibit to the Tokos Annual Report on Form 10-K
dated March 27, 1992 with those portions omitted for confidentiality reasons filed
separately with the Commission and incorporated herein by reference).
10.29 Form of Tokos Executive Non-qualified Retirement Plan and Trust (filed as Exhibit
10.29 to the Company's Form S-4 and incorporated herein by reference).
10.30 Employment Agreement, dated as of June 1, 1995, between Tokos and Nicholas A. Mione
(filed as Exhibit 10.30 to the Company's Form S-4 and incorporated herein by
reference).
10.31 Employment Agreement, dated as of May 1, 1995, between Tokos and Robert F. Byrnes
(filed as Exhibit 10.31 to the Company's Form S-4 incorporated herein by reference).
10.32 Employment Agreement, dated as of January 1, 1995, between Tokos and Terry P. Bayer
(filed as Exhibit to the Company's Form S-4 and incorporated herein by reference).
10.33 Amended and Restated Severance Compensation and Restrictive Covenant Agreement, dated
October 2, 1995, between Healthdyne and Parker H. Petit (filed as Exhibit (10)(ggg) to
the Healthdyne Quarterly Report on Form 10-Q for the period ended September 30, 1995
and incorporated herein by reference).
10.34 Amended and Restated Severance Compensation and Restrictive Covenant Agreement, dated
October 2, 1995, between Healthdyne and J. Brent Burkey (filed as Exhibit (10)(ddd) to
the Healthdyne Quarterly Report on Form 10-Q for the period ended September 30, 1995
and incorporated herein by reference).
10.35 Amended and Restated Severance Compensation and Restrictive Covenant Agreement, dated
October 2, 1995, between Healthdyne and Donald R. Millard (filed as Exhibit (10)(fff)
to the Healthdyne Quarterly Report on Form 10-Q for the period ended September 30,
1995 and incorporated herein by reference).
10.36 Form of Promissory Note with Tokos officers and related Security Agreement (filed as
an Exhibit to the Tokos Registration Statement on Form S-1 (Registration No. 33-33340)
and incorporated herein by reference).
</TABLE>
25
<PAGE> 26
<TABLE>
<S> <C>
10.37 Amended and Restated Severance Compensation and Restrictive Covenant Agreement, dated
October 2, 1995, between Healthdyne and J. Terry Dewberry (filed as Exhibit (10)(eee)
to the Healthdyne Quarterly Report on Form 10-Q for the period ended September 30,
1995 and incorporated herein by reference).
10.38 Amended and Restated Severance Compensation and Restrictive Covenant Agreement dated
October 2, 1995, between Healthdyne and J. Paul Yokubinas (filed as Exhibit (10)(hhh)
to the Healthdyne Quarterly Report on Form 10-Q for the period ended September 30,
1995 and incorporated herein by reference).
The following exhibits are filed as a part of this Report:
3.1 Restated Certificate of Incorporation.
4.3 Supplemental Indenture dated March 7, 1996, between the Company and SouthTrust Estate
& Trust Company of Georgia, N.A., Trustee to Indenture, dated December 1, 1986, for 8%
Convertible Subordinated Debentures due December 31, 2001.
21.0 List of Subsidiaries.
27 Financial Data Schedule (for SEC use only).
99.0 Financial Statements of Tokos Medical Corporation (Delaware) (filed as part of of the
Company's Form 8-K dated March 8, 1996, as amended by the Company's Form 8-K/A dated
March 29, 1996 and incorporated herein by reference).
99.1 Financial Statements of Healthdyne, Inc. (filed as part of the Company's 8-K dated
March 8, 1996, as amended by the Company's Form 8-K/A dated March 29, 1996 and
incorporated herein by reference).
99.2 Copies of sections of the Joint Proxy Statement/Prospectus included as part of the
Company's Form S-4 incorporated by reference into this Annual Report on Form 10-K.
(b.) Reports on Form 8-K.
None. A report on Form 8-K concerning the acquisition by Matria of Tokos and
Healthdyne was filed on March 22, 1996 and amended by Form 8-KA dated March 29, 1996.
</TABLE>
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
MATRIA HEALTHCARE, INC.
March 28, 1996 By:/s/ Parker H. Petit
--------------------------------
Parker H. Petit, Chairman of the
Board
March 28, 1996 By:/s/ Robert F. Byrnes
--------------------------------
Robert F. Byrnes, President
and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Parker H. Petit and Robert F.
Byrnes, and each of them, his or her true and lawful attorneys-in-fact and
agents, 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 attorneys-in-fact and
agents 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 attorneys-in-fact and agents, or
their 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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Parker H. Petit Chairman of the Board
- ------------------- and Director March 28, 1996
Parker H. Petit
President and Chief Executive Officer
(Principal Executive Officer)
/s/ Robert F. Byrnes and Director March 28, 1996
- --------------------
Robert F. Byrnes
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Senior Vice President-Finance,
Chief Financial Officer
and Treasurer (Principal
Financial and Accounting
/s/ Donald R. Millard Officer) March 28, 1996
- ---------------------
Donald R. Millard
/s/ Craig T. Davenport Director March 28, 1996
- ----------------------
Craig T. Davenport
/s/ Thomas W. Erickson Director March 28,1996
- ----------------------
Thomas W. Erickson
/s/ David L. Goldsmith Director March 28, 1996
- ----------------------
David L. Goldsmith
/s/ Gene P. Guselli Director March 28, 1996
- -------------------
Gene P. Guselli
/s/ Carl E. Sanders Director March 28, 1996
- -------------------
Carl E. Sanders
/s/ Jacquelyn M. Ward Director March 28, 1996
- ---------------------
Jacquelyn M. Ward
/s/ Morris S. Weeden Director March 28, 1996
- --------------------
Morris S. Weeden
/s/ Frederick P. Zuspan, M.D. Director March 28, 1996
- -----------------------------
Frederick P. Zuspan, M.D.
</TABLE>
28
<PAGE> 29
TOKOS MEDICAL CORPORATION (DELAWARE)
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charges to Balance at
beginning of Charges to costs and Net end of
Description period revenue expenses Deductions(1) period
- ----------- ----------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1993
Allowance for contractual
adjustments and doubtful
accounts 17,400,000 3,084,000 13,656,000 19,040,000 15,100,000
December 31, 1994
Allowance for contractual
adjustments and doubtful
accounts 15,100,000 -0- 7,042,000 9,242,000 12,900,000
December 31, 1995
Allowance for contractual
adjustments and doubtful
accounts 12,900,000 -0- 5,251,000 10,551,000 7,600,000
December 31, 1993
Reserves for patient service
equipment and supplies -0- -0- 1,178,000 -0- 1,178,000
December 31, 1994
Reserves for patient service
equipment and supplies 1,178,000 -0- 852,000 -0- 2,030,000
December 31, 1995
Reserves for patient service
equipment and supplies 2,030,000 -0- -0- -0- 2,030,000
December 31, 1993
Reserves for patient
monitoring devices -0- -0- 2,200,000 -0- 2,200,000
December 31, 1994
Reserves for patient
monitoring devices 2,200,000 -0- -0- -0- 2,200,000
December 31, 1995
Reserves for patient
monitoring devices 2,200,000 -0- -0- -0- 2,200,000
</TABLE>
- ----------------
(1) Contractual adjustments and doubtful accounts written off, net of
recoveries.
29
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION OF
MATRIA HEALTHCARE, INC.
Matria Healthcare, Inc., a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
1. This is the Restated Certificate of Incorporation of Matria
Healthcare, Inc., which was originally incorporated under the name
"Tokos/Healthdyne Acquisition Company, Inc." The original Certificate of
Incorporation of the corporation was filed with the Secretary of State of the
State of Delaware (the "Secretary of State") on October 4, 1995. A Certificate
of Amendment of Tokos/Healthdyne Acquisition Company, Inc. changing its name
from "Tokos/Healthdyne Acquisition Company, Inc." to "Matria Healthcare, Inc."
was filed with the Secretary of State on February 1, 1996. A Certificate of
Ownership and Merger merging Tokos Medical Corporation (Delaware), a Delaware
corporation, and Healthdyne, Inc., a Georgia corporation, with and into Matria
Healthcare, Inc. was filed with the Secretary of State on March 8, 1996.
2. This Restated Certificate of Incorporation was duly adopted by
the board of directors of the corporation without a vote of the stockholders in
accordance with the provisions of Section 245 of the General Corporation Law of
the State of Delaware and only restates and integrates and does not further
amend the provisions of the Certificate of Incorporation of this corporation as
heretofore amended or supplemented. There is no discrepancy between the
provisions of the Certificate of Incorporation of the corporation as heretofore
amended or supplemented and the provisions of this Restated Certificate of
Incorporation, which are as follows:
ARTICLE I.
The name of the Corporation is Matria Healthcare, Inc. (the
"Corporation").
ARTICLE II.
The name and address of the registered agent of the Corporation in the
State of Delaware are:
The Corporation Trust Company
1209 Orange Street
Wilmington, New Castle County, Delaware 19801
<PAGE> 2
ARTICLE III.
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
ARTICLE IV.
The Corporation shall have authority to issue 150,000,000 shares of
stock, consisting of 100,000,000 shares of Common Stock, par value $0.01 per
share, and 50,000,000 shares of Preferred Stock, par value $0.01 per share.
ARTICLE V.
The shares of Preferred Stock may be issued from time to time in one
or more series. The Board of Directors is authorized to fix by resolution the
designations, powers, preferences and relative, participating, optional or
other special rights (including voting rights, if any, and conversation rights,
if any), and qualifications, limitations or restrictions thereof, of any such
series of Preferred Stock, and the number of shares constituting any such
series, or all or any of them; and to increase or decrease the number of shares
of any series subsequent to the issue of shares of that series, but not below
the number of such shares then outstanding. Except as otherwise provided (i)
by law, (ii) by this Certificate of Incorporation as amended from time to time,
or (iii) by resolutions of the Board of Directors fixing the powers and
preferences of any class or series of shares as to which the Board of Directors
has been expressly vested with authority to fix the powers and preferences, (a)
the Common Stock shall possess the full voting power of the Corporation and (b)
the number of authorized shares of any class or classes of stock may be
increased or decreased (but not below the number of shares thereof then
outstanding) by the affirmative vote of the holders of a majority of the stock
of the Corporation entitled to vote.
ARTICLE VI.
The business and affairs of the Corporation shall be managed and
controlled by a Board of Directors. The number of directors constituting the
Board of Directors shall be fixed, initially, by the Bylaws of the Corporation;
thereafter the number of directors shall be fixed or altered exclusively by
resolutions adopted by the Board of Directors. The directors shall be divided
into three classes as nearly equal in number as possible, designated Class I,
Class II and Class III. The initial term of office of Class I directors shall
expire at the 1996 annual meeting of stockholders; of Class II directors at the
1997 annual meeting of stockholders; and of Class III directors at the 1998
annual meeting of stockholders. At each annual meeting of stockholders,
successors to the class of directors whose terms of office expire in that year
shall be elected to hold office for a term of three years. Each director shall
hold office until his successor is
Page 2 of 4
<PAGE> 3
elected and qualified or until his earlier resignation. No decrease in the
number of directors shall shorten the term of any incumbent director.
Elections of directors need not be by ballot unless the Bylaws so provide.
ARTICLE VII.
In furtherance and not in limitation of the powers conferred by law,
the Board of Directors is authorized to adopt, amend or repeal the Bylaws of
the Corporation, subject to the restrictions, if any, contained in the Bylaws
of the Corporation, and subject to the further restriction that, until three
years from March 8, 1996, Articles VI and VII of this Certificate and Sections
3.2, 3.14 and 3.15 of the Bylaws can only be amended by the affirmative vote of
the holders of at least 66-2/3% of the Common Stock of the Corporation.
ARTICLE VIII.
To the fullest extent permitted by the General Corporation Law of the
State of Delaware, as the same exists or may hereafter be amended, a director
of the Corporation shall not be liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director. The liability
of a director of the Corporation to the Corporation or its stockholders for
monetary damages shall be eliminated to the fullest extent permissible under
applicable law in the event it is determined that Delaware law does not apply.
The Corporation shall, to the fullest extent permitted by law, indemnify its
directors and officers against any liabilities, losses or related expenses
which they may incur by reason of serving or having served as directors or
officers of the Corporation, or serving or having served at the request of the
Corporation as directors, officers, trustees, partners, employees or agents of
any entity in which the Corporation has an interest. The Corporation is
authorized to provide by Bylaw, agreement or otherwise for indemnification of
directors, officers, employees and agents in excess of the indemnification
otherwise permitted by applicable law. Any repeal or modification of this
Article shall not result in any liability of a director, or any change or
reduction in the indemnification to which a director, officer, employee or
agent would otherwise be entitled, with respect to any action or omission
occurring prior to such repeal or modification.
ARTICLE IX.
Any action required or permitted to be the taken by holders of stock
of the Corporation must be taken at a meeting of such holders and may not be
taken by consent in writing, except (i) as permitted by resolutions of the
Board of Directors fixing the powers and preferences of any class or series of
shares as to which the Board of Directors has been expressly vested with
authority to fix the powers and preferences, or (ii) for the purposes of
approving, authorizing or adopting any action or proposal theretofore approved,
authorized or adopted by the Board of Directors.
Page 3 of 4
<PAGE> 4
IN WITNESS WHEREOF, this Restated Certificate of Incorporation has
been signed by J. Brent Burkey, its authorized officer this 29th day of March,
1996.
MATRIA HEALTHCARE, INC.
By: /s/ J. Brent Burkey
------------------------------------------
J. Brent Burkey
Senior Vice President, General Counsel and
Secretary
Page 4 of 4
<PAGE> 1
EXHIBIT 4.3
MATRIA HEALTHCARE, INC.
AND
SOUTHTRUST ESTATE AND TRUST COMPANY OF GEORGIA, N.A., TRUSTEE
--------------------
Supplemental Indenture
Dated as of March 8, 1996
to
Indenture
Dated as of December 1, 1986
8% Convertible Subordinated Debentures
Due December 31, 2001
--------------------
<PAGE> 2
Supplemental Indenture (the "Supplemental Indenture"), dated as of
March 8, 1996, made by and between MATRIA HEALTHCARE, INC., a Delaware
corporation ("Matria"), and SOUTHTRUST ESTATE & TRUST COMPANY OF GEORGIA,
N.A., a national banking association, successor to National Bank of Georgia, as
Trustee (the "Trustee"), under the Indenture dated as of December 1, 1986,
hereinafter mentioned (the "Indenture").
WHEREAS, HEALTHDYNE, INC., a Georgia corporation ("Healthdyne"), and
the Trustee entered into the Indenture in connection with the issuance of
Healthdyne's 8% Convertible Subordinated Debentures due December 31, 2001 (the
"Debentures"); and
WHEREAS, $3,500,000 principal amount of Debentures was issued under the
Indenture and $1,333,080 is outstanding on the date of the execution and
delivery of this Supplemental Indenture; and
WHEREAS, Healthdyne, Matria and Tokos Medical Corporation (Delaware)
("Tokos") have entered into that certain Agreement and Plan of Merger, dated as
of October 2, 1995, as amended by that certain First Amendment to Agreement and
Plan of Merger, dated as of December 4, 1995, and by that certain Second
Amendment to Agreement and Plan of Merger, dated as of January 31, 1996, under
which on the date hereof Healthdyne and Tokos will merge with and into Matria
(the "Merger"); and
WHEREAS, in connection with the Merger, the parties hereto desire to
amend the Indenture, without the consent of any Debentureholder, to have Matria
assume Healthdyne's obligations under the Indenture (as provided in Section
11.01 of the Indenture) and for the purpose of evidencing certain adjustments
to the conversion rights of the Debenture in connection with the assumption by
Matria of Healthdyne's obligations under the Indenture (as provided in Section
16.05 of the Indenture); and
WHEREAS, Matria has delivered to the Trustee the Board Resolution and
Opinion of Counsel required by Sections 11.01, 11.06 and 12.03 of the Indenture;
NOW, THEREFORE, in consideration of the premises and for good and
valuable consideration, the sufficiency of which is hereby acknowledged,
Matria and the Trustee agree as follows:
SECTION 1. Definitions. For purposes of this Supplemental Indenture,
all terms used herein, unless otherwise defined herein, shall have the meaning
assigned to them in the Indenture, except that references to the "Company" in
the Indenture, as amended and supplemented by this Supplemental Indenture,
shall mean Matria Healthcare, Inc.
SECTION 2. Succession of Matria to Healthdyne under the Indenture.
Upon the effectiveness of the Merger, and pursuant to the requirements of
Section 11.01 of the Indenture, the due and punctual payment of the principal
of, and premium, if any, and interest on all of the Debentures, according to
their tenor, and the due and punctual performance and observance of all the
covenants and conditions of the Indenture to be kept or performed by Healthdyne
prior to the effectiveness of the Merger, are hereby expressly assumed by
Matria.
<PAGE> 3
SECTION 3. Adjustment of Conversion Rights. Upon the effectiveness of
the Merger, and pursuant to the requirements to Section 16.05 of the Indenture,
holders of each Debenture then outstanding shall have, in lieu of the right to
convert such Debenture into Common Stock of Healthdyne, the right to convert
such Debenture into the number of shares of Common Stock of Matria receivable
upon such Merger by a holder of the number of shares of Common Stock of
Healthdyne into which such Debenture might have been converted immediately
prior to the Merger. As provided in Section 12.02 of the Indenture, upon
execution and delivery of this Supplemental Indenture, Matria shall succeed to
and be substituted for Healthdyne with the same effect as if it had been named
in the Indenture as the Company. Accordingly, this Supplemental Indenture does
not amend or supplement the provisions regarding adjustment of the conversion
price; such provisions are subject to the terms and conditions set forth in the
Indenture, taking into account the succession, and substitution as the Company,
of Matria.
SECTION 4. Representation of Matria. All the requirements of law and
the Certificate of Incorporation and Bylaws of Matria have been fully complied
with and all conditions and requirements necessary to authorize the execution,
acknowledgement and delivery of this Supplemental Indenture and to make the
Indenture, as supplemented by this Supplemental Indenture, a valid, binding and
legal instrument for the benefit of the Debentureholders, have been complied
with or have been done and performed.
SECTION 5. Governing Law, Etc. This Supplemental Indenture shall be
deemed to be a contract made under the laws of the State of Georgia, and for
all purposes shall be construed in accordance with the laws of the State of
Georgia (without regard to principles of conflicts of laws). The terms and
conditions of this Supplemental Indenture shall be, and be deemed to be, part
of the terms and conditions of the Indenture for any and all purposes
applicable to the Debentures. Other than as amended and supplemented by this
Supplemental Indenture, the Indenture is in all respects ratified and confirmed.
SECTION 6. Acceptance by Trustee. The Trustee hereby accepts this
Supplemental Indenture and agrees to perform the same upon the terms and
conditions set forth in the Indenture.
SECTION 7. The Indenture As Supplemented. From and after the date of
this Supplemental Indenture, all references in the Indenture to this
"Indenture" shall refer to the Indenture as supplemented hereby.
[SIGNATURES ON FOLLOWING PAGE.]
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Supplemental
Indenture to be duly executed all as of the day and year first above written.
MATRIA HEALTHCARE, INC.
By: /S/ PARKER H. PETIT
--------------------------------
Name: Parker H. Petit
Title: Chairman of the Board
SOUTHTRUST ESTATE & TRUST COMPANY,
as Trustee
By: /S/ VIRGINIA PETTY
--------------------------------
Name: Virginia Petty
Title: Assistant Vice President
<PAGE> 1
EXHIBIT 21.0
MATRIA HEALTHCARE, INC. SUBSIDIARIES
March 15, 1996
<TABLE>
<S> <C>
Jurisdiction of
Name Incorporation
- ---- ---------------
*Creative Medical Concepts, Inc. Georgia
*East Med Services, Inc. Georgia
*EMS Supplies Incorporated Georgia
*Healthdyne Financial Services, Inc. Georgia
*Healthdyne Home Care Services, Inc. Georgia
*Healthdyne Home Care Products, Inc. Georgia
*Healthdyne Integrated Alternatives, Inc. Georgia
*Healthdyne Nursery Products, Inc. Delaware
High-Tech Nursing, Inc. Georgia
HMM of Illinois, Inc. Georgia
HMM of New York, Inc. New York
Healthdyne Maternity Management of Texas, Inc. Texas
Maternal Fetal Diagnostic Services, Inc. Georgia
*Omni Medical Sales & Services Corporation Georgia
Perinatal Care Alternatives, Inc. Georgia
Perinatal Services Nederland B.V. Nederlands
*Shared Care, Inc. Georgia
Tokos Medical Corporation California
Carelink Corporation Delaware
Medical Resource Management, Inc. SC
Monitored Care, Inc. Delaware
Specialized Clinical Services, Inc. California
Specialized Clinical Services, Inc. Delaware
Tokos Acquisition Corporation Delaware
Tokos Clinical Services Corporation
(Portland) Delaware
Tokos Clinical Services Corporation
(New York) New York
Tokos Clinical Services Corporation Delaware
Tokos Medical Management Corporation Delaware
Women's Homecare, Inc. Delaware
Note: The above subsidiaries (except for Perinatal Services Nederland B.V.
in which Matria owns a 51% interest and Omni Medical in which Matria owns
an 80% interest) are directly 100% owned by Matria Healthcare, Inc.
</TABLE>
*INACTIVE
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF TOKOS FOR THE YEAR ENDED DECEMBER 31, 1995, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 4,793
<SECURITIES> 3,273
<RECEIVABLES> 25,367
<ALLOWANCES> 7,600
<INVENTORY> 1,384
<CURRENT-ASSETS> 27,829
<PP&E> 23,988
<DEPRECIATION> 16,130
<TOTAL-ASSETS> 44,583
<CURRENT-LIABILITIES> 12,970
<BONDS> 0
0
0
<COMMON> 18
<OTHER-SE> 29,471
<TOTAL-LIABILITY-AND-EQUITY> 44,583
<SALES> 0
<TOTAL-REVENUES> 87,502
<CGS> 0
<TOTAL-COSTS> 69,820
<OTHER-EXPENSES> 24,414
<LOSS-PROVISION> 5,251
<INTEREST-EXPENSE> 521
<INCOME-PRETAX> (11,644)
<INCOME-TAX> 150
<INCOME-CONTINUING> (11,794)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,794)
<EPS-PRIMARY> (.68)
<EPS-DILUTED> (.68)
</TABLE>
<PAGE> 1
EXHIBIT 99.0
REPORT OF INDEPENDENT AUDITORS
Stockholders and Board of Directors
Tokos Medical Corporation (Delaware)
We have audited the consolidated balance sheets of Tokos Medical Corporation
(Delaware) and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended December 31, 1995. Our audits also
included the financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We 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
from 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 consolidated financial position of Tokos
Medical Corporation (Delaware) at December 31, 1995 and 1994, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Ernst & Young LLP
February 22, 1996, except for note 13, the date of
which is March 8, 1996
Orange County, California
1
<PAGE> 2
CONSOLIDATED BALANCE SHEETS
TOKOS MEDICAL CORPORATION (DELAWARE)
<TABLE>
<CAPTION>
December 31,
-------------------------
1995 1994
------------ -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 4,793,000 $ 9,149,000
Short-term investments 3,273,000 3,508,000
Accounts receivable (less allowances of $7,600,000 in 1995
and $12,900,000 in 1994) 17,767,000 23,207,000
Patient supplies 1,384,000 1,288,000
Prepaid expenses and other current assets 612,000 1,634,000
------------ -----------
Total current assets 27,829,000 38,786,000
Equipment and improvements:
Equipment 17,128,000 15,476,000
Patient monitoring devices 6,849,000 6,824,000
Leasehold improvements 11,000 11,000
------------ -----------
23,988,000 22,311,000
Less accumulated depreciation and amortization 16,130,000 11,903,000
------------ -----------
7,858,000 10,408,000
Intangible assets, net 4,556,000 4,331,000
Other assets 4,340,000 4,865,000
------------ -----------
$ 44,583,000 $58,390,000
============ ===========
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
December 31,
--------------------------
1995 1994
------------ ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,625,000 $ 3,318,000
Accrued expenses 3,230,000 3,753,000
Accrued litigation settlement, including interest 5,151,000 1,450,000
Accrued restructuring charges 50,000 628,000
Current portion of long-term debt 1,914,000 6,488,000
----------- -----------
Total current liabilities 12,970,000 15,637,000
Long-term debt, less current portion 2,124,000 2,593,000
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par value, 2,000,000 shares
authorized, none issued and outstanding at December 31, 1995 and 1994 -0- -0-
Common stock, $.001 par value, authorized 60,000,000 shares;
issued 17,660,741 shares at December 31, 1995 and 17,410,468
shares at December 31, 1994; outstanding 17,548,628 shares at
December 31, 1995 and 17,254,465 shares at December 31, 18,000 17,000
1994
Additional paid-in capital 87,608,000 86,519,000
Notes receivable and accrued interest from officers (3,630,000) (3,492,000)
Accumulated deficit (53,968,000) (42,126,000)
----------- -----------
30,028,000 40,918,000
Treasury stock, at cost (539,000) (758,000)
----------- -----------
29,489,000 40,160,000
----------- -----------
$44,583,000 $58,390,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
CONSOLIDATED STATEMENTS OF OPERATIONS
TOKOS MEDICAL CORPORATION (DELAWARE)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1995 1994 1993
---------------- --------------- ----------------
<S> <C> <C> <C>
Net patient service revenues $ 87,502,000 $ 100,696,000 $ 120,837,000
Cost and expenses:
Cost of patient services 69,820,000 77,240,000 92,400,000
General and administrative 17,145,000 20,157,000 22,852,000
Provision for doubtful accounts 5,251,000 7,042,000 13,656,000
Research and development 513,000 1,617,000 2,395,000
Settlement of litigation 4,300,000 -0- -0-
Restructuring, severance and other expenses 2,456,000 -0- 14,000,000
---------------- --------------- ----------------
99,485,000 106,056,000 145,303,000
---------------- --------------- ----------------
Loss from operations (11,983,000) (5,360,000) (24,466,000)
Interest expense (income):
Interest expense 521,000 417,000 525,000
Interest income (860,000) (468,000) (564,000)
---------------- --------------- ----------------
(339,000) (51,000) (39,000)
---------------- --------------- ----------------
Loss before taxes (11,644,000) (5,309,000) (24,427,000)
Income taxes 150,000 550,000 1,956,000
---------------- --------------- ----------------
Net loss $ (11,794,000) $ (5,859,000) $ (26,383,000)
================ =============== ================
Loss per common share $ (0.68) $ (0.34) $ (1.53)
================ =============== ================
Weighted average number of common shares outstanding 17,396,000 17,169,000 17,240,000
================ =============== ================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
CONSOLIDATED STATEMENTS OF CASH FLOWS
TOKOS MEDICAL CORPORATION (DELAWARE)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1995 1994 1993
------------- ------------ -------------
<S> <C> <C> <C>
Operating activities
Net loss $(11,794,000) $(5,859,000) $(26,383,000)
Adjustments to reconcile net loss to net cash provided (used)
in operating activities:
Depreciation and amortization 6,019,000 6,842,000 7,132,000
Settlement of shareholder litigation 4,300,000 -0- -0-
Reserve for patient service equipment, patient monitoring
devices and investments in other healthcare entities 625,000 -0- 3,378,000
Sales (purchases) of short-term investments 235,000 (73,000) (357,000)
Tax benefits associated with stock option exercises -0- -0- 124,000
Deferred income taxes -0- 8,000 6,668,000
Accrued interest income on officer notes (180,000) (174,000) (120,000)
Accrued interest expense on shareholder litigation settlement 151,000 -0- -0-
Other non-cash items 145,000 -0- (288,000)
Changes in operating assets & liabilities net of effect of
acquisitions:
Net accounts receivable 6,046,000 5,123,000 18,516,000
Patient service equipment and supplies (96,000) (214,000) 929,000
Prepaid expenses and other current assets 1,022,000 4,584,000 1,591,000
Accounts payable (693,000) 41,000 (5,024,000)
Accrued expenses (523,000) 2,056,000 (318,000)
Accrued restructuring charges (578,000) (5,513,000) 6,141,000
------------ ----------- ------------
Net cash provided by operating activities 4,679,000 6,821,000 11,989,000
Investing activities:
Purchases and construction of equipment and improvements (1,357,000) (1,954,000) (2,357,000)
Acquisition of physician owned companies net of cash acquired (865,000) (435,000) -0-
Increases in other assets (244,000) (214,000) (768,000)
------------ ----------- ------------
Net cash used in investing activities (2,466,000) (2,603,000) (3,125,000)
Financing activities:
Proceeds from stock option exercises and purchases pursuant to
employee stock purchase plan 1,210,000 250,000 709,000
Proceeds from issuance of note payable to equipment financing
company -0- -0- 1,198,000
Acceptance of note receivable from officers (80,000) (1,012,000) (900,000)
Proceeds from payments on notes receivable from officers 122,000 -0- -0-
Purchases of treasury stock -0- (50,000) (1,350,000)
Treasury stock issued, gross 219,000 447,000 -0-
Treasury stock contributions to employee stock purchase plan (168,000) (327,000) -0-
Payments of long-term debt (7,122,000) (3,096,000) (5,536,000)
Payment related to settlement of shareholder litigation (750,000) -0- -0-
Other long-term debt and equity transactions -0- 9,000 (14,000)
------------ ----------- ------------
Net cash used in financing activities (6,569,000) (3,779,000) (5,893,000)
Increase (decrease) in cash and equivalents (4,356,000) 439,000 2,971,000
Cash and equivalents at beginning of year 9,149,000 8,710,000 5,739,000
------------ ----------- ------------
Cash and equivalents at end of year $ 4,793,000 $ 9,149,000 $ 8,710,000
============ =========== ============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE> 6
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
TOKOS MEDICAL CORPORATION (DELAWARE)
<TABLE>
<CAPTION>
Common Stock
----------------------
Shares Amount
---------- -------
<S> <C> <C>
Balance at December 31, 1992 17,226,691 $17,000
Common stock options exercised 96,286
Common stock issued pursuant to employee stock
purchase plan 70,121
Contribution of treasury stock to employee stock
purchase plan
Tax benefits associated with stock option exercises
Treasury stock purchased
Note receivable from officer
Accrued interest on officer notes
Other equity transactions (16,830)
Net loss ---------- -------
Balance at December 31, 1993 17,376,268 $17,000
Common stock options exercised 30,692
Issuance of treasury stock to employee stock purchase
plan and other stock awards
Treasury stock purchased
Note receivable from officer
Accrued interest on officer notes
Other equity transactions 3,508
Net loss ---------- -------
Balance at December 31, 1994 17,410,468 $17,000
Common stock options exercised 250,273 1,000
Issuance of treasury stock to employee stock purchase
plan and other stock awards
Note receivable from officer
Payment on note receivable from officers
Accrued interest on officer notes
Net loss ---------- -------
Balance at December 31, 1995 17,660,741 $18,000
========== =======
</TABLE>
See notes to consolidated financial statements.
6
<PAGE> 7
<TABLE>
<CAPTION>
Notes
Receivable
and
Additional Accrued Accumulated Treasury Stock
Paid-In Interest ---------------------------------------------
Capital from Officers Deficit Shares Amount Total
- ----------- --------------- -------------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
$85,748,000 $(1,102,000) $ (9,711,000) -0- $ -0- $74,952,000
224,000 224,000
290,000 290,000
25,510 195,000 195,000
124,000 124,000
(260,979) (1,350,000) (1,350,000)
(900,000) (900,000)
(304,000) (304,000)
27,000 27,000
(26,383,000) (26,383,000)
---------- ----------- ------------ -------- ----------- ------------
$86,413,000 $(2,306,000) $(36,094,000) (235,469) $(1,155,000) $46,875,000
95,000 95,000
(173,000) 89,466 447,000 274,000
(10,000) (50,000) (50,000)
(1,012,000) (1,012,000)
(174,000) (174,000)
11,000 11,000
(5,859,000) (5,859,000)
---------- ----------- ------------ -------- ----------- -----------
$86,519,000 $(3,492,000) $(42,126,000) (156,003) $ (758,000) $40,160,000
1,089,000 1,090,000
(48,000) 43,890 219,000 171,000
(80,000) (80,000)
122,000 122,000
(180,000) (180,000)
(11,794,000) (11,794,000)
- ----------- ----------- ------------ -------- ----------- -----------
$87,608,000 $(3,630,000) $(53,968,000) (112,113) $ (539,000) $29,489,000
=========== =========== ============ ======== =========== ===========
</TABLE>
7
<PAGE> 8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
TOKOS MEDICAL CORPORATION (DELAWARE)
December 31, 1995
BUSINESS
Tokos Medical Corporation (Delaware) ("Tokos" or the "Company") and its
subsidiaries provide specialized obstetrical home healthcare and risk
assessment services which assist physicians and payors in the management of
high risk pregnancies and numerous other obstetrical and gynecological
conditions throughout the United States.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 the consolidated balance sheet and
statement of operations for the periods presented.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany accounts and transactions have
been eliminated in consolidation.
Cash and Equivalents: The Company considers all highly liquid investments with
a maturity of three months or less when purchased to be cash equivalents.
Short-Term Investments: Investments having a maturity of more than three
months and less than twelve months are classified as short-term investments.
Short-term investments primarily consist of U.S. government obligations and
commercial paper. Effective January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt & Equity Securities (SFAS No. 115). Under this statement, the Company
classifies its short-term investments as trading securities which are carried
at fair value and any unrealized gains or losses are included in earnings.
Previously, the Company accounted for its short-term investments at amortized
cost. The fair value of short-term investments was substantially equal to
their carrying value at December 31, 1993. The adoption of SFAS No. 115 did
not have a material effect on the Company's results of operations for 1994.
For the years ended December 31, 1995 and 1994, the change in net unrealized
holding gains (losses) on trading securities included in income from trading
assets was an unrealized gain of $101,000 and an unrealized loss of ($73,000),
respectively.
Equipment and Improvements: Equipment and improvements are stated at cost.
Patient monitoring devices are carried at manufactured cost, net of reserves
recorded due to the Company's strategic decision to reduce its support of
certain patient monitoring devices. Depreciation of equipment is computed
using the straight-line method over the estimated service lives of the
respective assets which range from three to five years. Leasehold improvements
and assets recorded under capital lease obligations are amortized using the
straight-line method over the lives of the respective leases. Amortization of
assets subject to capital leases is included in depreciation expense.
Intangible Assets: Intangible assets, consisting of goodwill and covenants not
to compete, represent the excess of the purchase price over the estimated fair
value of the net assets of acquired companies and are amortized on a
straight-line basis over the periods of expected benefit ranging from 1 to 20
years. Amortization expense was $1,297,000, $350,000 and $187,000 for 1995,
1994 and 1993, respectively. Accumulated amortization at December 31, 1995 and
1994, was $1,967,000 and $670,000, respectively. At each balance sheet date,
the Company assesses whether changes have occurred that would require revision
of the estimated remaining useful life of the intangible assets or render the
carrying value of the intangible assets impaired. Any potential impairment is
measured based upon projected discounted future operating cash flows of the
acquired operation using a discount rate reflecting the Company's average
borrowing rate.
Stock Options: The Company grants stock options for a fixed number of shares
to employees with an exercise price equal to the fair value of the shares at
the date of the grant. The Company accounts for stock option
8
<PAGE> 9
grants in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and, accordingly, recognizes no compensation expense for the stock
option grants.
9
<PAGE> 10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Net Patient Service Revenues: Net revenues are based on amounts billed or
billable for services rendered, net of price adjustments made with third-party
payors by contract or otherwise. Revenues are also net of allowances which the
Company makes and adjusts from time to time to reflect its estimates, based on
historical collection experience, including recoveries in excess of amounts
previously estimated, of the difference between amounts billed and amounts
which it has or expects to receive in full settlement from primary third-party
payors, secondary payors and patients. Net revenues include revenues generated
from the Company's own patient service centers and fees from patient service
operations managed by the Company.
Provision for Doubtful Accounts: The Company provides for estimated
uncollectible accounts as revenues are recognized. The provision is adjusted
periodically based upon the Company's quarterly evaluation of historical
collection experience, industry reimbursement trends and other relevant
factors.
Concentration of Credit Risk: Financial instruments which potentially expose
the Company to concentrations of credit risk consist primarily of cash and
equivalents, short-term investments, and accounts receivable with third-party
payors. The Company invests its available cash in money market instruments and
debt instruments of the U.S. government, financial institutions, and
corporations with strong credit ratings. The Company has established
guidelines relative to diversification and maturities that maintain safety and
liquidity. These guidelines are periodically reviewed and modified to take
advantage of trends in yields and interest rates. The collectibility of
accounts receivable from third-party payors is directly affected by conditions
and changes in the insurance industry and governmental programs, which are
taken into account by the Company in computing and evaluating its allowance for
doubtful accounts.
Net Loss Per Common Share: The net loss per share was computed by dividing the
net loss for the year by the weighted average number of shares of Common Stock
outstanding. Outstanding stock options have been excluded from the
computation as these options are anti-dilutive. Fully diluted earnings per
share are not presented as the amounts are not materially different from those
presented herein.
Reclassifications: Certain reclassifications of 1994 amounts have been made to
correspond with 1995 classifications.
2. PHYSICIAN OWNED COMPANIES
The Company had previously entered into agreements with certain physician-owned
companies to provide its basic core high-risk pregnancy and related healthcare
services to the patients of the companies for a fee. These services include
home uterine activity monitoring, home infusion therapy and other homecare
services, as well as, to a lesser extent, certain administrative services, such
as billing and collection. Pursuant to these agreements, the Company receives a
negotiated fee for these services based on the volume of services performed for
these companies. Total revenues recorded by the Company, which were generated
from services provided on behalf of these entities, totaled approximately
$406,000, $9,200,000 and $17,400,000 for the years ended December 31, 1995,
1994 and 1993, respectively. The amount included in accounts receivable
represents the Company's portion of the uncollected revenues of the managed
companies generated from the services performed; none of the accounts
receivable are owed back to the managed companies. Included in gross accounts
receivable is approximately $2,000 at December 31, 1995 and $4,100,000 at
December 31, 1994 relating to these companies. Upon collection of these
revenues, the Company reclassifies the fees dues for services performed from
accounts receivable to amounts due from physician-owned companies. Included in
prepaid expenses and other current assets are such amounts due from these
managed companies of $-0- and $645,000 at December 31, 1995 and 1994,
respectively.
During 1995 and 1994, the Company purchased certain of these physician-owned
companies for $1,094,000 and $627,000 in cash and $1,475,000 and $1,659,000 in
notes payable, respectively. These acquisitions were accounted for using the
purchase method of accounting with the results of operations of the businesses
acquired included from the effective date of the acquisitions. These
acquisitions have resulted in intangible assets of $1,679,000 and $1,483,000
for 1995 and 1994, respectively, and are being amortized over periods ranging
from one to four years. These acquisitions comprise approximately 96% of the
total number of
10
<PAGE> 11
physician-owned companies, for which the Company provides management services,
and the Company intends to acquire the balance in the first quarter of 1996.
11
<PAGE> 12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
3. OTHER ASSETS
<TABLE>
<CAPTION>
The components of other assets are as follows:
December 31,
-------------------------
1995 1994
---------- ----------
<S> <C> <C>
Investments in other healthcare entities $2,657,000 $3,179,000
Purchased software, net of accumulated amortization of $587,000 and
$309,000 at December 31, 1995 and 1994, respectively 1,034,000 998,000
Capitalized merger expenses 360,000 -0-
Long-term deposits 193,000 328,000
Other 96,000 360,000
---------- ----------
$4,340,000 $4,865,000
========== ==========
</TABLE>
To facilitate strategic expansion, the Company has made equity investments in
other healthcare entities which are carried at the lower of cost or fair value.
Each investment represents less than 10% of each company's equity. The
Company periodically reviews the operating performance of each company for
impairment of its investments. Based on these reviews, these investments were
written-down by $625,000 which is included in general and administrative
expenses during 1995. The Company, therefore, believes the carrying amount of
each investment is not in excess of the approximate fair value for the periods
presented.
4. ACCRUED EXPENSES
The components of accrued expenses are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Accrued compensated absences $1,304,000 $1,121,000
Accrued salaries, wages and incentives 626,000 1,266,000
Other 1,300,000 1,366,000
---------- ----------
$3,230,000 $3,753,000
</TABLE> ========== ==========
5. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1995 1994
------------- --------------
<S> <C> <C>
Purchased marketing rights $ -0- $ 4,000,000
Notes payable from physician owned company acquisitions 2,198,000 1,658,000
Capital lease obligations 717,000 1,484,000
Note payable to equipment financing company 648,000 873,000
Other 475,000 1,066,000
---------- -------------
4,038,000 9,081,000
Less current portion 1,914,000 6,488,000
---------- -------------
$2,124,000 $ 2,593,000
========== =============
</TABLE>
12
<PAGE> 13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
5. LONG-TERM DEBT (CONTINUED)
In December 1991, the Company agreed to pay $8,000,000 for the exclusive
marketing rights in the U.S. and Canada for a fetal fibronectin test, a
proprietary immunoassay developed and patented by Adeza Biomedical Corporation
("Adeza"). This test has the potential to be a reliable marker for preterm
delivery. At the time, there were many scientific and regulatory obstacles to
be overcome before Food and Drug Administration ("FDA") approval could be
obtained and the Company could market the product. The Company had no
assurances that such approval would be obtained and, therefore, the amount was
charged to expense in accordance with generally accepted accounting principles.
Included in long-term debt at December 31, 1994, was $4.0 million for the
remaining obligation related to the purchased marketing rights, which became
due and payable when Adeza received notification from the FDA that its
pre-market approval application ("PMA") for the fetal fibronectin immunoassay
was accepted for filing. On January 16, 1995, Adeza informed the Company that
it had received such notification, therefore the Company paid in full the $4.0
million over several installment payments during 1995.
During 1995 and 1994, the Company purchased certain managed companies, and
incurred $1,475,000 and $1,658,000 in notes payable, respectively. These notes
payable are to be paid over one to four years in accordance with the terms of
the purchase agreements.
Included in equipment and improvements in the accompanying consolidated balance
sheets at December 31, 1995 and 1994 are $5,674,000 and $5,070,000,
respectively, in assets held under capital lease. At December 31, 1994 the
Company eliminated $12,968,000 in fully depreciated equipment and improvements
held under capital lease from the respective cost and accumulated depreciation
accounts. Capital lease obligations consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1995 1994
---------- ----------
<S> <C> <C>
Present value of future rental payments under capitalized
agreements, at various interest rates $ 718,000 $1,484,000
Less current portion 340,000 1,228,000
---------- ----------
$ 378,000 $ 256,000
========== ==========
</TABLE>
The Company has the right to exercise various renewal or purchase options at
the end of the initial lease terms.
For the years ended December 31, 1995, 1994, and 1993, the Company acquired
equipment under equipment financing and capital lease obligations of $604,000,
$-0-, and $2,507,000, respectively.
During 1993, the Company obtained financing for equipment purchases totaling
$1,198,000 with an equipment financing company. Pursuant to the agreement, the
Company is required to make monthly payments through May 1998. The note bears
interest at 10% per annum. The Company did not finance equipment purchases
with an equipment financing company in 1995 or 1994.
In October 1994, the Company entered into a revolving line of credit agreement
with a commercial lender. Under the terms of this credit facility the Company
may borrow up to $10,000,000 based upon the value of eligible collateral as
defined in the credit agreement. Borrowings under this agreement bear interest
at a rate of 2% over prime, and are secured by certain of the Company's assets,
principally accounts receivable. The credit agreement expires November 30,
1996. At December 31, 1995 and 1994 there were no outstanding borrowings.
Interest paid was $341,000 in 1995, $416,000 in 1994, and $528,000 in 1993.
13
<PAGE> 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
5. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt and future minimum lease payments under capital
lease obligations are as follows:
<TABLE>
<CAPTION>
Long-Term Capital Lease
Debt Obligations Total
---------- ------------- ----------
<S> <C> <C> <C>
1996 $1,594,000 $368,000 $1,962,000
1997 1,420,000 333,000 1,753,000
1998 360,000 58,000 418,000
1999 25,000 -0- 25,000
2000 -0- -0- -0-
---------- ------------- ----------
3,399,000 759,000 4,158,000
Less amounts representing interest 79,000 41,000 120,000
---------- ------------- ----------
3,320,000 718,000 4,038,000
Less current portion 1,574,000 340,000 1,914,000
---------- ------------- ----------
$1,746,000 $378,000 $2,124,000
========== ============= ==========
</TABLE>
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statements of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments" (SFAS 107), requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates,
methods and assumptions are set forth below for the Company's financial
instruments.
(a) Cash and equivalents and Short-Term Investments
The carrying amount approximates fair values because of the short maturity of
these instruments or because they are marked at market.
(b) Investments in Other Healthcare Entities
The amount is not in excess of the approximate fair value based on the
Company's review of the respective unaudited financial statements from each of
these companies.
(c) Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the
current rates offered to the Company for debt of the same remaining maturities.
The estimated fair values of the Company's financial instruments at December
31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
--------------------------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
<S> <C> <C> <C> <C>
Cash and equivalents $4,793,000 $4,793,000 $9,149,000 $9,149,000
Short-Term investments 3,273,000 3,273,000 3,508,000 3,508,000
Investments in other healthcare entities 2,657,000 2,657,000 3,179,000 3,179,000
Long-Term Debt:
Purchased marketing rights -0- -0- 4,000,000 3,779,000
Notes payable to managed companies 2,198,000 1,998,000 1,658,000 1,505,000
Notes payable to equipment financing
company 648,000 648,000 873,000 873,000
Other long-term debt 475,000 429,000 1,066,000 966,000
</TABLE>
14
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
7. STOCKHOLDERS' EQUITY
Stock Options: In 1985, the Company adopted an Incentive Stock Option Plan
("Option Plan"), as amended, whereby the Company may grant options to officers,
employees and directors ("Optionee") at prices not less than fair value of the
Common Stock at the date of grant. Through December 31, 1991, the Option Plan
had been amended to increase the aggregate number of shares covered under the
plan to 3,500,000 shares. Of the total shares authorized, 500,000 shares may
be reduced on a one-for-one basis for each share of Common Stock issued under
the Company's 1991 Employee Stock Purchase Plan ("Purchase Plan"). In 1992,
the stockholders approved an amendment to the Option Plan to increase the
maximum number of shares available from 3,500,000 shares by an amount not to
exceed 2% of the number of fully diluted shares of Common Stock outstanding for
each of the years ending December 31, 1991, 1992, 1993, and 1994. Options
expire ten years after the date of grant or earlier upon the Optionee's
separation from the Company. Options are exercisable at the date of grant
subject to certain repurchase rights by the Company.
In an effort to provide additional incentive to its employees, on April 6, 1993
the Compensation Committee approved an exchange program pursuant to which all
holders of options under the Option Plan had the right to exchange their
unexercised options for an equivalent number of new options having an exercise
price of $6.625, the fair market value of the Common Stock on April 6, 1993.
Each new option included a modified vesting period.
Summarized information for the option plans is as follows:
<TABLE>
<CAPTION>
Number of Option Price
Options Per Share
----------- ----------------------
<S> <C> <C> <C> <C>
Options outstanding at December 31, 1992 1,475,931 $0.17 - $37.75
Granted 1,514,562 5.38 - 7.88
Exercised (96,286) 0.17 - 11.00
Cancelled (1,192,420) 1.83 - 37.75
-----------
Options outstanding at December 31, 1993 1,701,787 0.17 - 37.75
Granted 667,250 3.50 - 7.15
Exercised (39,912) 0.23 - 6.63
Cancelled (176,281) 1.17 - 27.75
-----------
Options outstanding at December 31, 1994 2,152,844 0.17 - 37.75
Granted 670,500 6.00 - 9.63
Exercised (250,273) 0.17 - 7.88
Cancelled (540,642) 1.83 - 25.75
-----------
Options outstanding at December 31, 1995 2,032,429 $0.17 - $37.75
===========
</TABLE>
Employee Stock Purchase Plan: In 1991, the Company adopted the Employee Stock
Purchase Plan ("Purchase Plan") which authorizes the issuance of up to 500,000
shares of Common Stock to eligible employees of the Company. Shares issued
under the Purchase Plan from the 500,000 shares authorized reduce on a
one-for-one basis the number of shares issuable under the Company's Option
Plan. Conversely, shares issued under the Option Plan from the 500,000 shares
authorized reduce on a one-for-one basis the number of those shares issuable
under the Purchase Plan. Generally, all employees of the Company, except for
executive officers, are eligible to participate in the Purchase Plan. The
purchase price of the Common Stock is the lesser of 85% of the fair market
value of the Common Stock at the beginning or end of the quarter in which
purchased. Pursuant to the Purchase Plan, no shares were newly issued and
33,680 were issued from treasury stock during 1995.
15
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
7. STOCKHOLDERS' EQUITY (CONTINUED)
Stockholder Rights Plan: On March 19, 1993, the Board of Directors declared a
dividend of one common share purchase right ("Right") for each outstanding
share of Common Stock. An exercisable Right will, under certain conditions,
entitle its holder to purchase from the Company one share of Common Stock at
the exercise price of $30 per share, subject to adjustment, until March 23,
2003. The Rights will become exercisable 10 days after a person or group (an
"Acquiring Person") acquires 20% or more of the Common Stock, or 10 days after
a person announces a tender offer which would result in such person acquiring
20% or more of the Common Stock. The Right may be redeemed by the Board of
Directors for $.01 per Right at any time until 10 days following the public
announcement that a person has become an Acquiring Person. Under certain
circumstances after a person becomes an Acquiring Person, or after a merger or
other business combination involving the Company, an exercisable Right will
entitle its holder (other than the Acquiring Person) to purchase shares of
Common Stock (or shares of an acquiring company) having a market value of two
times the exercise price of one Right.
8. NOTES RECEIVABLE AND ACCRUED INTEREST FROM OFFICERS
During 1994 and 1993, the Company loaned its Chief Executive Officer ("CEO")
$1,012,000 and $900,000, respectively. Such loans, which were approved by the
Board of Directors, are evidenced by interest-bearing promissory notes and are
secured by approximately 701,000 shares of Tokos Common Stock owned by its CEO.
The value of this collateral at December 31, 1995 was $6,394,000. At December
31, 1995, $2,156,000 was the aggregate balance outstanding, including accrued
interest, and is classified as a reduction of stockholders' equity. The
promissory notes, originally due March 20, 1994, have been extended by the
Board of Directors to December 31, 1996. The notes bear interest at the rate of
6% per annum and are payable in cash.
Pursuant to the terms of the Company's 1985 Incentive Stock Option Plan,
certain executive officers exercised options and purchased shares of the
Company's Common Stock by the delivery of interest-bearing promissory notes
that are payable in cash. At December 31, 1995, $1,474,000 was the aggregate
balance outstanding, including accrued interest, and is classified as a
reduction of stockholders' equity. The Company holds 300,000 shares of Common
Stock of Tokos in escrow as collateral for these notes. The value of this
collateral at December 31, 1995 was $2,737,000. The notes bear interest at 6%
per annum, and were due December 31, 1995; however, the Board extended the
notes until December 31, 1996 so that the officers would not sell their shares
of Tokos' stock.
The Board of Directors may, at its discretion, increase, hold or release shares
held as collateral for the notes.
In February 1996, the Company accepted 42,596 shares of the Company's Common
Stock formerly held in escrow as repayment of principal and interest related to
these officer notes in the amount of $421,000.
9. INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1994 1993
------------ ---------- ------------
<S> <C> <C> <C>
Current:
Federal payable $ -0- $ (168,000) $(4,483,000)
State payable 150,000 250,000 240,000
Tax benefit from the exercise of stock options to
paid-in capital -0- -0- (124,000)
------------ ---------- -----------
150,000 82,000 (4,367,000)
Deferred:
Federal -0- 468,000 6,199,000
Credit to paid-in capital -0- -0- 124,000
------------ ---------- -----------
$ 150,000 $ 550,000 $ 1,956,000
============ ========== ===========
</TABLE>
16
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
9. INCOME TAXES (CONTINUED)
Deferred income taxes reflect the net effects of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1994
--------- ----------
<S> <C> <C>
Deferred tax liabilities:
Service fee income from physician-owned companies $ (367,000) $ (666,000)
Deferred tax assets:
Net operating losses acquired from CareLink Corporation 5,300,000 5,300,000
Intangible assets 4,702,000 4,354,000
Allowance for doubtful accounts 2,054,000 3,829,000
Net operating loss carryforwards 6,830,000 2,075,000
Equipment and improvements 1,277,000 2,021,000
Accruals and other allowances 778,000 1,140,000
Accrued shareholder litigation 1,751,000 -0-
Accrued restructuring charges 380,000 750,000
Alternative minimum tax credit carryforwards 536,000 536,000
Research and development credit carryforwards 387,000 387,000
State taxes 287,000 276,000
General business credit carryforwards 468,000 468,000
Charitable contribution carryforwards 218,000 183,000
Miscellaneous 201,000 127,000
------------ -----------
Total deferred tax assets 25,169,000 21,446,000
------------ -----------
Net deferred tax assets 24,802,000 20,780,000
Valuation allowance (24,802,000) (20,780,000)
============ -----------
Net deferred tax assets $ -0- $ -0-
============ ===========
</TABLE>
The reconciliation of income tax expense to U.S. federal statutory
rates is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Income taxes at U.S. statutory rates $(4,076,000) $(1,858,000) $(8,550,000)
State income taxes, net of federal benefit 98,000 163,000 160,000
Income tax rate differential (34%) from statutory rate
(35%) -0- -0- 428,000
Increase in valuation allowance associated with deferred
tax assets 4,022,000 2,003,000 9,697,000
Tax and interest related to IRS examination per
management estimate -0- 300,000 -0-
Other items 106,000 (58,000) 221,000
----------- ----------- -----------
$ 150,000 $ 550,000 $ 1,956,000
=========== =========== ===========
</TABLE>
17
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
9. INCOME TAXES (CONTINUED)
At December 31, 1995, the Company had net operating loss carryovers available
for federal income tax purposes of approximately $11,293,000. The net
operating loss carryforwards begin to expire in 2009. Section 382 of the Code
imposes annual limitations on the utilization of net operating loss carryovers
against future income if there has been a more than 50% change in ownership.
Although the Section 382 limitations will apply to the Company as result of the
Merger (see Note 13), the Company believes that such limitations will not
result in the loss of the utilization of its loss carryovers.
The Company also had net operating loss carryforwards from its acquisition of
CareLink Corporation available for federal income tax purposes of approximately
$15,600,000. As a result of this change in ownership, the use of the CareLink
Corporation net operating loss carryforwards in future years will be limited to
approximately $2,300,000 annually. These losses may be further limited to the
annual income of the acquiring subsidiary. These net operating loss
carryforwards begin to expire in 2003. When realized, the tax benefit for
those items will be applied to reduce income tax expense.
At December 31, 1995, the Company also had $468,000 and $536,000, respectively,
of general business credit and alternative minimum tax credit carryover for
federal income tax purposes. These credits expire at various times beginning
in 1999. The Company had research and development credit carryovers for
federal income tax purposes of approximately $387,000 from the acquired
CareLink Corporation which begin to expire at various times through 2002. When
realized, these credits will be applied to reduce income tax expense.
Income taxes paid, including prepayments of estimated income taxes, totaled
$96,000 in 1995, $336,000 in 1994, and $915,000 in 1993.
The Company is currently under examination by the Internal Revenue Service for
the years ended December 31, 1991, 1990, and 1989. The Company recorded
$300,000 in the fourth quarter of 1994 as management's estimate for tax and
interest related to this examination. Management continues to believe that the
resolution of this examination will not have a material adverse effect on the
Company's financial position.
10. RESTRUCTURING, SEVERANCE AND OTHER CHARGES
During 1993, the Board of Directors approved plans to restructure the Company's
operations by, among other things, reducing the number of its monitoring
centers, centralizing patient intake and claims administration, reducing
in-house manufacturing and product development activities, and changing its
strategy regarding support of certain patient service equipment and patient
monitoring devices. The Company has taken a number of actions consistent with
those decisions. In connection therewith, the Company recorded aggregate
restructuring charges totaling $14,000,000 (or $.81 per share). The components
of the $14,000,000 restructuring charge included $5,691,000 related to
involuntary severance costs of affected employees, $3,540,000 related to costs
associated with the consolidation of monitoring sites and certain
administrative functions, as well as reduction of manufacturing activities,
$3,378,000 related to reserves against patient service equipment and patient
monitoring devices, and $1,391,000 related to other restructuring costs. At
December 31, 1993, the $6,141,000 remaining in the accrual was to be
substantially paid in 1994 and 1995. During 1994, $5,513,000 in restructuring
charges were expended with a remaining accrual at December 31, 1994 of
$628,000. The amounts expended include $3,318,000 related to involuntary
severance costs and $2,165,000 related to costs associated with the
consolidation of administrative functions and monitoring sites. During 1995,
an additional $578,000 was expended with a remaining accrual at December 31,
1995 of $50,000. Certain reclassifications of these amounts have been made
within the restructuring categories from those previously reported; none of
which are significant.
18
<PAGE> 19
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
10. RESTRUCTURING, SEVERANCE AND OTHER CHARGES (CONTINUED)
During 1995, as the Company's revenues continued to decline, specific decisions
were made and communicated by management related to cost reduction efforts in
order to lower the Company's break even point. The cost reduction plan
consisted of reductions in the Company's workforce of approximately 105
employees, comprised of personnel within the information systems,
reimbursement, administrative and to a lesser extent clinical service, and
termination of several facilities. In connection with these cost reduction
activities, the Company incurred $2,456,000 in expenses all of which have been
expended. The Components of these expenses include $1,834,000 related to
involuntary severance costs of affected employees, $332,000 related to the
consolidation of facilities and $290,000 in other related costs.
11. LEASE COMMITMENTS
The Company leases its office facilities, patient service centers, and various
types of equipment under noncancelable operating leases. Lease terms generally
range from three to five years with renewal options for additional periods.
Many of the office facility leases provide that the Company pay for taxes,
maintenance, insurance and other expenses, and contain rent escalation clauses.
Future minimum payments under the operating leases consist of the following at
December 31, 1995:
<TABLE>
<S> <C>
1996 $2,587,000
1997 1,952,000
1998 458,000
1999 145,000
2000 76,000
----------
$5,218,000
==========
</TABLE>
Total rent expense for operating leases was $3,637,000 in 1995, $3,293,000 in
1994, and $3,924,000 in 1993.
12. CONTINGENCIES
In July 1995, the Company reached a $10 million settlement with the plaintiffs
in a class action securities suit entitled In re Tokos Medical Corporation
Securities Litigation filed in the United States District Court for the Central
District of California. The Company's cost of settlement, after adjustment for
insurance proceeds directly deposited in an escrow account pursuant to the
settlement, was $5.75 million in cash and stock. The Company has paid $750,000
in cash, with the remaining $5.0 million payable in cash or by the issuance of
common stock. The charge to income of $4.3 million ($0.25 per share) during
the quarter ended June 30, 1995 is in addition to the aggregate amount of $1.45
million which had been previously accrued in general and administrative
expense. In the settlement, the Company denied any wrongdoing or liability.
The terms of the settlement must be approved by the court before the settlement
is effective. If the Company elects to issue common stock in settlement of
this obligation, the fair market value of the shares issued may exceed $5.0
million. It is the Company's present intention to pay the $5.0 million in
cash, either from borrowings under its line of credit or from funds made
available as a result of the proposed merger with Healthdyne (see Note 13).
The Company is subject to certain claims arising in the normal course of
business. In management's opinion, any such contingencies would not materially
affect the Company's financial position or operating results.
19
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
13. SUBSEQUENT EVENT
On March 8, 1996, the Company completed a merger ("the Merger") with
Healthdyne, ("Healthdyne"), a national provider of specialized obstetrical home
healthcare risk assessment services, upon the approval of the shareholders of
each Company. Under the terms of the Agreement and Plan of Merger, each share
of common stock outstanding on March 8, 1996, of the Company and Healthdyne,
Inc. was exchanged for one share of Matria Healthcare, Inc. ("Matria"), a newly
created Delaware corporation. In the Merger, Matria issued approximately 17.0
million shares of common stock to Healthdyne shareholders and approximately
17.8 million shares to the Company's shareholders. The Merger will be
accounted for using the purchase method and the Company has been deemed the
acquirer since the Company's shareholders received approximately 51% of the
newly issued shares.
The purchase price of Healthdyne was approximately $185 million, of which
approximately $150 million will be allocated to goodwill and other intangibles
and will be amortized over 5 years.
The financial position and results of operations of the Company and Healthdyne
will be consolidated effective March 1, 1996. Presented below are unaudited
consolidated condensed pro forma financial statements as if Healthdyne had been
acquired as of the beginning of 1995. This summary includes the impact of
adjustments for amortization of goodwill and other intangible assets associated
with the acquisition. The pro forma consolidated condensed Statement of Loss
does not include approximately $30 million of annual savings expected to be
realized by 1997, or non-recurring restructuring costs currently estimated at
$14.1 million that are expected to be incurred by the Company in 1996. The
Company will incur additional liabilities of approximately $9.4 million for
estimated severance payments and other obligations of Healthdyne as a result of
the Merger. These liabilities will be recorded as a reduction of the fair
value of net tangible assets of Healthdyne in the calculation of goodwill. The
pro forma results are not necessarily indicative of what actually would have
occurred if the acquisition had been in effect for the entire year, nor are
they intended to be a projection of future results.
Pro Forma Consolidated Condensed Balance Sheet (Unaudited)
December 31, 1995
<TABLE>
<S> <C>
Assets
Cash and short-term investments $ 43,914
Trade accounts receivable 29,114
Property and equipment, net 19,914
Goodwill and other intangibles 153,969
Other assets 17,133
--------
$264,044
========
Liabilities and Stockholder Equity
Current liabilities $ 52,828
Long-term liabilities 10,247
Stockholders' equity 200,969
--------
$264,044
========
</TABLE>
20
<PAGE> 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
TOKOS MEDICAL CORPORATION (DELAWARE)
13. SUBSEQUENT EVENT (CONTINUED)
Pro Forma Consolidated Condensed Statement of Loss (Unaudited)
Year Ended December 31, 1995
<TABLE>
<S> <C>
Revenues $157,129
Operating costs and expenses 162,187
Amortization of goodwill and other intangibles 32,123
Other expenses 7,494
Interest income 2,262
Income tax benefit 713
--------
Loss from continuing operations $(41,700)
========
Loss per share $ (1.23)
========
Weighted average number of common share and
common share equivalents 33,940
========
</TABLE>
Certain officers of the Company and Healthdyne will become eligible for
severance payment in the event that those officers are terminated or elect to
terminate their employment with Matria after the Merger, and all of the
unvested stock options became vested upon consummation of the Merger. Under
the severance benefit agreements, in the unlikely event the employment of each
of the individuals entitled to such arrangements were terminated after the
Merger, Matria's aggregate liability as of December 31, 1995 to former
Healthdyne and Company directors and officers would approximate $16.5 million.
Healthdyne's executive officers participate in a Retirement Benefit Award
Program established in 1994. In the event of a change of control all benefits
accrued to date under this program immediately vest and each executive officer
may require funds equal to the accrued benefit be placed in trust. On October
2, 1995, the Company adopted a Retirement Benefit Award Program similar to
Healthdyne's that would be effective only upon consummation of the Merger.
Under the retirement benefit reward agreements, in the event each of the
individuals entitled to such agreements were to so request in accordance with
the terms of those agreements, the aggregate amount that Matria would have been
required to place in trust at December 31, 1995 would approximate $3.2 million.
21
<PAGE> 1
EXHIBIT 99.1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Healthdyne, Inc.:
We have audited the accompanying consolidated balance sheets of Healthdyne,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of earnings (loss), shareholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
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 Healthdyne, Inc.
and subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
March 1, 1996, except as to note 14,
which is as of March 8, 1996
1
<PAGE> 2
HEALTHDYNE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------
Assets 1995 1994
------ ------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 10) $ 7,577 14,700
Short-term investments (note 10) 28,271 29,816
Trade accounts and notes receivable, less allowances
of $8,372 and $6,146 at December 31, 1995 and
1994, respectively 11,347 14,483
Inventories 804 532
Prepaid expenses and other current assets 5,469 4,279
Deferred income taxes (note 7) 1,027 1,027
Assets held for disposition, net (note 2) - 33,785
------- -------
Total current assets 54,495 98,622
Property and equipment, net (note 3) 12,056 12,449
Excess of cost over net assets of businesses acquired,
less accumulated amortization of $323 and $187 at
December 31, 1995 and 1994, respectively (note 2) 4,966 3,260
Intangible pension asset (note 9) 1,993 -
Other assets 2,531 2,604
------- -------
$76,041 116,935
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 3
<TABLE>
<CAPTION>
December 31,
------------------
Liabilities and Shareholders' Equity 1995 1994
------------------------------------ -------- --------
<S> <C> <C>
Current liabilities:
Current installments of long-term debt (notes 2, 4, and 10) $ 1,142 715
Accounts payable, principally trade 2,906 2,225
Accrued liabilities (note 5) 12,335 12,802
-------- --------
Total current liabilities 16,383 15,742
Long-term debt, excluding current installments (notes 2, 4, and 10) 2,115 3,213
Accrued pension cost (note 9) 2,679 -
Other long-term liabilities 3,700 4,158
-------- --------
Total liabilities 24,877 23,113
-------- --------
Minority interest 656 558
Shareholders' equity (note 8):
Preferred stock, $.01 par value. Authorized 2,250
shares; issued none - -
Common stock, $.01 par value. Authorized 25,000 shares;
issued and outstanding 16,597 shares and 15,277
shares at December 31, 1995 and 1994, respectively 166 153
Additional paid-in capital 72,070 111,059
Minimum pension liability (note 9) (303) -
Accumulated deficit (21,425) (17,948)
-------- --------
Total shareholders' equity 50,508 93,264
Commitments and contingencies (notes 2, 9, 11, and 12)
-------- --------
$ 76,041 116,935
======== ========
</TABLE>
3
<PAGE> 4
HEALTHDYNE, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings (Loss)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Revenues $ 69,627 66,407 67,555
Cost of revenues 27,804 27,618 27,991
-------- -------- --------
Gross profit 41,823 38,789 39,564
Selling and administrative expenses 38,666 36,698 38,795
Provision for doubtful accounts 4,088 5,368 7,044
Research and development expenses 327 554 886
-------- -------- --------
Operating loss (1,258) (3,831) (7,161)
Interest income 2,093 1,173 119
Interest expense (170) (596) (1,306)
Minority interest in net earnings of partnerships (675) (655) (1,096)
Other expense, net (63) (77) (998)
-------- -------- --------
Loss from continuing operations
before income tax benefit (73) (3,986) (10,442)
Income tax benefit (note 7) (863) (2,178) (2,790)
-------- -------- --------
Earnings (loss) from continuing operations 790 (1,808) (7,652)
-------- -------- --------
Earnings (loss) from discontinued operations:
Operating earnings (loss), net of income tax expense
(benefit) of $736, $2,574, and $(3,096) in 1995,
1994, and 1993, respectively (1,730) 647 10,794
Gain on sale of subsidiary stock, net of income tax
expense of $4,070 (note 6) - - 5,480
Gain on disposal of subsidiary, net of income tax
expense of $456 (note 2) - 17,330 -
Costs associated with distribution of ownership in
subsidiaries (note 2) (2,537) - -
-------- -------- --------
Earnings (loss) from discontinued operations (4,267) 17,977 16,274
-------- -------- --------
Net earnings (loss) $ (3,477) 16,169 8,622
======== ======== ========
Net earnings (loss) per common share and common
share equivalent:
Earnings (loss) from continuing operations $ .05 (.12) (.50)
Earnings (loss) from discontinued operations (.27) 1.17 1.07
-------- -------- --------
Net earnings (loss) $ (.22) 1.05 .57
======== ======== ========
Weighted average number of common shares and
common share equivalents 15,552 15,335 15,212
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
HEALTHDYNE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Amounts and shares in thousands)
<TABLE>
<CAPTION>
Common stock Additional Minimum Total
-------------- paid-in Accumulated pension shareholders'
Shares Amount capital deficit liability equity
------ ------ ------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 15,123 $151 110,282 (42,739) - 67,694
Issuance of common stock:
Exercise of options 14 - 72 - - 72
Employee Stock Purchase Plan 55 1 302 - - 303
Net earnings - - - 8,622 - 8,622
------ ------ ---------- ----------- --------- -------------
Balance, December 31, 1993 15,192 152 110,656 (34,117) - 76,691
Issuance of common stock:
Exercise of options 49 1 253 - - 254
Employee Stock Purchase Plan 36 - 190 - - 190
Purchase of treasury stock by subsidiary - - (105) (105)
Decrease in minority interest in subsidiary, net of
investment effect, resulting from purchase of
treasury stock by subsidiary - - 38 - - 38
Increase in investment in subsidiary, net of minority
interest effect, resulting from exercise of subsidiary
stock options 27 - 27
Net earnings - - - 16,169 - 16,169
------ ------ ---------- ----------- --------- -------------
Balance, December 31, 1994 15,277 $153 111,059 (17,948) - 93,264
====== ====== ========== =========== ========= =============
</TABLE>
(Continued)
5
<PAGE> 6
HEALTHDYNE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Amounts and shares in thousands)
<TABLE>
<CAPTION>
Common stock Additional Minimum Total
-------------- paid-in Accumulated pension shareholders'
Shares Amount capital deficit liability equity
------ ------ ------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 15,277 $153 111,059 (17,948) - 93,264
Issuance of common stock:
Exercise of options 1,004 10 2,612 - - 2,622
Employee Stock Purchase Plan 50 1 222 - - 223
Conversion of subordinated debentures 138 1 745 - - 746
Cashless exercise of warrants 27 - - - - -
Purchase of minority interest of partnerships 101 1 458 - - 459
Distribution of ownership interest of 81% interest
in Healthdyne Technologies, Inc. - - (25,480) - - (25,480)
Distribution of ownership interest of 100% interest
in Healthdyne Information Enterprises, Inc. - - (17,559) - - (17,559)
Increase in investment in subsidiary, net of minority
interest effect, resulting from exercise of subsidiary
stock options - - 13 - - 13
Minimum pension liability - - - - (303) (303)
Net loss - - - (3,477) - (3,477)
------ ---- ------- ------ ---- -------
Balance, December 31, 1995 16,597 $166 72,070 (21,425) (303) 50,508
====== ==== ======= ======= ==== =======
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
HEALTHDYNE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1995 1994 1993
-------- --------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Earnings (loss) from continuing operations $ 790 (1,808) (7,652)
Adjustments to reconcile earnings (loss) from continuing
operations to net cash provided by (used in) operating
activities:
Depreciation and amortization 4,204 4,218 4,091
Provision for doubtful accounts 4,088 5,368 7,044
Minority interest in net earnings of partnerships 675 655 1,096
Unrealized (gain) loss on short-term investments (562) 588 -
Purchases of short-term investments (41,157) (105,717) -
Sales of short-term investments 43,264 75,313 -
Deferred income taxes - (843) -
(Increase) decrease in:
Trade accounts receivable (952) 298 (5,211)
Inventories (272) (134) 585
Refundable income taxes - 295 (295)
Other assets (117) 2,688 5,692
Increase (decrease) in:
Accounts payable 681 952 (1,298)
Accrued and other liabilities (542) 93 4,021
Discontinued operations, net (12,154) (6,585) (3,793)
-------- --------- --------
Net cash provided by (used in) operating activities (2,054) (24,619) 4,280
-------- --------- --------
Cash flows from investing activities:
Purchase of minority interest in partnerships (371) (276) (857)
Acquisition of businesses, net of cash acquired (300) - -
Investment in affiliate (1,000) - -
Purchases of property and equipment (3,921) (3,240) (5,012)
Proceeds from disposal of property and equipment 342 - -
Proceeds from sale of subsidiary - 61,230 -
Discontinued operations, net (4,853) (24,905) 2,873
-------- -------- --------
Net cash provided by (used in) investing activities (10,103) 32,809 (2,996)
-------- -------- --------
</TABLE>
(Continued)
7
<PAGE> 8
HEALTHDYNE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings under revolving credit agreement $ - 2,000 30,000
Repayments under revolving credit agreement - (13,000) (37,000)
Proceeds from issuance of long-term debt 997 1,227 1,169
Principal repayments of long-term debt
and obligations under capital leases (1,730) (623) (1,354)
Proceeds from issuance of common stock of Company
and common stock of subsidiary 2,858 509 375
Purchase of treasury stock by subsidiary - (105) -
Capital contributions from minority interest in partnerships - - 270
Distribution to minority interest in partnerships (577) (953) (1,732)
Discontinued operations, net 3,486 13,840 3,296
-------- -------- --------
Net cash provided by (used in) financing activities 5,034 2,895 (4,976)
-------- -------- --------
Net increase (decrease) in cash and short-term
investments (7,123) 11,085 (3,692)
Cash and cash equivalents at beginning of year 14,700 3,615 7,307
-------- -------- --------
Cash and cash equivalents at end of year $ 7,577 14,700 3,615
======== ======== ========
Supplemental disclosures of cash paid for:
Interest $ 281 363 1,293
======== ======== ========
Income taxes $ 66 1,138 183
======== ======== ========
Supplemental disclosure of noncash financing activity :
Conversion of 8% convertible subordinated debentures $ 746 - -
======== ======== ========
Increase in intangible asset resulting from minimum
pension liability $ 1,993 - -
======== ======== ========
Debt issued in connection with acquisition of minority
interest in partnerships $ 712 - -
======== ======== ========
Common stock issued in connection with acquisition
of minority interest in partnerships $ 459 - -
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 9
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1995, 1994, and 1993
(1) Summary of Significant Accounting Policies
(a) Business
During 1995, Healthdyne, Inc. (the "Company") provided a
diversified line of home health care services and products through
three major subsidiaries. Its previously 81%-owned Healthdyne
Technologies, Inc. ("Technologies") subsidiary manufactures medical
products for use in the home; its wholly owned Perinatal Services,
Inc., doing business as Healthdyne Maternity Management ("HMM"),
subsidiary provides home pregnancy monitoring and related home
obstetrical care; and its previously wholly owned Healthdyne
Information Enterprises, Inc. ("HIE") subsidiary provides clinical
information systems and management services to physicians and other
health care networks. Additionally, through March 1994, the Company
owned a 68% interest in Home Nutritional Services, Inc. ("HNS"), a
home infusion therapy provider (see note 2). In 1995, the Company
distributed its ownership of Technologies and HIE to its shareholders
(see note 2).
(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 sheet and income and expenses for the period.
The consolidated financial statements include the accounts of
Healthdyne, Inc. and all of its majority owned subsidiaries and
partnerships. All significant intercompany balances and transactions
have been eliminated in consolidation. The results of operations of
HNS, Technologies, and HIE are shown as discontinued operations for
all years presented.
(c) Revenues and the Allowance for Uncollectible Accounts
Revenues are derived from the pregnancy monitoring process, the
infusion therapy process, and the rental of medical products.
Revenues are recognized as the related services are rendered and are
net of estimated contractual allowances. 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)
9
<PAGE> 10
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(d) 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.
(e) Short-Term Investments
Short-term investments consist of United States Government and municipal
bonds. The Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," on January 1, 1994. Under that statement,
the Company classifies its short-term investments as trading securities
with unrealized gains and losses included in earnings. Unrealized gains
(losses) of $562 and $(588) are included in the consolidated statements
of earnings (loss) for the years ended December 31, 1995 and 1994,
respectively.
(f) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
(g) 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 five to 10 years. Amortization of leasehold improvements
and leased equipment is recorded over the shorter of the lives of the
related assets or the lease terms.
(h) Excess of Cost Over Net Assets of Businesses Acquired
The excess of cost over net assets of businesses acquired (goodwill) is
being amortized using the straight-line method over periods ranging from
30 to 40 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.
(Continued)
10
<PAGE> 11
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(i) Income Taxes
The Company accounts for income taxes using an asset and liability
approach in accordance with Statement of Financial Accounting Standards
No. 109 (SFAS 109). Under SFAS 109, deferred income taxes are
recognized for the tax consequences of "temporary differences" by
applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. Additionally, the effect on
deferred taxes of a change in tax rates is recognized in earnings in the
period that includes the enactment date.
Investment and research and experimental tax credits are accounted for
on the flow-through method.
(j) Sales of Subsidiary Stock
The Company has elected to record gains and losses from sales of
subsidiary stock as a component of earnings.
(k) Earnings (Loss) Per Share of Common Stock
Primary earnings (loss) per common share and common share equivalent are
based on the weighted average number of shares outstanding, common share
equivalents derived from dilutive stock options and warrants, and an
adjustment, if any, to reflect the dilutive stock options of HNS and
Technologies. Fully diluted earnings per share are calculated taking
into consideration the effect of convertible subordinated debentures and
an adjustment, if any, to reflect the dilutive stock options of HNS and
Technologies on a fully diluted basis. Fully diluted earnings per share
are not significantly different from primary earnings per share.
(l) Reclassifications
Certain amounts in the 1994 and 1993 consolidated financial statements
have been reclassified to conform to presentations adopted in 1995.
(2) Acquisitions, Divestitures, and Discontinued Operations
On November 6, 1995, the Company completed its distribution of its wholly
owned subsidiary HIE to its shareholders of record on October 30, 1995 in a
taxable distribution. On May 22, 1995, the Company distributed its 81%
ownership of its subsidiary, Technologies, to the shareholders of record of
Healthdyne on May 5, 1995 in a tax free distribution. As a result of these
transactions, the Company's consolidated financial statements reflect the
results of operations of HIE and Technologies as discontinued operations.
(Continued)
11
<PAGE> 12
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
In August 1995, HMM acquired Gynesis, Inc., a Florida provider of
obstetrical home care services, for $325 in cash. This acquisition was
accounted for using the purchase method of accounting with the results of
operations of the business acquired included from the effective date of the
acquisition. The acquisition resulted in excess of cost over net assets
acquired of approximately $222. The pro forma effect on earnings for the
periods prior to the acquisition are not significant.
In March 1995, HMM acquired Atlanta Obstetrical Services and Norwell
Obstetrical Services, two Georgia providers of obstetrical home care
services, for approximately $125 in cash and short-term notes. The
acquisitions were accounted for using the purchase method of accounting
with the results of operations of the businesses acquired included from the
effective date of the acquisitions. The acquisitions resulted in excess of
cost over net assets acquired of approximately $78. The pro forma effect on
earnings for the periods prior to the acquisitions are not significant.
In February 1995, the Company converted a $250 note receivable from
National Reproductive Medical Center, Inc. ("NRMC"), a California fertility
clinic, into 14,280 shares of NRMC's Series C convertible preferred stock
and acquired an additional 57,120 shares of NRMC's Series C convertible
preferred stock for $1,000. Assuming a conversion ratio of preferred to
common stock of 1:1, the 71,400 shares acquired constitute approximately
11.11% of the fully diluted common shares of NRMC. The Company has an
option which expires July 8, 1996 to acquire 100% of the remaining
outstanding common stock for approximately $15,000 in stock or cash.
During 1995, HMM purchased the minority interest from other partners in
four separate partnerships for approximately $142 in cash and $712 in
short-term notes plus additional consideration based upon future cash
receipts of one of the acquired partnerships through January 1, 1999. The
acquisitions resulted in excess of cost over net assets acquired of
approximately $854. The additional consideration, if any, will be recorded
as additional excess of cost over net assets acquired.
In March 1994, HNS entered into an Agreement and plan of merger and the
Company entered into a Stock Purchase Agreement with W.R. Grace & Co.
pursuant to which W.R. Grace & Co. purchased all of the outstanding shares
of common stock of HNS for $7.85 per share in cash. The Company sold its
7,800,000 shares of HNS in the transaction. The sale resulted in cash
proceeds to the Company of approximately $61,000 and an after-tax gain of
approximately $17,330. As a result of this transaction, the Company has
reclassified the results of operations of HNS for the years ended December
31, 1994 and 1993 as earnings (loss) from discontinued operations.
During 1993, HMM purchased the minority interest from other partners in
three separate partnerships. The total cash paid to the other partners was
$857 plus additional consideration based upon future cash receipts of the
acquired partnerships through June 30, 1995. The acquisitions resulted in
excess of cost over net assets acquired of approximately $571. In 1995 and
1994, in accordance with the terms of the purchase agreements, and based
upon cash receipts of the partnerships, additional consideration of $688
(cash of $229 and 101,000 shares of common stock of $459) and $279 (cash),
respectively, was earned and paid, which was recorded as additional excess
of cost over net assets acquired.
(Continued)
12
<PAGE> 13
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(3) Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1995 1994
------- ------
<S> <C> <C>
Rental assets $18,886 16,334
Machinery, equipment, and fixtures 11,822 12,877
Leasehold improvements 737 781
------- ------
31,445 29,992
Less accumulated depreciation and amortization 19,389 17,543
------- ------
$12,056 12,449
======= ======
</TABLE>
(4) Long-Term Debt
Long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------
1995 1994
------ ------
<S> <C> <C>
Convertible subordinated debentures and note (net of
discount of $164 and $261 at December 31, 1995 and
1994, 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 $1,301 2,029
Unsecured promissory note issued in connection with buyout
of minority partnership interest; interest at 9% payable
annually; principal payable in five annual installments
beginning August 1993 400 600
Unsecured, noninterest-bearing obligation incurred in
connection with buyout of minority partnership interest;
payable $126 on June 30, 1996 and $335 on December 31,
1996 461 -
Other debt; interest at rates ranging from approximately 6%
to 10%; a portion secured by rental assets and other
property; payable in monthly installments through 1999 1,095 1,299
------ ------
Total long-term debt 3,257 3,928
Less current installments 1,142 715
------ ------
Long-term debt, excluding current installments $2,115 3,213
====== ======
</TABLE>
(Continued)
13
<PAGE> 14
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
Approximate aggregate minimum annual payments due on long-term debt for the
five years subsequent to December 31, 1995 are as follows: 1996, $1,142;
1997, $376; 1998, $195; 1999, $243; 2000, none; and thereafter, $1,301.
(5) Accrued Liabilities
Accrued liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1995 1994
------- ------
<S> <C> <C>
Accrued salaries, wages, and incentives $ 5,029 3,683
Deferred rent expense 457 956
Other 6,849 8,163
------- ------
$12,335 12,802
======= ======
</TABLE>
(6) Sale of Common Stock of Subsidiary
In June 1993, Technologies, a wholly owned subsidiary of the Company, sold
1,753,750 shares of its unissued common stock in an initial public
offering. Proceeds from the offering, net of underwriters' commissions and
other expenses, were approximately $14,715 to Technologies. As a result of
the offering, the Company's ownership percentage of Technologies was
reduced to 81%. This transaction resulted in a net of tax gain of $5,480.
(7) Income Taxes
The components of income tax benefit relating to continuing operations are
as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Current expense (benefit):
Federal $ (863) (1,335) (2,867)
State - - 77
-------- -------- --------
(863) (1,335) (2,790)
Deferred benefit - Federal - (843) -
-------- -------- --------
Total income tax benefit $(863) (2,178) (2,790)
======== ======== ========
</TABLE>
Prior years' net operating losses in the amount of approximately $19,381
were utilized in 1994 to offset taxable income from discontinued operations
for financial reporting purposes.
(Continued)
14
<PAGE> 15
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
Below is a reconciliation of the expected income tax benefit (based on the
U.S. Federal statutory income tax rate of 35%) to the actual income tax
expense from continuing operations:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Computed expected income tax benefit $ (26) (1,395) (3,655)
Increase (decrease) resulting from:
Losses in excess of allowable carrybacks - - 838
Nontaxable municipal interest income (608) (420) -
Nondeductible expenses 203 250 138
Prior years' tax loss carryover utilized (432) (585) -
Other, net - (28) (111)
------ -------- --------
$ (863) (2,178) (2,790)
====== ======== ========
</TABLE>
At December 31, 1995, 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:
<TABLE>
<CAPTION>
Net
Year of Investment R&E operating
expiration tax credit credit loss
---------- ---------- ------ ---------
<S> <C> <C> <C>
1996 $ 9 - -
1997 84 260 -
1998 54 230 -
1999 113 - -
2001 8 - -
2005 - - 2,257
2006 - - 4,591
2008 - - 2,947
2010 - - 4,118
---------- ------ ---------
$ 268 490 13,913
========== ====== =========
</TABLE>
The net operating loss carryforward of $13,913 includes deductions of
approximately $7,879 related to the exercise of stock options which will be
credited to additional paid-in capital when recognized. The Company also
has available alternative minimum tax (AMT) credit carryforwards of
approximately $1,027 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 $7,929.
(Continued)
15
<PAGE> 16
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
At December 31, 1995 and 1994, the Company had deferred tax assets of
approximately $10,578 and $8,034, respectively, before valuation allowances
of approximately $9,551 and $7,007, respectively. The valuation allowance
is based on the likelihood that a substantial portion of the deferred tax
asset will not be realized. The increase in the valuation allowance of
$2,544 during 1995 was equal to the increase in the deferred asset.
At December 31, 1995 and 1994, deferred income taxes consist of future tax
benefits attributable to:
<TABLE>
<CAPTION>
1995 1994
-------- -------
<S> <C> <C>
Assets (liabilities):
Allowance for doubtful accounts $ 3,257 2,333
Accruals and reserves not deducted for tax purposes 2,292 2,276
Depreciation (2,078) (1,893)
Net operating loss carryforwards 5,412 3,541
Credit carryforwards 1,695 1,777
-------- -------
Total 10,578 8,034
Less valuation allowance 9,551 7,007
-------- -------
Net deferred tax asset $ 1,027 1,027
======== =======
</TABLE>
The net deferred tax asset at December 31, 1995 and 1994 relates primarily
to the Company's AMT credit carryforward. Management believes that the
deferred tax asset will be realized by the reduction of future years'
income tax for tax reporting purposes as the temporary differences reverse.
(Continued)
16
<PAGE> 17
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(8) Shareholders' Equity
Stock Option Plans
The Company maintains six stock option plans for the benefit of key
employees and nonemployee directors. Terms of options granted under the
plans are determined by the Stock Option Committee of the Board of
Directors, subject to the terms of the respective plans. A summary of
stock option transactions under these plans is shown below:
<TABLE>
<CAPTION>
Option price
Shares per share
------ ---------
<S> <C> <C>
Options outstanding at December 31, 1992 1,011,278
Granted 741,250 $1.93 - 2.20
Exercised (13,748) .87 - 1.79
Canceled or expired (68,338) 1.42 - 6.24
-----------
Options outstanding at December 31, 1993 1,670,442
Granted 808,000 1.65 - 2.36
Exercised (49,304) 1.41 - 2.16
Canceled or expired (278,354) 1.42 - 7.30
-----------
Options outstanding at December 31, 1994 2,150,784
Granted 559,894 2.66 - 9.15
Exercised (1,102,013) 1.65 - 21.25
Canceled or expired (101,614) 2.47 - 22.00
-----------
Options outstanding at December 31, 1995 1,507,051
===========
</TABLE>
Stock options exercisable pursuant to these plans were approximately
436,000 shares, 1,036,000 shares, and 690,000 shares at December 31,
1995, 1994, and 1993, respectively.
Other
In connection with a 1984 restructure of a revolving credit agreement,
the Company issued warrants to purchase 210,000 shares of the Company's
common stock at $1.70 per share (exercisable on March 1, 1986 and
expiring on March 1, 1995) to certain lenders. In prior periods, 120,000
of these warrants were exercised. During 1995, the remaining 90,000
warrants were exercised in a cashless exercise resulting in the issuance
of 27,000 shares of common stock.
(Continued)
17
<PAGE> 18
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
In order to take advantage of certain changes in Georgia Corporation Code,
in January 1993, the Company's Board of Directors approved a revised Rights
Agreement dated February 26, 1993 pursuant to which a dividend distribution
of one purchase right for each share of the Company's common stock
outstanding as of March 1, 1993 was declared. 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 Series C
Cumulative Preferred Stock, at a purchase price of $61 per unit. The
rights, which do not have voting power, expire on March 1, 2003 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.
(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 the lesser of (i) one-half of each participant's
contributions but not more than 2.5% of the participant's base salary or
(ii) 20% of the Company's pretax earnings before consideration of this
contribution. Discretionary Company contributions are allowed under the
plan. Contributions to the plan for the years ended December 31, 1995,
1994, and 1993 were approximately $350, $194, and $205, respectively.
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 of 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 10% of the employee's compensation. A participant
immediately ceases to be a participant in the Purchase Plan upon
termination of his or her employment for any reason. During 1995, 1994,
and 1993, respectively, 50,200, 35,426, and 55,409 shares of common stock
were issued under the Purchase Plan.
(Continued)
18
<PAGE> 19
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
During 1995, 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. At December 31, 1995, the plan is unfunded. Management has
not determined whether and when the plan will be funded in future periods.
The following table sets forth the plan's funded status at December 31,
1995:
<TABLE>
<S> <C>
Actuarial present value of accumulated benefit obligation,
including vested benefit of $2,679 $ 2,679
=======
Projected benefit obligation for service rendered to date $ 3,113
Plan assets at fair value -
-------
Projected benefit obligation in excess of plan assets 3,113
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions (737)
Prior service cost not yet recognized in net periodic
pension cost (1,993)
Additional liability 2,296
-------
Accrued pension cost $ 2,679
=======
Net pension cost for 1995 included the following components:
Service cost $88
Interest cost on projected benefit obligation 160
Net amortization and deferral 135
-------
Net periodic pension cost $ 383
=======
</TABLE>
The weighted average assumed discount rate used to measure the accumulated
and projected benefit obligations was 7.0%. The weighted average rate of
compensation increase was 5.0%.
(10)Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires that the Company
disclose estimated fair values for its financial instruments. Fair value
estimates, methods, and assumptions are set forth below for the Company's
financial instruments.
(Continued)
19
<PAGE> 20
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(a) Cash and Short-Term Investments
The carrying amount approximates fair value because of the short
maturity of these instruments or because they are marked to market.
(b) Long-Term Debt
The fair value of the Company's long-term debt is estimated based
on the Company's incremental borrowing rate.
The estimated fair values of the Company's financial instruments at
December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
----------------- -----------------
Carrying Fair Carrying Fair
amount value amount value
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 7,577 7,577 14,700 14,700
Short-term investments 28,271 28,271 29,816 29,816
Long-term debt:
Subordinated debentures (1,301) (1,664) (2,029) (2,367)
Promissory notes (400) (445) (600) (635)
Other long-term borrowings (1,556) (1,637) (1,299) (1,263)
</TABLE>
(11)Commitments
The Company is committed under noncancelable operating lease agreements for
facilities and equipment. The future minimum annual lease payments under
these leases for the next five years and in the aggregate are summarized as
follows:
<TABLE>
Years ending December 31,
-------------------------
<S> <C>
1996 $3,096
1997 981
1998 238
1999 and thereafter -
------
$4,315
======
</TABLE>
Rental expense for cancelable and noncancelable leases was approximately
$2,567, $2,551, and $2,452 for the years ended December 31, 1995, 1994, and
1993, respectively.
(Continued)
20
<PAGE> 21
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(12)Contingencies
The Company and its subsidiaries are involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, based in part on the advice of counsel, the ultimate
disposition of these matters will not have a material adverse effect on the
Company's consolidated balance sheet, results of operations, or liquidity.
A complaint was filed on February 1, 1995 by The Lindner Fund, Inc. in the
Eastern District of Missouri against the Company and its former subsidiary
HNS alleging that The Lindner Fund would not have sold its investment in
HNS on February 8, 1994 had the Company and HNS disclosed the potential
sale of HNS. Damages have been requested in the amount of $1,051,
representing the aggregate difference between the price received upon the
sale of such stock by The Lindner Fund and the $7.85 per share price paid
by W. R. Grace & Co. on April 6, 1994 for HNS. The Company has denied the
allegations set forth in the complaint and is currently defending the
matter vigorously.
HMM has entered into several partnership agreements which contain
provisions which would require them to purchase the other partners'
interest upon the occurrence of certain events, principally a change in law
that prohibits the type of structure that these partnerships utilize.
These buyout provisions generally provide for a predetermined formula to
establish the purchase price, with payout of the purchase price over a
period of five years. If all of these buyouts had been required at
December 31, 1995, the Company's liability would have been approximately
$1,200.
(Continued)
21
<PAGE> 22
HEALTHDYNE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(13)Quarterly Financial Information - Unaudited
Presented below is a summary of the unaudited consolidated quarterly
financial information for the years ended December 31, 1995 and 1994.
<TABLE>
<CAPTION>
Quarter
----------------
Fourth Third Second First
------ ------- ------- -------
<S> <C> <C> <C> <C>
1995:
Revenues $ 17,692 17,732 17,184 17,019
Gross profit 11,168 10,666 10,106 9,883
Earnings from continuing operations 340 25 113 312
Earnings (loss) from discontinued operations - (2,921) (1,697) 351
Net earnings (loss) per common share
and common share equivalent:
Earnings (loss) from continuing operations .02 - .01 .02
Earnings (loss) from discontinued operations - (.19) (.11) .02
1994:
Revenues 17,305 17,183 16,486 15,433
Gross profit 10,064 9,956 9,923 8,846
Earnings (loss) from continuing operations (13) 42 (659) (1,178)
Earnings (loss) from discontinued operations (655) 688 18,721 (777)
Net earnings (loss) per common share
and common share equivalent:
Earnings (loss) from continuing operations - - (.04) (.08)
Earnings (loss) from discontinued operations (.04) .05 1.22 (.05)
</TABLE>
(14) Subsequent Events
On March 8, 1996, Tokos Medical Corporation ("Tokos") and the Company
merged with and into Matria Healthcare, Inc. ("Matria"), 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 common stock outstanding on March 8, 1996 of Tokos
and the Company was exchanged fro one share of Matria common stock. The
Merger will be accounted for using the purchase method of accounting and
Tokos will be deemed to be the acquirer since its shareholders received
approximately 51% of the newly issued shares of Matria common stock.
In January 1996, HMM completed the buyouts of three partnerships located in
Texas and Florida. The total consideration paid for these partnerships was
$1,046 in cash and notes payable. The excess of cost over net assets
acquired approximated the amount paid for these partnerships.
22
<PAGE> 1
EXHIBIT 99.2
COMPARATIVE MARKET DATA
Healthdyne Common Stock and Tokos Common Stock are quoted on the Nasdaq
National Market ("Nasdaq") under the symbols "HDYN" and "TKOS", respectively.
Upon consummation of the Merger, Newco Common Stock is expected to be quoted on
Nasdaq under the symbol "MATR." Newco has applied to the Nasdaq to have the
shares of Newco Common Stock to be issued in the Merger included in the Nasdaq.
The table below sets forth, for the calendar quarters indicated, the high and
low sales prices per share quoted on Nasdaq for Healthdyne Common Stock
(adjusted to reflect the Spinoffs) and Tokos Common Stock. The information with
respect to the Nasdaq quotations reflects interdealer prices, without retail
markup, markdown or commissions and may not represent actual transactions.
<TABLE>
<CAPTION>
HEALTHDYNE TOKOS
COMMON STOCK* COMMON STOCK
------------------ ------------------
HIGH LOW HIGH LOW
------- ------ ------- ------
<S> <C> <C> <C> <C>
Calendar 1994:
First Quarter....................................... $ 2.481 $1.737 $ 6.250 $3.250
Second Quarter...................................... 2.127 1.560 4.500 3.250
Third Quarter....................................... 2.268 1.667 8.000 3.375
Fourth Quarter...................................... 2.517 2.127 8.000 5.125
Calendar 1995:
First Quarter....................................... 2.917 2.148 7.875 4.359
Second Quarter...................................... 4.492 2.602 7.500 5.500
Third Quarter....................................... 8.765 3.506 12.875 6.750
Fourth Quarter...................................... 9.500 7.500 11.125 8.000
Calendar 1996:
First Quarter (through February 1, 1996)............ 10.125 8.375 10.375 8.625
</TABLE>
- ---------------
* The high and low prices of Healthdyne Common Stock have been adjusted
retroactively to January 1, 1994 to reflect the spinoff of Healthdyne
Technologies in May 1995, and HIE in November 1995. The adjusted prices of the
Healthdyne Common Stock prior to November 1995 do not reflect actual trading
prices, and are based on assumptions regarding the relative market value of a
share of Healthdyne Common Stock after deduction of the relative value
attributable to the entities spun-off by Healthdyne.
1
<PAGE> 2
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendations of the Boards of Directors of Tokos and
Healthdyne with respect to the Merger Agreement and the transactions
contemplated thereby, stockholders should be aware that certain members of the
management of Tokos and Healthdyne and the Boards of Directors of Tokos and
Healthdyne have interests in the Merger that are in addition to the interests of
stockholders of Tokos and Healthdyne generally.
Amendments to Healthdyne's Change in Control Agreements. In February 1988,
Healthdyne entered into agreements with Messrs. Petit, Dewberry, Burkey and
Millard and in October 1993 entered into a similar agreement with Mr. Yokubinas,
entitling such executive officers to certain benefits upon specified
terminations of employment within three years following a "change in control" of
Healthdyne. Each agreement provides that in the event of a "change in control"
of Healthdyne, the executive officer concerned will be entitled to certain
benefits upon his subsequent termination of employment during the term of the
agreement unless such termination is (i) because of his death, disability or
retirement, (ii) by Healthdyne for cause, or (iii) with respect to termination
by the executive officer, by the executive officer, other than for "good
reason." Under these agreements, a number of circumstances entitle the executive
officer to treat a good faith termination on his part as being a termination for
"good reason." These include an adverse change in the executive officer's
compensation, discontinuation of certain benefits, the assignment of duties
inconsistent with his status or duties in effect immediately prior to the
"change in control" of Healthdyne, the relocation of Healthdyne's principal
executive office to a location outside of Marietta, Georgia or Healthdyne's
requiring the executive officer to be based anywhere other than Healthdyne's
principal executive office.
If an executive officer's employment with Healthdyne or its subsidiaries
terminates following the consummation of a "change in control" of Healthdyne
other than under the circumstances set forth in clauses (i), (ii) or (iii) of
the preceding paragraph, the executive officer will be entitled to receive his
full base salary through the date of termination and a lump sum severance
payment equal to three times the executive officer's average annual salary and
other income derived from Healthdyne which is reportable for federal tax
purposes for the five years preceding the date of his termination. In addition,
such executive officer will be entitled to receive, for a period of three years
after the date of his termination, all life, disability and health insurance
coverage, automobile allowances and other fringe benefits equivalent to those in
effect at the date of termination and is entitled to receive additional amounts
relating to any excise taxes imposed on the executive as a result of Section
280G of the Code.
In connection with the execution of the Merger Agreement, and as
contemplated therein, Healthdyne entered into amended and restated agreements
with each of the executive officers mentioned above and a new agreement with
Frank D. Powers, President of Healthdyne Maternity Management (the "New
Agreements"). The New Agreements, which take effect only if and at the time that
the Merger becomes effective, will supersede the prior agreements described
above. The New Agreements acknowledge that the Merger constitutes a "change in
control", as defined in the agreements, and extend the term of the New
Agreements from a term ending in February 1997 to a term ending three years
after the Merger. In addition, under the New Agreements the executive officer
agrees to comply with certain protective covenants which, for a period of three
years following the later of the Effective Time or the effective time of any
other "change in control" of Newco that occurs within three years after the
effective date of the Merger and during the executive officer's continued
employment with Newco, prohibit the executive officer from competing with Newco,
soliciting customers or soliciting personnel of Newco. The New Agreements
otherwise are substantially similar to the change in control agreements
previously in effect.
Under these agreements, if a "change in control" had taken place on January
1, 1996, Messrs. Petit, Dewberry, Yokubinas, Burkey, Millard and Powers would
have been entitled to receive approximately $4,308,000, $2,319,000, $1,007,000,
$1,681,000, $651,000 and $647,000, respectively, upon termination of employment
as contemplated under these agreements. Section 280G of the Code imposes a 20%
excise tax on the recipient of "excess parachute payments," as identified in the
Code, and denies a tax deduction for such excess parachute payments to the
company making them. In addition, if any such payments constitute excess
parachute payments under Section 280G of the Code, Healthdyne (or, after the
Merger, Newco) would be
2
<PAGE> 3
obligated under these agreements to reimburse each executive officer for the
excise taxes resulting from such parachute payments and from any reimbursements
thereof paid by Healthdyne (or, after the Merger, Newco) and for the income
taxes imposed on the executive officer with respect to such reimbursements.
Healthdyne believes that, if Newco becomes obligated to make severance payments
under these agreements, no portion of these payments will constitute excess
parachute payments. However, there can be no assurance that the IRS would not
assert that some portion of such payments are excess parachute payments. If the
IRS were to prevail in such an assertion, the amount of deductions disallowed
and the amount of reimbursements required to be paid to terminated executives
could be substantial.
Amendments to Tokos Employment Agreements. During 1994 and 1995, Tokos
entered into Employment Agreements with Mr. Byrnes and Ms. Bayer and certain
other officers of Tokos, and a similar agreement with Mr. Mione. These
agreements provide for severance payments and certain benefits in the event of a
termination upon a "change in control," a "termination for failure to renew" and
a "termination other than for cause." The executive officers are not entitled to
any compensation or benefits if they are terminated for "cause" or if, prior to
change of control, they voluntarily terminate their employment with Tokos. A
termination upon a "change in control" is defined as a termination following (i)
the acquisition by a person or entity of twenty percent (20%) or more of Tokos'
common stock in a transaction not approved by the Board of Directors; or (ii) a
merger, consolidation or reorganization of Tokos with one or more corporations
as a result of which Tokos is merged out of existence or becomes a subsidiary of
another corporation or the sale of all or substantially all of the assets of
Tokos; or (iii) a tender or exchange offer, merger, consolidation or business
combination as a result of which the persons who were directors of Tokos before
such transaction cease to constitute a majority of the Board of Directors of
Tokos or any successor of Tokos. A "termination for failure to renew" means a
failure by Tokos to renew or extend the term of the agreement beyond the basic
term of the agreement or any extension thereof. A "termination other than for
cause" is defined as constructive termination of the executive officer or
material breach of the employment agreement by Tokos. A "termination for cause"
is defined as a termination for any willful dishonesty towards, fraud upon or
deliberate injury to, Tokos by the executive officer.
Amendments to the employment agreements described above were executed on
October 2, 1995, and become effective only upon the effectiveness of the Merger.
The amendments increase the amount of severance compensation payable in the
event of a termination upon a "change in control" or "termination for failure to
renew" from 18 months continuation of salary plus 150% of the highest bonus
earned by the employee, to an amount equal to three times the executive
officer's average annual base salary and other income derived from Tokos which
is reportable for federal tax purposes for the five years preceding the date of
his or her termination. In addition, the covenants against competition and
soliciting customers and employees previously included in the employment
agreements were revised to provide greater protection to Tokos.
If a "change in control" had taken place on January 1, 1996, Messrs. Byrnes
and Mione and Ms. Bayer would have been entitled under the amended Employment
Agreements to receive approximately $3,812,000, $633,000 and $702,000,
respectively, upon termination of employment as contemplated under these
agreements. The amount of severance compensation payable under the employment
agreements is limited to amounts which are deductible by Tokos for federal
income tax purposes under Section 280G of the Code.
Retirement Benefits. Healthdyne's executive officers participate in a
Retirement Benefit Award Program established by Healthdyne in 1994. In the event
of a "change in control" of Healthdyne, all benefits accrued to date under these
Retirement Benefit Awards immediately vest and each executive officer may
require Healthdyne to place in trust for the executive officer's benefit an
amount of money equal to the present value of the executive officer's accrued
retirement benefit. The executive officers who participate in this retirement
program and the amounts that Healthdyne would be required to place in trust for
each such executive officer as of December 31, 1995, if requested thereunder,
are as follows: Petit -- $1,098,000; Dewberry -- $423,000;
Yokubinas -- $510,000; Burkey -- $250,000; and Millard -- $145,000. Effective
November 16, 1995, Healthdyne adopted a retirement benefit award for Mr. Powers.
The amount Healthdyne would be required to place in trust for Mr. Powers as of
December 31, 1995, if requested thereunder, is $160,000.
3
<PAGE> 4
Effective October 2, 1995, as contemplated in the Merger Agreement, Tokos
adopted retirement benefit awards similar to Healthdyne's for Messrs. Byrnes and
Mione and Ms. Bayer. The amounts Tokos would be required to place in trust for
each such executive officer as of December 31, 1995, if requested thereunder,
following the Merger, are as follows: Byrnes -- $345,000; Mione -- $221,000;
Bayer -- $0.
Stock Option Plans. Pursuant to the Merger Agreement, as of the Effective
Time, Newco shall assume the stock options outstanding under the stock option
plans of each of Tokos and Healthdyne (the "Assumed Options"). Each Assumed
Option shall be exercisable for the number of Newco Shares equal to the number
of Tokos or Healthdyne shares subject to such option prior to the Effective
Time, at the exercise price per Newco Share equal to the exercise price per
Tokos or Healthdyne share applicable to such Assumed Option immediately prior to
the Effective Time (without taking into account any anti-dilution formula);
provided, however, that in the case of any Employee Stock Option to which
Section 421 of the Code applies by reason of its qualification under Section 422
of the Code, the conversion formula shall be adjusted, if necessary, to comply
with Section 424(a) of the Code. Except as provided above, each Assumed Option
shall continue to have and be subject to the same terms and conditions as were
applicable to such option immediately prior to the Effective Time except that,
in the case of Healthdyne, each such Assumed Option held by an optionee who
continues his service with Healthdyne up to the Effective Time shall become
immediately exercisable for all of the shares subject to such option and, in the
case of Tokos, the repurchase rights in favor of Tokos with respect to each
Assumed Option held by an optionee who continues his service with Tokos up to
the Effective Time will not be transferred to Newco in the Merger. Assumed
Options held by executive officers and directors of Healthdyne or Tokos, whose
employment by Newco is terminated at or after the Effective Time shall continue
to be exercisable for 12 months after the Effective Time (to the extent
otherwise exercisable), rather than three months, after such termination of
employment, unless the final expiration date of the Assumed Options would have
occurred prior thereto without regard to early termination for any reason, in
which case such Assumed Options shall continue to be exercisable only until the
final expiration date.
Approval and adoption of the Merger Agreement by Healthdyne and Tokos
stockholders will constitute approval of the assumption by Newco of the Assumed
Options outstanding under the Healthdyne Stock Option Plans and the Tokos Stock
Option Plans.
As of December 31, 1995, employees (or former employees) non-employee
directors and consultants of Tokos held Tokos Stock Options to purchase an
aggregate of 2,014,838 shares of Tokos Common Stock at a weighted average
exercise price of $5.98 per share (based on exercise prices ranging from $0.23
to $31.50 per share). Options to purchase 937,338 Tokos Shares at a weighted
average exercise price of $5.85 per share have not yet become vested as defined
in the Tokos Stock Option Plans, but will accelerate and become fully
exercisable without restriction at the Effective Time. As of December 31, 1995,
employees (or former employees) of Healthdyne, non-employee directors and
consultants held Healthdyne Options to purchase an aggregate of 1,506,317 shares
of Healthdyne Common Stock at a weighted average exercise price of $3.2041 per
share (based on exercise prices ranging from $1.6473 to $7.9415 per share).
Options to purchase 1,070,888 Healthdyne Shares at a weighted average exercise
price of $3.0279 per share have not yet become exercisable, but will accelerate
and become fully exercisable at the Effective Time.
Certain Benefits. From and after the Effective Time, Newco will honor in
accordance with their terms all benefits accrued at the Effective Time under the
Tokos Plans and Healthdyne Plans, including any rights to payments and benefits
under the agreements and arrangements described above under " -- Amendments to
Healthdyne's Change In Control Agreements" and " -- Amendments to Tokos
Employment Agreements" and shall grant all Tokos and Healthdyne employees from
and after the Effective Time credit for all service with Tokos and/or Healthdyne
and their respective affiliates and predecessors prior to the Effective Time for
all purposes for which such service was recognized under the benefit plan in
question; provided, however, that the granting of credit for such services shall
not result in a duplication of benefits provided to employees who become
employees of Newco. To the extent any such benefit plans provide medical or
dental welfare benefits after the Effective Time, such benefit plans shall waive
any preexisting condition exclusions and waiting periods for plan participation
unless the employee was subject to one or more preexisting condition exclusions
in the Tokos or Healthdyne plan, and shall provide that any expenses incurred on
or before the Effective Time
4
<PAGE> 5
shall be taken into account under the benefit plans of Newco for purposes of
satisfying applicable deductible, coinsurance and maximum out-of-pocket
provisions.
Indemnification and Insurance. Under the terms of the Merger Agreement,
Newco is required to indemnify and advance expenses to current and former
officers, directors, employees and agents of Tokos and Healthdyne (the
"Indemnified Parties"), to the fullest extent permitted under applicable law,
against all losses, claims, damages, liabilities, costs or expenses (including
attorneys' fees), judgments, fines, penalties and amounts paid in settlement in
connection with any claim, action, suit, proceeding or investigation arising out
of or pertaining to acts or omissions, or alleged acts or omissions, by them in
their capacities as such, whether commenced, asserted or claimed before or after
the Effective Time arising under the Securities Act, the Exchange Act or state
corporation laws in connection with the Merger. In addition, Newco is obligated
not to amend the provisions of its certificate of incorporation and bylaws
providing for exculpation of director and officer liability and indemnification,
except as required by applicable law or except to make changes permitted by law
that would enlarge the Indemnified Parties' right of indemnification. For a
period of six years after the Effective Time, Newco is obligated to maintain in
effect policies of directors' and officers' liability insurance that are
substantially no less advantageous to the Indemnified Parties than the policies
presently covering such individuals.
Board of Directors. Pursuant to the Merger Agreement, Healthdyne and Tokos
have agreed that four current members of Healthdyne's Board of Directors (Parker
H. Petit, Carl E. Sanders, Morris S. Weeden and Frederick P. Zuspan, M.D.) and
Jackie M. Ward will serve on Newco's Board of Directors, which will consist of
ten members. In addition, Healthdyne and Tokos have agreed that the following
five current members of the Board of Directors of Tokos will serve as directors
on the Board of Directors of Newco: Robert F. Byrnes, Gene P. Guselli, Craig T.
Davenport, Thomas W. Erickson and David L. Goldsmith. See "Operation, Management
and Business of Newco After the Merger -- Management of Newco."
Healthdyne's Financial Advisors. Healthdyne has paid a fee of $125,000 to
Needham and has agreed to reimburse Needham for its reasonable out-of-pocket
expenses. In addition, Healthdyne has agreed to pay Colman Furlong a fee of
$650,000 if the Merger is consummated, and has agreed to reimburse Colman
Furlong for its reasonable out-of-pocket expenses.
Tokos' Financial Advisor. Tokos has paid fees and incurred contingent
obligations to Robertson Stephens in connection with the Merger and has agreed
to pay Robertson Stephens a fee of $1.5 million (including out-of-pocket
expenses) if the Merger is consummated. In addition, Robertson Stephens is the
investment manager of investment entities that invested in the purchase of Tokos
preferred stock, and has also provided certain investment banking services to
Tokos from time to time, including acting as the managing underwriter for the
initial public offering of shares of the common stock of Tokos on March 26, 1990
and acting as financial advisor to Tokos in several of its acquisitions.
Robertson Stephens also makes a market in the Common Stock of Tokos. David L.
Goldsmith, a director of Tokos, is a partner of Robertson Stephens, and Mr.
Goldsmith will be director of Newco after the Merger.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
Troutman Sanders LLP, counsel to Healthdyne, is of the opinion that, for
federal income tax purposes, the Merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code and, accordingly, that (i) no
gain or loss will be recognized by Healthdyne as a result of the Merger, (ii) no
gain or loss will be recognized by Healthdyne shareholders upon the receipt of
Newco Common Stock in exchange for Healthdyne Common Stock in connection with
the Merger, (iii) the tax basis of Newco Common Stock to be received by
Healthdyne shareholders in connection with the Merger will be the same as the
tax basis in the Healthdyne Common Stock surrendered in exchange therefor, and
(iv) the holding period of Newco Common Stock to be received by Healthdyne
shareholders in connection with the Merger will include the holding period of
the Healthdyne Common Stock surrendered in exchange therefor, provided that the
Healthdyne Common Stock is held as a capital asset at the Effective Time. This
opinion is based in part on the truth and accuracy of the representations,
warranties and statements of fact made or to be made by Healthdyne, Tokos and
Newco in connection with the Merger.
5
<PAGE> 6
Healthdyne's obligation to consummate the Merger is conditioned upon
receipt of a written opinion from Troutman Sanders LLP to the effect that the
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Code and that Healthdyne and Tokos
will each be a "party" to that reorganization within the meaning of Section
368(b) of the Code.
Morrison & Foerster LLP, counsel to Tokos, is of the opinion that, for
federal income tax purposes, the Merger will be treated as a reorganization
within the meaning of Section 368(a) of the Code and accordingly, that (i) no
gain or loss will be recognized by Tokos as a result of the Merger, (ii) no gain
or loss will be recognized by Tokos stockholders upon the receipt of Newco
Common Stock in exchange for Tokos Common Stock in connection with the Merger,
(iii) the tax basis of Newco Common Stock to be received by Tokos stockholders
in connection with the Merger will be the same as the tax basis in the Tokos
Common Stock surrendered in exchanged therefor, and (iv) the holding period of
Newco Common Stock to be received by Tokos stockholders in connection with the
Merger will include the holding period of the Tokos Common Stock surrendered in
exchange therefor, provided that the Tokos Common Stock is held as a capital
asset at the Effective Time. This opinion is based in part on the truth and
accuracy of the representations, warranties and statements of fact made or to be
made by Healthdyne, Tokos and Newco in connection with the Merger.
Tokos' obligation to consummate the Merger is conditioned upon receipt of a
written opinion from Morrison & Foerster LLP to the effect that the Merger will
be treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code and that Healthdyne and Tokos will each be
a "party" to that reorganization within the meaning of Section 368(b) of the
Code.
The IRS has ruled privately that conversion of stock purchase rights
substantially similar to the rights associated with the Tokos Common Stock and
the Healthdyne Common Stock into rights substantially similar to Newco Stock
Rights in the Merger will be disregarded for federal income tax purposes.
Accordingly, neither Tokos stockholders nor Healthdyne shareholders should
realize a gain or loss on such conversion.
The discussion regarding federal income tax consequences set forth above is
included for general information only. It does not address the state, local or
foreign tax aspects of the Merger and may not apply to a stockholder who
acquired his or her shares of Healthdyne Common Stock or Tokos Common Stock
pursuant to the exercise of employee stock options or rights or otherwise as
compensation. This discussion relates only to Healthdyne Common Stock and Tokos
Common Stock held as capital assets within the meaning of Section 1221 of the
Code by persons who are citizens or residents of the United States. This
discussion does not address tax consequences to categories of holders entitled
to special treatment under the Code (including, without limitation, foreign
persons, tax-exempt organizations, insurance companies, financial institutions
and dealers in stocks and securities). It is based on currently existing
provisions of the Code, existing and proposed Treasury Regulations thereunder
and current administrative rulings and court decisions. All of the foregoing are
subject to change, and any such change could affect the continuing validity of
this discussion. No ruling has been sought from the IRS with respect to the
federal income tax consequences of the Merger. Healthdyne and Tokos stockholders
should consult their own tax advisors with regard to the specific tax
consequences of the Merger to them, including the application and effect of any
state, local and foreign tax laws.
REGULATORY APPROVALS
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger could not have been consummated until notifications and certain
information had been furnished to the FTC and the Antitrust Division and
specified waiting period requirements had been satisfied. Each of Healthdyne and
Tokos filed a notification and report form under the HSR Act with the FTC and
the Antitrust Division on October 3, 1995 and received notice of early
termination of the waiting period on November 2, 1995.
The obligations of Healthdyne and Tokos to consummate the Merger are
subject to the condition that there be no temporary restraining order,
preliminary or permanent injunction or other order by any court of competent
jurisdiction or other legal restraint or prohibition preventing the consummation
of the Merger. Each party has agreed to use its best efforts to have any such
injunction or order lifted. See "The Merger Agreement -- Conditions to the
Merger" and "-- Termination."
6
<PAGE> 7
THE MERGER AGREEMENT
The detailed terms of and conditions to the Merger are contained in the
Merger Agreement, which is included in full as Appendix A to this Joint Proxy
Statement/Prospectus. The following summary description of the terms of the
Merger Agreement is qualified in its entirety by, and made subject to, the more
complete information set forth in the Merger Agreement.
THE MERGER
Subject to the terms and conditions of the Merger Agreement, at the
Effective Time, Tokos and Healthdyne will be merged with and into Newco and
thereupon the separate existence of Tokos and Healthdyne will cease, and Newco
will be the surviving corporation. The Merger will have the effects specified in
the DGCL.
CLOSING AND EFFECTIVE TIME OF THE MERGER
The closing of the transactions contemplated by the Merger Agreement shall
take place on the day after the later of (a) the date on which the later to
occur of the Healthdyne Meeting and the Tokos Meeting is held or (b) the day on
which all of the conditions set forth in the Merger Agreement are satisfied or
waived, or at such other date, time and place as Tokos and Healthdyne agree.
Concurrently with the Closing, Healthdyne and Tokos will cause a
Certificate of Merger to be filed with the Secretary of State of the State of
Delaware and a Certificate of Merger to be filed with the Secretary of State of
the State of Georgia. Each such filing will be made substantially simultaneously
with the other and the Merger will become effective upon the later to occur of
such filings.
CONVERSION OF SECURITIES
Pursuant to the Merger Agreement, at the Effective Time, (i) each issued
and outstanding share of Tokos Common Stock, together with its associated common
stock purchase right will be converted into one share of Newco Common Stock and
one associated Newco Stock Right and (ii) each issued and outstanding share of
Healthdyne Common Stock, together with its associated preferred stock purchase
right will be converted into one share of Newco Common Stock and one associated
Newco Stock Right. The Merger will not cause the associated stock purchase
rights of Healthdyne or Tokos stockholders to become exercisable. The shares of
Healthdyne Common Stock and Tokos Common Stock and their respective accompanying
stock purchase rights to be converted in connection with the Merger are
sometimes referred to herein collectively as the "Shares" and the shares of
Newco Common Stock and the associated Newco Stock Rights are sometimes referred
to herein collectively as "Newco Shares."
All shares of Tokos Common Stock and Healthdyne Common Stock converted in
the Merger will no longer be outstanding and will automatically be cancelled and
retired and will cease to exist, and each holder of a certificate representing
any such shares will cease to have any rights with respect thereto, except the
right to receive, without interest, shares of Newco Common Stock upon the
surrender of such certificate. Any shares held in the treasury of Healthdyne or
Tokos shall be cancelled and retired, and no payment shall be made with respect
thereto.
TREATMENT OF STOCK OPTIONS AND CONVERTIBLE SECURITIES
Pursuant to the Merger Agreement, as of the Effective Time, Newco shall
assume the Assumed Options. Each Assumed Option will be exercisable for the
number of Newco Shares equal to the number of Tokos or Healthdyne shares subject
to such option prior to the Effective Time, at the exercise price per Newco
Share equal to the exercise price per Tokos or Healthdyne share applicable to
such Assumed Option immediately prior to the Effective Time (without taking into
account any anti-dilution formula); provided, however, that in the case of any
Employee Stock Option to which Section 421 of the Code applies by reason of its
qualification under Section 422 of the Code, the conversion formula shall be
adjusted, if necessary, to comply with Section 424(a) of the Code. Except as
provided above, each Assumed Option shall continue to have and be
7
<PAGE> 8
subject to the same terms and conditions as were applicable to such option
immediately prior to the Effective Time except that, in the case of Healthdyne,
each such Assumed Option held by an optionee who continues his service with
Healthdyne up to the Effective Time shall become immediately exercisable for all
of the shares subject to such option and, in the case of Tokos, the repurchase
rights in favor of Tokos with respect to each Assumed Option held by an optionee
who continues his service with Tokos up to the Effective Time will not be
transferred to Newco in the Merger. Assumed Options held by officers and
directors of Healthdyne whose employment by Newco is terminated at or after the
Effective Time shall continue to be exercisable for 12 months after the
Effective Time (to the extent otherwise exercisable), rather than three months,
after such termination of employment, unless the final expiration date of the
Assumed Options would have occurred prior thereto without regard to early
termination for any reason, in which case such Assumed Options shall continue to
be exercisable only until the final expiration date. Assumed Options held by
Tokos executive officers shall continue to be exercisable after the Effective
Time (to the extent otherwise exercisable) until the final expiration date of
such options. Any repurchase rights of Tokos and Healthdyne with respect to (y)
unvested Tokos and Healthdyne shares previously issued upon exercise of options
granted under the option plans or (z) unvested Newco Shares issuable upon
exercise of the Assumed Options, shall not be assigned to Newco. As soon as
reasonably practicable after the Effective Time, Newco will cause to be filed
one or more registration statements on Form S-8 under the Securities Act, or
amendments to any registration statements on Form S-8 covering its stock options
to register the Newco Shares issuable upon exercise of the Assumed Options, and
at or prior to the Effective Time, Newco shall take all corporate action
necessary to reserve for issuance a sufficient number of Newco Shares for
delivery upon exercise of the Assumed Options. The consummation of the Merger
shall not of itself be treated as a termination of an optionee's service with
Tokos or Healthdyne for purposes of the Assumed Options or the option plans.
Approval and adoption of the Merger Agreement by Healthdyne and Tokos
Stockholders will constitute approval of the assumption by Newco of the Assumed
Options outstanding under the Healthdyne Stock Option Plans and the Tokos Stock
Option Plans.
As of the Effective Time, each of the 8% Convertible Subordinated
Debentures Due December 31, 2001 (the "Convertible Debentures") of Healthdyne
which is outstanding both as of October 2, 1995 and at the Effective Time shall
be assumed by Newco by execution and delivery of a supplemental indenture,
pursuant to which Newco will agree to issue Newco Shares upon conversion of the
Convertible Debentures.
EXCHANGE OF CERTIFICATES
As of the Effective Time, Newco will deposit with SunTrust Bank, Atlanta,
Georgia, as exchange agent (the "Exchange Agent"), for the benefit of the
holders of shares of Healthdyne Common Stock and Tokos Common Stock, for
exchange in accordance with the Merger Agreement, certificates representing the
shares of Newco Common Stock to be issued in exchange for certificates which
represented shares of Tokos Common Stock or Healthdyne Common Stock, as the case
may be, immediately prior to the Effective Time.
Promptly after the Effective Time, Newco will cause the Exchange Agent to
mail to each holder of record of Tokos Common Stock and Healthdyne Common Stock
a letter of transmittal to be used by such holders in forwarding their
certificates representing such shares ("Certificates") and instructions for use
in effecting the surrender of the Certificates in exchange for certificates
representing shares of Newco Common Stock. TOKOS AND HEALTHDYNE STOCKHOLDERS ARE
REQUESTED NOT TO SURRENDER THEIR RESPECTIVE CERTIFICATES FOR EXCHANGE UNTIL THEY
RECEIVE A NOTICE AND TRANSMITTAL FORM FROM THE EXCHANGE AGENT.
Because of the one-for-one Exchange Ratio for both Healthdyne and Tokos
shares, there will be no fractional shares issued in the Merger unless
Healthdyne or Tokos effects changes in its outstanding capital stock (such as a
stock split or stock dividend), none of which is anticipated. In the event that
any such change results in an Exchange Ratio of other than one-for-one, no
fractional shares of Newco Common Stock will be issued and any holder of shares
of Healthdyne Common Stock or Tokos Common Stock entitled under the Merger
Agreement to receive a fractional share will be entitled to receive only a cash
payment in lieu thereof, which payment will be in an amount equal to the product
of (i) the fractional percentage of a share of Newco
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<PAGE> 9
Common Stock to which such holder would otherwise be entitled, and (ii) the
Average Price (as defined below) of a Newco Share. The "Average Price" of a
Newco Share will be the average of the closing sales prices thereof for the five
trading days commencing on the third trading day following the Closing.
No dividends that are declared on Newco Shares will be paid to persons
entitled to receive certificates representing Newco Shares until such persons
surrender their certificates representing shares of Healthdyne Common Stock or
Tokos Common Stock. Upon such surrender, there shall be paid to the person in
whose name the certificates representing such Newco Shares shall be issued, any
dividends which shall have become payable with respect to such Newco Shares
between the Effective Time and the time of such surrender. In no event shall the
person entitled to receive such dividends be entitled to receive interest on
such dividends. If any certificates for any Newco Shares are to be issued in a
name other than that in which the certificate representing shares of Healthdyne
Common Stock or Tokos Common Stock surrendered in exchange therefor is
registered, it shall be a condition of such exchange that the person requesting
such exchange shall pay to the Exchange Agent any transfer or other taxes
required by reason of the issuance of certificates for such Newco Shares in a
name other than that of the registered holder of the certificate surrendered, or
shall establish to the satisfaction of the Exchange Agent that such tax has been
paid or is not applicable. Notwithstanding the foregoing, none of Tokos,
Healthdyne, the Exchange Agent nor any other person shall be liable to a holder
of shares of Healthdyne Common Stock or Tokos Common Stock for any Newco Shares
or dividends thereon or the cash payment for fractional interests delivered to a
public official pursuant to applicable abandoned property, escheat or similar
laws.
At the Effective Time, the stock transfer books of Healthdyne and Tokos
shall be closed and no transfer of shares of Healthdyne Common Stock or Tokos
Common Stock shall thereafter be made. If, after the Effective Time,
certificates representing shares of Healthdyne Common Stock or Tokos Common
Stock are presented to Newco, they shall be cancelled and exchanged for
certificates representing Newco Shares in accordance with the terms hereof.
Any portion of the monies from which cash payments in lieu of fractional
interests in shares of Newco Common Stock will be made (including the proceeds
of any investment thereof), if any, and any shares of Newco Common Stock that
are unclaimed by the former stockholders of Tokos or Healthdyne one year after
the Effective Time will be delivered to Newco. Any former stockholders of Tokos
or Healthdyne who have not theretofore complied with the exchange procedures in
the Merger Agreement may thereafter look to Newco for delivery of their shares
of Newco Common Stock, deliverable in respect of each share of Newco Common
Stock such stockholder holds and any unpaid dividends and distributions on such
shares of Newco Common Stock. Notwithstanding the foregoing, none of Tokos,
Healthdyne, the Exchange Agent or any other person will be liable to any former
holder of shares of Tokos Common Stock or Healthdyne Common Stock for any amount
properly delivered to a public official pursuant to the applicable abandoned
property, escheat or similar laws.
No interest will be paid or accrued on cash in lieu of fractional shares,
if any, or unpaid dividends and distributions, if any, which will be paid upon
surrender of Certificates.
In the event any certificate evidencing shares is lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed, the Exchange Agent will issue
in exchange for such lost, stolen or destroyed certificate evidencing shares the
appropriate amount of Newco Common Stock. The Board of Directors of Newco may,
as a condition to the issuance thereof, require the owner of such lost, stolen
or destroyed Certificate to give Newco a bond in such sum as it may direct as
indemnity against any claim that may be made against Newco with respect to such
certificate alleged to have been lost, stolen or destroyed.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various customary representations and
warranties relating to, among other things, each of Healthdyne's and Tokos': (i)
organization, existence, and capital structure and ownership of their respective
subsidiaries; (ii) authorization, execution, delivery, performance and
enforceability of the Merger Agreement; (iii) absence of conflicts under their
respective organizational documents, required
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<PAGE> 10
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual and
long-term compensation for services in all capacities to Tokos for the fiscal
years ended December 31, 1995, 1994 and 1993 of those persons who were at
December 31, 1995 either (i) the chief executive officer of Tokos, or (ii) one
of the other four most highly compensated executive officers of Tokos whose
annual salary and bonuses exceeded $100,000 or for whom disclosure would
otherwise be required but for the fact that the individual was not serving as an
executive officer at December 31, 1995 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM(2)
COMPENSATION
------------
ANNUAL AWARDS OF
COMPENSATION STOCK
----------------- OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY(1) BONUS (SHARES) COMPENSATION
- ------------------------------------ ----- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert F. Byrnes.................... 1995 $264,000 $ 0 100,000 $ 0
Chairman of the Board, Chief 1994 264,000 26,400 50,000 0
Executive Officer 1993 264,000 23,760 50,000(3) 0
John R. Bason(7).................... 1995 46,875 0 0 159,914(5)
Executive Vice President 1994 225,625 11,250 30,000 515(6)
1993 220,625 16,875 102,500(3) 0
Nicholas A. Mione................... 1995 165,375 0 40,000 0
Executive Vice President, Finance 1994 165,375 24,806 20,000 10,177(6)
and Administration, CFO 1993 157,500 14,175 77,500(3) 0
Terry P. Bayer...................... 1995 228,000 0 80,000 29,346(5)
President, Operating Subsidiary 1994 173,146 16,300 50,000 1,813(6)
1993 0 0 50,000(4) 0
</TABLE>
- ---------------
(1) Includes deferrals by the individuals under Tokos' 1987 401(k) Plan. Tokos
has not made contributions on behalf of any of its employees under this
Plan.
(2) Tokos has not issued stock appreciation rights and does not have a
"long-term incentive plan" as that term is defined in the applicable rules.
(3) Includes 25,000 options initially granted to Mr. Bason during 1993. All
other options represent the repricing in April 1993 of prior grants.
(4) Represents option grants to Ms. Bayer in December 1993 upon her acceptance
of a position with Tokos.
(5) Includes $48,606 paid to Mr. Bason pursuant to a Separation Agreement,
$25,961 in unused paid time off that Mr. Bason had accrued prior to his
departure from Tokos and $85,347 in other compensation paid to Mr. Bason in
connection with his agreement to cancel unexercized stock options; and,
includes $29,346 paid to Ms. Bayer for non-deductible relocation expenses
incurred during 1995.
(6) Includes $515 and $10,177 paid to Messrs. Bason and Mione, respectively, for
unused paid time off accrued in excess of established limits imposed by
Tokos in 1994; and includes $1,813 paid to Ms. Bayer for non-deductible
relocation expenses incurred during 1994.
(7) Mr. Bason resigned his position with Tokos in March 1995.
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<PAGE> 11
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth certain information with respect to grants
to the Named Executive Officers of stock options, pursuant to Tokos' 1995 Stock
Option Plan, during fiscal 1995.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
PERCENTAGE ANNUAL RATES OF
OF TOTAL STOCK PRICE
OPTIONS EXERCISE OR APPRECIATION FOR
GRANTED TO BASE PRICE OPTION TERM(3)
OPTIONS EMPLOYEES IN PER EXPIRATION -------------------
NAME GRANTED(1) FISCAL YEAR SHARE(2) DATE 5% 10%
- --------------------------------------- ---------- ------------ ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Robert F. Byrnes....................... 100,000 15.3% $6.25 01/03/05 $393,059 $996,089
Terry P. Bayer......................... 80,000 12.2 6.25 01/03/05 314,447 796,871
Nicholas A. Mione...................... 40,000 6.1 6.25 01/03/05 157,224 398,435
John R. Bason.......................... 0 0 N/A N/A 0 0
</TABLE>
- ---------------
(1) Options granted are fully exercisable upon the date of grant. Options
granted under the Option Plan generally vest at the rate of 25% at the end
of the first calendar year following the date of grant and 25% per year
thereafter. All shares purchased upon exercise of options which have not
vested are subject to certain repurchase rights of Tokos. The Plan
Administrator retains discretion, subject to plan limits, to modify the
terms of outstanding options and to reprice outstanding options. Options
are granted for a term of ten (10) years, subject to earlier termination in
certain events related to termination of service to Tokos.
(2) The exercise price and tax withholding obligations related to exercise may
be paid in cash, by delivery of already owned shares, through delivery of a
promissory note, in installment payments, or through a loan for which Tokos
acts as a guarantor or a combination of the foregoing, as determined by the
Plan Administrator.
(3) The potential realizable value illustrates value that could be realized upon
exercise of the options immediately prior to the expiration of their term,
assuming the specified compounded rates of appreciation on Tokos' Common
Stock over the term of the options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION VALUE
The following table sets forth certain information with respect to option
exercises during fiscal 1995 by the Name Executive Officers, and with respect to
unexercised options held by the Named Executive Officers as of December 31,
1995, in each case, under Tokos' 1995 Stock Option Plan.
<TABLE>
<CAPTION>
VALUE OF
UNEXERCISED
NUMBER OF IN-THE-MONEY
UNEXERCISED OPTIONS AT
OPTIONS AT FISCAL YEAR
FISCAL YEAR END END(1)(2)
---------------- -------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE(1) UNEXERCISABLE
- -------------------------------------------------- --------------- -------- ---------------- -------------
<S> <C> <C> <C> <C>
Robert F. Byrnes.................................. 0 $ 0 200,000/0 $ 668,750/0
Terry P. Bayer.................................... 0 0 180,000/0 517,500/0
Nicholas A. Mione................................. 20,000 100,000 117,500/0 308,750/0
John R. Bason..................................... 0 0 0 0
</TABLE>
- ---------------
(1) Option grants are fully exercisable on the date of grant.
(2) Market value of securities underlying the options at December 31, 1995 less
the exercise or base price of "in-the-money" options.
CERTAIN TRANSACTIONS
Pursuant to the terms of both Tokos' 1985 Stock Option Plan and 1995 Stock
Option Plan, certain executive officers exercised options and purchased shares
of Tokos' Common Stock by the delivery of interest-
11
<PAGE> 12
bearing promissory notes that are payable in cash. The name, title, and
outstanding indebtedness, including accrued interest, of such officers, or
former officers, as of December 31, 1995 are: Robert F. Byrnes, Chairman of the
Board, Chief Executive Officer, President and Chief Operating Officer,
$1,097,000; Nicholas A. Mione, Executive Vice President, Finance and
Administration, and Chief Financial Officer, $119,000; and Mr. Davenport, a
former executive officer and current director of Tokos, $258,000. Tokos holds
300,000 shares of Common Stock of Tokos in escrow as collateral for these notes.
The value of this collateral at December 31, 1995 was $2,737,500. The notes bear
interest at 6% per annum, and were due on December 31, 1995; however, the Board
extended the notes until December 31, 1996 so that the officers would not sell
their shares of Tokos' stock.
During 1994 and 1993, Tokos loaned Mr. Byrnes $1,012,000 and $900,000,
respectively. Mr. Byrnes used such monies to extinguish an outstanding debt he
had initiated to pay approximately $2,000,000 in taxes that he owed in
connection with his exercise of options to purchase Tokos' stock in 1992. The
Board of Directors unanimously approved the loans to Mr. Byrnes so that he would
not be forced to sell his shares of Tokos' stock to repay his tax-related debt.
The loans by Tokos to Mr. Byrnes are evidenced by interest-bearing promissory
notes and are secured by approximately 701,000 shares of Tokos Common Stock
owned by Mr. Byrnes. The value of this collateral at December 31, 1995 was
$6,394,000. The outstanding indebtedness at December 31, 1995, including accrued
interest, was $2,156,000. The promissory notes, originally due March 20, 1994,
have been extended by the Board of Directors to December 31, 1996. The notes
bear interest at the rate of 6% per annum and are payable in cash.
In December 1993, Tokos entered into a one-year consulting and
non-competition agreement with Mr. Davenport in connection with his resignation
as President and Chief Operating Officer of Tokos. The compensation for Mr.
Davenport's services under the agreement was $264,000, which amount was paid in
full as of December 31, 1994. The Agreement also provided for the payment of an
additional bonus if Mr. Davenport completed a certain project by December 31,
1995; however, Mr. Davenport did not undertake such project and accordingly no
bonus was due or will be paid to Mr. Davenport.
EMPLOYMENT AGREEMENTS
During 1994 and 1995, Tokos entered into Employment Agreements with Mr.
Byrnes and Ms. Bayer and certain other officers of Tokos, and a similar
agreement with Mr. Mione. These agreements provide for severance payments and
certain benefits in the event of a termination upon a "change in control," a
"termination for failure to renew: and a "termination other than for cause." The
executive officers are not entitled to any compensation or benefits if they are
terminated for "cause" or if, prior to change of control, they voluntarily
terminate their employment with Tokos. A termination upon a "change in control"
is defined as a termination following (i) the acquisition by a person or entity
of twenty percent (20%) or more of Tokos' common stock in a transaction not
approved by the Board of Directors; or (ii) a merger, consolidation or
reorganization of Tokos with one or more corporations as a result of which Tokos
is merged out of existence or becomes a subsidiary of another corporation or the
sale of all or substantially all of the assets of Tokos; or (iii) a tender or
exchange offer, merger, consolidation or business combination as a result of
which the persons who were directors of Tokos before such transaction cease to
constitute a majority of the Board of Directors of Tokos or any successor of
Tokos. A "termination for failure to renew" means a failure by Tokos to renew or
extend the term of the agreement beyond the basic term of the agreement or any
extension thereof. A "termination other than for cause" is defined as
constructive termination of the executive officer or material breach of the
employment agreement by Tokos. A "termination for cause" is defined as a
termination for any willful dishonesty towards, fraud upon or deliberate injury
to, Tokos by the executive officer.
Amendments to the employment agreements described above were executed on
October 2, 1995, and become effective only upon the effectiveness of the Merger.
The amendments increase the amount of severance compensation payable in the
event of a termination upon a "change in control" or "termination for failure to
renew" from 18 months continuation of salary plus 150% of the highest bonus
earned by the employee, to an amount equal to three times the executive
officer's average annual base salary and other income derived from Tokos which
is reportable for federal tax purposes for the five years preceding the date of
12
<PAGE> 13
his or her termination. In addition, the covenants against competition and
soliciting customers and employees previously included in the employment
agreements were revised to provide greater protection to Tokos.
BOARD COMPENSATION
Tokos reimburses all of its directors for out-of-pocket expenses incurred
by them in connection with attending Tokos' Board meetings. In addition, each
non-employee director receives an annual retainer of $10,000 plus $2,000 for
each meeting attended and $1,000 for each telephonic meeting in which they
participate. Pursuant to this arrangement, Ms. George and Messrs. Erickson,
Guselli, Goldsmith and Davenport each earned $23,000 in 1995. In addition, Mr.
Goldsmith was compensated $2,000 for attending certain meetings on behalf of
Tokos in 1995.
Non-employee members of the Board were eligible to receive automatic grants
of non-qualified options pursuant to the provisions of Tokos' 1985 Stock Option
Plan (the "1985 Option Plan") which expired in February 1995. Under such 1985
Option Plan, non-employee members of the Board were entitled to automatic stock
option grants to purchase 15,000 shares of common stock at the time of their
reelection to the Board, such options to vest in increments of 5,000 over a
three-year period. At the 1995 Annual Meeting of the Stockholders of Tokos, the
stockholders approved Tokos' 1995 Stock Option Plan (the "1995 Stock Option
Plan") that contained terms with respect to stock options for non-employee
members of the Board that are substantially similar to the terms contained in
the 1985 Option Plan. Accordingly, in June 1995 Messrs. Guselli and Erickson
each received automatic grants to purchase 15,000 shares of Tokos Common Stock
in connection with their reelection as directors of Tokos.
DESCRIPTION OF HEALTHDYNE
BUSINESS OF HEALTHDYNE
Prior to the spinoff of its subsidiaries Healthdyne Technologies in May
1995 and HIE in November 1995, Healthdyne was a national provider of home
healthcare services, medical devices and specialty products. Healthdyne's
remaining business unit, HMM, is a national provider of specialized obstetrical
home healthcare and risk assessment services which assist physicians and payors
in the management of high risk pregnancies and numerous other obstetrical and
gynecological conditions. HMM provides its services throughout the United States
through approximately 35 service centers and a number of other additional
service sites.
Healthdyne was incorporated in Georgia in 1970, and its initial focus was
the development of a home medical care device to aid in the monitoring of
infants diagnosed as being susceptible to SIDS. Since the introduction of its
original SIDS monitoring system, Healthdyne has developed and acquired various
businesses and products for the home healthcare and hospital markets. In 1986,
Healthdyne decided to focus its business on the high technology home healthcare
market, including developing new products and services, and divested itself of
operations which did not fit this strategic focus. The divestitures of certain
operations over the next several years, the founding of HMM in 1987, the
development by Healthdyne Technologies of a line of diagnostic recording and
therapeutic products for the sleep disorders market, and the founding of HIE in
1994, are examples of the continuing implementation of this strategy.
At the beginning of 1995, Healthdyne's primary operating units were
composed of its manufacturing operation, Healthdyne Technologies, which produces
high technology medical devices designed for use in the home and specialized
clinical settings, its information systems business, HIE, which focuses on the
information technology needs of the healthcare industry and HMM, which provides
obstetrical care to patients in the home environment.
RECENT DEVELOPMENTS
On April 6, 1994, Healthdyne sold its 68% ownership interest in Home
Nutritional Services, Inc. ("HNS"), its home infusion services business; on May
22, 1995, Healthdyne distributed to its shareholders the 10,000,000 shares of
Common Stock (approximately 81% of the outstanding shares) of Healthdyne
13
<PAGE> 14
EXECUTIVE COMPENSATION
The following table sets forth certain information concerning the
compensation of Healthdyne's Chief Executive Officer and each of the other four
most highly compensated executive officers of Healthdyne serving as of December
31, 1995 (these five individuals, collectively, the "named executive officers")
for their services in all capacities to Healthdyne and its subsidiaries during
the past three years:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
-------------------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
----------------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) OPTIONS(#) ($)(2)
----------------------------------- ---- -------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Parker H. Petit.................... 1995 $391,878 $ -- 70,000 $2,055
Chairman of the Board and 1994 371,877 150,000 185,000 2,055
Chief Executive Officer 1993 350,016 -- 170,000 2,467
J. Terry Dewberry.................. 1995 235,125 -- 40,000 2,055
Vice Chairman 1994 223,750 90,000 110,000 2,055
1993 210,000 -- 45,000 2,340
J. Paul Yokubinas.................. 1995 219,450 -- 40,000 2,055
President and Chief Operating 1994 208,333 84,000 35,000 2,055
Officer 1993 190,000 -- 55,000 2,202
J. Brent Burkey.................... 1995 209,000 -- 35,000 2,055
Senior Vice President, General 1994 198,750 60,000 40,000 2,055
Counsel and Secretary 1993 185,000 -- 40,000 2,047
Donald R. Millard.................. 1995 198,550 -- 35,000 2,055
Vice President -- Finance, Chief 1994 188,750 57,000 30,000 2,055
Financial Officer and Treasurer 1993 175,000 -- 30,000 --
</TABLE>
- ---------------
(1) Bonuses may be payable under Healthdyne's 1995 Management Incentive Plan
based upon a formula tied to Healthdyne's 1995 financial results, which
have not yet been compiled.
(2) Represents Healthdyne's matching contributions to the named executive
officers under Healthdyne's tax-qualified 401(k) Profit Sharing Plan
accrued during the twelve months indicated.
STOCK OPTIONS. The following table contains information concerning the
grant of stock options under Healthdyne's 1991 and 1993 Stock Option Plans to
the named executive officers of Healthdyne as of the end of the last fiscal
year.
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<PAGE> 15
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE
----------------------- VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES
SECURITIES OPTIONS OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR
OPTIONS EMPLOYEES BASE OPTION TERM
GRANTED IN FISCAL PRICE EXPIRATION ------------------
NAME (#)(1) YEAR ($/SH)(2) DATE 5%($) 10%($)
- ---------------------------------- --------- ----------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Parker H. Petit................... 20,000 3.60% $4.27 06/08/00 $23,594 $ 52,138
50,000 9.01 3.94 06/20/00 54,427 120,270
J. Terry Dewberry................. 40,000 7.21 3.94 06/20/00 43,542 96,216
J. Paul Yokubinas................. 40,000 7.21 3.94 06/20/00 43,542 96,216
J. Brent Burkey................... 35,000 6.31 3.94 06/20/00 38,099 84,189
Donald R. Millard................. 35,000 6.31 3.94 06/20/00 38,099 84,189
</TABLE>
- ---------------
(1) These options to purchase Healthdyne's Common Stock were granted as follows:
On June 8, 1995, 20,000 option shares to Mr. Petit; on June 20, 1995,
50,000 option shares to Mr. Petit, 40,000 option shares each to Messrs.
Dewberry and Yokubinas, and 35,000 option shares each to Messrs. Burkey and
Millard. For the options granted in 1995, 33% of the shares subject to the
option grants become exercisable in cumulative increments on the first,
second and third anniversary date of the option grants. The options each
have a term of five years from the date of grant and are not transferable,
otherwise than by will or the laws of descent and distribution. Except as
provided in each of the option agreements, the options may not be exercised
unless employment with Healthdyne or an affiliate or subsidiary continues.
Options granted under the plans will expire (i) immediately upon the
employee's termination for good cause; (ii) three months after the date of
termination for reason other than good cause; (iii) three months after the
employee's voluntary termination; (iv) one year after the employee's death
or disability; or (v) five years from the date of the grant. In connection
with the Merger, options held by officers and directors of Healthdyne will
be amended so that such options will not terminate for twelve months after
the Effective Time unless the final expiration date of such option would
occur prior to such time. The purchase price of the shares subject to these
options may be paid (i) in cash; (ii) through the surrender of previously
owned stock of Healthdyne; or (iii) a combination of cash and previously
owned stock of Healthdyne. The optionees are obligated to reimburse
Healthdyne at the time of any exercises of the options for any taxes
required to be withheld by Healthdyne under federal, state or local law as
the result of the exercise of the options.
(2) The exercise price of the outstanding options to purchase Healthdyne's
Common Stock has been reduced substantially in connection with the spin off
to the shareholders of Healthdyne of Healthdyne's former 81%-owned
subsidiary, Healthdyne Technologies, effective May 22, 1995, and
Healthdyne's former wholly owned subsidiary, HIE, effective November 6,
1995 (collectively, the "Spinoffs"). At the time of each of the Spinoffs,
the aggregate exercise price of each outstanding option to purchase
Healthdyne Common Stock was reduced by an amount proportionate to the
reduction in the market price of the Healthdyne Common Stock resulting from
the Spinoff (the "Reduction Amount"), and each option holder who continued
as an employee or director of Healthdyne received "adjustment options" from
the company whose stock was distributed in the Spinoff to purchase an
equivalent number of shares of such company at an aggregate exercise price
equal to the Reduction Amount. These adjustments are consistent with the
adjustments to Healthdyne's stock prices shown under the Comparative Market
Data.
15
<PAGE> 16
STOCK OPTION EXERCISES. The following table sets forth information with
respect to the named executive officers concerning the exercise of options
during the last fiscal year and unexercised options held as of the end of the
fiscal year:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT LAST FISCAL OPTIONS AT LAST FISCAL
SHARES VALUE YEAR END (#) YEAR END (#)(2)
ACQUIRED REALIZED --------------------------- ---------------------------
NAME (#) (1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- -------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Parker H. Petit.................. 342,833 $2,324,964 -- 146,667 $ -- $ 875,594
J. Terry Dewberry................ 141,666 1,018,121 -- 78,334 -- 439,840
J. Paul Yokubinas................ 102,082 477,448 15,000 81,668 19,863 462,156
J. Brent Burkey.................. 55,000 377,351 16,667 68,333 108,638 384,763
Donald R. Millard................ -- -- 54,999 65,001 312,823 362,460
</TABLE>
- ---------------
(1) Represents the excess of the fair market value of the stock at the time of
exercise above the exercise price of the options.
(2) Based on $8.625, the last sale price of Healthdyne's Common Stock on
December 29, 1995.
COMPENSATION OF DIRECTORS. Directors of Healthdyne who are officers of
Healthdyne receive no additional compensation for serving on the Board of
Directors. Directors who are not officers receive a fee of $3,000 per quarter,
plus $1,000 for each Board meeting and $750 for each Committee meeting attended,
and are reimbursed for any travel expenses incurred.
PENSION PLAN. The named executive officers of Healthdyne participate in a
non-qualified pension plan. The following table shows the estimated pension
benefits payable to a covered participant at normal retirement age under this
pension plan which provides benefits based on remuneration that is covered under
the plan and years of service with Healthdyne and its affiliates.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
-------------------------------------------------------------
REMUNERATION 10 15 20 25 30 35
------------ ------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 75,000.............................. $ 7,000 $18,250 $ 29,500 $ 29,500 $ 29,500 $ 29,500
100,000.............................. 14,500 29,500 44,500 44,500 44,500 44,500
125,000.............................. 22,000 40,750 59,500 59,500 59,500 59,500
150,000.............................. 29,500 52,000 74,500 74,500 74,500 74,500
175,000.............................. 37,000 63,250 89,500 89,500 89,500 89,500
200,000.............................. 44,500 74,500 104,500 104,500 104,500 104,500
</TABLE>
Remuneration covered by the benefit award is based on the average base
salary of the executive for the three years in which his base salary is the
highest. This amount for each of the named executive officers participating in
the plan as of December 31, 1995 was $371,257, $222,958, $205,928, $197,583 and
$187,433, respectively, for Messrs. Petit, Dewberry, Yokubinas, Burkey and
Millard. The estimated years of service for each named executive officer as of
the end of the last fiscal year was 25 years for Mr. Petit, 15 years for Mr.
Dewberry, 13 years for Mr. Yokubinas, 13 years for Mr. Burkey and 9 years for
Mr. Millard. Benefits shown are computed as a diminishing single life annuity
beginning at age 65 with annual reductions equal to the annual increases in
primary social security benefits. The base salary used to calculate covered
compensation is the same figure reported in the "Salary" column of the Summary
Compensation Table. See "Change of Control Arrangements" below for a discussion
of the effects of a "change of control" of Healthdyne on these retirement
benefit awards.
16
<PAGE> 17
In the event of a "change of control" of Healthdyne (defined to include,
among other things, the Merger and the sale or distribution of 30% or more of
Healthdyne's assets in one or a series of related transactions, including the
Spinoffs), all benefits accrued to date immediately vest and each executive
officer may require Healthdyne to place in trust for the executive officer's
benefit an amount of money equal to the present value of the participant's
accrued retirement benefit. See "The Merger--Interests of Certain Persons in the
Merger."
CHANGE OF CONTROL ARRANGEMENTS. In February 1988, Healthdyne entered into
agreements with Messrs. Petit, Dewberry, Burkey and Millard and in October 1993
entered into a similar agreement with Mr. Yokubinas, entitling such executive
officers to certain benefits upon specified terminations of employment within
three years following a "change in control" of Healthdyne. Each agreement
provides that in the event of a "change in control" of Healthdyne, the executive
officer concerned will be entitled to certain benefits upon his subsequent
termination of employment during the term of the agreement unless such
termination is (i) because of his death, disability or retirement, (ii) by
Healthdyne for cause, or (iii) with respect to termination by the executive
officer, by the executive officer, other than for "good reason." Under these
agreements, a number of circumstances entitle the executive officer to treat a
good faith termination on his part as being a termination for "good reason."
These include an adverse change in the executive officer's compensation,
discontinuation of certain benefits, the assignment of duties inconsistent with
his status or duties in effect immediately prior to the "change in control" of
Healthdyne, the relocation of Healthdyne's principal executive office to a
location outside of Marietta, Georgia or Healthdyne's requiring the executive
officer to be based anywhere other than Healthdyne's principal executive office.
If an executive officer's employment with Healthdyne or its subsidiaries
terminates following the consummation of a "change in control" of Healthdyne
other than under the circumstances set forth in clauses (i), (ii) or (iii) of
the preceding paragraph, the executive officer will be entitled to receive his
full base salary through the date of termination and a lump sum severance
payment equal to three times the executive officer's average annual salary and
other income derived from Healthdyne which is reportable for federal tax
purposes for the five years preceding the date of his termination. In addition,
such executive officer will be entitled to receive, for a period of three years
after the date of his termination, all life, disability and health insurance
coverage, automobile allowances and other fringe benefits equivalent to those in
effect at the date of termination and is entitled to receive additional amounts
relating to any excise taxes imposed on the executive as a result of Section
280G of the Code.
In connection with the execution of the Merger Agreement, and as
contemplated therein, Healthdyne entered into amended and restated agreements
with each of the executive officers mentioned above and a new agreement with
Frank D. Powers, President of Healthdyne Maternity Management (the "New
Agreements"). The New Agreements, which take effect only if and at the time that
the Merger becomes effective, will supersede the prior agreements described
above. The New Agreements acknowledge that the Merger constitutes a "change in
control", as defined in the agreements, and extend the term of the New
Agreements from a term ending in February 1997 to a term ending three years
after the Merger. In addition, under the New Agreements the executive officer
agrees to comply with certain protective covenants which, for a period of three
years following the later of the Effective Time or the effective time of any
other "change in control" of Newco that occurs within three years after the
effective date of the Merger and during the executive officer's continued
employment with Newco, prohibit the executive officer from competing with Newco,
soliciting customers or soliciting personnel of Newco. The New Agreements
otherwise are substantially similar to the change in control agreements
previously in effect.
Under these agreements, if a "change in control" had taken place on January
1, 1996, Messrs. Petit, Dewberry, Yokubinas, Burkey, Millard and Powers would
have been entitled to receive approximately $4,308,000, $2,319,000, $1,007,000,
$1,681,000, $651,000 and $647,000, respectively, upon termination of employment
as contemplated under these agreements. Section 280G of the Code imposes a 20%
excise tax on the recipient of "excess parachute payments," as identified in the
Code, and denies a tax deduction for such excess parachute payments to the
company making them. In addition, if any such payments constitute excess
parachute payments under Section 280G of the Code, Healthdyne (or, after the
Merger, Newco) would be obligated under these agreements to reimburse each
executive officer for the excise taxes resulting from such
17
<PAGE> 18
parachute payments and from any reimbursements thereof paid by Healthdyne (or,
after the Merger, Newco) and for the income taxes imposed on the executive
officer with respect to such reimbursements. Healthdyne believes that, if Newco
becomes obligated to make severance payments under these agreements, no portion
of these payments will constitute excess parachute payments. However, there can
be no assurance that the IRS would not assert that some portion of such payments
are excess parachute payments. If the IRS were to prevail in such an assertion,
the amount of deductions disallowed and the amount of reimbursements required to
be paid to terminated executives could be substantial.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The
Compensation Committee of the Board of Directors of Healthdyne is responsible
for executive compensation decisions as described above. During 1994, the
committee consisted of Parker H. Petit, William J. Gresham, Jr., Charles R.
Hatcher, Jr., Carl E. Sanders and Morris S. Weeden. Mr. Petit is Chairman of the
Board and Chief Executive Officer of Healthdyne. Mr. Sanders is the Chairman of
a law firm which provided legal services to Healthdyne during 1994 and which
will provide legal services to Healthdyne in the future.
CERTAIN TRANSACTIONS
In July 1981, 405,000 shares of Common Stock reserved under Healthdyne's
1981 Incentive Stock Option Plan were sold to certain of Healthdyne's officers
for $1.33 per share in exchange for $540,000 principal amount of Healthdyne's 8%
promissory notes (the "1981 Promissory Notes") payable in four years and secured
by the purchased shares. The Board of Directors of Healthdyne extended the
respective maturity dates of the 1981 Promissory Notes, forgave interest accrued
from July 1985 through December 1987, and stayed the accrual of any additional
interest until the stock is sold by said individuals. Mr. Parker H. Petit owns
248,000 of such shares. The maximum outstanding principal indebtedness to
Healthdyne of Mr. Petit (the only executive officer or director whose
indebtedness to Healthdyne exceeded $60,000) since January 1, 1995 was $917,900,
of which $325,800 related to the 1981 Promissory Notes, $350,000 to a loan
evidenced by a promissory note, dated September 24, 1992, payable on December
31, 1996, $17,100 to a loan evidenced by a promissory note dated October 1,
1990, payable on demand, $100,000 to a loan evidenced by a promissory note,
dated March 16, 1993, payable on demand, and $125,000 to a loan evidenced by a
promissory note, dated June 27, 1994, payable on demand. All notes, except the
1981 promissory notes, bear interest at a floating rate which is currently
8.25%. At the present time, Mr. Petit has approximately $873,182 of principal
indebtedness outstanding to Healthdyne.
Mr. Carl E. Sanders, a director of Healthdyne, is also the Chairman of
Troutman Sanders LLP, a law firm based in Atlanta, Georgia which provided
certain legal services to Healthdyne in fiscal year 1995 and may be retained by
Healthdyne in the future.
18
<PAGE> 19
OPERATION, MANAGEMENT AND BUSINESS OF NEWCO AFTER THE MERGER
BUSINESS OF NEWCO
Newco is a recently incorporated Delaware corporation formed for the
purposes of the Merger. Prior to the Merger, Newco will have no material assets
or liabilities. At the consummation of the Merger, Healthdyne and Tokos will
merge with and into Newco, and Newco will issue shares of Newco Common Stock to
former stockholders of Healthdyne and Tokos.
From and after the Effective Time, Newco will consolidate the operations of
each of the constituent companies in order to take advantage of efficiencies
presented by the combination. Newco expects that decisions as to the continuing
employment of Healthdyne and Tokos officers and employees, and the continuing
operation of business and each company's facilities, will be made on a
case-by-case basis after the consummation of the Merger, based upon Newco's
evaluation of the combined operations of Healthdyne and Tokos.
MANAGEMENT OF NEWCO
Directors After the Merger. As provided in the Merger Agreement, as of the
Effective Time, Newco is obligated to take all action necessary to cause: Carl
E. Sanders and Craig T. Davenport to be elected as directors of Newco for terms
expiring at the 1996 Annual Meeting of Stockholders; Jackie M. Ward, Frederick
P. Zuspan, M.D., Thomas W. Erickson and David L. Goldsmith to be elected as
directors of Newco for terms expiring at the 1997 Annual Meeting of
Stockholders; and Parker H. Petit, Robert F. Byrnes, Morris S. Weeden and Gene
P. Guselli to be elected as directors of Newco for terms expiring at the 1998
Annual Meeting of Stockholders. Under the terms of the Newco Bylaws, if any of
the Tokos Nominated Directors (Robert F. Byrnes, Gene P. Guselli, Craig T.
Davenport, Thomas W. Erickson and David L. Goldsmith) are unable or unwilling to
serves as a director of Newco, such individual or individuals shall be replaced
by an individual or individuals designated by the Tokos Board of Directors and
if any of the Healthdyne Nominated Directors (Parker H. Petit, Carl E. Sanders,
Jackie M. Ward, Morris S. Weeden and Frederick P. Zuspan, M.D.) are unable or
unwilling to serve, such individual or individuals shall be replaced by a
individual or individuals designated by the Healthdyne Board of Directors. In
addition, for a period of three years following the Effective Time and
continuing through Newco's 1998 Annual Meeting of Stockholders, (i) any vacancy
on Newco's Board of Directors, or any committee thereof, arising among the Tokos
Nominated Directors and any nominee selected to fill a director position
occupied by a Tokos Nominated Director will be filled or selected by the
remaining Tokos Nominated Directors and (ii) any vacancy on Newco's Board of
Directors, or any committee thereof, arising among the Healthdyne Nominated
Directors and any nominee selected to fill a director position occupied by a
Healthdyne Nominated Director will be filled or selected by the remaining
Healthdyne Nominated Directors. As provided in Newco Bylaws, the affirmative
vote of a majority of all directors will be necessary to constitute the act of
Newco's Board of Directors.
At each annual meeting, directors will be elected to succeed those
directors whose terms expire at such annual meeting, for a term of office which
will expire at the third succeeding annual meeting. Biographical information
with respect to the proposed directors of Newco is set forth below.
Parker H. Petit, age 56, is the founder of and has been employed by
Healthdyne as its Chairman of the Board of Directors and Chief Executive Officer
since 1970. Mr. Petit is also Chairman of the Board of Directors of Healthdyne
Technologies, Inc. and Healthdyne Information Enterprises, Inc. and a director
of Atlantic Southeast Airlines, Inc., a regional airline.
Robert F. Byrnes, age 51, has served as Chief Executive Officer of Tokos
since July 1984, as Chairman of the Board since November 1987 and as President
and Chief Operating Officer of Tokos since January 1994. From 1982 to July 1984,
Mr. Byrnes was the President and Chief Operating Officer of Caremark, Inc.
(formerly Home Health Care of America, Inc.). From 1978 to 1982, Mr. Byrnes was
Vice President of Marketing -- Business Development and Clinical Research for
Genentech, Inc. Prior to that, Mr. Byrnes held managerial positions with
divisions of American Hospital Supply Corporation, Abbott Laboratories, Inc. and
Eli Lilly & Company. Mr. Byrnes is also a director of several private healthcare
companies.
19
<PAGE> 20
Carl E. Sanders, age 70, has served as a director of Healthdyne since 1986.
Mr. Sanders, a former governor of the State of Georgia, is Chairman of Troutman
Sanders LLP, an Atlanta based law firm which provides legal services to
Healthdyne. Mr. Sanders is also a director of Carmike Cinemas, Inc., The Actava
Group, Inc., Norrell Corporation, Roadmaster Industries, Inc. and Healthdyne
Information Enterprises, Inc.
Jackie M. Ward, age 57, is President and Chief Executive Officer of
Computer Generation Incorporated, a privately-held, Atlanta based corporation
engaged in designing and producing "turnkey" computer hardware and software
systems for telecommunications and other specialized applications, which she
founded in 1968. Ms. Ward is also a former Chairperson of the Board of Regents
of the University System of Georgia and Chairman-elect of the Metro Atlanta
Chamber of Commerce, as well as a director of SCI Systems, Inc., Trigon Blue
Cross Blue Shield and NationsBank, N.A. and a member of several other government
and public service commissions.
Morris S. Weeden, age 76, has served as a director of Healthdyne since 1987
and is retired. Mr. Weeden was Vice Chairman--Board of Directors of Morton
Thiokol Inc., a salt, chemical, pharmaceutical, household and aerospace products
manufacturer, from March 1980 to December 1984. Prior thereto, Mr. Weeden was
Executive Vice President of Morton Norwich Products, Inc. in charge of
pharmaceutical operations, President of Morton International, a pharmaceutical
division of Morton Norwich Products, Inc. and President of Bristol Laboratories,
a pharmaceutical division of Bristol Myers Corp. Mr. Weeden is also a director
of Xytronyx, Inc.
Frederick P. Zuspan, M.D., age 74, has served as a director of Healthdyne
since 1993 and has been a physician since 1951. Dr. Zuspan has been Professor
and Chairman Emeritus, Department of Obstetrics and Gynecology at the Ohio State
University College of Medicine since July 1991 and Editor-in-Chief of the
American Journal of Obstetrics and Gynecology since 1991. Dr. Zuspan was
previously Professor of the Ohio State University College of Medicine from 1987
to 1991 and Professor and Chairman of the Department of Obstetrics and
Gynecology at the Ohio State University College of Medicine from 1983 to 1991,
at the University of Chicago, Pritzker School of Medicine from 1966 to 1975, and
at the Medical College of Georgia from 1960 to 1966.
Thomas W. Erickson, age 44, has served as a director of Tokos since 1985.
Mr. Erickson has also served as President of CareSelect Group, Inc., a
management service organization that provides management and administrative
services for various independent practice associations, since June 1994. Mr.
Erickson has also served as President and Chief Executive Officer of Erickson
Capital Group, Inc., a private investment firm, which invests in a wide range of
health care service companies and managed care alliances. Mr. Erickson is also a
director of numerous private healthcare companies.
Gene P. Guselli, age 42, has served as a director of Tokos since April
1994. Mr. Guselli has been President and Chief Executive Officer of InfoMedics,
Inc., a private company that produces automated patient information systems,
since December 1995. Prior to December 1995, Mr. Guselli served as President and
Chief Executive Officer of Private Healthcare Systems, Inc. since 1985. Prior to
1985, Mr. Guselli served in a variety of capacities as a hospital administrator
in both Boston and New York City. Mr. Guselli also served as a senior consultant
for the Health Data Institute in 1984. Mr. Guselli has over 19 years in the
healthcare industry. He is also a director of the American Association of
Preferred Provider Organizations.
Craig T. Davenport, age 43, has served as a director of Tokos since
November 1986 and as a consultant to Tokos through December 1994. Mr. Davenport
has been the Chief Executive Officer of the D.W. Group, a private advisory and
investment firm which provides services to newly emerging health care companies,
since August 1994. He has also been the President and Chief Executive Officer of
Intercare Systems, Inc., a private company that develops interactive, multimedia
systems for use in educating patients and professionals, since October 1994. Mr.
Davenport served as Chief Operating Officer of Tokos from November 1986 to
December 1993, and as President of Tokos from November 1987 to December 1993.
Prior to joining Tokos in 1985, Mr. Davenport held managerial positions with
divisions of American Hospital Supply Corporation. Mr. Davenport is also a
director of TheraTx, Inc. and numerous private healthcare companies.
David L. Goldsmith, age 47, has served as a director of Tokos since 1985.
Mr. Goldsmith has been a managing director of Robertson Stephens since 1992, and
a partner of Robertson Stephens from 1981 to 1992.
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<PAGE> 21
In addition, Mr. Goldsmith directs the Robertson Stephens' venture capital and
management buyout activity. Mr. Goldsmith is also a director of Apria
Healthcare, Inc., Spectranetics, Inc., and several private health care
companies.
In addition, Newco is obligated to take all necessary actions to establish
the Executive Committee and such committee will initially consist of Parker H.
Petit, as Chairman, and Robert F. Byrnes, Carl E. Sanders, Jackie M. Ward, Gene
P. Guselli and Craig T. Davenport, as the other members.
In addition to such powers as may be delegated to it from time to time by
Newco's Board of Directors, the Executive Committee shall: resolve any
differences, disagreements or issues presented to the Executive Committee for
consideration by the Transition Committee; act in the absence of the full Board
of Directors of Newco as deemed necessary and appropriate and as permitted by
applicable law; keep the full Board of Directors of Newco apprised of Executive
Committee activities and decisions; and conduct detailed review and evaluation
of the annual budget prior to submission to the full Board of Directors of
Newco. In all matters brought before the Executive Committee by the Transition
Committee for resolution by the Executive Committee, Parker H. Petit and Robert
F. Byrnes shall act as ex officio nonvoting members.
The Audit Committee shall initially consist of four members. In addition to
such powers as may be delegated to it from time to time by Newco's Board of
Directors, the Audit Committee shall: recommend outside accountants for approval
by the full Board of Directors and the stockholders of Newco; meet with Newco's
outside auditors and Newco's Chief Financial Officer and their respective staffs
to review and evaluate accounting and control systems, issues and related
matters; meet independently with Newco's auditors and Chief Financial Officer to
discuss the accuracy and integrity of Newco's financial reporting management
information and control systems, and any other appropriate issues; and address
any other matters which are appropriate for the Audit Committee's review or
involvement. The initial members of the Audit Committee shall be two
non-employee Tokos Directors designated by the Board of Directors of Tokos and
two non-employee Healthdyne Directors designated by the Board of Directors of
Healthdyne.
The Compensation Committee shall initially consist of six members. In
addition to such powers as may be delegated to it from time to time by Newco's
Board of Directors, the Compensation Committee shall: review and approve
salaries for all corporate officers; review and approve all incentive and
special compensation plans and programs, including stock options and related
longer term incentive compensation programs; review and approve management
succession planning; conduct special competitive compensation studies and retain
compensation consultants as deemed necessary and appropriate; and recommend
appropriate programs and actions on any of the above matters to the full Board
of Directors of Newco for their review and approval. The initial members of the
Compensation Committee shall be two non-employee Healthdyne Directors designated
by the Board of Directors of Healthdyne and two non-employee Tokos Directors
designated by the Board of Directors of Tokos. Parker H. Petit and Robert F.
Byrnes shall serve as ex officio non-voting members of the Compensation
Committee.
The Nominating Committee shall initially consist of Robert F. Byrnes, as
Chairman, and Parker H. Petit, Frederick P. Zuspan, M.D. and David L. Goldsmith,
as the other members. In addition to such powers as may be delegated to it from
time to time by Newco's Board of Directors, the Nominating Committee shall to
the extent not inconsistent with the Merger Agreement: identify, screen and
recommend candidates for appointment to the Board of Directors of Newco for
consideration by the full Board of Directors of Newco and by the stockholders of
Newco; and establish compensation and retirement policies for members of the
Board of Directors of Newco.
For a period of three years following the Effective Time, any vacancies on
a committee of Newco's Board of Directors shall be filled in the same manner as
vacancies in Newco's Board of Directors. In accordance with the Newco Bylaws,
each of the committees named herein may act only by affirmative vote of a
majority of the authorized number of members of such committee.
In addition to the above committees, pursuant to the Merger Agreement,
Healthdyne and Tokos have established the Transition Committee. Glass &
Associates, Inc. has been selected to serve as the Consultant to Healthdyne,
Tokos and the Transition Committee until the conclusion of the Transition
Period. Prior to the
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<PAGE> 22
Effective Time, the Transition Committee is to deliver a business plan to the
Boards of Directors of Healthdyne and Tokos that specifically identifies
business strategies, goals and potential savings to be achieved by Newco in the
Transition Period. The Transition Committee will survive the Merger and will
thereafter continue as a committee of the Board of Directors of Newco to report
directly to the Board of Directors of Newco at each regular or special meeting
thereof for a period of nine months following October 2, 1995, unless extended
or earlier terminated by the Newco Board of Directors.
Executive Officers After the Merger. Newco's Board of Directors is
obligated to take all action necessary to cause Parker H. Petit to be elected
the Chairman of the Board of Newco, Robert F. Byrnes to be elected the President
and Chief Executive Officer of Newco, Frank Powers to be elected the Executive
Vice President-Provider Operations of Newco, Terry P. Bayer to be elected the
Executive Vice President-Managed Care Operations of Newco, Donald R. Millard to
be elected the Senior Vice President and Chief Financial Officer of Newco and J.
Brent Burkey to be elected the Senior Vice President and General Counsel of
Newco. Other senior management positions of Newco after the Merger are expected
to be held by persons currently employed by Healthdyne or Tokos. Biographical
information with respect to Ms. Bayer and Messrs. Powers, Millard and Burkey is
set forth below.
Terry P. Bayer, age 45, has served as President of Tokos Medical
Corporation, Tokos' principal subsidiary, since October 1994 and as President of
Tokos' Matryx Health Partners division since March 1994. Prior to joining Tokos,
Ms. Bayer attended Stanford Law School from which she received a juris doctor
degree in June 1994. Ms. Bayer served as Vice President and General Manager of
Lincoln National Insurance from May 1989 through May 1992; Regional Vice
President of Partners National Health Plan from September 1988 through May 1989;
and Regional Vice President for Maxicare Health Plans from September 1984
through September 1988. Prior to 1984 Ms. Bayer held a number of management
level positions with various health plans and similar organizations.
Frank Powers, age 47, has served as President of Healthdyne Maternity
Management since October 1989 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.
Donald R. Millard, age 48, has served as Vice President-Finance and Chief
Financial Officer of Healthdyne since July 1987 and, in addition, was elected
Treasurer in March 1990. Prior to joining Healthdyne, he served as President of
Dental One, Inc., a dental healthcare provider, from December 1982 to June 1987.
J. Brent Burkey, age 49, has served as Senior Vice President and General
Counsel of Healthdyne since September 1987 and as Vice President and General
Counsel of Healthdyne since November 1982. He has also served as Secretary of
Healthdyne since August 1984 and prior thereto as Assistant Secretary.
Neither Healthdyne nor Tokos is aware of any material relationships between
Healthdyne or its directors or executive officers and Tokos or its directors or
executive officers, except as contemplated by the Merger Agreement or as
described herein, including the documents incorporated herein by reference.
NEWCO PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to Healthdyne and
Tokos with respect to certain stockholders of Healthdyne and Tokos as of
December 31, 1995, and with respect to Newco, as adjusted to reflect the
consummation of the Merger, by (1) each person who owns beneficially more than
five percent (5%) of the outstanding shares of Healthdyne or Tokos Common Stock
or is projected to own beneficially more than five percent (5%) of the
outstanding shares of Newco Common Stock, (2) each of Healthdyne's and Tokos'
directors and Newco's designated directors, (3) each of Newco's designated
executive officers and
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<PAGE> 23
(4) all of Healthdyne's directors and officers as a group, all of Tokos'
directors and officers as a group and all of Newco's designated directors and
executive officers as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP(1) PERCENT OF CLASS(2)
------------------------------------ --------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER HEALTHDYNE TOKOS NEWCO HEALTHDYNE TOKOS NEWCO
- -------------------------------------------- ---------- ---------- ---------- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Parker H. Petit(3)(4)....................... 1,722,661 1,722,661 10.3% 5.3 %
Robert F. Byrnes(5)......................... 1,232,263 1,232,263 7.0 % 3.6
Carl E. Sanders(6).......................... 72,500 72,500 * *
Jackie M. Ward(7)........................... 4 4 -- --
Morris S. Weeden(8)......................... 15,000 15,000 * *
Frederick P. Zuspan, M.D.(9)................ 5,000 5,000 * *
Gene P. Guselli(10)......................... 26,250 26,250 * *
Craig T. Davenport(11)...................... 92,392 92,392 * *
Thomas W. Erickson(12)...................... 24,000 24,000 * *
David L. Goldsmith(13)...................... 51,182 51,182 * *
Frank D. Powers(14)......................... 3,967 3,967 * *
Terry P. Bayer(15).......................... 180,000 180,000 1.0 *
Donald R. Millard(16)....................... 80,917 80,917 * *
J. Brent Burkey(17)......................... 33,965 33,965 * *
Wellington Management
Company(18)............................... 1,505,880 1,505,880 9.3 4.5
Gruber & McBaine Capital Management(19)..... 1,073,000 1,073,000 6.6 3.2
J. Terry Dewberry(20)....................... 35,192 35,192 * *
J. Paul Yokubinas(21)....................... 84,231 84,231 * *
Thornton A. Kuntz, Jr.(22).................. 834 834 * *
William J. Gresham, Jr.(23)................. 13,500 13,500 * *
Charles R. Hatcher, Jr. M.D.(24)............ 10,000 10,000 * *
Alexander H. Lorch(25)...................... 21,000 21,000 * *
State of Wisconsin Investment Board(26)..... 1,223,000 1,223,000 7.0 3.6
Mary J. George(27).......................... 29,250 29,250 * *
Nicholas A. Mione(28)....................... 175,100 175,100 1 *
All directors and executive officers of
Matria as a group (14 persons)............ 1,934,014 1,606,087 3,540,101 11.6 9.1 10.3
All directors and executive officers of
Healthdyne as a group (13 persons)........ 2,098,767 2,098,767 12.6
All directors and executive officers of
Tokos as a group
(8 persons)............................... 1,810,437 1,810,437 10.0
</TABLE>
- ---------------
* Indicates less than 1%.
(1) Under the rules of the Commission, a person is deemed to be a beneficial
owner of a security if he or she has or shares the power to vote or to
direct the voting of such security, or the power to dispose or to direct
the disposition of such security. A person is also deemed to be a
beneficial owner of any securities of which that person has the right to
acquire beneficial ownership within 60 days as well as any securities owned
by such person's spouse, children or relatives living in the same house.
Accordingly, more that one person may be deemed to be a beneficial owner of
the same securities. Unless otherwise indicated by footnote, the named
individuals have sole voting power and investment power with respect to the
shares held by them.
(2) With respect to each person in the table, assumes that such person has
exercised all options, warrants and other rights to purchase Newco Common
Stock, exercisable within 60 days, beneficially owned by him or that no
other person has exercised any such rights.
(3) Does not include 260,500 shares owned by Bank South, N.A., Atlanta,
Georgia, as Trustee of an irrevocable trust for benefit of two of Mr.
Petit's children. Mr. Dewberry, a director of Healthdyne, is a member of a
self-perpetuating, three-member advisory committee that has the power to
remove the Trustee and to direct the Trustee as to the voting and
disposition of the shares owned by the Trustee except that the advisory
committee has no such power during the lifetime of Mr. Petit if the shares
held by Mr. Petit and the trust, when aggregated, are "significant from the
viewpoint of voting control" of Healthdyne. Both the Trustee and the
advisory committee consider the shares owned by the Trustee to
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<PAGE> 24
be significant in terms of voting control. In the absence of direction by
the advisory committee, the Trustee has sole power to direct the voting and
disposition of these securities.
(4) Includes 1,601,411 shares owned by Mr. Petit, 3,750 shares held by Mr.
Petit as custodian for one of his children, 97,500 shares held by Petit
Investments, L.P., a limited partnership in which Mr. Petit serves as
general partner ("Petit Investments"), 10,000 shares held by Petit Grantor
Trust, a living trust, and 10,000 shares which are subject to purchase upon
exercise of options exercisable within 60 days.
(5) Includes 1,032,263 shares held by Mr. and Mrs. Byrnes, as trustees of The
Byrnes Family Trust, as to which shares Mr. and Mrs. Byrnes share voting
and dispositive power, and 200,000 shares issuable upon exercise of options
held by Mr. Byrnes.
(6) Represents 62,500 shares owned by Mr. Sanders and 10,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(7) Represents 4 shares issuable upon conversion of 8% Convertible Subordinated
Debentures owned by Ms. Ward.
(8) Represents 5,000 shares owned by Mr. Weeden and 10,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(9) Represents 5,000 shares which are subject to purchase by Dr. Zuspan upon
exercise of options exercisable within 60 days.
(10) Represents 26,250 shares which are subject to purchase by Mr. Guselli upon
exercise of options exercisable within 60 days.
(11) Represents 68,188 shares held by Mr. and Mrs. Davenport, as trustees of The
Davenport Family Trust, as to which shares Mr. and Mrs. Davenport share
voting and dispositive power, 7,500 shares owned by Mr. Davenport and
16,704 shares which are subject to purchase upon exercise of options
exercisable within 60 days.
(12) Represents 24,000 shares which are subject to purchase by Mr. Erickson upon
exercise of options exercisable within 60 days.
(13) Represents 21,932 shares owned by Mr. Goldsmith and 29,250 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(14) Represents 634 shares owned by Mr. Powers and 3,333 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(15) Represents 180,0000 shares which are subject to purchase by Ms. Bayer upon
exercise of options exercisable within 60 days.
(16) Represents 14,421 shares owned by Mr. Millard, 58,333 shares which are
subject to purchase upon exercise of options exercisable within 60 days,
and 8,163 shares issuable upon conversion of 8% Convertible Subordinated
Debentures owned by Mr. Millard.
(17) Represents 13,965 shares owned by Mr. Burkey and 20,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(18) Based on information set forth in Amendment No. 1 to Schedule 13G dated
January 25, 1995, Wellington Management Company, in its capacity as
investment adviser, may be deemed to be the beneficial owner of shares
owned by numerous investment counselling clients. The address of Wellington
Management Company is 75 State Street, Boston, Massachusetts 02109.
(19) Based on information set forth in a joint filing on Schedule 13D dated
January 19, 1995, with respect to beneficial ownership of the following
persons and entities: Gruber & McBaine Capital Management, Jon D. Gruber,
J. Patterson McBaine, Lagunitas Partners, L.P., GMJ Investments, L.P.,
Charles C. McGettigan, Myron A. Wick, III, Proactive Investment Managers,
L.P., and Proactive Partners. The address of Gruber & McBaine Capital
Management is 50 Osgood Place, San Francisco, California 94113.
(20) Represents 30,192 shares owned by Mr. Dewberry and 5,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(21) Represents 64,231 shares owned by Mr. Yokubinas and 20,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(22) Represents 834 shares which are subject to purchase by Mr. Kuntz upon
exercise of options exercisable within 60 days.
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<PAGE> 25
(23) Represents 3,500 shares owned by Mr. Gresham and 10,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(24) Represents 10,000 shares which are subject to purchase by Dr. Hatcher upon
exercise of options exercisable within 60 days.
(25) Represents 11,000 shares owned by Mr. Lorch and 10,000 shares which are
subject to purchase upon exercise of options exercisable within 60 days.
(26) Based on information in the Schedule 13G filed by SWIB with respect to
holdings as of September 30, 1995; SWIB manages these shares on behalf of
the investment trust funds held by the Wisconsin Retirement System; SWIB
has sole voting and dispositive power with respect to these shares. The
address of the State of Wisconsin Investment Board is 121 East Wilson
Street, Madison, Wisconsin 53703.
(27) Represents 29,250 shares which are subject to purchase by Ms. George upon
exercise of options exercisable within 60 days.
(28) Includes 51,600 shares held by Mr. Mione, as trustee of The Nicholas A.
Mione Jr. Living Trust, and 117,500 shares which are subject to purchase by
Mr. Mione upon exercise of options exercisable within 60 days.
DESCRIPTION OF CAPITAL STOCK OF NEWCO
The authorized capital stock of Newco consists of 1,000 shares of common
stock, $.01 par value, and 1,000 shares of preferred stock, $.01 par value.
Newco's authorized capital stock, as set forth in the Amended and Restated
Certificate of Incorporation which will be adopted by the approval of the Merger
Agreement, will consist of 100,000,000 shares of common stock, $.01 par value,
and 50,000,000 shares of preferred stock, $.01 par value.
COMMON STOCK. The holders of Newco Common Stock are entitled to one vote
for each share held of record on all matters submitted to a vote of
stockholders. The holders of Newco Common Stock have no cumulative voting rights
in the election of directors. Subject to the prior rights of holders of
preferred stock of Newco which may be issued, the holders of Newco Common Stock
are entitled to dividends, when and if declared by the Board of Directors out of
funds legally available therefor. In the event of the liquidation, dissolution
or winding up of Newco the holders of Newco Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preferences of any outstanding shares of preferred stock. Holders of Newco
Common Stock have no preemptive rights and have no right to convert Newco Common
Stock into any other securities. All shares of Newco Common Stock issued
pursuant to the Merger will be when issued, fully paid and nonassessable.
PREFERRED STOCK. The Board of Directors has the authority, without further
stockholder approval, to issue authorized but unissued shares of preferred stock
in one or more series and to determine the preferences, rights, privileges and
restrictions of any series, including the dividend rights, conversion rights,
voting rights, rights and terms of redemption, liquidation preferences, the
number of shares constituting any such series and the designation of such
series. Such issuance of preferred stock may adversely affect, among other
things, the voting rights of existing stockholders.
COMMON STOCK PURCHASE RIGHTS. Pursuant to the Rights Agreement (the
"Rights Agreement") between Newco and SunTrust Bank, as Rights Agent, a common
stock purchase right (a "Right") will be issued with each share of Newco Common
Stock. Each Right entitles the registered holder to purchase from Newco a unit
consisting of one-hundredth of a share (a "Unit") of Newco Common Stock at a
Purchase Price of $61 per Unit, subject to adjustment. The Purchase Price shall
be paid in cash. The description and terms of the Rights are set forth in the
Rights Agreement.
Initially, the Rights will be attached to all Newco Common Stock
certificates representing shares then outstanding, and no separate Rights
Certificates will be distributed. The Rights will separate from the Newco Common
Stock and a "Distribution Date" will occur upon the earlier of (i) 10 days
following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") has acquired, or obtained the right
to acquire, beneficial ownership of 15% or more of the outstanding shares of
Newco
25
