SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
X Quarterly Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 1999
Or
_ Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from ______ to ______
Commission File Number 0-20619
Matria Healthcare, Inc.
(Exact name of registrant as specified in its charter)
Delaware 58-2205984
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1850 Parkway Place, 12th Floor, Marietta, Georgia 30067
(Address of principal executive offices) (Zip Code)
(770) 767-4500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
The number of shares outstanding of the issuer's only class of Common Stock,
$.01 par value, together with associated Common Stock purchase rights, as of
July 31, 1999 was 36,674,934.
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
Matria Healthcare, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents...................... $ 10,242 9,109
Short-term investments ........................ -- 2,859
Trade accounts receivable, less allowances of
$18,945 and $21,235 at June 30, 1999 and
December 31, 1998, respectively................ 47,094 37,311
Inventories ................................... 9,256 1,699
Prepaid expenses and other current assets ..... 3,075 4,556
-------- -------
Total current assets........................ 69,667 55,534
Property and equipment, less accumulated depreciation of
$33,056 and $30,238 at June 30,1999 and
December 31, 1998, respectively ............... 19,356 16,865
Intangible assets, less accumulated amortization of
$5,931 and $612 at June 30, 1999 and
December 31, 1998, respectively ............... 139,791 16,261
Deferred tax asset .................................. 20,000 --
Cash surrender value of life insurance .............. 6,788 4,425
Other assets ........................................ 2,727 3,949
-------- --------
$258,329 97,034
======== ========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
Matria Healthcare, Inc. and Subsidiaries
Consolidated Condensed Balance Sheets
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Current liabilities:
Current installments of long-term debt
and obligations under capital leases $14,267 718
Accounts payable, principally trade 22,841 8,939
Accrued liabilities 15,488 9,536
------- ------
Total current liabilities 52,596 19,193
Long-term debt and obligations under capital
leases, excluding current installments 97,952 18,385
Other long-term liabilities 8,525 9,575
--------- ---------
Total liabilities 159,073 47,153
Preferred stock, $.01 par value. Authorized 50,000,000 shares:
Series A convertible, redeemable; issued 10,000 shares at
June 30, 1999; none at December 31, 1998;
redemption value $10,000 10,000 --
Series B redeemable; issued 35,000 shares at
June 30, 1999; none at December 31, 1998;
redemption value $35,000 30,782 --
Common shareholders' equity:
Common stock, $.01 par value. Authorized 100,000,000 shares:
issued and outstanding 36,606,880 and 36,409,544 shares
at June 30, 1999 and December 31,1998, respectively 366 364
Additional paid-in capital 285,188 280,585
Accumulated other comprehensive loss (272) --
Accumulated deficit (223,273) (227,533)
Notes receivable and accrued interest from shareholder (3,535) (3,535)
--------- ---------
Total shareholders' equity 58,474 49,881
--------- ---------
$258,329 97,034
========= =========
</TABLE>
See accompanying notes to consolidated condensed financial statements
<PAGE>
Matria Healthcare, Inc. and Subsidiaries
Consolidated Condensed Statements of Operations
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
1999 1998 1999 1998
-------------------- -------------------
<S> <C> <C> <C> <C>
Revenues ........................................................................ $ 62,302 33,473 121,661 66,291
Cost of sales ................................................................... 30,462 12,799 61,738 26,124
Selling and administrative expenses ............................................. 21,101 15,112 41,662 29,820
Provision for doubtful accounts ................................................. 2,034 1,714 3,940 3,204
Amortization of intangible assets ............................................... 2,601 9,147 5,200 18,294
-------- -------- -------- --------
Operating earnings (loss) ............................................. 6,104 (5,299) 9,121 (11,151)
Interest expense, net ........................................................... (2,070) (24) (3,573) (6)
Other income, net ............................................................... 4 28 161 214
-------- -------- -------- --------
Earnings (loss) before income taxes ................................... 4,038 (5,295) 5,709 (10,943)
Income taxes .................................................................... -- -- -- --
-------- -------- -------- --------
Net earnings (loss) .................................................. 4,038 (5,295) 5,709 (10,943)
Accretion of Series B redeemable preferred stock ................................ (110) -- (197) --
Preferred stock dividend requirements ........................................... (800) -- (1,449) --
-------- -------- -------- --------
Net earnings (loss) available to common shareholders ...............$ 3,128 (5,295) 4,063 (10,943)
======== ======== ======== ========
Earnings (loss) per common share:
Basic ................................................................. $ 0.09 (0.14) 0.11 (0.30)
======== ======== ======== ========
Diluted ............................................................... $ 0.08 (0.14) 0.11 (0.30)
======== ======== ======== ========
Weighted average shares outstanding:
Basic ................................................................. 36,540 36,652 36,490 36,739
======== ======== ======== ========
Diluted ............................................................... 40,383 36,652 37,558 36,739
======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
<PAGE>
Matria Healthcare, Inc. and Subsidiaries
Consolidated Condensed Statements of Cash Flows
<TABLE>
<CAPTION>
(Amounts in thousands)
(Unaudited)
Six Months Ended June 30,
---------------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings (loss) $ 5,709 (10,943)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,347 20,675
Provision for doubtful accounts 3,940 3,204
Changes in assets and liabilities, net of effect of acquisitions:
Accounts receivable (5,396) (5,074)
Inventories, prepaids and other current assets 1,711 (2,620)
Intangible and other noncurrent assets (2,328) (529)
Accounts payable and accrued liabilities (7,627) (8,125)
Accrued pension cost 180 (3,037)
Other current liabilities 76 (2,551)
====== =======
Net cash provided by (used in) operating activities 4,612 (9,000)
------ -------
Cash Flows from Investing Activities:
Purchases of property and equipment (3,786) (1,273)
Sales of short-term investments 2,859 7,935
Purchases of short-term investments - (1,858)
Acquisition of businesses, net of cash acquired (93,019) -
------- -------
Net cash provided by (used in) investing activities (93,946) 4,804
-------- -------
Cash Flows from Financing Activities:
Borrowings under credit agreement 108,000 2,000
Proceeds from issuance of debt 711 781
Principal repayments of debt and capital lease obligations (17,669) (763)
Proceeds from issuance of common stock 346 349
Preferred stock dividend payments (649) -
Purchase of treasury stock - (1,866)
Other, net - (60)
------- --------
Net cash provided by financing activities 90,739 441
-------- --------
Effect of exchange rate changes on cash and cash equivalents (272) -
-------- --------
Net increase (decrease) in cash and cash equivalents 1,133 (3,755)
Cash and cash equivalents at beginning of period 9,109 9,086
--------- --------
Cash and cash equivalents at end of period $10,242 5,331
========= ========
</TABLE>
See accompanying notes to consolidated condensed financial statements
<PAGE>
Notes to Consolidated Condensed
Financial Statements
(Amounts in thousands, except share and per share amounts)
(Unaudited)
1. General
The consolidated condensed financial statements as of June 30, 1999 and
for the three and six months ended June 30, 1999 and 1998 are
unaudited. In the opinion of management, all adjustments, consisting of
normal recurring accruals, necessary for fair presentation of the
consolidated financial position and results of operations for the
periods presented have been included. Certain reclassifications of
prior period information have been made to conform to the current year
presentation. The results for the three and six month periods ended
June 30, 1999 are not necessarily indicative of the results for the
full year ending December 31, 1999.
The consolidated condensed financial statements should be read in
conjunction with the consolidated financial statements and related
notes included in the Annual Report on Form 10-K of Matria Healthcare,
Inc. ("Matria" or the "Company") for the year ended December 31, 1998.
2. Net Earnings (Loss) Per Share of Common Stock
Basic earnings (loss) per common share available to common shareholders
are based on the weighted average number of common shares outstanding.
Diluted earnings (loss) per common share are based on the weighted
average number of common shares outstanding and dilutive potential
common shares, such as dilutive stock options and warrants, determined
using the treasury stock method, and dilutive convertible preferred
shares, determined using the if-converted method.
3. Acquisitions
Effective January 1, 1999, the Company completed the acquisition of
substantially all of the assets of Gainor Medical Management, L.L.C.
("Gainor Medical"), for a purchase price of approximately $130,000. The
acquisition was accounted for under the purchase method of accounting
and resulted in purchased patient lists of $3,300, executive
non-compete agreements of $500 and goodwill of $114,030. The
acquisition agreement also provides for additional contingent purchase
price of up to $35,000 based on the 1999 financial performance of the
Gainor Medical businesses. The assets acquired included the outstanding
capital stock of and membership interests and other equity interests in
the subsidiaries of Gainor Medical. Results of its operations have been
included in the Company's consolidated results of operations effective
January 1, 1999. If earned, the contingent purchase price is payable by
the issuance of subordinated notes in the year 2000, and would be
recorded as additional goodwill when earned.
<PAGE>
At the closing of the transaction, the Company paid $83,758 of the
purchase price in cash to the seller, assumed approximately $1,242 in
debt and issued $45,000 in redeemable preferred stock and warrants of
the Company. The transaction also included a cash adjustment payable by
the Company of $6,573, one-half of which was paid at the closing and
the remaining one-half of which was paid during the second quarter of
1999.
As of the acquisition date of the Gainor Medical business, the Company
had a net operating loss carryforward of approximately $86,000. In
connection with this acquisition, the Company recognized a $20,000
deferred tax asset and a corresponding decrease in goodwill for the
estimated tax benefits of the net operating loss carryforward to be
realized in the future as a result of the acquisition.
The cash portion of the purchase price was financed partially through a
$125,000 five-year bank credit facility, which the Company entered into
in January 1999 (See Note 4).
In January 1998, the Company converted a $250 note receivable from
Diabetes Management Services, Inc. ("DMS") and paid $500 cash to
acquire a 10% equity interest in DMS. During 1998, the Company made
advances to fund working capital of DMS totaling $1,335. In January
1999, the Company converted the notes receivable for these advances and
paid cash of $6,500 to acquire the remaining equity interests of DMS.
The acquisition was accounted for using the purchase method of
accounting and resulted in goodwill of $10,765. Results of DMS's
operations have been included in the Company's consolidated results of
operations effective January 1, 1999.
Summarized below are the unaudited pro forma results of operations of
the Company for the six months ended June 30, 1998 as if the
acquisitions described above and the Company's acquisition in July 1998
of Quality Diagnostic Services, Inc. ("QDS") had been effective January
1, 1998. The results of operations of the 1998 and 1999 acquisitions
have been included in the consolidated condensed statements of
operations of the Company as of January 1, 1999 and therefore no pro
forma results are presented for the six months ended June 30, 1999.
Six Months Ended
June 30, 1998
---------------------------
<TABLE>
<CAPTION>
<S> <C>
Revenues $108,604
Net loss available to common shareholders (16,384)
Net loss per common share (0.45)
</TABLE>
<PAGE>
4. Long Term Debt
In January 1999, in connection with the acquisitions of the Gainor
Medical business and DMS, the Company replaced its prior credit
facility with a $125,000 five-year bank credit facility. The new
facility consists of an $80,000 term loan facility, payable $6,000 in
1999, $12,000 in 2000, $14,000 in 2001, $16,000 in 2002, $20,000 in
2003 and $12,000 in 2004 and a $45,000 revolving credit facility. The
facility, which is collateralized by accounts receivable, inventories
and certain assets of the Company, provides, at the Company's option,
interest at the prime rate plus .375% to 1.75% or the LIBOR rate plus
1.5% to 2.5%. The facility requires a commitment fee payable quarterly,
in arrears, of .375% to .500%, based upon the unused portion. As of
June 30, 1999, the total outstanding amount under this facility was
$108,000 and the interest rate was 7.50%. Under this agreement, the
Company is required to maintain certain financial ratios. The agreement
places certain limitations on cash dividends. At June 30, 1999, the
Company was in compliance with these requirements.
5. Preferred Stock
In connection with the purchase of the Gainor Medical business, the
Company designated 16,500 shares and issued 10,000 shares of 4% Series
A convertible redeemable preferred stock ("Series A CRPS"), and
designated 60,000 shares and issued 35,000 shares of 8% Series B
redeemable preferred stock ("Series B RPS") with attached warrants to
purchase 4,000,000 shares of the Company's common stock at $3.00 per
share.
The Series A CRPS is convertible at any time into 2,222,222 shares of
common stock. At its option, the Company may redeem the Series A CRPS,
at any time beginning two years after the acquisition date, after the
30 day moving average of the closing price of the Company's stock has
exceeded $5.40 per share, at a redemption price of $1,222 per share.
The Series A CRPS has a mandatory redemption feature, which requires
the Company to redeem one third of the shares issued on each of the
eighth, ninth and tenth anniversary dates of the original issuance date
at the redemption price of $1,000 per share. Redemption may occur at
the holder's request, in the event there is a change of control of the
Company, as defined in the applicable shareholder agreement. Dividends
are payable quarterly, in arrears, in cash or additional shares of
Series A CRPS, or a combination thereof, at the option of the Company.
The Series A CRPS has been recorded at the mandatory redemption value.
At its option, the Company may redeem the Series B RPS in whole or in
part at any time at the redemption price of $1,000 per share. The
Series B RPS has a mandatory redemption feature which requires the
Company to redeem one third of the shares issued on each of the eighth,
ninth and tenth anniversary dates of the original issuance date, at the
redemption price of $1,000 per share. At issuance date, the Company
allocated $4,415 of the $35,000 total redemption value of Series B RPS
to the fair value of the warrants issued, using a Black-Scholes option
pricing model. This amount was recorded as a credit to additional
paid-in capital and is being accreted over the term of the Series B
RPS.
<PAGE>
In the event of liquidation, holders of Series A CRPS and Series B RPS
are entitled to receive, from the assets available for distribution to
the shareholders, an amount in cash or property at fair market value,
equal to $1,000 per share plus unpaid dividends. The Company is
restricted from paying dividends on the Company's common stock until
all unpaid dividends on the Series A CRPS and Series B RPS are paid.
6. Business Segment Information
The Company's reportable business segments are the strategic business
units that offer different products and services. They are managed
separately, and the Company evaluates performance based on operating
earnings of the respective business unit.
As a result of the acquisitions in the last half of 1998 and the first
quarter of 1999, the Company's operations have been classified into
three reportable business segments, Women's Health, Diabetes Supplies
and Services and Cardiovascular. The Women's Health segment offers
services designed to assist physicians and payors in the cost effective
management of maternity patients including: specialized home nursing;
risk assessment; patient education and management; home uterine
contraction monitoring; infusion therapy; gestational diabetes
management; and other monitoring and clinical services as prescribed by
the patient's physician. The Diabetes Supplies and Services segment has
two components: diabetes disease management services and microsampling
products, which are products used to obtain and test small samples of
bodily fluids. The Cardiovascular segment provides cardiac event
monitoring, holter monitoring and pacemaker follow-up services. The
Other segments include three business segments that are below the
quantitative threshold for disclosure: respiratory disease management;
infertility practice management services; and clinical record software
and services.
The accounting policies of the segments are the same as those for the
consolidated entity. There are no intersegment sales, and operating
earnings (loss) by business segment excludes interest income, interest
expense, and corporate expenses.
<PAGE>
Summarized financial information as of and for the six month periods ended
June 30, 1999 and 1998 by business segment follows:
<TABLE>
<CAPTION>
Revenues Operating earnings (loss)
------------------------------ --------------------------------
1999 1998 1999 1998
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Women's Health $ 55,294 59,291 6,981 (6,956)
Diabetes Supplies and Services 52,632 - 4,514 -
Cardiovascular 7,600 - 1,493 -
Other Segments 6,135 7,000 (1,656) (2,293)
-------- ------- ------- -------
Total segments 121,661 66,291 11,332 (9,249)
General corporate - - (2,211) (1,902)
Interest income (expense), net - - (3,573) (6)
Other income (expenses), net - 161 214
------- ------- ------- ------
Consolidated revenues and earnings
(loss) before income taxes $ 121,661 66,291 5,709 (10,943)
========== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
Identifiable assets
------------------------------
June 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
Women's Health $ 39,416 57,011
Diabetes Supplies and Services 148,746 39
Cardiovascular 16,768 14,383
Other Segments 4,562 6,543
General Corporate 48,837 19,058
-------- ------
Consolidated Assets $ 258,329 97,034
========= ======
</TABLE>
The Company's revenues from outside the United States were approximately
16% of total revenues. No single customer accounted for 10% of
consolidated net revenue in either period.
<PAGE>
7. Recent Accounting Pronouncements
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS No. 133"). SFAS No. 133, which is effective for
2000, requires all derivatives to be recorded on the balance sheet at
fair value and establishes accounting treatment for certain hedge
transactions. The Company is analyzing the implementation requirements
and currently does not anticipate there will be a material impact on
the results of operations or financial position after adoption of SFAS
No. 133.
8. Comprehensive Income
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and
presentation of comprehensive income and its components in a full set
of financial statements. For the Company, comprehensive income consists
of net earnings (loss) and foreign currency translation adjustments.
The statement requires only additional disclosures in the financial
statements, it does not affect the Company's financial position or
results of operations. Comprehensive income (loss) for the three and
six month periods ended June 30, 1999 was $3,944, and $5,437,
respectively, and for the corresponding periods in 1998 was ($5,295)
and ($10,943), respectively.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
General
During 1998 and early 1999, the Company announced several strategic actions to
expand its business focus beyond managing the condition of pregnancy into other
disease management markets. These actions included: (i) the acquisition in July
1998 of Quality Diagnostic Services, Inc. ("QDS"), a cardiac event monitoring
company; (ii) the completion of a licensing agreement in October 1998 with
National Jewish Medical and Research Center ("National Jewish") to provide
services in the respiratory disease management market; and (iii) the acquisition
in January 1999 of the business and assets of Gainor Medical Management, L.L.C.
("Gainor Medical") and Diabetes Management Services, Inc. ("DMS"), diabetes
disease management companies. Disease management is an emerging healthcare
sector receiving a heightened focus in the healthcare industry, and the
competition in this sector is fragmented without a dominant leader. The
Company's management believes that with the successful implementation of its
expansion strategies, the Company will become the dominant market leader in
disease management and that these strategies will result in significant revenue
growth in 1999 and beyond.
In connection with these acquisitions, the Company acquired intangible assets
that are being amortized over various useful lives from 5-15 years. The
amortization periods are based on, among other things, the nature of the
products and markets, the competitive position of the acquired companies and the
adaptability to changing market conditions of the acquired companies.
<PAGE>
The following discussion of the results of operations and financial condition of
the Company should be read in conjunction with the consolidated financial
statements and related notes in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 and the Company's Report on Form 8-K/A filed on
April 5, 1999 with the Securities and Exchange Commission. As a result of the
1998 and 1999 strategic actions and acquisitions, the historical results of
operations are not necessarily indicative of the results that will be achieved
by the Company during future periods.
Results of Operations
Revenues increased $28.829 million or 86.1% and $55.370 or 83.5% in the three
and six month periods ended June 30, 1999 as compared to the same periods in
1998 primarily due to the acquisitions of the Gainor Medical business and DMS,
the businesses that are included in the Diabetes Supplies and Services segment,
and QDS, the business that is included in the Cardiovascular segment. Revenues
for the Diabetes Supplies and Services and Cardiovascular segments were $26.699
million and $3.910 million, respectively, in the second quarter of 1999, and
$52.632 million and $7.600 million for the six month period of 1999. These
increases during the second quarter were partly offset by a decrease in revenues
in the Women's Health segment of 4.2% and 6.7% in the three and six month
periods, respectively, resulting from the termination of marketing rights of the
fetal fibronectin immunoassay test effective August 31, 1998 as well as a
decline in prescriptions for preterm labor management services.
Cost of revenues as a percentage of revenues increased to 48.9% and 50.7% for
the three month and six month periods ended June 30, 1999 from 38.2% and 39.4%
for the same periods in 1998. This increase resulted primarily from the
acquisition of the the Gainor Medical business where cost of revenues
was 64.9% and 67.1% for the three and six months.
Selling and administrative expenses as a percentage of revenues decreased to
33.9% and 34.3% for the three and six month periods ended June 30, 1999 from
45.1% and 45.0% for the same periods in 1998 due to economies of scale achieved
as a result of the Company's acquisitions of the Gainor Medical business, QDS,
and DMS.
The Company provides for estimated uncollectible accounts as revenues are
recognized. The provision for doubtful accounts as a percentage of revenues in
the Women's Health and Cardiovascular segments was 5.5% and 5.0% for the three
and six month periods ended June 30, 1999 and 1998, respectively. The provision
for doubtful accounts as a percentage of revenues in the Diabetes Management
segment was approximately 1% in the three and six month periods of 1999. 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.
<PAGE>
Amortization of intangible assets decreased in the three and six month periods
ended June 30, 1999 as compared to the same periods in 1998 due to the writeoffs
of intangible assets taken in the third and fourth quarters of 1998. The impact
of the decrease resulting from these writeoffs was partially offset by the
additional amortization of the intangible assets recorded as part of the
acquisitions described above.
Interest expense increased in the three and six month periods ended June
30, 1999 as compared to the same periods in 1998 due to a significant increase
in borrowings related to business acquisitions.
The Company did not record a federal or state income tax provision in the
three or six month periods ended June 30, 1999 or 1998 due to the Company's
operating loss carryforwards.
Liquidity and Capital Resources
As of June 30, 1999 the Company had cash and short-term investments of $10.242
million. Net cash provided by operations increased to $4.612 million for the six
month period ended June 30, 1999, compared to cash used in operating activities
of $9.000 million for the same period of 1998. Contributing to this cash flow
improvement was a 100% improvement in operating earnings, excluding amortization
of intangibles, from $7.143 million to $14.321 million. Additionally, during
1998, cash flow from operating activities was reduced by payments of $4.183
million relating to severance costs of terminated employees, $2.587 million for
performance incentives paid under the Company's management incentive plan,
$2.069 million for funding of a split dollar life insurance arrangement for
certain officers, and $1.328 million for lump-sum payouts related to the
termination of a nonqualified defined benefit pension plan.
The Company's accounts receivable days sales outstanding were 68 days as of June
30, 1999 as compared to 96 days as of December 31, 1998. The reduction is due to
lower days sales outstanding of the Gainor Medical business accounts receivable
as well as a reduction of accounts receivable days outstanding in the Women's
Health segment from 111 days at December 31, 1998 to 91 days at June 30, 1999.
Only 30% of the the Gainor Medical business' sales are reimbursed by third party
and U.S. Government healthcare payors with the remaining sales being to original
equipment manufacturers, corporate employers and international healthcare
providers. As the sales to third party and U.S. Government healthcare providers
increase, the Company believes that the days sales outstanding will increase.
The Asset Purchase Agreement for the acquisition of QDS provides for
additional cash payments of up to $6.000 million contingent upon 1999 revenues
of the Company's cardiac monitoring business.
<PAGE>
The acquisition agreement for the Gainor Medical business provides for
additional contingent purchase price of up to $35.000 million based upon 1999
financial performance of the Gainor Medical business. If earned, the Gainor
Medical business contingent purchase price is payable by the issuance of
subordinated notes to the sellers in the year 2000. Capital expenditures of
$3.786 million in the first six months of 1999 relate primarily to the purchases
of patient equipment to support revenue growth in the Cardiovascular segment and
for the upgrade and expansion of computer information systems in all segments of
the Company. The Company expects to expend approximately $10.500 million for
capital items in 1999.
The Company believes that its current cash balances, expected cash flows from
operations and investing activities and amounts available under the existing
credit facility will be sufficient to finance its current operations.
Year 2000 Issue
The Year 2000 issue refers generally to the data structure and processing
problem that may prevent systems from properly processing date-sensitive
information when the year changes to 2000. The Year 2000 issue affects
information technology ("IT") systems, such as computer programs and various
types of electronic equipment that process date information by using only two
digits rather than four digits to define the applicable year, and thus may
recognize a date using "00" as the year 1900 rather than the year 2000. The
issue also affects some non-IT systems, such as devices which rely on a
microcontroller to process date information. The Year 2000 issue could disrupt a
company's operations by generating erroneous data or causing system failures or
miscalculations.
The Company is involved in an extensive, ongoing program to identify and
correct problems arising from the Year 2000 issues. The program is broken down
into the following categories: (1) application systems; (2) hardware; (3)
monitoring equipment; and (4) computer applications of its significant suppliers
and significant payors.
The Company has evaluated the application systems in two parts: (1) AS400
applications and (2) client server applications. The AS400 applications are
believed to be capable of functioning properly beyond the year 1999 at this
time. Although the Company originally had intended to replace its client server
applications in 1999, because that project will not be complete by year end
1999, the Company is remediating the existing client server application systems,
a process that the Company estimates will be completed by the end of the third
quarter of 1999.
<PAGE>
Remediation and testing of the AS400 hardware are complete, and the
remediation and testing of the individual personal computers are approximately
90% complete. The Company expects the remainder of conversion and testing to be
complete in October 1999.
In the first quarter of 1999, the Company completed its review of embedded
computer chips and software applications, which control certain monitoring and
other equipment. Remediation efforts are expected to be minor and should be
completed in the third quarter of 1999.
In 1998, the Company spent $60,000 for software and consulting fees
associated with the initial Year 2000 evaluation. Budgeted expenditures in 1999
total $100,000. The Company is primarily addressing all Year 2000 issues with
current staffing levels.
In the first quarter of 1999, the Company sent inquiries to its significant
suppliers and payors concerning the Year 2000 compliance of their significant
computer applications. The Company sent second requests during the second
quarter of 1999. The responses received to date do not disclose any significant
issues with respect to non-compliance. The Company will continue to evaluate
Year 2000 risks with respect to such suppliers and payors as responses are
received. In that connection, it should be noted that substantially all of the
Company's revenues are derived from reimbursement by third-party payors, and
that the Company is dependent upon such payors' evaluation of their Year 2000
compliance status to assess such risks. If such payors are incorrect in their
evaluation of their own Year 2000 compliance status, this could result in delays
or errors in reimbursement to the Company, the effects of which could be
material to the Company.
In light of its compliance efforts and based on information currently
available, the Company believes that its risk associated with problems arising
from Year 2000 issues is not significant. However, because of the many
uncertainties associated with Year 2000 compliance issues, and because the
Company's assessment is necessarily based on information from third-party payors
and suppliers, there can be no assurance that the Company's assessment is
correct or as to the materiality or effect of any failure of such assessment to
be correct. The Company will continue with its assessment process as described
above and, to the extent that changes in such assessment require it, will
attempt to develop alternatives or modifications to its compliance plan
described above. There can, however, be no assurance that such compliance plan,
as it may be changed, augmented or modified from time to time, will be
successful. There can be no assurance that the Year 2000 problem will not have a
material adverse effect on the Company's business, financial condition and
results of operations.
The SEC's recent guidance for Year 2000 disclosure calls for companies to
describe their most likely worst case Year 2000 scenarios. Notwithstanding the
aforementioned issues, the Company does not expect significant problems at the
turn of the century with internal conversions and remediation. However, the most
likely worst case scenario is that if third-party payors are not able to
reimburse the Company after the turn of the century, the Company would be
required to sustain operations through existing cash balances or through the use
of available borrowings under its credit facilities. Also, the Company would be
required to add additional staff during the time period leading up to and
immediately following January 1, 2000, in order to address any unexpected Year
2000 issues.
<PAGE>
Forward-Looking Information
This Form 10-Q contains forward-looking statements and information that
are based on the Company's beliefs and assumptions, as well as
information currently available to the Company. From time to time, the
Company and its officers, directors or employees may make other oral or
written statements (including statements in press releases or other
announcements) that contain forward-looking statements and information.
Without limiting the generality of the foregoing, the words "believe,"
"anticipate," "estimate," "expect," "intend," "plan," "seek" and
similar expressions, when used in this report and in such other
statements, are intended to identify forward-looking statements. All
forward-looking statements and information in this Form 10-Q are
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are intended to be covered by the
safe harbors created thereby. Such forward-looking statements are not
guarantees of future performance and are subject to risks,
uncertainties and other factors that may cause the actual results,
performance or achievements of the Company to differ materially from
historical results or from any results expressed or implied by such
forward-looking statements. Such factors include, without limitation,
(i) changes in reimbursement rates, policies or payment practices by
third party payors, whether initiated by the payor or legislatively
maintained; (ii) the loss of major customers; (iii) termination of the
Company's exclusive supply agreement with Nissho Corporation or failure
to continue the agreement on the terms currently in effect; (iv)
impairment of the Company's rights in intellectual property; (v)
increased or more effective competition; (vi) new technologies that
render obsolete or non-competitive products and services offered by the
Company; (vii) changes in regulations applicable to the Company or
failure to comply with existing regulations; (viii) future health care
or budget legislation or other health reform initiatives; (ix)
increased exposure to professional negligence liability; (x)
difficulties in successfully integrating recently acquired businesses
into the Company's operations and uncertainties related to the future
performance of such businesses; (xi) losses due to foreign currency
exchange rate fluctuations or deterioration of economic conditions in
foreign markets; (xii) costs associated with Year 2000 related systems
failures; (xiii) the amount of sales to third parties and U.S.
Government healthcare providers, and (xiv) the risk factors discussed
from time to time in the Company's SEC reports, including but not
limited to, its Annual Report on Form 10-K for the year ended December
31, 1998. Many of such factors are beyond the Company's ability to
control or predict, and readers are cautioned not to put undue reliance
on such forward-looking statements. The Company disclaims any
obligation to update or review any forward-looking statements contained
in this report or in any statement referencing the risk factors and
other cautionary statements set forth in this Report, whether as a
result of new information, future events or otherwise, except as may be
required by the Company's disclosure obligations in filings it makes
with the SEC under Federal Securities laws.
<PAGE>
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk from changes in interest rates and
foreign exchange rates.
The Company's primary interest rate risk relates to its variable rate bank
credit facility. At June 30, 1999, the Company's total variable rate long-term
debt obligation was $108.000 million. A hypothetical 10% increase on the
Company's variable interest rate debt for a duration of one year would result in
additional interest expense of $810,000.
Based upon overall currency rate exposure at June 30, 1999, a near-term 10%
appreciation or depreciation of the U.S. dollar would have an insignificant
effect on the Company's financial position, results of operations and cash flow
over the next fiscal year.
<PAGE>
PART II
OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The directors of the Company are divided into three classes. The class
comprised of Mark J. Gainor, Jackie M. Ward and Frederick P. Zuspan, M.D. will
continue to serve until the 2000 annual meeting of stockholders and until their
successors are elected and qualified. The class comprised of Parker H. Petit,
Frank D. Powers and Morris S. Weeden will continue to serve until the 2001
annual meeting and until their successors are elected and qualified.
At the annual meeting of stockholders of the Company held on July 23,
1999, the following directors were elected, each of whom will serve until the
2002 annual meeting of stockholders and until his successor is elected and
qualified:
Nominee Affirmative Votes Withheld Votes
Donald R. Millard 31,998,565 196,082
Rod F. Dammeyer 32,001,165 193,482
Carl E. Sanders 31,663,340 531,307
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
11 Statement Regarding Computation of Earnings (Loss) Per Share
27 Financial Data Schedule (for SEC purposes only)
(b) Reports on Form 8-K.
The Company has not filed any Current Report on Form 8-K for the
quarter ended June 30, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Matria Healthcare, Inc.
August 10, 1999 By: /s/ Donald R. Millard
----------------------------------------
Donald R. Millard
Director, President, Chief Executive
Officer and Chief Financial Officer
(Principal Executive and Financial
Officer)
By:/s/ Yvonne V. Scoggins
----------------------------------------
Yvonne V. Scoggins
Vice President, Chief Accounting
Officer and Treasurer
EXHIBIT 11
Matria Healthcare, Inc. and Subsidiaries
Computation of Earnings (Loss) per Share
(Amounts in thousands, except per share amounts)
(Unaudited)
<TABLE>
Three Months Ended June 30, Six Months Ended June 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Basic
Net earnings (loss) .............................................. $ 4,038 $ (5,295) $ 5,709 $(10,943)
Accretion on preferred stock ..................................... (110) - (197) -
Preferred stock dividend requirements ............................ (800) - (1,449) -
------ ------- -------- -------
Net earnings (loss) available to common shareholders ............. $ 3,128 $ (5,295) $ 4,063 $(10,943)
======= ======== ======= =======
Shares:
Weighted average number of common shares outstanding ........ 36,540 36,652 36,490 36,739
======= ======= ====== =======
Net earnings (loss) per common share ............................. $ 0.09 $ (0.14) $ 0.11 $ (0.30)
======= ======= ======= =======
Diluted
Net earnings (loss) available to common shareholders ............. $ 3,128 (5,295) 4,063 (10,943)
Interest on convertible preferred shares 101 - - -
------- ------- ------ -------
Net earnings (loss) for diluted calculation ...................... $ 3,229 (5,295) 4,063 (10,943)
======= ====== ====== =======
Shares:
Weighted average number of common shares outstanding ........ 36,540 36,652 36,490 36,739
Shares issuable from assumed exercise of options and warrants 1,621 - 1,068 -
Convertible preferred stock 2,222 - - -
------ ------ ----- ------
40,383 36,652 37,558 36,739
====== ====== ====== ======
Net earnings (loss) per common share ............................. $ 0.08 (0.14) 0.11 (0.30)
======= ====== ====== ======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
Quarterly Report on Form 10-Q for the period ended June 30, 1999
</LEGEND>
<CIK> 0001007228
<NAME> Matria Healthcare, Inc.
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 6-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Jun-30-1999
<EXCHANGE-RATE> 1
<CASH> 10,242
<SECURITIES> 0
<RECEIVABLES> 66,039
<ALLOWANCES> (18,945)
<INVENTORY> 9,256
<CURRENT-ASSETS> 69,667
<PP&E> 52,412
<DEPRECIATION> (33,056)
<TOTAL-ASSETS> 258,329
<CURRENT-LIABILITIES> 52,596
<BONDS> 0
40,782
0
<COMMON> 366
<OTHER-SE> 58,108
<TOTAL-LIABILITY-AND-EQUITY> 258,329
<SALES> 0
<TOTAL-REVENUES> 121,661
<CGS> 0
<TOTAL-COSTS> 61,738
<OTHER-EXPENSES> 46,701
<LOSS-PROVISION> 3,940
<INTEREST-EXPENSE> 3,573
<INCOME-PRETAX> 5,709
<INCOME-TAX> 0
<INCOME-CONTINUING> 5,709
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,709
<EPS-BASIC> .11
<EPS-DILUTED> .11
</TABLE>
