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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
X Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
- --- Act of 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996) For the fiscal
year ended December 31, 1996,
or
Transition Report Pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934 (No Fee Required) For the transition period from
________________________ to _______________________
Commission File No. 0-20619
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MATRIA HEALTHCARE, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-220598
(State or other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1850 Parkway Place 30067
Marietta, Georgia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (770) 423-4500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Common Stock Purchase Rights
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports); and (2) has been subject to such
filing requirements for the past 90 days: Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ].
As of March 11, 1997, there were 36,416,199 shares of Common Stock outstanding,
and the aggregate market value of the Common Stock of the Registrant held by
non-affiliates was approximately $148,460,690 based upon the closing sale price
of such stock on that date.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Registrant's definitive Proxy Statement for the 1997 Annual
Meeting of Shareholders are incorporated by reference into Part III.
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MATRIA HEALTHCARE, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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<S> <C>
PART I............................................................................
Item 1. Business............................................... 3
Item 2. Properties............................................. 10
Item 3. Legal Proceedings ..................................... 11
Item 4. Submission of Matters to a Vote of Security Holders.... 12
PART II...........................................................................
Item 5. Market for the Company's Common Equity
and Related Stockholder Matters ................... 13
Item 6. Selected Financial Data ............................... 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 14
Item 8. Financial Statements and Supplementary Data ........... 19
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ............ 19
PART III..........................................................................
Item 10. Directors and Executive Officers ...................... 19
Item 11. Executive Compensation ................................ 19
Item 12. Security Ownership of Certain Beneficial
Owners and Management ................................. 19
Item 13. Certain Relationships and Related Transactions ........ 19
PART IV...........................................................................
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K ............................... 20
SIGNATURES........................................................................ 24
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PART I.
ITEM 1. BUSINESS.
INTRODUCTION. Matria Healthcare, Inc., a Delaware corporation ("Matria"
or the "Company"), was incorporated on October 4, 1995 for the purpose of the
merger (the "Merger") of Tokos Medical Corporation (Delaware), a Delaware
corporation ("Tokos"), and Healthdyne, Inc., a Georgia corporation
("Healthdyne"), with and into Matria. The effective date of the Merger was March
8, 1996. Prior to the Merger, Matria had no material assets or liabilities and
its then outstanding shares of common stock, par value $0.01 per share ("Matria
Common Stock"), were held exclusively by Tokos and Healthdyne. As a result of
the Merger, the operations and assets of Tokos and Healthdyne were consolidated
into Matria, and each share of common stock of Tokos and Healthdyne outstanding
on the effective date of the Merger was exchanged for one share of Matria Common
Stock.
Matria is the leading provider of specialized obstetrical home
healthcare services which assist physicians in the management of high risk
pregnancies. In addition, Matria provides home healthcare services for the
management of other complicated obstetrical and gynecological conditions, such
as pregnancy induced hypertension. Matria's services are designed to achieve
improved medical outcomes at significant cost savings through the reduction of
patient hospitalization. Services offered by Matria include screening to assist
in the identification of women who may be at risk of complications during
pregnancy; maternal risk assessment and prenatal education for asymptomatic
patients; fetal fibronectin testing for use by physicians to predict the
likelihood of preterm delivery; daily management and education of high risk
patients; administration and supervision of a range of home infusion therapies
for obstetrical and gynecological conditions; and specialty obstetrical and
gynecological nursing.
On June 1, 1996, the Company exercised an option and acquired the
remaining 85% ownership interest in National Reproductive Medical Centers, Inc.
("NRMC"), a multi-site provider of infertility treatment services headquartered
in California. Founded in 1987 and operating as "Pacific Fertility Centers",
NRMC provides a broad spectrum of diagnostic and therapeutic services to
infertile couples with particular emphasis on in-vitro fertilization and embryo
transfer procedures. The transaction, valued at $12.8 million, was paid for in a
combination of cash and common stock of Matria. The option to acquire NRMC was
obtained by Healthdyne prior to the merger.
SERVICES. The Company offers a comprehensive range of specialized home
healthcare and risk assessment services designed to assist physicians in
managing high risk pregnancies and numerous other obstetrical and gynecological
conditions more cost effectively. Substantially all of the Company's revenues
are derived from these services.
High Risk Pregnancy Management. The Company offers multiple levels of
high risk pregnancy management services to assist physicians in the early
detection of preterm labor and the management of complicated pregnancies. These
levels are designed to meet various patient acuity levels and range from low
intensity surveillance to comprehensive obstetrical home care. Each level
includes one or more of the following: the identification of women who may be at
risk for complications during pregnancy; the development of a program of care
for each patient; the education of the patient as to symptoms associated with
preterm labor; skilled perinatal nursing assessments of the patient's condition;
and the
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use of perinatal nurses specializing in obstetrics to administer and
manage various therapies.
A physician who chooses to utilize the Company's preterm labor
management services will prescribe the level of service offered by the Company
that the physician believes is appropriate for the patient's acuity level. The
patient is assigned to a perinatal nurse located in one of the Company's patient
service centers. This nurse is generally the patient's primary contact for the
duration of her treatment plan which typically lasts four to seven weeks
depending on the level of service prescribed and the time period until delivery.
At the time of the assignment, the nurse contacts the patient to discuss the
physician's treatment plan and instruct her in the use of any device if one has
been prescribed by her physician. The nurse will educate the patient with regard
to symptoms associated with preterm labor, the methods to detect such symptoms,
and proper methods of care to minimize complications during pregnancy. The nurse
contacts the patient on an as needed or daily basis depending on the program
prescribed to assess her condition, including any symptoms of preterm labor, to
provide emotional support and counseling, and to encourage compliance with the
physician's treatment plans. Through the daily contact with the patient and the
frequent assessment of symptoms associated with preterm labor, the Matria nurse
obtains information that assists the prescribing physician in the early
detection and treatment of preterm labor.
In order to assist physicians in determining the most appropriate
treatment level for patients, the Company also markets a laboratory test,
developed with the assistance of the Company by Adeza Biomedical Corporation,
that can be utilized by physicians as an aid in determining the likelihood of
preterm labor commencing within a given time period from the date of the test.
The test, which is FDA approved, measures the existence of fetal fibronectin, a
protein present at various times in all pregnancies ("fFN"), in the vagina of
the patient and based thereon predicts the likelihood of delivery within a
fourteen day time period. See Item 3 "Legal Proceedings" for a description of
litigation commenced against the Company by Adeza Biomedical Corporation in
connection with this product.
Physicians may also prescribe labor inhibiting drugs known as
tocolytics for patients who are symptomatic and in need of some form of
intervention. The Company provides supervision, including pharmaceutical support
and administration of this therapy regime to patients as an alternative to
hospitalization. Frequently, this therapy involves delivery of the drugs by
micro infusion pump. The Company monitors the patient's reactions to the therapy
on an on-going basis. Nurses report any change in patient status to the
patient's physician, as well as provide the physician with periodic reports
during the course of the therapy.
Other Obstetrical and Gynecological Services. The Company provides a
broad range of skilled nursing, infusion therapy and patient management services
on a home care basis for a variety of obstetrical and gynecological conditions,
including pregnancy induced hypertension and gestational diabetes. Such
conditions may be treated with on-going nursing assessment and focused education
at various levels of frequency and intensity, other patient management and
diagnostic services, and blood and urine testing.
Maternal Risk Assessment and Prenatal Education Services. The Company,
through its comprehensive MaternaLink(TM) Program, offers a comprehensive risk
assessment and patient education program designed to reduce maternity related
costs by providing expectant mothers with focused education and psychological
support and identifying pregnancies that may be high risk. The Company sells the
program to employers, managed care
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organizations, health plans and other third-party payors or administrators who
make it available to their respective employees, insureds or members who are
pregnant. Through interviews with the expectant mother, the Company collects
data about the woman, her family/medical history and other circumstances that
might affect her pregnancy. Based on this information, the nurse provides the
woman with education regarding her specific risks, if any, and recommends
appropriate behavior modifications that may facilitate a healthy outcome.
Relevant information collected by the Company is summarized in reports and
provided to the participant's healthcare provider and case manager. Results of
program utilization and effect are summarized for the client in periodic
reports. The Company, working in conjunction with HMO's and other managed care
organizations demonstrated reported improved patient outcomes and documented
cost savings from its MaternaLink(TM) program.
Infertility Services. Through its wholly-owned subsidiary, NRMC, Matria
provides a broad spectrum of diagnostic and therapeutic services to infertile
couples with particular emphasis on in-vitro fertilization and embryo transfer
procedures.
PATIENT CARE INFORMATION SYSTEMS. Due to the acute nature of high risk
pregnancies, physicians, pharmacists and perinatal nurses must have prompt
access to a patient's medical history, current clinical status and treatment
plan. Matria's predecessor companies made substantial investments in the
development of information systems to support healthcare professionals in
detecting obstetrical complications, as well as in developing and implementing
individualized treatment plans for their patients. In addition, they created
systems to track patient outcomes and summarize data regarding patient care.
Matria has integrated and enhanced these systems.
In addition to monitoring devices to access the patient's daily
condition, Matria has a data information system designed to assist managed care
organizations and physician groups in tracking outcomes and summarize data
regarding maternity-related care. This system consists of proprietary software
and processes that collect information about maternity related access, care,
utilization and satisfaction. Methodologies for analyzing data and presenting
information include the use of varied collection data tools, implementation of a
relational data base design and customization of reports to meet client
requirements.
SERVICE LOCATIONS. Matria has approximately 37 service centers
throughout the United States and a number of additional sites of service. In
1996 Matria consolidated the number of its centers from approximately 83 to 37
in order to avoid duplication in a given geographic area and to benefit from the
synergies created through the Merger. All of the patient service centers operate
in accordance with policies, procedures and objectives established by Matria.
JCAHO Accreditation. Matria is continuing the process substantially
completed by its predecessor companies of having its service centers accredited
by the Joint Commission on Accreditation of Health Care Organizations ("JCAHO").
Matria is currently in the process of reaccreditating the centers in Matria's
name.
MARKETING AND SALES. Matria markets its services and products through a
dedicated direct sales force to physicians, other healthcare providers,
management service organizations and third-party payors. Matria also maintains a
group of clinical support specialists and a dedicated team of managed care
account managers to support and assist
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the direct sales force in these efforts. In its patient services business,
Matria stresses the clinical experience of its personnel, the quality of its
clinical services, and the cost and clinically effective nature of its therapies
when compared to hospitalization.
Matria has a number of contractual and other arrangements with medical
professionals, institutions and third-party payors. These arrangements include
agreements with prepaid health plans under which Matria provides services to
members of the organization at discounted prices, and agreements with medical
professionals and institutions under which Matria provides certain services,
including reimbursement management and billing and collection services.
REIMBURSEMENT. A significant portion of the Company's revenues are
affected directly by the reimbursement policies of third-party payors, such as
private insurance programs and state Medicaid programs. Matria attempts to focus
its marketing efforts on developing private pay accounts. In general, these
accounts pay at a higher rate than government payment programs. Changes in the
funding available from either third party or government payors or in their
reimbursement policies could have an adverse impact on the Company's business.
Private insurance companies, including HMO's, are the primary source of
reimbursement for Matria, which assumed a substantial number of formal and
informal contractual relationships previously held by Tokos and Healthdyne with
these entities. During 1996, government payors accounted for approximately 7% of
Matria's revenues. Reimbursement for uterine activity monitoring is presently
available from approximately one-half of the 50 state Medicaid programs.
Matria assists its patients in obtaining reimbursement from their
insurance companies or other third-party payors. Generally, Matria contacts the
patient's insurance company or other third-party payor before the commencement
of services in order to determine the patient's coverage and the percentage of
charges that the payor will reimburse. Matria's reimbursement specialists then
evaluate the patient's insurance to determine the proper procedures for
submission of reimbursable claims for payment. Matria typically obtains an
assignment of benefits from the patient that enables Matria to file claims for
its services with the third-party payor. In most cases, third-party payors
reimburse Matria directly for the portion of the charges the payor recognizes.
HEALTH CARE REFORM. Legislative efforts continue at the federal and
state levels to control rising health care costs. Recently, federal initiatives
have been considered in the context of federal budget legislation. President
Clinton's fiscal year 1998 budget proposal would generally reduce payments to
Medicare and Medicaid providers and grant states broader authority to establish
Medicaid managed care systems. In addition, a number of states are considering
or have enacted health care reforms, including reforms through Medicaid
demonstration projects. These involve mandatory statewide managed care programs
for Medicaid beneficiaries under which payment is made to providers through
negotiated or capitated rates, as opposed to traditional fee-for-service or fee
schedule payments. There can be no assurance that future health care or budget
legislation or other health reform initiatives at the state or federal levels
will not have an adverse effect on the business of the Company.
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REGULATION. Participants in the healthcare industry, including
providers of services such as those offered by Matria, are subject to extensive
federal, state and local regulation relating to, among other things, licensure,
conduct of operations and the addition of facilities and services, and there can
be no assurance that future regulatory changes will not have a material adverse
effect on the results of operations or financial condition of the Company. As a
provider of services to patients under various government programs, including
certain state Medicaid programs, Matria is subject to the federal fraud and
abuse laws. These laws prohibit among other things, (I) any bribe, kickback,
rebate, or payment of any other remuneration in return for the referral of
patients covered under federal healthcare programs including Medicare or
Medicaid, and (ii) the submission of false claims. Violations of these
provisions may result in civil and criminal penalties and exclusion from
participation in federal healthcare programs.
The broad language of the anti-kickback statute has been interpreted by
certain courts and governmental enforcement agencies in a manner which could
impose liability on healthcare providers for engaging in a wide variety of
business transactions. Limited "safe harbor" regulations exempt certain
practices from enforcement action under the prohibitions. However, these safe
harbors are only available to transactions which fall entirely within the
narrowly defined guidelines.
In recent years, the federal government has significantly increased the
resources allocated to enforce the fraud and abuse laws. For example, the Office
of the Inspector General, in cooperation with other federal agencies, announced
a program, Operation Restore Trust, under which it is scrutinizing the
activities of home health agencies, durable medical equipment suppliers, skilled
nursing facilities, and hospices in California, Florida, Illinois, New York and
Texas, states in which Matria has significant operations. The Administration has
announced plans to expand Operation Restore Trust to all 50 states. Private
insurers and various state enforcement agencies also have increased their
scrutiny of healthcare claims in an effort to identify and prosecute fraudulent
and abusive practices. Matria maintains an internal regulatory compliance review
program and from time to time retains special counsel to provide advice on
compliance with such laws and regulations. However, no assurance can be given
that the practices of Matria, if reviewed, would be found to be in compliance
with such laws, as such laws ultimately may be interpreted.
In 1995, the so-called "Stark II Law," went into effect. Stark II
imposes civil penalties and exclusions for certain specified referrals by
physicians to entities with which they have a financial relationship (subject to
specified exceptions). While implementing regulations have been issued relating
to referrals for clinical laboratory services, no implementing regulations have
been issued relating to referrals for other services subject to the
self-referral prohibitions. In addition, several states in which Matria operates
have laws that prohibit certain direct or indirect payments or fee-splitting
arrangements between healthcare providers if such arrangements are designed to
induce or encourage the referral of patients to a particular provider. Other
states have enacted or are considering legislation that either prohibits
"physician self-referral" arrangements or requires physicians to disclose any
financial interest they may have with a healthcare provider that such physicians
recommend to their patients. Possible sanctions for violations of these
restrictions include loss of licensure and civil and criminal penalties. Such
statutes and proposed legislation vary from state to state and seldom have been
interpreted by the courts or regulatory agencies. Strict enforcement of these
regulations is likely. In part as a result of these changes, Matria's
predecessor companies and, to a lesser extent, Matria have terminated various
partnerships,
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Subchapter S corporations and other arrangements in which they were involved in
an attempt to ensure that physician referrals would not be precluded by these
statutory prohibitions. Although substantially reduced from prior periods,
Matria retains certain select financial relationships with physicians who may
refer, or be in a position to refer, patients for services. Matria believes
that these financial relationships meet applicable exceptions permitting
referrals by such physicians. Matria may be required to further modify these
arrangements, or forced to discontinue accepting referrals from such physicians
if the laws are subsequently interpreted to prohibit these relationships.
Most of the medical products utilized by Matria for the provision of
its services are classified as medical devices under the Federal Food, Drug and
Cosmetic Act (the "FDC Act") and are subject to regulation by the FDA. In
addition, some of the services that Matria offers involve the provision of drugs
or tests that are regulated by the FDA under the FDC Act. While these medical
devices, drugs and tests are labeled for specific indications and cannot be
promoted for any other indications, physicians may and do prescribe them for
indications that have not been approved by the FDA. The FDA allows physicians to
prescribe drugs for such "off-label" indications under the "practice of
medicine" doctrine. For example, terbutaline is labeled for the treatment of
asthma but is frequently prescribed by obstetricians as a tocolytic for the
treatment of preterm labor. See Item 3 "Legal Proceedings" for a discussion of a
Petition filed with the FDA by the National Women's Health Network concerning
the use of subcutaneous terbutaline in the home. Any action by the FDA that
limits the ability of Matria to offer a high risk pregnancy management service
involving medical devices or the administration of drugs or tests for
indications for which they have not been labeled could have a material adverse
effect on the results of operations or financial condition of Matria.
A variety of regulatory actions are available to the FDA in order to
ensure that regulated firms comply with the provisions of the FDC Act. Although
the Company does not anticipate any enforcement action against it, the
commencement of any such action which limits the manner in which Matria conducts
its business could have an adverse impact.
In certain states, the provision of infusion services and other nursing
services to patients in their homes and the laboratory services related to fFN
are subject to state home healthcare licensing and/or certificate of need
("CON") requirements in the case of nursing services and laboratory licensing in
the case of fFN testing. The Company is engaged in an ongoing effort to obtain
information from state regulatory agencies on the application of new and
existing licensing and CON provisions applicable to its business activities. The
Company is not a licensed laboratory for purposes of performing actual fFN
laboratory analysis and relies upon Adeza and other licensed laboratories to
perform this process on its behalf. Additional licensing or other forms of
affiliations with licensed entities will be necessary, however, as eligibility
of fFN for reimbursement under state Medicaid programs increases. When
applicable, Matria also may be required either to obtain a license or other
regulatory approval before it renders nursing services directly in the home or
to affiliate with other licensed agencies in connection with the delivery of
such services. Although generally a standard aspect of conducting a healthcare
business, compliance with applicable requirements in certain instances can be
both burdensome and costly. Violation of these state statutes can result in
substantial fines and other penalties. The Company believes that it has obtained
or is in the process of obtaining licenses or establishing affiliations with
licensed entities for each facility for which licensing is required. This is an
area of increasing legislative activity, and there can be no assurance that the
Company will not become subject to regulatory and licensing statutes in other
states in which it operates.
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In addition, Matria is subject to laws and regulations which relate to
business corporations in general, including antitrust laws, occupational health
and safety laws and environmental laws. None of these laws and regulations has
had a material adverse effect on the Company's business or competitive position
or required material capital expenditures on the part of the Company.
Failure to comply with these laws or regulations applicable to the
Company could adversely affect Matria's ability to continue to provide, or to
receive reimbursement for, its products and services and could also subject
Matria and its officers to penalties. Changes in laws or interpretations of
existing laws or regulations could have a material adverse effect on permissible
activities of Matria, the relative costs of doing business and the amount of
reimbursement by government and other third-party payors. In addition, laws and
regulations often are adopted to regulate new products, services and industries.
Matria is unable to predict what legislation or regulations, if any, may be
adopted in the future relating to the Company's business or the healthcare
industry, including third-party reimbursement, or what effect any such
legislation or regulations may have on Matria.
COMPETITION. The home obstetrical care services market in which Matria
competes is a relatively new market. As a result of the Merger, Matria believes
that it is both the leading provider (based on annual level of sales) of home
obstetrical care and the largest entity in this market whose services are
devoted exclusively to home obstetrical care. Competition exists in
substantially all of the metropolitan areas in which Matria maintains centers
from a number of local obstetrical providers and, in some instances, regional or
national companies. Matria actually provides the patient services for several
regional and national companies on a subcontract basis which offers Matria the
opportunity to participate with these more diversified service providers in
contracting with certain third-party payors who prefer to contract with a single
source for all home care services.
The principal competitive factors for Matria are the therapies offered,
the expertise of its clinical employees, the ability to provide prompt and
reliable service, the price at which the services are offered, and the
regulatory requirements of the FDA. The Company believes that it generally
competes favorably with respect to these factors.
RECENT CONTROVERSIES. The operations of Matria may be affected by
several controversies surrounding the home obstetrical care business. There has
been, and continues to be, debate within the medical community about how to
decrease the incidence of prematurity, which is a major cause of the high U.S.
infant mortality rate. Matria believes that increased surveillance of women at
risk of developing preterm labor can assist the physician in early diagnosis of
preterm labor and help improve the medical outcomes of complicated pregnancies.
Matria provides a comprehensive range of services to assist the physician in
this surveillance, including fFN testing, perinatal nursing, obstetrical
pharmacy services and tocolytic therapy. A significant portion of these services
includes the use of home uterine activity monitoring devices. In September 1992,
an eight member committee of the American College of Obstetricians and
Gynecologists ("ACOG") published an opinion stating, among other things, that
the use of home uterine activity monitoring devices has not been shown to
prevent prematurity; while the committee opinion represented a more recent
review of existing literature, there was essentially no change from its 1989
opinion regarding the independent benefit of home uterine activity monitoring.
Since that time, the FDA has approved the uterine activity monitors utilized by
Matria (the only provider of home
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obstetrical care with devices so approved) as safe and effective for the
prediction of the onset of preterm labor in women with a history of a previous
preterm delivery. While Matria does not believe that either home uterine
activity monitoring or any other diagnostic device can, in and of itself,
improve therapeutic outcomes (e.g., a mammogram cannot prevent breast cancer),
it does believe that monitoring can assist the physician in the early detection
of preterm labor. See Item 3 "Legal Proceedings" for a discussion of a Petition
recently filed by the National Women's Health Network ("NWHN").
RESEARCH AND DEVELOPMENT. Matria's research and development strategy is
to develop new and more cost-effective service procedures for providing
obstetrical care to patients in the home environment, as well as to develop an
office-based patient record and clinical management system for use by physicians
in the management of their patients.
EMPLOYEES. The Company currently employs a total of approximately 779
full-time employees and over 126 regular part-time employees. In addition, the
Company employs an additional 1,000 part-time clinical employees to provide
patient training and backup support on an "as needed" basis. None of the
Company's employees are represented by a union. The Company considers its
relationship with its employees to be satisfactory.
PATENTS, TRADEMARKS AND LICENSES. Matria utilizes a number of
trademarks including, without limitation, System 37(R) and MaternaLink(TM), and
considers the same to be important to the marketing and promotion of its
services. Matria does not believe that it possesses any patents which are
material to its business although the patent possessed by Adeza for the use of
the fFN may be deemed to be material to the continued marketing of that product.
Matria's business does depend and will likely continue to depend on trade secret
protection to strengthen its proprietary position. Matria requires its employees
to execute appropriate confidentiality agreements in connection with their
employment. There can be no assurance that these agreements will not be breached
or that Matria will have adequate remedies for such breach. Furthermore, no
assurance can be given that competitors will not independently develop
substantially equivalent proprietary information or that Matria can meaningfully
protect its rights in unpatented proprietary technology. Litigation may be
necessary to protect trade secrets or "know-how" owned by Matria, which could
result in substantial costs to, and might have a material adverse effect on,
Matria.
ITEM 2. PROPERTIES.
Matria's principal executive and administrative offices are located at
1850 Parkway Place, Marietta, Georgia, and total approximately 99,400 square
feet. The facility is leased through February 28, 2003. The lease provides for
annual rental payments of $2.063 million.
Additional properties also are leased for the other operations of
Matria. Matria's patient service centers are typically located in suburban
office parks and range between 600 and 6,500 square feet of space with an
average of approximately 3,500 square feet. Total square footage for these
facilities is approximately 126,000 square feet. These facilities are leased for
various terms through 2001 at aggregate annual rental of approximately $2.200
million. The former corporate headquarters of Tokos in Santa Ana, California,
with 115,000 square feet, will be leased through December 31, 1997 at an annual
rental of $588,000. The Company expects to terminate this lease effective
December 31, 1997 and relocate its occupants to smaller more appropriate
facilities.
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In 1996, Matria relinquished or sublet a number of facilities as a part
of the consolidation of the business operations of Tokos and Healthdyne. Matria
believes that it has adequate facilities for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
A complaint, filed by Adeza Biomedical Corporation ("Adeza") in the
Superior Court of Santa Clara County, California, was served on Matria on March
7, 1997. The complaint alleges that Matria breached an Exclusive Marketing
Agreement, dated December 31, 1991, as amended (the "Agreement"), between Adeza
and Tokos and was filed in an attempt to terminate the Agreement. Under the
Agreement, Tokos invested $10 million to assist Adeza in the development of a
test to predict the likelihood of the onset of preterm labor utilizing a fetal
fibronectin immunoassay ("fFN Test"). Matria denies these allegations and
intends to defend the matter vigorously.
A complaint, filed by The Lindner Fund, Inc. in the Eastern District of
Missouri, was served on February 3, 1995 against Healthdyne and its former
subsidiary, Home Nutritional Services, Inc. ("HNS"), alleging that The Lindner
Fund would not have sold its investment in HNS on February 8, 1994 had
Healthdyne and HNS disclosed the potential sale of HNS. Damages have been
requested in the amount of $1,050,900, representing the aggregate difference
between the price received upon the sale of such stock by The Lindner Fund and
the $7.85 per share price paid by W.R. Grace & Co. on April 6, 1994 for HNS.
Healthdyne denied the allegations set forth in the complaint and Matria is
defending the matter vigorously.
On July 17, 1996, the NWHN filed a Petition with the FDA and issued a
press release alleging that terbutaline, although widely prescribed by
physicians for the off-label use as a tocolytic, was unsafe when administered
subcutaneously in the home. The Company strongly disputes the assertions of the
NWHN and has both filed a response to the Petition with the FDA and commenced
litigation against the NWHN.
In addition to the foregoing, Matria is subject to various legal claims
and actions incidental to its business and the businesses of its predecessors
and their respective subsidiaries, including product liability claims and
professional liability claims. Matria maintains, as did its predecessors,
insurance, including insurance covering professional and product liability
claims, with customary deductible amounts and, with the exception of one case
for which insurance in the amount of $10 million exists, has been indemnified by
Healthdyne Technologies, Inc., a former subsidiary of Healthdyne ("Healthdyne
Technologies"), with respect to any claim relating to equipment manufactured and
sold by Healthdyne Technologies, regardless of the date of manufacture of the
equipment in question or whether the claim arose before or after the May 22,
1995 spin-off of Healthdyne Technologies. There can be no assurance, however,
that (i) additional suits will not be filed in the future against Matria, (ii)
Matria's prior experience with respect to the disposition of its litigation
accurately indicates the results that will occur in pending or future cases, or
(iii) adequate insurance coverage will be available at acceptable prices for
incidents arising in the future.
11
<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable
SPECIAL ITEM. EXECUTIVE OFFICERS OF THE COMPANY.
The following sets forth certain information with respect to the
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Frank D. Powers 48 Executive Vice President
J. Brent Burkey 50 Senior Vice President, General Counsel
and Secretary
Donald R. Millard 49 Senior Vice President-Finance,
Chief Financial Officer and
Treasurer
</TABLE>
The executive officers of the Company are elected annually and serve
at the pleasure of the Board of Directors.
Mr. Powers has been Executive Vice President of the Company since
March 8, 1996. Prior thereto, he served as President of Healthdyne Maternity
Management, a subsidiary of Healthdyne, from October 1989 until March 1996, and
as President of Healthdyne's Home Care Group from November 1986 to October 1989.
In addition, he was President of Healthdyne's Home Care Products Division from
September 1984 to November 1986 and Corporate Controller of Healthdyne from
January 1983 to September 1984.
Mr. Burkey has served as Senior Vice President, General Counsel and
Secretary of the Company since March 8, 1996. Prior thereto, he served as Senior
Vice President and General Counsel of Healthdyne from September 1987 to March
1996 and as Vice President and General Counsel of Healthdyne from November 1982
to September 1987. He also served as Secretary of Healthdyne from August 1984 to
March 1996 and as Assistant Secretary of Healthdyne from November 1982 to August
1984.
Mr. Millard has served as Senior Vice President-Finance, Chief
Financial Officer and Treasurer of the Company since March 8, 1996. Prior
thereto, he served as Vice President-Finance and Chief Financial Officer of
Healthdyne from July 1987 to March 1996 and, in addition, was Treasurer of
Healthdyne from March 1990 to March 1996. Prior thereto, he was President of
Dental One, Inc. a dental healthcare provider, from December 1982 to June 1987.
12
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Matria's Common Stock is traded in the over the counter market and is
quoted on the Nasdaq National Market ("NASDAQ") under the symbol "MATR". The
approximate number of record holders as of March 11, 1997 was 3,547.
Trading in Matria Common Stock did not take place prior to the
effective date of the Merger except for the initial purchase of a limited number
of shares by Tokos and Healthdyne as part of the Company's incorporation.
Neither Matria nor its predecessors paid any cash dividends with
respect to their respective common stocks and Matria does not intend to declare
any dividends in the near future. Matria is a party to an indenture assumed from
Healthdyne relating to subordinated debentures that contains provisions
restricting the payment of cash dividends during the continuation of a default
in the payment of interest on the subordinated debentures.
The high and low sales price of Matria Common Stock from March 11, 1996
(the first day that trading occurred) through March 31, 1996 was $9.75 and
$7.50, respectively. In addition, the following table sets forth, for the
remaining calendar quarters indicated in 1996, the high and low sales prices of
Matria.
CALENDAR QUARTER LOW HIGH
---------------- --- ----
Second $7.375 $9.25
Third 6.50 8.75
Fourth 4.625 8.375
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information represents the financial
performance of Matria from March 1, 1996 through December 31, 1996 and for all
periods prior thereto Tokos (deemed for accounting purposes to be the acquiror
of Healthdyne in the Merger) and is derived from, and should be read in
conjunction with, the historical consolidated financial statements of Matria and
Tokos and the related notes thereto. For all practical purposes, Matria did not
engage in business prior to the effective date of the Merger, and the results of
Tokos are not necessarily indicative of Matria's future performance.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands, except per share data)
Consolidated statements of operations:
<S> <C> <C> <C> <C> <C>
Revenues $130,806 85,209 98,565 120,837 159,887
Operating expenses 122,686 83,990 96,640 117,460 128,262
Provision for doubtful accounts 7,591 5,251 7,042 13,656 17,056
Amortization of goodwill and other
intangibles 30,083 1,235 350 187 133
Settlement of litigation -- 4,300 -- -- --
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Restructuring, severance and other
charges 22,525 2,456 -- 14,000 2,982
-------- ------- ------- ------- -------
182,885 97,232 104,032 145,303 148,433
-------- ------- ------- ------- -------
Income (loss) from operations (52,079) (12,023) (5,467) (24,466) 11,454
Interest income net 824 333 50 39 39
Other income net 134 46 108 -- --
-------- ------- ------ ------- ------
Income (loss) before income tax expense (51,121) (11,644) (5,309) (24,427) 11,493
Income tax expense -- 150 550 1,956 5,030
-------- ------- ------- ------- -------
Net earnings (loss) $(51,121) (11,794) (5,859) (26,383) 6,463
======== ======= ======= ======= =======
Earnings (loss) per common and common
equivalent share $ (1.58) (0.68) (0.34) (1.53) 0.37
======== ======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding
32,328 17,396 17,169 17,240 17,568
======== ======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(In thousands)
Consolidated balance sheet data:
<S> <C> <C> <C> <C> <C>
Total assets $223,188 44,468 58,183 69,959 99,886
Long-term obligations, excluding current
maturities 2,499 2,078 2,593 3,348 5,182
Shareholders' equity 173,178 29,489 40,160 46,875 74,952
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
General.
On March 8, 1996, Tokos Medical Corporation ("Tokos") and Healthdyne,
Inc. (Healthdyne") merged with and into the Company, which was created solely
for the purpose of the Merger. Pursuant to the terms of the Agreement and Plan
of Merger, dated October 2, 1995, as amended, among Tokos, Healthdyne and the
Company, each share of common stock outstanding on March 8, 1996 of Tokos and
Healthdyne was exchanged for one share of the Company's Common Stock. The
Company issued approximately 17,007,000 shares of Common Stock to the former
Healthdyne shareholders and approximately 17,655,000 shares to Tokos
shareholders. The Merger was accounted for using the purchase method of
accounting, and Tokos was deemed to be the acquiror since its shareholders
received approximately 51% of the newly issued shares of Matria Common Stock.
In March 1995, Healthdyne acquired a 15% ownership interest in NRMC for
$1.250 million cash, and effective June 1, 1996, the Company acquired the
remaining 85% by the issuance of 906,582 shares of the Company's Common Stock
and the assumption of NRMC common stock options which were converted into
options to purchase 60,604 shares of the
14
<PAGE> 15
Company's Common Stock with a total combined value of $7.121 million and cash
payments of $5.947 million, including transaction costs of $250,000. The
acquisition was accounted for using the purchase method of accounting.
The Company's present operations and future prospects may be influenced
by several factors, including developments in the healthcare industry,
third-party reimbursement policies and practices, and changes in regulatory
requirements or the manner in which such requirements are enforced. As a result
of the increasing cost of health care in the United States and overall efforts
to reduce or control government and corporate spending, government and
third-party payors are becoming increasingly focused on promoting cost-effective
healthcare services, and payors, in particular, have become more involved in
decisions regarding diagnosis and treatment to ensure that care is delivered in
a cost-effective manner.
Substantially all of the Company's current revenues are derived
directly from third-party payors for services rendered to patients by the
Company. The financial performance of all healthcare companies, including the
Company, could be adversely affected by the financial condition of certain
governmental and private payors and by their continuing efforts to reduce
healthcare costs by lowering reimbursement rates, increasing medical reviews of
invoices for services and negotiating for reduced contract rates. The Company
and its predecessor companies have responded to these developments by attempting
to emphasize cost-effective therapies and procedures, pre-qualifying insurance
coverage prior to the delivery of services and educating third-party payors on
the benefits of the Company's home therapies. Although reduction in the
reimbursement rates that the Company receives for services rendered could have
an adverse impact on the Company, the Company is hopeful that the overall
cost-effective nature of treatment in the home (as compared to hospitalization),
coupled with the potential benefits to be derived from prenatal care, will be
recognized and encouraged by any new healthcare initiatives.
The trend within the healthcare industry to deliver quality healthcare
services in a more cost-effective manner had an impact on the Company's
predecessors and is expected to continue to have an impact on the Company.
Driven by employers and third-party payors, as well as by legislation and
regulation, prices for services provided to patients, in general, are being
reduced, cost-effective preventative health care is being stressed and
vertically integrated networks of care providers (some of whom are accepting the
insurance risk of providing care through capitation contracts with third-party
payors) are being established. Matria anticipates that this trend will continue
and is attempting to focus its efforts on services, some of which are offered in
conjunction with third-party payors, which it believes can benefit from this new
environment. There can be no assurance, however, that either additional changes
or presently unforeseen consequences from this trend may not develop.
The following discussion of the results of operations and financial
condition of the Company, should be read in conjunction with consolidated
financial statements and related notes of the Company included in this Annual
Report on Form 10-K for the year ended December 31, 1996 as filed with the
Securities and Exchange Commission (the "Commission"). Since the financial
results prior to the Merger represent the results of Tokos only and since the
financial results of Matria for 1996 include the results of Healthdyne only
since March 1, 1996 and NRMC only since June 1, 1996 and also include certain
costs and expenses associated with the Merger, the historical results of
operations are not necessarily indicative of the results that will be achieved
by the Company during future periods.
15
<PAGE> 16
RESULTS OF OPERATIONS.
Revenues increased $45.597 million or 53.5% in 1996 and decreased
$13.356 million or 13.6% in 1995. The decline in revenues experienced by Tokos
in 1995 was primarily a result of decreases in preterm labor management patient
service days. This decline continued into 1996; however, it was offset by the
additional Healthdyne revenues included in the Company's revenues from March 1,
1996 and by the additional NRMC revenues included in the Company's revenues from
June 1, 1996.
Additional revenues were also realized in 1996 from the marketing of
the fetal fibronectin immunoassay (fFN), a new in vitro diagnostic test used as
an aid in assessing the risk of preterm delivery in women. Through a marketing
agreement entered into by Tokos in 1991, the Company has exclusive rights to
market this test in the United States, Canada and Puerto Rico (See Item 3. -
"Legal Proceedings" herein). The FDA approved this product in September 1995 and
the Company began marketing the test in 1996 as a means of predicting whether
preterm delivery was likely in women with symptoms associated with preterm
labor. In January 1997 the FDA expanded the marketing approval of fFN to also
include asymptomatic patients - women who do not have symptoms of preterm labor.
Cost of revenues as a percent of revenues for 1996 increased to 42.7%
from 41.1% and 39.8% in 1995 and 1994, respectively. The increase in 1996 is due
primarily to the inclusion of the results of operations of NRMC since June 1,
1996, whose costs of revenues as a percentage of revenues for 1996 was 67.5%.
The preterm labor management business actually experienced a reduction in cost
of revenues as a percentage of revenues in 1996 primarily achieved through
consolidation of service sites and operating efficiencies related to the Merger.
The increase in 1995 from 1994 was primarily a result of revenues declining at a
faster rate than expenses.
Selling and administrative expenses declined as a percentage of
revenues in 1996 to 50.8% from 56.9% and 56.6% in 1995 and 1994, respectively,
primarily due to synergies achieved as a result of the Merger.
Excluding the amortization of the additional goodwill and other
intangibles associated with the Merger ($32.613 million per year for three
years and $29.946 million per year for two additional years), the Company
achieved annualized cost saving on a quarterly run rate basis compared to the
historical combined costs of Tokos and Healthdyne of approximately $28.000
million in 1996, primarily as a result of reductions of patient services center
expenses in overlapping geographic locations, elimination of duplicate
facilities including corporate headquarters, and synergies in staff and
functional areas. An additional amount in excess of $4.000 million of
annualized cost savings are expected to be achieved by the end of the second
quarter of 1997. No assurance can be given, however, that unforeseen
difficulties will not be encountered in completing the integration of the
operations of Tokos and Healthdyne or that the full benefits and attendant cost
savings expected from such integration will be realized or achieved in the
expected time frame.
As a result of the Merger and the acquisition of NRMC, a large
percentage of the assets reflected on the Company's balance sheet are intangible
assets or goodwill (as opposed to tangible assets such as cash, accounts
receivable, inventory and equipment). At December 31, 1996, the Company's total
assets were $223.188 million, of which $148.099 million, or 66.4% of total
assets, were goodwill and intangibles. In addition, the amortization
16
<PAGE> 17
or any future write-down of such goodwill and intangibles by the Company could
have a material adverse effect on the results of operations of the Company.
The Company provides for estimated uncollectible accounts as revenues
are recognized. The provision for doubtful accounts as a percentage of revenues
for the preterm labor management business was approximately 6% in 1996 and 1995
and 7% in 1994. The provision is adjusted periodically based upon the Company's
quarterly evaluation of historical collection experience, recoveries of amounts
previously provided, industry reimbursement trends and other relevant factors.
Therefore, the provision rate could vary on a quarterly basis. NRMC collects
substantially all charges for patient services at the time services are
provided. Therefore, the provision for doubtful accounts for NRMC is not
significant.
During 1995, as Tokos' revenues continued to decline, specific
decisions were made and communicated by management related to cost reduction
efforts. The cost reduction plan consisted of reductions in the workforce
(comprised of personnel within information systems, reimbursement,
administrative support and to a lesser extent clinical services) and termination
of several facility leases. In connection with these cost reduction activities,
Tokos incurred $2.456 million of restructuring costs in 1995. In connection with
the Merger, the Company incurred approximately $22.525 million of restructuring
costs which were charged to operations in 1996. Of these costs, approximately
$12.000 million related to involuntary severance and relocation of employees,
$2.500 million related to the consolidation of facilities, $5.400 million
related to the write-down of software and equipment that will be obsolete as a
result of the adoption of new systems, and $2.625 million related to other
miscellaneous Merger related costs.
Tokos recorded income tax expense of $150,000 related to state
franchise taxes in 1995. No state franchise tax has been recorded in 1996.
Neither Tokos in 1995 nor the Company in 1996 recorded federal or state income
tax benefits. The net tax operating loss will be available to offset future
taxable income, if any.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1996 the Company had cash and short-term investments
of $24.640 million.
Net cash provided by operating activities was $4.833 million for 1996,
compared with $3.314 million provided in 1995 and $6.607 million provided in
1994. In 1996, net cash flow was reduced by payments of approximately $14.720
million for Merger related costs, $5.345 million for the settlement of a former
Tokos shareholders lawsuit and $5.947 million related to the purchase of NRMC.
Net cash used by investing activities was $3.588 million, $2.222 million and
$2.389 million in 1996, 1995 and 1994, respectively. The increase in 1996 is
primarily due to an increase in capital expenditures relating to the upgrade of
clinical computer systems at the Company's sites of service. It is anticipated
that the Company's capital expenditures in 1997 will not exceed those in 1996.
During 1995, Tokos purchased certain physician-owned companies for which it
originally provided services and during 1995 and the first quarter of 1996,
Healthdyne purchased the minority interest of certain affiliated partnerships.
Notes issued in connection with these acquisitions have a balance outstanding
of $1.831 million at December 31, 1996. The remaining balances are to be paid
at various times over the next four years.
17
<PAGE> 18
In July 1995, Tokos reached a $10.000 million settlement, subject to
court approval, with the plaintiffs in a class action securities lawsuit. Tokos
accrued an aggregate liability, net of insurance proceeds, of $5.750 million for
its portion of the settlement. Prior to the Merger, Tokos paid $750,000 toward
the settlement. Final court approval of the settlement was received in June 1996
and in July 1996 the Company made the final $5.000 million payment in cash,
together with accrued interest of $344,623.
The Company incurred substantial costs in connection with the Merger.
These costs include: (I) restructuring costs incurred by the Company of
approximately $22.525 million, consisting of $12.000 million relating to
severance costs and relocations of employees, $2.500 million of lease
termination costs for duplicate facilities, $5.400 million for the write-off of
computer equipment and $2.625 million for other Merger-related expenses; (ii)
additional liabilities incurred by Healthdyne as a result of the Merger of
approximately $9.350 million, consisting of $9.200 million relating to severance
costs of terminated employees and $150,000 for patient service centers
specifically identified to be closed; and (iii) transaction costs of
approximately $3.700 million, consisting of $2.275 million for investment
banking fees, $1.000 million for legal and accounting fees and $425,000 for
other costs such as document printing and mailing and filing fees. As of
December 31, 1996 the remaining liability for these estimated costs was
approximately $14.000 million.
Additionally, the Company may be required to make additional severance
payments of approximately $2.235 million in accordance with employment
agreements with certain officers of Tokos and Healthdyne, and may be required to
place in trust approximately $3.200 million under a retirement benefit awards
program for such officers.
The Company believes that its current cash balances, including those
acquired from Healthdyne and NRMC, and expected cash flows from operations and
investing activities, will be sufficient to finance its current operations and
fund any expansion of NRMC's business for the foreseeable future.
This Management's Discussion and Analysis contains forward-looking
statements including statements concerning expected increases in revenues
arising from the Merger, expected increased revenues arising from the marketing
of fetal fibronectin immunoassay, expected synergies arising from the Merger,
the effect of goodwill on the company's results of operations, capital
expenditures to be made in the future and the adequacy of the Company's sources
of cash to finance its current and future operations. These forward-looking
statements involve a number of risks and uncertainties. In addition to the
factors discussed above, among other factors that could cause actual results to
differ materially are the following: business conditions and growth in the home
healthcare industry and the general economy; competitive factors, such as the
possible entry of large diversified healthcare companies into the obstetrical
home healthcare business; new technologies and pricing pressures; changes in
third-party reimbursement policies and practices and regulatory requirements
applicable to the Company's business; the continued availability for sale of
existing products and services; management decisions to pursue new product lines
or lines of business which involve additional costs, risks or capital
expenditures; and the risk factors listed from time to time in the Company's SEC
reports, including but not limited to, its Annual Report on Form 10-K for the
year ended December 31, 1996.
18
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following Consolidated Financial Statements of the Company and its
subsidiaries and independent auditors' report thereon are included as pages F-1
through F-25 of this Annual Report on Form 10-K:
PAGE
Independent Auditors' Reports F-1
F-1A
Consolidated Balance Sheets - December 31, 1996 and 1995 F-2
Consolidated Statements of Operations - Years Ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Shareholders' Equity - Years
Ended December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows - Years Ended
December 31, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-9
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10-13.
The information contained under the heading "Management of the Company"
in the Company's definitive proxy materials for its 1997 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission, is
incorporated by reference herein. Additional information relating to the
executive officers of the Company is included as a Special Item in Part I of
this Annual Report on Form 10-K
For purposes of determining the aggregate market value of the Company's
common stock held by nonaffiliates, shares held by all directors and executive
officers of the Company have been excluded. The exclusion of such shares is not
intended to, and shall not, constitute a determination as to which persons may
be "affiliates" of the Company as defined by the Securities and Exchange
Commission.
Based on a review of Forms 3, 4, and 5 and amendments thereto, provided
to the Company in order to determine compliance with individual filing
requirements of Section (16a) of the Securities Exchange Act of 1934 (the
"Act"), the Company is not aware of any applicable person who failed to comply
with the Act during the 1996 fiscal year.
19
<PAGE> 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1)The following consolidated financial statements of the Company
and its subsidiaries and report of independent auditors thereon are included as
pages F-1 through F-25 of this Annual Report on Form 10-K:
PAGE
Independent Auditors' Reports F-1
F-1A
Consolidated Balance Sheets - December 31, 1996 and 1995 F-2
Consolidated Statements of Operations - Years Ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statements of Shareholders' Equity - Years Ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statements of Cash Flows - Years Ended
December 31, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-9
(a)(2) The following supporting financial statement schedule and report
of independent auditors thereon are included as part of this Annual Report on
Form 10-K:
Independent Auditors' Report.
Schedule II - Valuation and Qualifying Accounts.
All other Schedules are omitted because the required information is
inapplicable or information is presented in the Consolidated Financial
Statements or related notes.
(a)(3) Exhibits:
The following exhibits are incorporated by reference herein as part of
this Report as indicated:
EXHIBIT DESCRIPTION
NUMBER
2 Agreement and Plan of Merger, dated October 2, 1995, as
amended, between Healthdyne, Tokos and Registrant
(included as Appendix A to the Joint Proxy
Statement/Prospectus filed as part of the Company's
Registration Statement No. 333-00781 on Form S-4
(Registration No. 333-00781) filed February 7, 1996 (the
"Form S-4") and incorporated herein by reference).
3.1 Amended and Restated Certificate of Incorporation
(included as Appendix D to
20
<PAGE> 21
the Joint Proxy Statement/Prospectus filed as a part of
the Company's Form S-4 and incorporated herein by
reference).
3.2 Bylaws (included as Appendix E to the Joint Proxy
Statement/Prospectus filed as part of the Company's Form
S-4 and incorporated herein by reference).
4.1 Indenture dated as of December 1, 1986, between Healthdyne
and National Bank of Georgia, trustee, for 8% Convertible
Subordinated Indentures due December 31, 2001 (filed as
Exhibit (4)(b) to the Healthdyne Annual Report on Form
10-K for the year ended December 31, 1986 and incorporated
herein by reference).
10.1 Form of Rights Agreement between Registrant and
SunTrust Bank, Atlanta (filed as Exhibit 10.1 to the
Company's Form S-4 and incorporated herein by reference).
10.2 1996 Stock Incentive Plan (included as Appendix F-I to the
Joint Proxy Statement/Prospectus filed as a part of the
Company's Form S-4 and incorporated herein by reference).
10.3 1996 Directors' Non-Qualified Stock Option Plan (included
as Appendix F-II to the Joint Proxy Statement/Prospectus
filed as a part of the Company's Form S-4 and incorporated
herein by reference).
10.4 1996 Employee Stock Purchase Plan (included as Appendix
F-III to the Joint Proxy Statement/Prospectus filed as a
part of the Company's Form S-4 and incorporated herein by
reference).
10.5 Corporate Services Agreement, dated as of April 21, 1995,
between Healthdyne and Healthdyne Technologies (filed as
Exhibit 10.21 to the Technologies Form 8-K and
incorporated herein by reference).
10.6 Tax Indemnification Agreement, dated as of April 21, 1995,
between Healthdyne and Healthdyne Technologies (filed as
Exhibit 10.20 to the Technologies Form 8-K and
incorporated herein by reference).
10.7 Tax Sharing Agreement, dated as of March 31, 1993, between
Healthdyne and Healthdyne Technologies (filed as an
Exhibit to the Registration Statement on Form S-1 of
Healthdyne Technologies (Registration No. 33-60708), dated
April 6, 1993, and incorporated herein by reference).
10.8 Agreement Concerning Taxes, dated as of April 21, 1995,
between Healthdyne, Healthdyne Technologies and Health
Scan Products, Inc. (filed as an exhibit to the
Technologies Form 8-K, and incorporated herein by
reference).
10.9 OEM Design and Manufacturing Agreement, dated as of April
21, 1995, between Healthdyne and Healthdyne Technologies
(filed as Exhibit 10.22 to the Technologies Form 8-K and
incorporated herein by reference).
10.10 Distribution Agreement, dated as of October 20, 1995,
between Healthdyne and Healthdyne Information
Enterprises, Inc. ("HIE") (filed as Exhibit 2.1 to
Amendment No. 1 to the Registration Statement on
Form S-1 of HIE (Registration No. 33-96478) dated
October 24, 1995 (the "HIE Form S-1"), and incorporated
herein by reference).
10.11 Tax Indemnity Agreement, dated as of October 20, 1995,
between Healthdyne and HIE (filed as Exhibit 10.2 to
Amendment No. 1 to the HIE Form S-1 and incorporated
herein by reference).
21
<PAGE> 22
10.12 Tax Disaffiliation Agreement, dated as of October 20,
1995, between Healthdyne and HIE (filed as Exhibit 10.3 to
Amendment No. 1 to the HIE Form S-1 and incorporated
herein by reference).
10.13 Severance Compensation and Restrictive Covenant Agreement,
dated October 2, 1995, between Healthdyne and Frank D.
Powers (filed as Exhibit 10.22 to the Company's Form S-4
and incorporated herein by reference).
10.14 Form of Healthdyne Executive Non-qualified Retirement Plan
and Trust (filed as Exhibit (10) (qq) to the Healthdyne
Annual Report on Form 10-K for the year ended December 31,
1994 and incorporated herein by reference).
10.15 Amendment No. 1 to Employment Agreement, dated as of
October 2, 1995, between Tokos and Robert F. Byrnes
(filed as Exhibit 10.24 to the Company's Form S-4 and
incorporated herein by reference).
10.16 Amendment No. 1 to Employment Agreement, dated as of
October 2, 1995, between Tokos and Nicholas A.
Mione (filed as Exhibit 10.25 to the Company's Form S-4
and incorporated herein by reference).
10.17 Amendment No. 1 to Employment Agreement, dated as of
October 2, 1995, between Tokos and Terry Bayer (filed as
Exhibit 10.26 to the Company's Form S-4 and incorporated
herein by reference).
10.18 Exclusive Marketing Agreement, dated December 31, 1991,
between Tokos and Adeza Biomedical Corporation (filed as
an Exhibit to the Tokos Annual Report on Form 10-K dated
March 27, 1992 with those portions omitted for
confidentiality reasons filed separately with the
Commission and incorporated herein by reference).
10.19 Form of Tokos Executive Non-qualified Retirement Plan and
Trust (filed as Exhibit 10.29 to the Company's Form S-4
and incorporated herein by reference).
10.20 Employment Agreement, dated as of June 1, 1995, between
Tokos and Nicholas A. Mione (filed as Exhibit 10.30 to the
Company's Form S-4 and incorporated herein by reference).
10.21 Employment Agreement, dated as of May 1, 1995, between
Tokos and Robert F. Byrnes (filed as Exhibit 10.31 to the
Company's Form S-4 incorporated herein by reference).
10.22 Employment Agreement, dated as of January 1, 1995, between
Tokos and Terry P. Bayer (filed as Exhibit to the
Company's Form S-4 and incorporated herein by reference).
10.23 Amended and Restated Severance Compensation and
Restrictive Covenant Agreement, dated October 2, 1995,
between Healthdyne and Parker H. Petit (filed as Exhibit
(10)(ggg) to the Healthdyne Quarterly Report on Form 10-Q
for the period ended September 30, 1995 and incorporated
herein by reference).
10.24 Amended and Restated Severance Compensation and
Restrictive Covenant Agreement, dated October 2, 1995,
between Healthdyne and J. Brent Burkey (filed as Exhibit
(10)(ddd) to the Healthdyne Quarterly Report on Form 10-Q
for the period ended September 30, 1995 and incorporated
herein by reference).
10.25 Amended and Restated Severance Compensation and
Restrictive Covenant Agreement, dated October 2, 1995,
between Healthdyne and Donald R. Millard (filed as Exhibit
(10)(fff) to the Healthdyne Quarterly Report on Form 10-Q
for the
22
<PAGE> 23
period ended September 30, 1995 and incorporated
herein by reference).
10.26 Form of Promissory Note with Tokos officers and related
Security Agreement (filed as an Exhibit to the Tokos
Registration Statement on Form S-1 (Registration No.
33-33340) and incorporated herein by reference).
10.27 Amended and Restated Severance Compensation and
Restrictive Covenant Agreement, dated October 2, 1995,
between Healthdyne and J. Terry Dewberry (filed as Exhibit
(10)(eee) to the Healthdyne Quarterly Report on Form 10-Q
for the period ended September 30, 1995 and incorporated
herein by reference).
10.28 Amended and Restated Severance Compensation and
Restrictive Covenant Agreement dated October 2, 1995,
between Healthdyne and J. Paul Yokubinas (filed as Exhibit
(10)(hhh) to the Healthdyne Quarterly Report on Form 10-Q
for the period ended September 30, 1995 and incorporated
herein by reference).
10.29 Agreement and Plan of Merger, dated June 24, 1996, between
National Reproductive Medical Centers, Inc. ("NRMC"),
Matria, NRMC Acquisition Corporation and certain NRMC
shareholders (filed as Exhibit 2.1 to the Matria Current
Report on Form 8-K dated July 10, 1996).
10.30 Shareholders Agreement, dated February 28, 1995, among
Healthdyne, Inc. (a predecessor of Matria), certain
shareholders of National Reproductive Medical Centers,
Inc. ("NRMC") and NRMC (filed as Exhibit 99.3 to the
Matria Current Report on Form 8-K dated July 10, 1996).
The following exhibits are incorporated by reference herein from the
Company's Annual Report on Form 10-K for the year ended December 31, 1995 as
part of this Report:
3.1 Restated Certificate of Incorporation.
4.3 Supplemental Indenture dated March 7, 1996, between the
Company and SouthTrust Estate & Trust Company of Georgia,
N.A., Trustee to Indenture, dated December 1, 1986, for 8%
Convertible Subordinated Debentures due December 31, 2001.
The following exhibits are filed as part of this Report:
10.31 Amendment No. 1 dated May 8, 1996 to Exclusive Marketing
Agreement, dated December 31, 1991, between Tokos and
Adeza Biomedical Corporation.
21.0 List of Subsidiaries.
23.0 Accountants' Consents to incorporation by reference in
the Company's Registration Statements Nos. 333-781,
333-02283 and 333-11143.
27.0 Financial Data Schedule (for SEC use only)
(b.) Reports on Form 8-K.
None.
23
<PAGE> 24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
MATRIA HEALTHCARE, INC.
March 24, 1997 By: /s/ Parker H. Petit
------------------------------------------
Parker H. Petit, Chairman of the
Board and Office of the President
March 24, 1997 By: /s/ Robert F. Byrnes
------------------------------------------
Robert F. Byrnes, Office of the President
March 24, 1997 BY: /s/ Donald R. Millard
------------------------------------------
Donald R. Millard, Office of the President,
Senior Vice President-Finance, Chief
Financial Officer and Treasurer
(Principal Financial and Accounting
Officer)
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Donald R. Millard as his or her
true and lawful attorney-in-fact and agent, with full power of substitution and
resubstitution, for and in his or her name, place and stead, in any and all
capacities, to sign any and all amendments to this Annual Report on Form l0-K,
and to file the same, with all exhibits thereto, and other documents in
connection therewith with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and to perform
each and every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he or she might or would
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Parker H. Petit Director March 24, 1997
- -----------------------
Parker H. Petit
/s/ Robert F. Byrnes Director March 24, 1997
- -----------------------
Robert F. Byrnes
/s/ Craig T. Davenport Director March 24, 1997
- -----------------------
Craig T. Davenport
24
<PAGE> 25
Signature Title Date
/s/ Thomas W. Erickson Director March 24,1997
- -----------------------------
Thomas W. Erickson
/s/ David L. Goldsmith Director March 24, 1997
- -----------------------------
David L. Goldsmith
- ----------------------------- Director March 24, 1997
Carl E. Sanders
- ----------------------------- Director March 24, 1997
Jacquelyn M. Ward
/s/ Morris S. Weeden Director March 24, 1997
- -----------------------------
Morris S. Weeden
/s/ Frederick P. Zuspan, M.D. Director March 24, 1997
- -----------------------------
Frederick P. Zuspan, M.D.
25
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Matria Healthcare, Inc.:
We have audited the accompanying consolidated balance sheet of Matria
Healthcare, Inc. (formerly Tokos Medical Corporation (Delaware)) and
subsidiaries as of December 31, 1996, and the related consolidated statements
of operations, shareholders' equity, and cash flows for the year then ended.
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 audit. The accompanying financial statements
of Matria Healthcare, Inc. as of December 31, 1995, and for the two years then
ended, were audited by other auditors whose report thereon dated February 22,
1996 expressed an unqualified opinion on those statements.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the 1996 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Matria
Healthcare, Inc. and subsidiaries as of December 31, 1996, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
March 7, 1997
F-1
<PAGE> 27
REPORT OF INDEPENDENT AUDITORS
Shareholders 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 the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period then ended. 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 the consolidated
results of its operations and its cash flows for each of the two years in the
period then ended 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.
/s/ ERNST & YOUNG LLP
--------------------------------------
Orange County, California
February 22, 1996, except for Note 13,
as to which the date is March 8, 1996
F-1a
<PAGE> 28
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------
Assets 1996 1995
------ -------- ------
<S> <C> <C>
Current assets:
Cash and cash equivalents (note 9) $6,930 4,422
Short-term investments (note 9) 17,710 3,273
Trade accounts receivable, less allowances of $26,198 and
$20,296 at December 31, 1996 and 1995, respectively 29,456 17,490
Inventories 867 1,356
Prepaid expenses and other current assets 1,628 1,449
-------- ------
Total current assets 56,591 27,990
Property and equipment, net (note 3) 15,220 7,610
Excess of cost over net assets of businesses acquired,
less accumulated amortization of $29,804 and $1,967 at
December 31, 1996 and 1995, respectively (note 2) 142,126 4,556
Intangible assets, less accumulated amortization of $2,222 and
$587 at December 31, 1996 and 1995, respectively (note 2) 5,973 1,034
Other assets 3,278 3,278
-------- ------
$223,188 44,468
======== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 29
<TABLE>
<CAPTION>
December 31,
-------------------
Liabilities and Shareholders' Equity 1996 1995
------------------------------------ --------- --------
<S> <C> <C>
Current liabilities:
Current installments of long-term debt and obligations
under capital leases(notes 2, 4, 9, and 11) $ 2,521 1,914
Accounts payable, principally trade 6,486 2,560
Accrued liabilities (notes 5 and 10) 25,559 6,695
--------- --------
Total current liabilities 34,566 11,169
Long-term debt and obligations under capital leases, excluding
current installments (notes 2, 4, 9, and 11) 2,499 2,078
Accrued pension cost (note 8) 4,096 -
Other long-term liabilities 8,849 1,732
--------- --------
Total liabilities 50,010 14,979
--------- --------
Shareholders' equity (note 7):
Preferred stock, $.01 and $.001 par value at December 31,
1996 and 1995, respectively. Authorized 50,000 and
2,000 shares at December 31, 1996 and 1995, respectively;
none issued - -
Common stock, $.01 and $.001 par value at December 31,
1996 and 1995, respectively. Authorized 100,000 and
60,000 shares at December 31, 1996 and 1995, respectively;
issued 36,318 and 17,661 shares at December 31, 1996 and
1995, respectively; outstanding 36,318 and 17,549 shares at
December 31, 1996 and 1995, respectively 363 18
Additional paid-in capital 281,318 87,608
Accumulated deficit (105,089) (53,968)
Notes receivable and accrued interest from officers (3,414) (3,630)
Treasury stock, at cost - (539)
--------- --------
Total shareholders' equity 173,178 29,489
Commitments and contingencies (notes 8, 11, and 12)
--------- --------
$223,188 44,468
========= ========
</TABLE>
F-3
<PAGE> 30
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Revenues $130,806 85,209 98,565
Cost of revenues 55,911 35,017 39,216
Selling and administrative expenses 66,493 48,460 55,807
Provision for doubtful accounts 7,591 5,251 7,042
Research and development expenses 282 513 1,617
Amortization of goodwill and intangibles 30,083 1,235 350
Restructuring expenses (note 10) 22,525 2,456 -
Settlement of litigation (note 12) - 4,300 -
-------- -------- --------
Operating loss (52,079) (12,023) (5,467)
Interest income 1,177 848 461
Interest expense (353) (515) (411)
Other income, net 134 46 108
-------- -------- --------
Loss before income tax expense (51,121) (11,644) (5,309)
Income tax expense (note 6) - 150 550
-------- -------- --------
Net loss $(51,121) (11,794) (5,859)
======== ======== ========
Net loss per common share $ (1.58) (.68) (.34)
======== ======== ========
Weighted average number of common shares 32,328 17,396 17,169
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 31
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Amounts and shares in thousands)
<TABLE>
<CAPTION>
Notes
receivable
Common stock Additional and accrued Treasury stock Total
-------------- paid-in Accumulated interest from ----------------- shareholders'
Shares Amount capital deficit officers Shares Amount equity
------ ------ ---------- ----------- ------------- ------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 17,376 $ 17 86,413 (36,094) (2,306) (235) $(1,155) 46,875
Issuance of common stock -
exercise of options 31 - 95 - - - - 95
Issuance of treasury stock to
employee stock purchase plan
and other stock awards - - - (173) - 89 447 274
Treasury stock purchased - - - - - (10) (50) (50)
Acceptance of note receivable
from officer - - - - (1,012) - - (1,012)
Accrued interest on officer notes - - - - (174) - - (174)
Other equity transactions 4 - 11 - - - - 11
Net loss - - - (5,859) - - - (5,859)
------ ------ ---------- ----------- ------------ ------- -------- -------------
Balance, December 31, 1994 17,411 17 86,519 (42,126) (3,492) (156) (758) 40,160
Issuance of common stock -
exercise of options 250 1 1,089 - - - - 1,090
Issuance of treasury stock to
employee stock purchase plan
and other stock awards - - - (48) - 44 219 171
Acceptance of note receivable
from officer - - - - (80) - - (80)
Payment on note receivable
from officers - - - - 122 - - 122
Accrued interest on officer notes - - - - (180) - - (180)
Net loss - - - (11,794) - - - (11,794)
------ ------ ---------- ----------- ------------ ------- -------- -------------
Balance, December 31, 1995 17,661 $ 18 87,608 (53,968) (3,630) (112) $ (539) 29,489
====== ====== ========== =========== =========== ====== ======= =============
</TABLE>
(Continued)
F-5
<PAGE> 32
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
(Amounts and shares in thousands)
<TABLE>
<CAPTION>
Notes
receivable
Common stock Additional and accrued Treasury stock Total
-------------- paid-in Accumulated interest from ---------------- shareholders'
Shares Amount capital deficit officers Shares Amount equity
------ ------ ------- ----------- ------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 17,661 $18 87,608 (53,968) (3,630) (112) $(539) 29,489
Issuance of common stock:
Acquisition of Healthdyne, Inc. 17,007 170 182,826 - - - - 182,996
Exercise of options 824 7 4,298 - - - - 4,305
Employee Stock Purchase Plan 33 - 214 - - - - 214
Conversion of subordinated
debentures 9 - 43 - - - - 43
Acquisition of National
Reproductive Medical
Center, Inc. 899 9 7,112 - - - - 7,121
Payment on debt resulting from
acquisition of minority interest
of partnerships 40 - 335 - - - - 335
Change in par value of common stock - 159 (159) - - - - -
Purchase of treasury stock - - - - - 43 (420) (420)
Cancellation of treasury stock (155) - (959) - - 155 959 -
Payment on note receivable from
officers - - - - 350 - - 350
Accrued interest on officer notes - - - - (134) - - (134)
Net loss - - - (51,121) - - - (51,121)
------ ------ ------- ----------- ------------- ------- ------- -------------
Balance, December 31, 1996 36,318 $363 281,318 (105,089) (3,414) - $- 173,178
====== ====== ======= =========== ============= ======= ======= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 33
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(51,121) (11,794) (5,859)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 34,263 6,019 6,842
Provision for doubtful accounts 7,591 5,251 7,042
Settlement of shareholder litigation - 4,300 -
Reserve for patient service equipment, patient
monitoring devices, and investments in other
healthcare entities - 625 -
Accrued interest on officer notes (134) (180) (174)
Write-off of intangible assets 990 - -
Loss on sale of fixed assets 493 - -
Minority interest in net earnings of partnerships 151 - -
Sales (purchases) of short-term investments 15,656 235 (73)
Other - 145 8
(Increase) decrease in:
Trade accounts receivable (8,598) 795 (1,919)
Inventories 1,230 (96) (214)
Prepaid expenses and other current assets 3,582 1,022 4,584
Other assets 1,469 (615) (214)
Increase (decrease):
Accounts payable 2,388 (693) 41
Accrued and other liabilities (3,127) (1,700) (3,457)
-------- ------- -------
Net cash provided by operating activities 4,833 3,314 6,607
-------- ------- -------
Cash flows from investing activities:
Acquisition of physician-owned companies, net of
cash acquired (567) (865) (435)
Acquisition of businesses, net of cash acquired (3,414) - -
Purchases of property and equipment (3,868) (1,357) (1,954)
Proceeds from disposal of property and equipment 4,261 - -
--------- ------- ------
Net cash used in investing activities (3,588) (2,222) (2,389)
--------- ------- ------
</TABLE>
(Continued)
F-7
<PAGE> 34
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,542 - -
Principal repayments of long-term debt and obligations
under capital leases (4,501) (7,122) (3,096)
Proceeds from issuance of common stock 4,519 1,210 250
Purchase of treasury stock (420) - (50)
Treasury stock issued - 219 447
Treasury stock contributions to employee stock purchase plan - (168) (327)
Acceptance of note receivable from officers - (80) (1,012)
Proceeds from payments on notes receivable from officers 350 122 -
Distributions to minority interest in partnerships (227) - -
Other long-term debt and equity transactions - - 9
------- -------- --------
Net cash provided by (used in) financing activities 1,263 (5,819) (3,779)
------- -------- --------
Net increase (decrease) in cash and short-term
investments 2,508 (4,727) 439
Cash and cash equivalents at beginning of year 4,422 9,149 8,710
------- -------- --------
Cash and cash equivalents at end of year $ 6,930 4,422 9,149
======= ======== ========
Supplemental disclosures of cash paid for:
Interest $ 382 341 416
======= ======== ========
Income taxes $ 96 96 336
======= ======== ========
Supplemental disclosures of noncash investing and
financing activities:
Conversion of 8% convertible subordinated
debentures $ 43 - -
======= ======== ========
Common stock issued for payment on debt
resulting from acquisition of minority
interest of partnerships $ 335 - -
======= ======== ========
Equipment acquired under capital
lease obligations $ 292 604 -
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 35
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
December 31, 1996, 1995, and 1994
(1) Summary of Significant Accounting Policies
(a) Business
On March 8, 1996, Tokos Medical Corporation (Delaware) - ("Tokos") and
Healthdyne, Inc. ("Healthdyne") merged with and into Matria Healthcare,
Inc. ("Matria" or the "Company"), a Delaware corporation created solely
for the purpose of the merger. Pursuant to the terms of the Agreement
and Plan of Merger, dated October 2, 1995, as amended, each share of
Tokos and Healthdyne common stock outstanding on March 8, 1996 was
exchanged for one share of Matria common stock. Based on the
outstanding shares of the respective companies, Tokos shareholders
received approximately 51% of the combined shares of Matria common stock
(see note 2).
The Company is a nationwide provider of specialized obstetrical home
healthcare, home pregnancy monitoring, and risk assessment services
which assist physicians and payors in the management of high-risk
pregnancies and numerous other obstetrical and gynecological conditions.
The Company also provides diagnosis and treatment of fertility
disorders.
(b) Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the
consolidated financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the consolidated balance sheet and income
and expenses for the period. Actual results could differ from those
estimates.
The consolidated financial statements include the accounts of Matria
Healthcare, Inc. and all of its majority owned subsidiaries and
partnerships. All significant intercompany balances and transactions
have been eliminated in consolidation.
(c) Revenue and Allowances for Uncollectible Accounts
Revenues are generated from the Company's own patient service centers,
the rental of medical products, and fees from patient service operations
managed by the Company. Revenues are recognized as the related services
are rendered and are net of estimated contractual allowances which the
Company makes and adjusts from time to time to reflect its estimates,
based on historical collection experience, including recoveries in excess
of amounts previously estimated, of the difference between amounts billed
and amounts which it has or expects to receive in full settlement from
primary third-party payors, secondary payors, and patients. Accordingly,
the ultimate collectibility of a substantial portion of the Company's
trade accounts receivable is susceptible to changes in third-party
reimbursement policies.
(Continued)
F-9
<PAGE> 36
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
A provision for doubtful accounts is made for revenues estimated to be
uncollectible and is adjusted periodically based upon the Company's
evaluation of current industry conditions, historical collection
experience, and other relevant factors which, in the opinion of
management, deserve recognition in estimating the allowance for
uncollectible accounts.
(d) Concentration of Credit Risk
Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and equivalents,
short-term investments, and accounts receivable with third-party payors.
The Company invests its available cash in debt instruments of the
United States Government and municipal bonds. The Company has
established guidelines relative to diversification and maturities that
maintain safety and liquidity. These guidelines are periodically
reviewed and modified to take advantage of trends in yields and interest
rates. The collectibility of accounts receivable from third-party
payors is directly affected by conditions and changes in the insurance
industry and governmental programs, which are taken into account by the
Company in computing and evaluating its allowance for doubtful accounts.
(e) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and interest-bearing deposits.
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with original maturities of three months
or less to be cash equivalents.
(f) Short-Term Investments
Short-term investments consist of United States Government and municipal
bonds. Under the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities, the Company classifies its short-term investments as trading
securities which are carried at fair value with any unrealized gains and
losses included in earnings. Unrealized gains (losses) of $(131), $101,
and $(73) are included in the consolidated statements of operations for
the years ended December 31, 1996, 1995, and 1994, respectively.
(g) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
(h) Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is provided primarily on the
straight-line method over the estimated useful lives of the assets
ranging from three to ten years. Amortization of leasehold improvements
and leased equipment is recorded over the shorter of the lives of the
related assets or the lease terms.
(Continued)
F-10
<PAGE> 37
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(i) Excess of Cost Over Net Assets of Businesses Acquired
The excess of cost over net assets of businesses acquired (goodwill) is
being amortized using the straight-line method over periods ranging from
5 to 20 years. At each balance sheet date, the Company assesses the
recoverability of goodwill by determining whether the amortization of
the goodwill balance over its remaining life can be recovered through
undiscounted future operating cash flows of the acquired operation. The
amount of goodwill impairment, if any, is measured based upon projected
discounted future operating cash flows using a discount rate reflecting
the Company's average cost of funds.
(j) Intangible Assets
Intangible assets consist of purchased software and covenants not to
compete. These costs are being amortized on a straight-line basis over
a period of three years.
(k) Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock option
plans in accordance with the provisions of Accounting Principles Board
("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense to be recognized
over the related vesting period would generally be determined on the date
of grant only if the current market price of the underlying stock
exceeded the exercise price. On January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS 123"), which permits entities to
recognize as expense over the vesting period the fair value of all
stock-based awards on the date of grant. Alternatively, SFAS 123 also
allows entities to continue to apply the provisions of APB Opinion No. 25
and provide pro forma net earnings (loss) and pro forma earnings (loss)
per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value based method defined in SFAS 123 had
been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123 (see note 7).
(Continued)
F-11
<PAGE> 38
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(l) Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
The Company adopted the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, on January 1, 1996. This Statement requires that long-lived assets
and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held
and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed
the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
Adoption of this Statement did not have a material impact on the
Company's financial position, results of operations, or liquidity.
(m) 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.
(n) Net Loss Per Share of Common Stock
The net loss per common 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.
(o) Reclassifications
Certain amounts in the 1995 and 1994 consolidated financial statements
have been reclassified to conform to presentations adopted in 1996.
Included in these reclassifications are the assets and liabilities of a
subsidiary to be sold in 1997 which have been reclassified to prepaid
expenses and other current assets.
(Continued)
F-12
<PAGE> 39
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(2) Acquisitions
As discussed in note 1(a), on March 8, 1996, Tokos and Healthdyne merged
with and into Matria (the "Merger") with Tokos deemed to be the acquirer
since Tokos shareholders received the majority of Matria common stock. The
purchase price of Healthdyne was based upon the number of shares of
Healthdyne common stock (including options to purchase shares of Healthdyne
common stock) outstanding on the date the Merger was consummated and the
average trading value of Tokos common stock for two trading days
immediately prior to and two trading days immediately after the
announcement date of the Merger. 17,007,000 shares of Matria common stock
with a value of $182,996 were issued to Healthdyne shareholders. The
Merger was accounted for in accordance with the purchase method of
accounting with the results of operations of the business acquired included
from the effective date of the acquisition. The acquisition resulted in
purchased software of $5,000, executive noncompete agreements of $3,000,
and cost over net assets acquired of $149,731.
The purchased fair value of the net tangible assets of Healthdyne included
$9,150 of estimated severance payments for Healthdyne employees resulting
from the merger, and $200 of facilities costs for patient service centers
specifically identified to be closed. Accrued severance costs of $4,597
remained at December 31, 1996.
In February 1995, Healthdyne converted a $250 note receivable from National
Reproductive Medical Center, Inc. ("NRMC"), a California fertility clinic,
into 14,280 shares of NRMC's Series C convertible preferred stock and
acquired an additional 57,120 shares of NRMC's Series C convertible
preferred stock for $1,000. Assuming a conversion ratio of preferred to
common stock of 1:1, the 71,400 shares acquired constituted approximately
11.11% of the fully diluted common shares of NRMC. In June 1996, the
Company exercised an option to acquire the remaining outstanding stock of
NRMC for $5,697 in cash and 899,000 shares of Matria common stock with a
value of $7,121 on the date of acquisition. This acquisition was accounted
for using the purchase method of accounting with the results of operations
of the business acquired included from the effective date of the
acquisition. The acquisition resulted in excess of cost over net assets
acquired of approximately $15,053.
Unaudited pro forma results of operations as if Healthdyne and NRMC had
been acquired January 1, 1995 are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues $147,732 169,715
Net loss (58,011) (45,785)
Net loss per share (1.63) (1.30)
</TABLE>
The following is a summary of assets acquired, liabilities assumed, and
consideration paid in connection with these 1996 acquisitions:
<TABLE>
<CAPTION>
Healthdyne NRMC
---------- -------
<S> <C> <C>
Fair value of assets acquired, including goodwill $ 221,436 17,970
Cash paid for the assets acquired - (5,447)
Common stock issued for the assets acquired (182,997) (7,121)
Acquisition costs paid (3,700) (250)
---------- -------
Liabilities assumed $ 34,739 5,152
========== =======
</TABLE>
(Continued)
F-13
<PAGE> 40
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
The Company had previously entered into agreements with certain
physician-owned companies to provide its basic core high-risk pregnancy and
related healthcare services to the patients of the companies for a fee.
During 1996 and 1995, the Company purchased certain of these
physician-owned companies for $611 and $1,094 in cash and $179 and $1,475
in notes payable, respectively. These acquisitions were accounted for
using the purchase method of accounting with the results of operations of
the businesses acquired included from the effective date of the
acquisitions. The acquisitions resulted in excess of cost over net assets
acquired of approximately $746 and $1,679 for 1996 and 1995, respectively.
(3) Property and Equipment
Property and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
------- ------
<S> <C> <C>
Rental assets $17,493 6,849
Machinery, equipment, and fixtures 13,926 15,585
Leasehold improvements 1,794 1,116
------- ------
33,213 23,550
Less accumulated depreciation and amortization 17,993 15,940
------- ------
$15,220 7,610
======= ======
</TABLE>
(Continued)
F-14
<PAGE> 41
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(4) Long-Term Debt
<TABLE>
<S> <C> <C>
Long-term debt is summarized as follows:
December 31,
--------------
1996 1995
------ ------
Convertible subordinated debentures and note (net of
discount of $128 at December 31, 1996); 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 $1,294 -
Unsecured promissory note issued in connection with buyout
of minority partnership interest; interest at 9% payable
annually; principal payable in annual installments
through August 1997 200 -
Unsecured, noninterest-bearing obligations incurred in
connection with buyout of physician-owned companies;
payable at various dates through June 1999 1,631 2,198
Capital lease obligations; interest ranging from 3% to 20%
with various monthly payments and maturing at various
dates through October 2001 1,303 717
Note payable to equipment financing company; interest
at 10% per annum, payable in monthly installments
through July 1998 376 648
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 August 1997 216 429
------ ------
Total long-term debt 5,020 3,992
Less current installments 2,521 1,914
------ ------
Long-term debt, excluding current installments $2,499 2,078
====== ======
</TABLE>
In October 1994, the Company entered into a revolving line of credit with a
commercial lender. Under the terms of this credit facility, the Company
could borrow up to $10,000 based upon the value of eligible collateral as
defined in the credit agreement. Borrowings under this agreement bore
interest at a rate of 2% over prime, and were secured by certain of the
Company's assets, principally accounts receivable. At December 31, 1995,
there were no outstanding borrowings under this agreement. The credit
agreement was canceled in March 1996.
(Continued)
F-15
<PAGE> 42
MATRIA HEALTHCARE, 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, 1996 are as follows:
<TABLE>
<S> <C>
1997 $2,521
1998 725
1999 413
2000 49
2001 1,312
------
$5,020
======
</TABLE>
(5) Accrued Liabilities
Accrued liabilities are summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
------- ------
<S> <C> <C>
Accrued salaries, wages, and incentives $4,220 626
Accrued severance 4,597 -
Accrued litigation settlement - 5,151
Accrued restructuring costs 9,359 50
Deferred revenue 3,402 -
Other 3,981 868
------- ------
$25,559 6,695
======= ======
</TABLE>
(6) Income Taxes
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Current expense (benefit):
Federal $ - - (168)
State - 150 250
-------- -------- --------
150 82
Deferred expense - Federal - - 468
-------- -------- --------
Total income tax expense $ - 150 550
======== ======== ========
</TABLE>
(Continued)
F-16
<PAGE> 43
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
Below is a reconciliation of the expected income tax benefit (based on the
U.S. Federal statutory income tax rate of 35%) to the actual income tax
expense:
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------
1996 1995 1994
--------- -------- --------
<S> <C> <C> <C>
Computed expected income tax benefit $ (17,892) (4,076) (1,858)
Increase (decrease) resulting from:
Losses in excess of allowable carrybacks 7,529 4,022 2,003
Nontaxable municipal interest income (385) - -
Nondeductible expenses 10,748 - -
State income taxes, net of Federal benefit - 98 163
Other, net - 106 242
--------- -------- --------
$ - 150 550
========= ======== ========
</TABLE>
At December 31, 1996, 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>
General Net
Year of business operating
expiration credit loss
---------- -------- ---------
<S> <C> <C>
1997 $ 344 -
1998 283 94
1999 100 523
2000 79 990
2001 97 1,537
2002 43 3,252
2003 61 2,922
2004 151 6,198
2005 - 7,137
2006 - -
2007 - 4,475
2008 - 7,266
2009 - 15,241
2010 - 7,182
2011 - 26,202
-------- ---------
$ 1,158 83,019
======== =========
</TABLE>
(Continued)
F-17
<PAGE> 44
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
The net operating loss carryforward of $83,019 includes deductions of
approximately $15,211 related to the exercise of stock options which will
be credited to additional paid-in capital when recognized. A portion of
the net operating loss ($15,600) is limited, by the Internal Revenue Code
Section 382, to an annual utilization of $2,300. The total net operating
loss is limited to an annual utilization of approximately $17,000. The
Company also has available alternative minimum tax (AMT) credit
carryforwards of approximately $1,473 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 $69,485.
At December 31, 1996 and 1995, the Company had deferred tax assets of
approximately $52,843 and $24,802, respectively, before valuation
allowances. The valuation allowance is based on the likelihood that a
substantial portion of the deferred tax asset will not be realized. The
increase in the valuation allowance of $28,041 during 1996 was equal to the
increase in the deferred asset.
At December 31, 1996 and 1995, deferred income taxes consist of future tax
benefits attributable to:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Assets (liabilities):
Allowance for doubtful accounts $ 4,564 2,054
Accruals and reserves not deducted for tax purposes 8,629 2,812
Depreciation and amortization 7,524 5,979
Net operating loss carryforwards 29,057 12,130
Credit carryforwards 2,631 1,609
Contribution carryforward 438 218
-------- --------
Total 52,843 24,802
Less valuation allowance (52,843) (24,802)
-------- --------
Net deferred tax asset $ - -
======== ========
</TABLE>
(7) Shareholders' Equity
Capital Stock
The authorized capital stock of the Company at December 31, 1995
consisted of 60,000 shares of common stock, $.001 par value, and 2,000
shares of convertible preferred stock, $.001 par value. In conjunction
with the Merger, the authorized capital stock was increased to 100,000
shares of common stock, $.01 par value, and 50,000 shares of preferred
stock, $.01 par value.
(Continued)
F-18
<PAGE> 45
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
Stock Option Plans
Prior to the Merger, the Company maintained a stock option plan for the
benefit of key employees and directors under which options granted expire
ten years from the date of grant. In connection with the Merger, the
Company assumed options outstanding under the Healthdyne option plans.
Both the Company's options and Healthdyne's options outstanding on the
date of the merger became fully vested. All other terms and conditions
of the options remained the same as they were prior to the Merger. As of
the date of the Merger, the Company adopted two stock option plans for
the benefit of key employees and nonemployee directors. A total of 1,250
shares of the Company's common stock have been authorized for issuance
under these plans. Stock options granted under these plans are
exercisable in equal amounts over three years and expire in ten years.
The Company has elected to follow APB Opinion No. 25 and related
interpretations in accounting for its stock options. Under APB Opinion
No. 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. However, SFAS 123, requires
presentation of pro forma net earnings (loss) and earnings (loss) per
share as if the Company had accounted for its employee stock options
granted subsequent to December 31, 1994, under the fair value method of
that statement. For purposes of pro forma disclosure, the estimated fair
value of the options is amortized to expense over the vesting period.
Under the fair value method, the Company's net loss and loss per share
would have been increased as follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
<S> <C> <C>
Net loss $(52,279) (12,218)
======== =======
Loss per share $(1.62) (.70)
======== =======
</TABLE>
Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, and the options generally have a three-year vesting
period, the pro forma effect will not be fully reflected until 1998.
The weighted-average fair value of the individual options granted during
1996 and 1995 is estimated as $3.03 and $2.52, respectively, on the date
of grant. The fair values for both years were determined using a
Black-Scholes option-pricing model with the following assumptions.
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Dividend yield None None
Volatility 40% 51%
Risk-free interest rate 6.25% 6.00%
Expected life 5 Years 3 Years
</TABLE>
(Continued)
F-19
<PAGE> 46
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
A summary of stock option transactions under these plans is shown below:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- -------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
--------- ---------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 2,032,429 $ 5.97 2,152,844 $5.68 1,701,787 $6.41
Assumed from Heathdyne option 1,108,888 3.34 - - - -
plans
Granted 919,920 8.14 670,500 6.37 667,250 4.52
Exercised (823,881) 4.47 (250,273) 3.43 (39,912) 3.10
Canceled (148,855) 7.57 (540,642) 6.62 (176,281) 7.52
--------- ----- --------- -------- --------- --------
Outstanding at end of year 3,088,501 $ 6.00 2,032,429 $5.97 2,152,844 $5.68
========= ===== ========= ======== ========= ========
Exercisable at year-end 2,262,627 $ 5.18 202,913 $3.41 282,301 $3.15
========= ===== ========= ======== ========= ========
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options at December 31, 1996:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------- -----------------------
Weighted Weighted Weighted
Range of average average average
exercise Shares remaining exercise Shares exercise
price outstanding contractual life price exercisable price
- --------------- ----------- ---------------- -------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ .67 - $ 5.00 1,110,870 3.87 $ 2.98 1,083,198 $ 3.01
$ 5.00 - $10.00 1,926,134 8.05 7.41 1,128,094 6.66
$10.00 - $20.00 21,147 3.47 11.25 20,985 11.26
$20.00 - $30.00 30,350 4.72 23.22 30,350 23.22
</TABLE>
Employee Stock Purchase Plan
The Company maintains an Employee Stock Purchase Plan (the "Purchase Plan") to
encourage ownership of its common stock by employees. The Purchase Plan
provides for the purchase of up to 500 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 a maximum of
either 10% of the employee's compensation or 1,000 shares of common stock per
quarter. A participant immediately ceases to be a participant in the Purchase
Plan upon termination of his or her employment for any reason. During 1996,
1995, and 1994, respectively, 33, 34, and 56 shares of common stock were issued
under the Purchase Plan. Compensation cost related to this plan determined
under SFAS 123 had an insignificant effect on the pro forma net loss and pro
forma loss per share disclosed above.
(Continued)
F-20
<PAGE> 47
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
Shareholder Rights Plan
In connection with the merger, Matria established a Shareholders' Rights
Agreement. If a person or group acquires beneficial ownership of 15% or
more of the Company's outstanding common stock or announces a tender
offer or exchange that would result in the acquisition of a beneficial
ownership of 20% or more of the Company's outstanding common stock, the
rights detach from the common stock and are distributed to shareholders
as separate securities. Each right entitles its holder to purchase one
one-hundredth of a share (a unit) of common stock, at a purchase price of
$61 per unit. The rights, which do not have voting power, expire on
March 9, 2006 unless previously distributed and may be redeemed by the
Company in whole at a price of $.01 per right any time before and within
10 days after their distribution. If the Company is acquired in a merger
or other business combination transaction, or 50% of its assets or
earnings power are sold at any time after the rights become exercisable,
the rights entitle a holder to buy a number of common shares of the
acquiring company having a market value of twice the exercise price of
the right. If a person acquires 20% of the Company's common stock or if
a 15% or larger holder merges with the Company and the common stock is
not changed or exchanged in such merger, or engages in self-dealing
transactions with the Company, each right not owned by such holder
becomes exercisable for the number of common shares of the Company having
a market value of twice the exercise price of the right.
(8) Employee Benefit Plans
The Company maintains a 401(k) defined contribution plan for the benefit of
its employees. The Company's obligation for contributions under the 401(k)
plan is limited to the lesser of (i) one-half of each participant's
contributions but not more than 2.5% of the participant's 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, 1996,
1995, and 1994 were approximately $376, $-0-, and $-0-, respectively.
During 1996, the Company established a nonqualified defined benefit pension
plan for the benefit of a certain select group of senior management. The
benefits are based on the employee's compensation during the three calendar
years in which the individual's base salary is the highest and actual years
of service. At December 31, 1996, the plan is unfunded. Management has
not determined whether and when the plan will be funded in future periods.
(Continued)
F-21
<PAGE> 48
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
The following table sets forth the plan's funded status at December 31,
1996:
<TABLE>
<S> <C> <C>
Actuarial present value of accumulated benefit obligation,
including vested benefit of $3,586 $3,586
======
Projected benefit obligation for service rendered to date $4,057
Plan assets at fair value -
------
Projected benefit obligation in excess of plan assets 4,057
Unrecognized net gain from past experience different from
that assumed and effects of changes in assumptions 759
Prior service cost not yet recognized in net periodic pension cost (720)
------
Accrued pension cost $4,096
======
Net pension cost for 1996 included the following components:
Service cost $ 179
Interest cost on projected benefit obligation 292
Net amortization and deferral 64
------
Net periodic pension cost $ 535
======
</TABLE>
The weighted average assumed discount rate used to measure the accumulated
and projected benefit obligations was 7.5%. The weighted average rate of
compensation increase was 5.0%.
(9) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, requires that the Company disclose
estimated fair values for its financial instruments. Fair value estimates,
methods, and assumptions are set forth below for the Company's financial
instruments.
(a) Cash and Short-Term Investments
The carrying amount approximates fair value because of the short
maturity of these instruments or because they are marked to market.
(b) Long-Term Debt
The Company estimates that the carrying amount of the Company's
long-term debt approximates the fair value based on the current
rates offered to the Company for debt of the same remaining
maturities.
(Continued)
F-22
<PAGE> 49
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(10) Restructuring
During 1996, in connection with the Merger, the Company incurred
restructuring charges of $22,525 related to severance costs for 278
involuntarily terminated employees in the executive, sales, clinical
service, and administrative support functions. Also, lease terminations
and other facilities-related exit costs arising from closing duplicate
patient service centers and consolidation of two corporate headquarters
were incurred. In addition, computer and patient service equipment was
determined to be incompatible with nursing station software to be used by
Matria and computer hardware and software was determined to be obsolete by
adoption of new systems.
A summary of the components of the 1996 restructuring charges follows:
<TABLE>
<S> <C>
Employee severance $10,750
Relocation 1,250
Duplicate/excess facility costs 2,500
Write-off of excess/obsolete equipment 5,400
Other 2,625
-------
$22,525
=======
The following restructuring costs were included
in accrued liabilities at December 31, 1996:
Employee severance $7,405
Duplicate/excess facility costs 924
Other 1,030
-------
$9,359
=======
</TABLE>
During 1995, the Company incurred restructuring costs of $2,456 related to
cost reduction efforts as the Company's revenues continued to decline. The
cost reduction plan consisted of reductions in the Company's workforce of
approximately 105 employees in the information systems, reimbursement,
administrative, and clinical service functions, and termination of several
facilities. At December 31, 1995, all amounts had been expended.
A summary of the components of the 1995 restructuring charges follows:
<TABLE>
<S> <C>
Employee severance $1,834
Facility closing 332
Other 290
------
$2,456
======
</TABLE>
(Continued)
F-23
<PAGE> 50
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
(11) Commitments
The Company is committed under noncancelable operating lease agreements for
facilities and equipment. Future minimum operating lease payments and the
present value of the future minimum capital lease payments as of December
31, 1996 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Years ending December 31, leases leases
- ------------------------- --------- -------
<S> <C> <C>
1997 $7,577 672
1998 6,442 427
1999 5,519 339
2000 3,454 54
2001 2,869 19
2002 and thereafter 4,418 -
------ ------
30,279 1,511
======
Less interest 208
----
Present value of future minimum
capital lease payments $1,303
======
</TABLE>
Amortization of leased assets is included in depreciation expense.
Rental expense for cancelable and noncancelable leases was approximately
$3,259, $3,637, and $3,293 for the years ended December 31, 1996, 1995, and
1994, respectively.
(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.
On March 7, 1997, Adeza Biomedical Corporation ("Adeza"), a Delaware
corporation, that, in conjunction with the Company, developed an immunoassay
test utilizing fetal fibronectin ("fFN") to predict the likelihood of the
onset of preterm delivery, initiated litigation against the Company in the
Superior Court of Santa Clara County, California seeking to terminate the
Exclusive Marketing Agreement, dated as of December 31, 1991, as amended,
between Adeza and the Company (the "Marketing Agreement"). The suit
alleges, among other things, that the Company breached the Marketing
Agreement by failing to utilize its best efforts to market fFN
notwithstanding the fact that the Company sales to date substantially exceed
the minimum level of sales required thereunder. The Marketing Agreement
grants the Company the exclusive right to market fFN in the United States of
America, Canada, and Puerto Rico and, in addition, gives the Company an
absolute license to the fFN technology in order for the Company to
manufacture the fFN product in the event of a default by Adeza. The Company
intends to deny the allegations in the Complaint, to defend the matter
vigorously, and to assert all remedies available to it.
(Continued)
F-24
<PAGE> 51
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Amounts in thousands, except share and per share amounts)
In July 1995, the Company reached a $10,000 settlement with the plaintiffs
in a class action securities suit. The Company's cost of settlement, after
adjustment for insurance proceeds directly deposited in an escrow account
pursuant to the settlement, was $5,750. The Company paid $750 in 1995 and
the remaining $5,000 in 1996. The charge to income in 1995 of $4,300 was in
addition to the aggregate amount of $1,450 which had been previously accrued
in selling and administrative expenses.
A complaint was filed on February 1, 1995 by The Lindner Fund, Inc. in the
Eastern District of Missouri against Healthdyne and its former subsidiary
HNS alleging that The Lindner Fund would not have sold its investment in HNS
on February 8, 1994 had Healthdyne and HNS disclosed the potential sale of
HNS. Damages have been requested in the amount of $1,051, representing the
aggregate difference between the price received upon the sale of such stock
by The Lindner Fund and the $7.85 per share price paid by W. R. Grace & Co.
on April 6, 1994 for HNS. Healthdyne denied the allegations set forth in
the complaint and Matria is currently defending the matter vigorously.
(13) Quarterly Financial Information - Unaudited
Presented below is a summary of the unaudited consolidated quarterly
financial information for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
Quarter
------------------------------------
Fourth Third Second First
-------- ------- ------- --------
<S> <C> <C> <C> <C>
1996:
Revenues $36,205 35,799 34,716 24,086
Net loss from operations (14,120) (7,344) (8,566) (21,091)
Net loss per common share (.39) (.20) (.25) (.96)
1995:
Revenues $19,787 20,545 21,525 23,352
Net loss from operations (2,127) (995) (6,251) (2,421)
Net loss per common share (.12) (.06) (.36) (.14)
</TABLE>
F-25
<PAGE> 52
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Matria Healthcare, Inc.
Under date of March 7, 1997, we reported on the consolidated balance sheet of
Matria Healthcare, Inc. and subsidiaries as of December 31, 1996 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for the year ended December 31, 1996, as contained in the annual report
on Form 10-K for the year 1996. In connection with our audit of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule as listed in the accompanying index.
This financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion on this financial
statement schedule based on our audit.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
March 7, 1997
<PAGE> 1
EXHIBIT 10.31
May 8, 1996
Mr. Daniel O. Wilds
President and Chief Executive Officer
Adeza Biomedical Corporation
1240 Elko Drive
Sunnyvale, CA 94089
Re: Exclusive Marketing Agreement, dated December 31, 1991, between Adeza
Biomedical Corporation and Tokos Medical Corporation (the "Agreement")
Dear Dan:
This letter agreement (this "Letter") sets forth the additional
understanding and agreements that have been reached between Adeza Biomedical
Corporation, a California corporation ("Adeza"), and Matria Healthcare, Inc.
("Matria"), a Delaware corporation and the successor by merger to Tokos Medical
Corporation ("Tokos") concerning the Agreement. This Letter shall serve as an
amendment to the Agreement pursuant to Section 13.10 of the Agreement. If there
is any conflict between the provisions of this Letter and the Agreement, the
terms of this Letter shall control. Capitalized terms used herein which are not
otherwise defined in this Letter shall have the meaning ascribed to them in the
Agreement.
1. Marketing Plans. Matria agrees to refine and expand the marketing
plan provided to Adeza in August and September, 1995 (the "Marketing Plan")
to cover a five (5) year period of time extending through December 31, 2000
and to include forecasts for Canada and Puerto Rico in addition to the
United States on the express condition and agreement that (i) the Marketing
Plan is acceptable to Adeza for the time periods and locations currently
set forth therein and is hereby approved pursuant to Section 2.2 of the
Agreement, (ii) nothing contained in the Marketing Plan itself shall be
deemed to extend or otherwise limit in any way the rights and obligations
of the parties under Articles IV and VI of the Agreement, and (iii) the
Marketing Plan will be revised as promptly as practicable to reflect the
introduction of the Tests into Canada and Puerto Rico after the market for
the Tests and the retail price thereof and reimbursement therefor have been
generally established in the United States, and such market will be deemed
established upon the cumulative sale by Matria of 100,000 Tests in the
United States; provided, however, that such revision shall be completed no
later than 90 days after such market has been established.
2. Clinical Trials. Matria agrees to work with Adeza to establish a
"Research Committee" composed of two representatives of each of Adeza and
Matria for the purpose of establishing the general framework, protocols and
timeliness of any additional clinical study deemed necessary under Section
5.3 of the Agreement. The Research Committee will meet no less often than
once per calendar quarter, either by telephone conference call or in
person, with any in person meetings to be convened at alternating sites
between Matria and Adeza. The Research Committee will also determine any
additional clinical studies which may be reasonably appropriate with
respect to the Tests and the timing of such additional studies.
Notwithstanding the foregoing, subject to agreement between Adeza and
Matria with respect to appropriate protocols and process for obtaining IRB
approval at various clinical sites, the following clinical trials are the
only clinical trials considered by the parties to be necessary within the
meaning of Section 5.3 of the Agreement, and such clinical trials shall be
undertaken and completed as expeditiously as practicable, unless otherwise
mutually agreed by the parties in writing:
(i) One (1) National Institute of Health ("NIH") Intervention Study
seeking to demonstrate the association between fFN test results and
infection and involving an estimated 10,000 patients shall be supported
by Adeza with Test kits, specimen collection kits and laboratory
analysis work in such amounts as Adeza normally provides or pays for in
connection with supporting an NIH clinical study.
<PAGE> 2
(ii) One (1) Induction Trial of a size and scope which, if
successful, is designed to demonstrate the potential clinical benefits
of inducing labor after a positive Test result has been obtained, and is
designed to be sufficient for submission with a PMA Application or PMA
Supplement to the FDA.
(iii) One (1) Intervention Study seeking to demonstrate the
clinical benefits of utilizing subcutaneous terbutaline following a
positive Test result.
(iv) All such clinical studies as shall be required for (a) the
maintenance of the existing FDA approval to market the ELISA Test to
symptomatic patients, (b) obtaining the initial FDA approval of the
Dipstick Assay (as defined below) for any purpose, and (c) obtaining FDA
approval to market the ELISA Test to low-risk asymptomatic patients.
As provided in Section 5.3 of the Agreement, completion of the
clinical studies (except to the extent that they involve the efforts of the
NIH) described in subsections (i) through (iv) of this Section 2 shall be
the responsibility of and shall be paid for by Adeza; provided, however,
that the amounts Adeza will be required to spend on such studies either
individually or in the aggregate will be limited as the Research Committee
may agree. Any additional clinical studies approved by the Research
Committee shall be undertaken by Adeza, and all expenses related to such
additional studies shall be shared by Adeza and Matria in such proportion
as unanimously determined by the Research Committee. In the event the
Research Committee is unable to reach unanimous consent as to the
appropriate allocation of such expenses, the parties hereby agree to enter
into limited, binding mediation solely with respect to such allocation.
Each of Adeza and Matria will appoint one (1) representative, and these
representatives will jointly select one (1) additional, independent
representative. The appropriate allocation of expenses shall be determined
by these three representatives within thirty (30) days after the selection
of the independent third representative. Any amounts which Adeza is
required to expend as a result of the foregoing or Section 5.3 of the
Agreement may be paid from any source, whether or not such amounts are
derived from Marketing Rights Payments or Product Purchase Payments.
3. Rapid Assay Test. The parties acknowledge and agree that the
so-called Rapid Assay Test or Dipstick Assay (both such terms representing
one and the same Test which is described below and which is hereinafter
referred to as the "Dipstick Assay") currently under development by Adeza
is a Fetal Fibronectin Membrane Immunoassay Test and, as such, is a type of
Membrane Test encompassed by and subject to the terms of the Agreement, as
amended hereby, to its fullest extent; provided, however, that the Dipstick
Assay shall not be considered to be a Membrane Test for purposes of
Sections 6.1.2 and 6.1.3 of the Agreement. The parties agree Sections 6.1.2
and 6.1.3 of the Agreement refer to the ELISA Test and not the Dipstick
Assay and that no additional marketing payments shall be due pursuant to
Sections 6.1.1, 6.1.2 and 6.1.3 of the Agreement.
Adeza and Matria agree that the Dipstick Assay is not a subsequent
generation PTD diagnostic product within the meaning of Section 7.1 of the
Agreement. The existing paragraph 2 of Exhibit A to the Agreement is hereby
deleted and replaced in its entirety with the following:
"Dipstick Assay". The Fetal Fibronectin Dipstick Immunoassay is a
solid-phase immunochromatographic colloidal gold assay for the qualitative
detection of fetal fibronectin in vaginal secretions. A vaginal specimen,
obtained from either the posterior fornix of the vagina or the external
cervical os using a sterile Dacron swab provided in the kit, is immersed in
a special buffer prior to performance of the assay. The assay is initiated
by immersing the dipstick into the buffer containing the patient specimen.
The buffer is absorbed by an absorbent pad containing affinity-purified
goat-antihuman fibronectin polyclonal antibody coupled to colloidal gold
located at the base of the dipstick. Any fetal fibronectin present in the
specimen binds to the polyclonal antibody present in the pad forming a
fibronectin-gold conjugate complex. The buffer, containing any complexes of
fibronectin and gold conjugate, migrates via capillary action across the
reaction zone of the dipstick which is coated with the monoclonal antibody
specifically recognizing a region unique to fetal fibronectin. When fetal
fibronectin is present in the patient specimen, the resulting antigen-
antibody "sandwich" present in the reaction zone produces a visible
pinkish-red line across the device signifying a "positive" test result.
When there is no fetal fibronectin in the patient specimen, no line appears
in the center of the device signifying a "negative" test result. A visible
line at the top of the reaction zone of
2
<PAGE> 3
the dipstick develops as the assay is run and serves as an assay procedural
control, regardless of the presence or absence of fetal fibronectin in the
patient specimen."
4. ELISA Kit Prices. In order to clarify Section 6.2.2 of the
Agreement insofar as it relates to an ELISA Kit as opposed to an ELISA
Test, the parties agree that an ELISA Kit shall be comprised of one
microtitre plate, one control kit and the equivalent of twenty-four (24)
single sample specimen collection kits. The existing Section 6.2.2 of the
Agreement is hereby amended to add the following:
"6.2.2.3 With respect to each ELISA Kit purchased by Matria;
6.2.2.3.1 In the years ending December 31, 1996 and 1997, an amount
equal to one-third ( 1/3) of Matria's Average Net Selling Price;
provided, however, that in no event will Adeza receive less than $600
per ELISA Kit from Matria; and
6.2.2.3.2 In year ending December 31, 1998 and beyond, an amount
equal to one-third ( 1/3) of its Average Net Selling Price; provided,
however, that in no event will Adeza receive less than $300 per ELISA
Kit from Matria."
5. Individual Specimen Collection Kits ("SCKs"). SCKs shall be
packaged by Adeza for one patient sample and delivered to Matria in
packages of not less than six (6) SCKs per package, or such other number of
SCKs as may be reasonably requested by Matria with no less than sixty (60)
days prior written notice to Adeza; provided, however, Adeza, at its
election, may utilize all of its then existing inventories of its then-
existing packages before accommodating the new requested number of SCKs per
package. Adeza shall not be required to make more than one (1) package
change each year and Adeza shall not be required to maintain more than one
(1) type of packaging at any time. Adeza shall provide Matria, at Adeza's
expense, with the following quantities of SCKs during the following
periods:
(i) May 1, 1996 to December 31, 1996 -- Three (3) individual SCKs
for each ELISA Test reportable result sold to Matria or 75,000 SCKs,
whichever is greater;
(ii) January 1, 1997 to December 31, 1997 -- Three (3) individual
SCKs for each ELISA Test sold to Matria or 250,000 SCKs, whichever is
greater;
(iii) January 1, 1998 to December 31, 1998 -- Two and one-half
(2.5) individual SCKs for each ELISA Test sold to Matria or 400,000
SCKs, whichever is greater;
(iii) January 1, 1999 to December 31, 1999 -- Two (2) individual
SCKs for each ELISA Test sold to Matria or 700,000 SCKs, whichever is
greater;
(iv) January 1, 2000 to December 31, 2000 -- One and one half (1.5)
individual SCKs for each ELISA Test sold to Matria or 1.2 million SCKs,
whichever is greater; and
(v) January 1, 2001 and December 31, 1002 -- One and one-tenth
(1.1) individual SCKs for each ELISA Test sold to Matria.
Matria agrees to pay Adeza fifty cents ($.50) for each SCK ordered by
Matria during each period set forth above in excess of the applicable
quantity for such period within thirty (30) days of the close of each such
period.
On or before November 30, 2001, the parties agree to meet to determine
the number of SCKs deemed reasonably necessary and appropriate to be
provided by Adeza on an ongoing basis in order to fulfill Matria's
reasonable requirements for SCKs under the Agreement and the price of the
SCKs. The parties agree that their goal is to reduce the number of SCKs
Adeza is required to provide to Matria without interrupting the business of
either Matria or Adeza; provided, however, that in no event shall the
number of SCKs provided at Adeza's expense be less than one (1) times the
number of ELISA Tests sold to Matria without the prior written approval of
Matria.
For the purposes of the Agreement and the Letter, the term SCK shall
not include any specimen collection kits included as part of an ELISA Kit.
3
<PAGE> 4
6. Freight Expense. As part of this Letter and in an effort to
expedite the commercial introduction of the Tests, Matria hereby agrees to
reimburse Adeza, by no later than 15 days after the date of written
confirmation by Matria of Adeza's accounting of such expenses, and Matria
agrees to issue such confirmation as soon as practicable after receipt of
such accounting, but in no event shall such confirmation occur later than
April 30 of any particular year unless Matria reasonably and in good faith
raises specific written objections to such Adeza accounting for all freight
charges associated with the transportation of a Test from any clinician,
hospital or health care facility to Adeza for laboratory analysis ("Freight
Expense"); provided, however, that such reimbursement shall be only to the
extent and in the amount, if any, by which the average transportation cost
per Test of all such charges during the year specified below (calculated by
dividing (x) the applicable Freight Expense by (y) the number of Tests
which are received by Adeza, whether or not analysis is completed, during
such period) exceeds the following amounts (the "Threshold Freight Price"):
Year 1 (commencing on May 1, 1996 and ending on the last day of
December, 1997)..........................................$13.50
Year 2 (commencing on January 1, 1998 and ending on the last
day of December, 1998)...................................$12.00
Years 3-5 (commencing on January 1, 1999 and ending on the last
day of December, 2000)...................................$10.00
In no event shall any Freight Expense or Test be included in (x) or
(y) above if the laboratory analysis is demonstrated by Matria to not be
completed with regard to a particular Test as a result of the action of
Adeza.
In each succeeding twelve (12) month period thereafter beginning on
January 1, 2001, the Threshold Freight Price in effect for the next
succeeding twelve (12) month period shall be adjusted up or down from the
Threshold Freight Price in effect for the immediately preceding twelve (12)
month period by an amount equal to the annual percentage increase or
decrease in the Consumer Price Index for all Urban Wage Earners as
published by the Bureau of Labor Statistics for the preceding calendar year
over the calendar year prior thereto.
Adeza shall determine from time to time the method or methods of
appropriate overnight delivery from the designated type or types of
carriers. Adeza shall provide Matria, included as part of the cost of the
Test, with shipping containers suitable for delivery of the Test from
clinicians, hospitals or health care facilities to Adeza for laboratory
analysis in conformity with the specifications for such Test.
No later than ninety (90) days after the end of any particular twelve
(12) month period specified above, Adeza shall provide Matria with a
detailed accounting of the average transportation expense per Test during
the prior twelve (12) month period. Upon seven (7) days prior written
notice to Adeza, Matria shall have the opportunity during reasonable
business hours to inspect the books and records of Adeza for the purpose of
confirming the calculation in question, if Matria so desires.
Both parties shall utilize reasonable business efforts to reduce the
amount of freight expenses per Test consistent with their respective duties
and obligations to the referring clinician and the need for prompt
overnight delivery. Adeza and Matria agree that during 1997, they will
discuss in good faith various actions by either or both of them which are
designed to lower freight expenses per Test between them, including sharing
in appropriate proportions any savings resulting from such lower freight
expenses.
It is agreed by Matria and Adeza that any items delivered to Matria
pursuant to this Letter and the Agreement, including, without limitation,
ELISA Test Kits, SCKs and shipping containers, shall be F.O.B. Adeza's
headquarters in Sunnyvale, California and Matria will bear all expense and
risk of delivery from the F.O.B. point.
4
<PAGE> 5
7. Clarification of Rights and Responsibilities. It is also agreed
between Adeza and Matria that certain provisions in the Agreement should be
amended as set forth below in order to clearly state the parties' intent:
(a) Section 2.2 Delete the phrase "So long as Tokos' Marketing
rights remain exclusive . . . ." from the beginning of the third
sentence because such phrase creates ambiguity as to what the parties'
respective rights are if such exclusivity terminates.
(b) Section 6.2.10 Add the following to the end of the first
sentence: " ;provided, however, this provision shall not apply if the
Affiliate is the end user of the Tests." Add the following to the end of
this Section: "The calculation of 50% set forth in the preceding
sentence will be based on sales of the ELISA Tests or the Rapid Assay
Tests during any particular calendar year. In the event that less than
50% of such Tests are sold by Matria in a bundled product offering, the
price for stand-alone sales of such Tests shall be used to determine the
price for the applicable portion of such bundled products."
(c) Section 7.1 The parties agree to discuss in good faith
appropriate modifications to this provision to clarify the procedures
thereunder as possible after the date of the Letter.
(d) Section 9.5 Add the following to the end of this Section: "The
foregoing is intended to specify certain of the remedies available to
the parties, but it is not intended to be exclusive and shall not
prejudice or otherwise effect the rights of either party with respect to
any remedies available to either of them at law or in equity."
(e) Sections 12.1 and 12.2 In order to clarify the procedures in
the event of indemnification, add the following:
"12.3 Procedures. If either party (the "Indemnified Party") receives
a written claim which it believes is the subject of indemnity by the other
party (the "Indemnifying Party"), the Indemnified Party will give the
Indemnifying Party prompt notice of such claim and the Indemnifying Party
will have the right to assume the defense of such claim with legal counsel
of its choice at its expense. The Indemnified Party may participate through
its own legal counsel at its own expense. The party not defending the claim
will render all reasonable assistance, and all out-of-pocket costs of such
assistance will be paid by the Indemnifying Party. The consent of both
parties shall be required to settle any claim, and such consent shall not
be unreasonably withheld."
8. Release. Upon execution of this Letter and in consideration of the
mutual covenants and agreements set forth herein, Matria, and its
predecessors and successors and assigns, including, without limitation,
Tokos, hereby fully and forever releases and discharges Adeza and its
officers, directors, agents, employees, affiliates, representatives,
successors, stockholders and assigns from and against any and all claims or
causes of action, whether based on contract, tort or otherwise, arising out
of or relating in any way to any delay incurred to date associated with the
approval by Adeza of the Marketing Plan. Matria and Adeza agree and
understand that this Letter is a full complete waiver of all claims with
respect to such delay, and Matria further agrees not to assist, encourage,
institute or cause to be instituted the filing of any suit or action in any
jurisdiction or the taking of any action relating to any claim described
above.
9. Acknowledgment. It is acknowledged and agreed by Adeza and Matria
that the Agreement and this Letter constitute a grant of exclusive
marketing rights to sell and distribute Tests, all as provided for in this
Letter and the Agreement, but do not constitute any license or sublicense
to intellectual property of Adeza, including, without limitation, any and
all intellectual property covered by the Agreement between Adeza and the
Fred Hutchinson Cancer Research Center dated May 10, 1988, as amended
August 1, 1989 and August 12, 1992 ("Hutchinson Agreement") and United
States Patent No. 4,894,326, except as otherwise provided in Article IV
relating to manufacturing rights.
10. Governing Law. This Letter shall be governed in all respects by
the laws of the State of Georgia.
5
<PAGE> 6
If this Letter accurately sets forth your understanding of the agreements
and understandings that have been reached between Adeza and Matria, as written
and as amended hereby, please execute two (2) copies of this Letter in the space
provided below and return one copy to me.
Very truly yours,
/s/ ROBERT F. BYRNES
--------------------------------------
Robert F. Byrnes
President and Chief Executive Officer
Accepted and agreed to
as of this 8th day of
May, 1996
ADEZA BIOMEDICAL CORPORATION
By: /s/ DANIEL O. WILDS
----------------------------------
Daniel O. Wilds
President and Chief Executive
Officer
6
<PAGE> 1
EXHIBIT 21
MATRIA HEALTHCARE, INC. SUBSIDIARIES
March 24, 1997
Jurisdiction of
Name Incorporation
*Carelink Corporation Delaware
Clinical-Management Systems, Inc. Georgia
*Creative Medical Concepts, Inc. Georgia
*East Med Services, Inc. Georgia
*EMS Supplies Incorporated Georgia
*Healthdyne Financial Services, Inc. Georgia
*Healthdyne Home Care Services, Inc. Georgia
*Healthdyne Home Care Services, Inc. Georgia
*Healthdyne Integrated Alternatives, Inc. Georgia
*Healthdyne Nursery Products, Inc. Delaware
*Healthdyne Maternity Management of Texas, Inc. Texas
High-Tech Nursing, Inc. Georgia
Maternal Fetal Diagnostic Services, Inc. Georgia
Matria Healthcare of Illinois, Inc. Georgia
Matria of New York, Inc. New York
*Monitored Care, Inc. Delaware
National Medical Reproductive Centers, Inc. California
Pacific Fertility Centers of California, Inc. California
Pacific Fertility Parenting Centers, Inc. California
*Perinatal Care Alternatives, Inc. Georgia
*Perinatal Services Nederland B.V. Nederlands
*Shared Care, Inc. Georgia
Specialized Clinical Services, Inc. California
Specialized Clinical Services, Inc. Delaware
*Tokos Acquisition Corporation Delaware
*Tokos Clinical Services Corporation (Portland) Delaware
*Tokos Clinical Services Corporation (New York) New York
*Tokos Clinical Services Corporation Delaware
*Tokos Medical Management Corporation Delaware
*Women's Homecare, Inc. Delaware
*Inactive
Note: The above subsidiaries (except for Perinatal Services Nederland B.V. in
which Matria owns a 51% interest and Omni Medical in which Matria owns an 80%
interest) are directly 100% owned by Matria Healthcare, Inc.
<PAGE> 1
EXHIBIT 23.0
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 333-781, 333-02283, and 333-11143) of Matria Healthcare, Inc.
(formerly Tokos Medical Corporation (Delaware)) and in the related Prospectus of
our report dated February 22, 1996, except for Note 13 as to which the date is
March 8, 1996, with respect to the consolidated financial statements and
schedules of Matria Healthcare, Inc. as of December 31, 1995 and for each of the
two years in the period then ended included in this Annual Report (Form 10-K)
for the year ended December 31, 1996.
/s/ Ernst & Young LLP
Orange County, California
March 27, 1997
<PAGE> 2
EXHIBIT 23.0
ACCOUNTANTS' CONSENT
The Board of Directors
Matria Healthcare, Inc.
We consent to incorporation by reference in the registration statements (Nos.
333-781, 333-02283, 333-11143) on Form S-8 of Matria Healthcare, Inc. of our
reports dated March 7, 1997, relating to the consolidated balance sheet of
Matria Healthcare, Inc. and subsidiaries as of December 31, 1996, and the
related consolidated statements of operations, shareholders' equity, and cash
flows and related schedule for the year ended December 31, 1996, which reports
appear in the December 31, 1996 annual report on Form 10-K of Matria
Healthcare, Inc.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
March 28, 1997
<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, 1996, 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-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 6,930
<SECURITIES> 17,710
<RECEIVABLES> 55,654
<ALLOWANCES> (26,198)
<INVENTORY> 867
<CURRENT-ASSETS> 56,591
<PP&E> 33,213
<DEPRECIATION> 17,993
<TOTAL-ASSETS> 223,188
<CURRENT-LIABILITIES> 34,566
<BONDS> 2,499
0
0
<COMMON> 363
<OTHER-SE> 172,815
<TOTAL-LIABILITY-AND-EQUITY> 223,188
<SALES> 0
<TOTAL-REVENUES> 130,806
<CGS> 0
<TOTAL-COSTS> 55,911
<OTHER-EXPENSES> 119,383
<LOSS-PROVISION> 7,591
<INTEREST-EXPENSE> (353)
<INCOME-PRETAX> (51,121)
<INCOME-TAX> 0
<INCOME-CONTINUING> (51,121)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,121)
<EPS-PRIMARY> (1.58)
<EPS-DILUTED> (1.58)
</TABLE>
