<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
TO FORM 8-K FILED MARCH 22, 1996
FILED PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Event Reported: March 8, 1996
Matria Healthcare, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 0-20619 58-2205984
- -------------------------------------------------------------------------------
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation or
organization)
1850 Parkway Place, 12th Floor, Marietta, Georgia 30067
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(770) 423-4500
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
N/A
- -------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
<PAGE> 2
The undersigned registrant hereby amends the following items of its
Current Report on Form 8-K, filed March 22, 1996, as set forth in the pages
below:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
(1) Tokos Medical Corporation (Delaware)
Audited:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for the years ended December
31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December
31, 1995, 1994 and 1993
Notes to Financial Statements
(2) Healthdyne, Inc.
Audited:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Earnings (Loss) for the years ended
December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December
31, 1995, 1994 and 1993
Notes to Financial Statements
(b) Proforma Financial Information:
Consolidated Condensed Balance Sheet
Consolidated Condensed Statements of Earnings (Loss)
Notes to Proforma Consolidated Condensed Financial Statements
(c) Exhibits:
(23.1) Consent of Ernst & Young LLP to incorporation by reference in
the Registrant's Registration Statement Nos. 333-01539 and
333-00781.
(23.2) Consent of KPMG Peat Marwick LLP to incorporation by
reference in the Registrant's Registration Statement Nos.
333-01539 and 333-00781.
(27.1) Financial Data Schedule
(27.2) Financial Data Schedule
2
<PAGE> 3
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MATRIA HEALTHCARE, INC.
By: /s/ Robert F. Byrnes
-----------------------------
Robert F. Byrnes
President and Chief
Executive Officer
Dated: March 29, 1996
3
<PAGE> 4
(a)(1)
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
4
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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>
5
<PAGE> 6
<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.
6
<PAGE> 7
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.
7
<PAGE> 8
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.
8
<PAGE> 9
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.
9
<PAGE> 10
<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>
10
<PAGE> 11
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
11
<PAGE> 12
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.
12
<PAGE> 13
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
13
<PAGE> 14
physician-owned companies, for which the Company provides management services,
and the Company intends to acquire the balance in the first quarter of 1996.
14
<PAGE> 15
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>
15
<PAGE> 16
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.
16
<PAGE> 17
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>
17
<PAGE> 18
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.
18
<PAGE> 19
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>
19
<PAGE> 20
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>
20
<PAGE> 21
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.
21
<PAGE> 22
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.
22
<PAGE> 23
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 153,666
Other assets 17,363
--------
$263,971
========
Liabilities and Stockholder Equity
Current liabilities $ 55,124
Long-term liabilities 7,878
Stockholders' equity 200,969
--------
$263,971
========
</TABLE>
23
<PAGE> 24
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.
24
<PAGE> 25
(a)(2)
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
25
<PAGE> 26
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.
26
<PAGE> 27
<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>
27
<PAGE> 28
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.
28
<PAGE> 29
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)
29
<PAGE> 30
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.
30
<PAGE> 31
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)
31
<PAGE> 32
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.
32
<PAGE> 33
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)
33
<PAGE> 34
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)
34
<PAGE> 35
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)
35
<PAGE> 36
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)
36
<PAGE> 37
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)
37
<PAGE> 38
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)
38
<PAGE> 39
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)
39
<PAGE> 40
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)
40
<PAGE> 41
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)
41
<PAGE> 42
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)
42
<PAGE> 43
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)
43
<PAGE> 44
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)
44
<PAGE> 45
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)
45
<PAGE> 46
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.
46
<PAGE> 47
(b)
MATRIA HEALTHCARE, INC.
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
The following pro forma consolidated condensed financial information and
explanatory notes are presented to reflect the Merger (the "Merger") of Tokos
Medical Corporation (Delaware) ("Tokos") and Healthdyne, Inc. ("Healthdyne")
with and into Matria Healthcare, Inc. ("Matria"). The Merger is being
accounted for in accordance with the purchase method of accounting. Under the
Agreement and Plan of Merger, each share of Tokos Common Stock and Healthdyne
Common Stock outstanding immediately prior to consummation of the Merger was
exchanged for one share of Matria Common Stock, par value $0.01 per share.
Based upon the outstanding shares of the respective companies as of March 8,
1996, Tokos shareholders received approximately 51% of the combined shares of
Matria Common Stock. Since Tokos' shareholders received the larger percentage
of Matria Common Stock and since there is no other evidence that clearly
indicates that Healthdyne would be the acquirer, for accounting purposes Tokos
has been deemed to be the acquirer of Healthdyne. The Pro Forma Consolidated
Condensed Balance Sheet as of December 31, 1995 assumes the Merger occurred on
December 31, 1995. The Pro Forma Consolidated Condensed Statement Of Earnings
(Loss) for the year ended December 31, 1995 assumes the Merger was consummated
on January 1, 1995.
The pro forma adjustments are based upon currently available information
and upon certain assumptions that management of Matria believes are reasonable.
The Merger will be recorded based upon the estimated fair market value of
Healthdyne's net assets at date of acquisition. The adjustments included in
the pro forma financial information presented herein are management's
preliminary determination of these adjustments based upon available
information. The actual adjustments, which will be based on a subsequent
evaluation of assets, liabilities and circumstances at the Merger date, are
not expected to differ significantly from the pro forma adjustments.
The Pro Forma Consolidated Condensed Financial Statements are not
necessarily indicative of either future results of operations or results that
might have been achieved if the Merger actually had been consummated as of the
indicated dates. The pro forma financial statements should be read in
conjunction with the historical financial statements of Tokos and Healthdyne
together with related notes thereto included in this Form 8-K.
47
<PAGE> 48
MATRIA HEALTHCARE, INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1995
-----------------------------------------------
Pro Forma
Historical Historical Adjustments Pro Forma
ASSETS Tokos Healthdyne Merger Matria
- ------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Current Assets:
Cash and short-term investments $ 8,066 35,848 - 43,914
Trade accounts receivable, net 17,767 11,347 - 29,114
Inventories 1,384 804 - 2,188
Deferred income taxes - 1,027 (1,027)(5) -
Prepaid expenses and other current assets 612 5,469 - 6,081
------- ------ ------- -------
Total current assets 27,829 54,495 (1,027) 81,297
Property and equipment, net 7,858 12,056 - 19,914
Goodwill and other intangibles, net 4,556 4,966 149,413 (1) 153,969
- (4,966)(6) -
Other assets 4,340 4,524 - 8,864
------- ------ ------- -------
$44,583 76,041 143,420 264,044
======= ====== ======= =======
</TABLE>
48
<PAGE> 49
MATRIA HEALTHCARE, INC.
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
December 31, 1995
--------------------------------------------------
Pro Forma
Historical Historical Adjustments Pro Forma
Tokos Healthdyne Merger Matria
--------------------------------------------------
(IN THOUSANDS)
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------
<S> <C> <C> <C> <C>
Current liabilities:
Current installments of long-term debt
and obligations under capital leases $ 1,914 1,142 - 3,056
Accounts payable, principally trade 2,625 2,906 - 5,531
Other current liabilities 8,431 12,335 9,350 (1)
- - 14,125 (9) 44,241
------- ------- ------- -------
Total current liabilities 12,970 16,383 23,475 52,828
Long-term debt and obligations under capital
leases, excluding current installments 2,124 2,115 - 4,239
Other long-term liabilities - 6,379 (1,027)(5) 5,352
------- ------- ------- -------
Total liabilities 15,094 24,877 22,448 62,419
Minority interest - 656 - 656
Stockholders' equity:
Common stock 18 166 (166)(1) 343
325 (1)
Additional paid-in capital 87,608 71,767 (71,767)(1) 272,349
185,280 (1)
(539)(7)
Notes and interest receivable from officers
and directors (3,630) - - (3,630)
Accumulated deficit (53,968) (21,425) 21,425 (1) (68,093)
- - (14,125)(9) -
------- ------- ------- -------
30,028 50,508 120,433 200,969
Treasury stock (539) - 539 (7) -
------- ------- ------- -------
Total stockholders' equity 29,489 50,508 120,972 200,969
------- ------- ------- -------
$44,583 76,041 143,420 264,044
======= ======= ======= =======
</TABLE>
49
<PAGE> 50
MATRIA HEALTHCARE, INC.
PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS (LOSS)
<TABLE>
<CAPTION>
Year Ended December 31, 1995
-----------------------------------------------------
Historical Historical Pro Forma Pro Forma
Tokos Healthdyne Adjustments Matria
---------- ---------- ------------------ ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues $ 87,502 69,627 - 157,129
Cost of revenues 69,820 27,804 (32,550)(11) 65,074
-------- ------ ------- -------
Gross profit 17,682 41,823 32,550 92,055
Selling and administrative expenses 15,910 38,474 32,550 (11) 86,934
Provision for doubtful accounts 5,251 4,088 - 9,339
Research and development expenses 513 327 - 840
Amortization of intangibles 1,235 192 28,030 (2) 32,123
1,666 (3) -
- - 1,000 (4) -
Settlement of litigation 4,300 - - 4,300
Severance and other expenses 2,456 - - 2,456
-------- ------ ------- -------
Operating loss (11,983) (1,258) (30,696) (43,937)
Interest income, net 339 1,923 - 2,262
Other expense, net - (738) - (738)
-------- ------ ------- -------
Loss from continuing operations
before income tax expense (benefit) (11,644) (73) (30,696) (42,413)
Income tax expense (benefit) 150 (863) - (713)
-------- ------ ------- -------
Earnings (loss) from continuing
operations $(11,794) 790 (30,696) (41,700)
========= ====== ======= =======
Earnings (loss) per common share and
common share equivalent from continuing
operations $ (.68) .05 (1.21)
======== ====== =======
Weighted average number of common
shares and common share equivalents 17,396 15,552 1,455 (10) 34,403
======== ====== ======= =======
</TABLE>
50
<PAGE> 51
MATRIA HEALTHCARE, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) Reflects the purchase of Healthdyne by Tokos, the resulting excess
purchase price over the estimated fair value of net tangible assets
acquired in the Merger, and the elimination of common stock and additional
paid in capital less accumulated deficit of Healthdyne. The purchase
price is based upon the number of shares of Healthdyne common stock
(including options to purchase shares of Healthdyne Common Stock)
outstanding on the date the Merger was consummated and the average trading
value of Tokos Common Stock for two trading days immediately prior to and
two trading days immediately after the announcement date of the Merger,
October 3, 1995. The fair value of the net tangible assets of Healthdyne
includes $9,350 of additional accrued liabilities for estimated severance
payments and other obligations resulting from the Merger. Included in
this amount is $1,350 related to severance for approximately one hundred
twenty-five Healthdyne non-executive employees that will be involuntarily
terminated as a result of the Merger, $7,800 of payments expected as a
result of the merger under executive severance agreements and $200
facilities costs for patient service centers specifically identified to be
closed. The employees to be terminated are primarily personnel in sales
and field administration positions located in various geographic regions
throughout the country. The employees have been or will be notified of
termination on or shortly after consummation of the Merger. The type and
amount of benefits and a plan of termination has been established. All
known issues have been resolved, but changes (such as increases in the
number of terminated executives or employees) or new issues could increase
such costs. If the ultimate amount of costs incurred is less than the
amount recorded as a liability at consummation date the purchase price
will be reduced accordingly. If the ultimate amount of costs exceeds the
amount recorded as a liability and this adjustment is determined within
one year of the consummation date, the purchase price will be increased;
thereafter, any costs exceeding the amount recorded as a liability will be
recorded as an expense in the period in which the adjustment is
determined.
An analysis of the purchase price is as follows:
<TABLE>
<S> <C>
Healthdyne shares outstanding at March 8, 1996 17,007
Tokos value per share $ 10.31
--------
Value of outstanding stock $175,342
Value of Healthdyne stock options, net of
proceeds from exercise 6,498
Transaction costs 3,765
-------
Purchase price of Healthdyne 185,605
Less - estimated fair value of net
tangible assets acquired 36,192
--------
Excess purchase price $149,413
========
</TABLE>
The fair value of the net tangible assets was determined as follows:
- Cash and short-term investments are at current net realizable values.
- Accounts receivable and payable are at book value since receivables
are expected to be recovered and payables are expected to be settled
both, within sixty days.
51
<PAGE> 52
- Inventories, which are primarily patient supplies, are at book value
since these inventories turnover in two to three months.
- Property and equipment is at net book value since net book value
approximates fair value.
- Goodwill and deferred taxes have been eliminated in accordance with
generally accepted accounting principles.
Excess purchase price has been allocated to intangibles as follows:
Internally developed software $ 5,000
Executive non-compete agreements 3,000
Goodwill 141,413
--------
$149,413
========
At the date of each balance sheet, Matria assesses the recoverability of
its goodwill, by determining whether the remaining goodwill balance is
expected to be recoverable through the undiscounted future operating cash
flows of the acquired operations. The amount of impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate reflecting the company's average cost of funds.
Pursuant to SAB 74, the adoption of SFAS 121 is not expected to have a
material impact on the financial position or results of operations of
Matria.
(2) Reflects additional amortization of goodwill using the straight-line
method over five years. Such amortization is not deductible for income
tax purposes.
(3) Reflects amortization of intangibles relating to internally developed
software over a period of three years.
(4) Reflects amortization of intangibles relating to non-compete agreements
over the three year term of the agreements.
(5) Reflects the elimination of Healthdyne deferred income taxes. With the
spin-off of Healthdyne Technologies, Inc. (a former subsidiary of
Healthdyne), the recoverability of this asset was not assured due to lack
of a history of taxable income from continuing operations and therefore,
the asset was fully reserved. The pro forma adjustment offsets the asset
against the reserve.
(6) Reflects the elimination of Healthdyne's historical goodwill.
(7) Reflects the retirement of Tokos' treasury stock.
52
<PAGE> 53
(8) The Pro Forma Consolidated Condensed Financial Statements do not include
anticipated cost savings of approximately thirty million ($30,000)
expected to be realized in connection with the Merger. Reductions of
patient service center expense in overlapping geographic locations, and
synergies in staff and functional areas provide expense reduction
opportunities.
(9) The Pro Forma Consolidated Condensed Statement of Earnings (Loss) does
not reflect non-recurring restructuring costs (currently estimated at
$14,125) that are expected to be incurred by Matria as a result of the
Merger. These charges are in addition to the $9,350 of accrued
liabilities of the acquired company, Healthdyne, discussed in Note 1
above. In connection with the realization by 1997 of annual savings of
approximately thirty million ($30,000), restructuring charges (currently
estimated at $14,125) are expected to be incurred in connection with the
Merger and have been recorded as a liability and an increase in
accumulated deficit in the Pro Forma Consolidated Condensed Balance Sheet.
The estimated restructuring costs consist of the following:
Personnel $ 4,100
Facilities 2,500
Equipment Costs 5,300
Other Merger expenses 2,225
--------
$ 14,125
========
Personnel related costs reflect $923 of executive and $3,177 of
non-executive severance costs for approximately two hundred seventy-five
Tokos employees to be involuntarily terminated. Facilities costs consist
of lease termination costs and other facilities-related exit costs arising
from the closing of duplicate patient service centers and consolidation of
the two corporate headquarters. Equipment costs consist primarily of
computer and patient service equipment to be written off due to
incompatibility with the nursing station software that has been selected
to be used by Matria and other computer hardware and software that will be
obsolete by adoption of new systems. The reserve for these charges was
established on the consummation date in compliance with Emerging Issues
Task Force No. 94-3 and 95-3 and was charged to operations in the quarter
the Merger was consummated.
The estimate of staff reduction totaling approximately two hundred
seventy-five, comes from the elimination of duplicate sales force, patient
service centers and duplicate staff and administrative support functions.
The contemplated time frame for completion of these reductions is six to
twelve months from closing.
Matria will incur certain additional costs in order to effect the
consolidation of the two companies and achieve the anticipated cost
savings referred to in Notes 8 and 9 above during 1996. Presently, Matria
has not completed its estimate of the costs of duplicate local, regional
and corporate activities. It is expected that these costs (which may be
substantial) will be charged to operations in future periods when incurred
and have not been accrued as restructuring costs or additional accrued
liabilities resulting from the Merger.
(10) Reflects the weighted average number of shares and common share
equivalents of Tokos Common Stock at December 31, 1995 plus the actual
number of shares of Healthdyne Common Stock outstanding on the effective
date of the Merger, and the conversion of each such share into one share
of Matria Common Stock.
53
<PAGE> 54
The weighted average number of shares outstanding used in the computation
of pro forma net loss per share consists of the following:
Historical weighted average number of shares
of Tokos outstanding 17,396
Issuance of Matria shares to
Healthdyne shareholders 17,007
------
Pro forma weighted average shares 34,403
======
(11) Reflects reclassifications of certain operating costs of Tokos from cost
of revenues to selling and administrative expenses to be consistent with
the presentation used by Healthdyne and adopted by Matria. Historically,
Healthdyne has classified certain operating costs that are not directly
related to patient care as "selling and administrative expenses" in the
consolidated statements of earnings. These costs include field sales and
sales administration costs, patient service center facility and
administration costs, and insurance benefit verification. Field sales and
sales administrative costs have not been classified as cost of revenues,
since these costs are related to personnel whose function is sales and who
have limited, if any, patient care responsibilities. Patient service
center facility and administrative costs have not been classified as "costs
of revenues" since both patient care, and selling and administrative
functions are conducted from these centers, and an allocation of such costs
between the functions is not considered material. Insurance benefit
verification is considered a part of the credit and collection function
and, therefore, these costs are classified as "selling and administrative
expenses". Amounts reclassified for Tokos include field sales, field sales
management and administrative costs, patient service center facility and
administration costs, insurance benefit verification costs and other
management and administration costs not associated with patient service
centers, represent approximately 15.5%, 11.0%, 1.5% and 6.5%, respectively,
of 1995 revenues.
Goodwill and other intangible assets in the Tokos historical financial
statements have been reclassified to present separately the intangible
assets and amortization of such assets, in order to be consistent with the
pro forma financial statement presentation.
54
<PAGE> 1
EXHIBIT 23.1
ACCOUNTANTS' CONSENT
The Board of Directors
Matria Healthcare, Inc.
We consent to incorporation by reference in the registration statements
(Form S-8 No. 333-01539 and No. 333-00781) of Matria Healthcare, Inc. of our
reports dated February 22, 1996, relating to the consolidated balance sheets of
Tokos Medical Corporation (Delaware) and subsidiaries (predecessor of Matria
Healthcare, Inc.) 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 and related schedule,
which reports appear in the December 31, 1995 annual report on Form 10-K of
Tokos Medical Corporation (Delaware).
ERNST & YOUNG LLP
Orange County, California
March 29, 1996
<PAGE> 1
EXHIBIT 23.2
ACCOUNTANTS' CONSENT
The Board of Directors
Matria Healthcare, Inc.
We consent to incorporation by reference in the registration statements
(Nos. 333-01539 and 333-00781) on Form S-8 of Matria Healthcare, Inc. of our
report dated March 1, 1996, except as to note 14, which is as of March 8, 1996,
relating to the consolidated balance sheets of Healthdyne, Inc. 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, which report appears in the Form 8-KA, dated
March 28, 1996, amending the Current Report on Form 8-K, dated March 8, 1996 of
Matria Healthcare, Inc.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
March 28, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HEALTHDYNE 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> 7,577
<SECURITIES> 28,271
<RECEIVABLES> 19,719
<ALLOWANCES> 8,372
<INVENTORY> 804
<CURRENT-ASSETS> 54,495
<PP&E> 31,445
<DEPRECIATION> 19,389
<TOTAL-ASSETS> 76,041
<CURRENT-LIABILITIES> 16,383
<BONDS> 0
0
0
<COMMON> 166
<OTHER-SE> 50,342
<TOTAL-LIABILITY-AND-EQUITY> 76,041
<SALES> 0
<TOTAL-REVENUES> 69,627
<CGS> 0
<TOTAL-COSTS> 27,804
<OTHER-EXPENSES> 38,993
<LOSS-PROVISION> 4,088
<INTEREST-EXPENSE> (170)
<INCOME-PRETAX> (73)
<INCOME-TAX> (863)
<INCOME-CONTINUING> 790
<DISCONTINUED> (4,267)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,477)
<EPS-PRIMARY> (.22)
<EPS-DILUTED> (.22)
</TABLE>
<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>
