SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
(Mark
One)
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[ X
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the fiscal
year ended December 31, 2007
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Or
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[ ]
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 for the
transition period
from to
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Commission
File No. 0-20619
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MATRIA
HEALTHCARE, INC.
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(Exact name of registrant as specified
in its charter)
| Delaware | 20-2091331 |
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(State or
other jurisdiction of
incorporation or organization)
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(IRS Employer Identification No.) |
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1850
Parkway Place
Marietta, Georgia
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30067 |
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(Address of
principal executive offices)
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(Zip Code) |
| (770) 767-4500 |
| Registrant's telephone number, including area code |
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Securities registered pursuant to Section 12(b) of the
Act:
Common
Stock, par value $0.01 per share
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Name of
each exchange on which registered:
Nasdaq
Global Select Market
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(Title of
each class)
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Securities registered pursuant to
Section 12(g) of the Act: None (Title
of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Yes
No
X
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Yes
No
X
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. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large
accelerated filer
____ Accelerated
filer X
Non-accelerated
filer ____ (Do not check if a smaller reporting
company) Smaller
reporting company _____
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes No X
As of
June 30, 2007, the aggregate market value of common stock held by nonaffiliates
was approximately $636,381,255, based upon the closing sale price for such date
as reported on the Nasdaq Global Select Market. As of
February 20,
2008, there were 21,452,348 shares of our common stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive Proxy Statement for the 2008 Annual Meeting of
Shareholders are incorporated by reference into Part
III.
MATRIA
HEALTHCARE, INC.
2007
FORM 10-K ANNUAL REPORT
TABLE
OF CONTENTS
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PART
I
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Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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8
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Item
1B.
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Unresolved
Staff Comments
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14
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Item
2.
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Properties
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14
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Item
3.
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Legal
Proceedings
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14
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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14
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Special
Item
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Executive
Officers of the Company
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15
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PART
II
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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17
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Item
6.
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Selected
Financial Data
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18
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition Results of
Operations
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19
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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32
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Item
8.
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Financial
Statements and Supplementary Data
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33
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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33
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Item
9A.
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Controls
and Procedures
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33
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Item
9B.
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Other
Information
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34
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PART
III
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Item
10.
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Directors,
Executive Officers of the Registrant and Corporate
Governance
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35
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Item
11.
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Executive
Compensation
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35
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management Related Stockholder
Matters
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35
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Item
13.
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Certain
Relationships and Related Transactions and Director
Independence
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36
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Item
14.
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Principal
Accountant Fees and Services
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36
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PART
IV
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Item
15.
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Exhibits
and Financial Statement Schedules
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37
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SIGNATURES
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43
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2
PART
I
Item
1. Business
General. Matria
Healthcare, Inc. (“Matria” or the “Company”) provides comprehensive, integrated
programs and services focused on wellness, disease and condition management,
productivity enhancement and informatics. This suite of services,
which we call “Health Enhancement,” is designed to reduce health-related costs
and enhance the health and quality of life of the individuals we
serve. Matria provides services to self-insured employers, private
and government sponsored health plans, pharmaceutical companies and
patients. Our employer clients are primarily Fortune 1000 companies
that self-insure the medical benefits provided to their employees, dependents
and retirees. Our health plan customers are regional and national
health plans, as well as government-sponsored health plans, such as state
Medicaid programs.
Our
business strategy is described under “Management’s Discussion & Analysis of
Financial Condition and Results of Operations” in Item 7 of this
Report.
Development of
our Business. We were
incorporated on December 28, 2004, in connection with our predecessor
registrant’s reorganization into a holding company structure. The
predecessor registrant was incorporated on October 4, 1995, in connection with
the merger of Tokos Medical Corporation and Healthdyne Maternity Management,
effective March 8, 1996. Through that merger, Matria emerged as the
country’s premier provider of high-risk maternity management
services. Subsequently, we decided to leverage the experience with
patient assessment, education and patient monitoring we gained through our
management of high-risk pregnancies by expanding our focus to include management
of individuals with chronic diseases. In furtherance of that
strategy, we launched our respiratory disease management program in
1998.
In 1999,
we added diabetes disease management to our service offerings through an
acquisition. At the same time, we acquired our former pharmacy and
supplies business, as well as Facet Technologies, LLC (“Facet”), our diabetes
product design, development and assembly business, and our foreign diabetes
services business in Germany (“Dia Real”). In 2002, we continued to
expand our disease management program offerings through internal development of
programs for cardiac disease, depression and chronic pain and through the
acquisition of Quality Oncology, Inc. (“Quality Oncology”), the nation’s leading
provider of cancer disease management services. In 2003, we launched
an initiative to offer disease management services through pharmaceutical
companies in support of complex drug therapies and began to offer disease
management services for hepatitis C. Through a strategic acquisition
in 2004, we expanded our services to include case management. We also
divested our domestic pharmacy and supplies business in 2004. In
2005, we furthered our goal of offering the broadest spectrum of services in the
industry across the full continuum of care through the acquisitions of Miavita,
LLC (“Miavita”), a leading provider of on-line health and wellness programs, and
WinningHabits, Inc. (“WinningHabits”), a premier provider of corporate wellness
programs. We also launched our commercialized informatics business in
2005, which involves the aggregation and analysis of data to enable our
customers to better manage health-related costs and further improve
outcomes.
In
December 2005, we signed a definitive merger agreement to acquire CorSolutions
Medical, Inc. (“CorSolutions”), another leading provider of disease management
and related services to employers, health plans and government-sponsored
healthcare programs. At the same time, we made the strategic decision
to divest Facet and Dia Real. With these strategic initiatives in
place, we combined our operations under one reportable
segment: Health Enhancement. We completed the acquisition
of CorSolutions on January 19, 2006. On September 1, 2006, we
completed the sale of Facet. We divested Dia Real on October 17,
2006. In September 2006, we invested in and formed a strategic
alliance with privately-held Secured Independence, Inc. to address the needs of
the long-term care insurance industry.
Recent
Developments. On
January 27, 2008, we entered into a definitive merger agreement with
Inverness Medical Innovations, Inc. (“Inverness”), pursuant to which Inverness
will acquire Matria. At the effective time of the merger, by virtue
of the merger and without any action on the part of the holders of any capital
stock of Matria, each share of common stock of Matria issued and outstanding
immediately prior to the
3
Our
Business Today
Health
Enhancement. With the
completion of the acquisition of CorSolutions in January 2006, we combined two
of the leaders in our industry, and created what we believe is the industry’s
most expansive health enhancement programs, services and capabilities across the
full continuum of care. In the merger with CorSolutions, we acquired an expanded
product line, a significant presence in the health plan market, a talented group
of employees, new expertise, valuable customer relationships and several new
facilities. We expended substantial effort to integrate CorSolutions,
Miavita and WinningHabits with our legacy businesses.
Health
enhancement involves multiple integrated programs and services that help
participants change unhealthy lifestyles that lead to chronic diseases, improve
self-care skills and compliance with plans of care and become better educated
consumers of healthcare services. Our health enhancement business has
50 service centers that serve participants and patients throughout the United
States.
Our
on-line, interactive wellness programs address issues such as: smoking
cessation, weight loss, exercise, healthier diet, stress relief, healthy aging
and productivity enhancement. These programs are designed to help
employees and health plan members live healthier and longer lives while reducing
their healthcare costs and increasing their productivity.
Our
disease and condition management programs focus on the most costly medical
conditions, including, without limitation, diabetes, coronary artery disease,
congestive heart failure, asthma, chronic obstructive pulmonary disease,
depression, chronic pain, hepatitis C, cancer and high-risk
pregnancies. With the acquisition of CorSolutions, we expanded our
disease management offerings to include many less common chronic
conditions. Also, with the acquisition of CorSolutions, we acquired
greater expertise in the area of productivity enhancement, including an absence
management program and the capability of integrating disease management programs
with a customer’s disability carriers.
We
emphasize a multidisciplinary approach to care that involves our clinicians
working with the physicians that are treating the participants in our programs
to oversee adherence to evidenced-based standards of care prescribed by the
physician. We focus on participants' self-management between
visits to their physician, the improvement of participants’ compliance with
their physicians’ care plans and the avoidance of controllable and costly
events, such as emergency room visits and hospital admissions. We
believe that our programs, which were developed in accordance with national
clinical standards, demonstrably reduce medical and healthcare-related costs and
produce improved outcomes for our participants. Our disease and
condition management services include, but are not limited to:
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Sophisticated
data analysis to identify and preliminarily stratify individuals at risk
for chronic diseases and high cost
conditions;
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Administration
of a multi-condition risk assessment, the results of which we use to build
a detailed medical profile in our proprietary information
systems;
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4
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The
use of predictive modeling to determine the probability that a given
individual has a chronic condition or is at risk of a significant health
event that will result in substantial healthcare costs in the near and
longer-term future;
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Development
of risk-specific care plans based on national clinical
standards;
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Ongoing
participant education, motivation and
support;
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Monitoring
of the participant’s utilization of medication and supplies, the frequency
of periodic laboratory testing and adherence to care
plans;
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For
some participants, biometric monitoring of weight, blood glucose, blood
pressure and/or uterine activity;
and
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Reporting
of clinical and financial outcomes.
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Our
customized educational materials encourage participants to make better lifestyle
choices, empower participants through knowledge to make clinically supported
decisions about their healthcare and help participants better manage their
conditions. The Matria clinicians coach and motivate participants to
develop self-care skills to manage their conditions, practice prevention, pursue
a health conscious lifestyle, actively seek health and wellness knowledge and
understand the financial and health impact of their lifestyle
decisions.
People
with chronic diseases and high-cost conditions face a myriad of medications,
treatments, directives and precautions that are part of a plan of care, and
thus, they typically need extra support. Our clinicians ensure this
support is readily available and proactively provided. To properly
manage one’s chronic disease, the individual must follow clinical parameters
defined for the disease. Our nurses, with the aid of the Company’s
technology, educate the participant on the management of these critical
parameters. By combining the human touch of experienced clinicians
with the power of Matria’s technology, the Company’s disease and condition
management processes have been demonstrated to improve the participant’s course
of treatment.
All of
our programs are built on proprietary, sophisticated and advanced technology
that enables us to ingest and analyze data from multiple sources, manage
participant care and report clinical and financial
outcomes. Increasingly, the market is recognizing the power of data
as a tool in managing health care and optimizing clinical and financial
outcomes. In 2005, we began to capitalize on our information systems
technology and data analysis expertise by offering our informatics services as
an adjunct to our wellness and disease and condition management
services. We will continue to make substantial investments in our
information systems.
Customers and
Third-Party Payors. We market our
health enhancement services to self-insured employers, health plans (both
commercial and governmental), pharmaceutical companies and physicians, through
our employee sales force and channel partners. In 2007, revenues from
continuing operations were derived from the following types of customers and
third-party payors: approximately 54% from health plans, 36% from employers, 7%
from government payors and 3% from administrative services only (“ASO”)
self-insured employer clients.
Billing and
Revenue Recognition. Our services are paid for primarily on
the basis of (i) monthly fees for each employee or member enrolled in a health
plan, (ii) each member identified with a particular chronic disease or condition
under contract, (iii) each member enrolled in our programs, (iv) fee-for-service
or (v) a fixed rate per case. Billings for certain services occur in
advance of services being performed. Such amounts are recorded as
Unearned revenues in the consolidated balance sheets. Such amounts are
subsequently recognized as revenue as services are performed.
5
Some
contracts provide that a portion of our fees are at-risk (i.e., refundable) if
our programs do not achieve certain financial cost savings and clinical
performance criteria. Revenues subject to refund are not recognized if (i)
sufficient information is not available to calculate performance measurements;
or (ii) interim performance measurements indicate that we are not meeting
performance targets. If either of these two conditions exists, we
record the amounts as unearned revenue, which is included in Unearned revenues
in the consolidated balance sheets. These amounts are recognized as
revenue when we establish that we have met the performance
criteria. Often, recognition of these revenues occurs in periods
subsequent to the recognition of the associated costs. Therefore,
upon recognition, these revenues increase our operating profits on a
dollar-for-dollar basis. If we do not meet performance criteria, we
are contractually obligated to refund some or all of the at-risk fees.
Historically, such refunds have been immaterial to our financial condition and
results of operations.
Seasonality. Our high-risk
pregnancy management services revenues tend to be seasonal. Revenues
tend to decrease with the onset of the holiday season starting with
Thanksgiving. As a result, first and fourth quarter revenues of each
year tend to be lower than second and third quarter revenues. The
other aspects of our health enhancement business currently do not reflect any
significant degree of seasonality.
Competition. Our health
enhancement business is highly competitive. Our competitors and
potential competitors include disease management companies, pharmaceutical
companies, pharmacy benefit management companies, case management companies,
health plans, healthcare providers and other organizations that provide services
to health plans and self-insured employers. Certain of our
competitors and potential competitors have significantly greater financial and
sales resources than we do. We believe that our ability to offer
customers an integrated health enhancement solution across a full continuum of
care, our demonstrated clinical and financial outcomes capabilities and our
highly regarded technology platforms will enable us to compete
effectively. However, there can be no assurance that we will not
encounter increased or more effective competition in the future, which would
limit our ability to maintain or increase our business.
Research and
Development. Program
development and refinements from the health enhancement operations are a result
of the cooperative efforts of the business’s information technology, clinical,
operating and marketing staff. The costs of these development
activities are charged to earnings when incurred. However, we
capitalize development costs incurred for internal use software under the
provisions of the AICPA Statement of Position 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use.
Governmental
Regulation. The healthcare
business is subject to extensive and frequently changing federal, state and
local regulation. Changes in applicable laws or any failure to comply
with existing or future laws, regulations or standards could have a material
adverse effect on our results of operations, financial condition, business and
prospects. We believe our current arrangements and practices are in
material compliance with applicable laws and regulations. There can
be no assurance that we are in compliance with all applicable existing laws and
regulations or that we will be able to comply with new laws or
regulations.
Certain
of our clinicians, such as nurses, must comply with individual licensing
requirements. All of our clinicians who are subject to licensing
requirements are licensed in the state in which they are physically present,
such as the location of the call center from which they operate. Due
to state laws or regulations, some of our nurses are required to be licensed in
more than one state. In the future, multiple state licensing requirements
for healthcare professionals who provide services telephonically over state
lines increasingly may require us to license more of our clinicians in more than
one state. New judicial decisions, agency interpretations or federal
or state legislation or regulations could increase the requirement for
multi-state licensing of a greater number of our clinical staff, which would
increase our administrative costs.
6
Certain
aspects of our health enhancement business are subject to unique licensing or
permit requirements. For example, many states require our subsidiary
providing high-risk pregnancy management services to be licensed as a home
health agency or durable medical equipment provider. Also, many
states require Quality Oncology, our cancer disease management subsidiary, to be
licensed as a utilization review provider. We may also be required to
obtain certification to participate in governmental payment programs, such as
state Medicaid programs. Some states have established Certificate of
Need ("CON") programs regulating the expansion of healthcare
operations. The failure to obtain, renew or maintain any of the
required licenses, certifications or CONs could adversely affect our
business.
Some of
the monitoring devices used by our subsidiary providing high-risk pregnancy
management services in the provision of our services are classified as medical
devices under the Federal Food, Drug and Cosmetic Act, or the FDC Act, and are
subject to regulation by the Food and Drug Administration, or the
FDA. In addition some of our services involve the use of drugs that
are regulated by the FDA under the FDC Act. Although medical devices
and drugs used by our subsidiary providing high-risk pregnancy management
services are labeled for specific indications and cannot be promoted for any
other indications, the FDA allows physicians to prescribe drugs and medical
devices for “off-label” indications under the “practice of medicine”
doctrine. Negative publicity concerning the off-label use of drugs
and devices may adversely affect the high-risk pregnancy management services
component of our business. Our failure to comply with FDA
requirements could result in FDA enforcement actions, which could include, but
are not limited to, recalls, warning letters, fines, injunctions and criminal
prosecution. Any such enforcement actions could have a material
adverse effect on our business, financial condition and results of
operations.
The
Health Insurance Portability and Accountability Act of 1996, or HIPAA, governs
electronic healthcare transactions and the privacy and security of medical
records and other individually identifiable patient
data. Additionally, we are subject to various state laws and
regulations related to the confidentiality and security of certain personal
information. Any failure to comply with HIPAA or relevant state laws and
regulations could result in criminal penalties and civil sanctions.
Although
a small component of our business relies on reimbursement by government payors,
such as state Medicaid, that business is subject to particularly pervasive
regulation by those agencies. These regulations impose stringent
requirements for provider participation in those programs and for reimbursement
of products and services. We are subject to periodic audits or
investigation by the Centers for Medicare and Medicaid Services, or CMS, and/or
its intermediaries, of our compliance with those requirements, and any
deficiencies found may be extrapolated to cover a larger number of reimbursement
claims. Additionally, many applicable laws and regulations are aimed
at curtailing fraudulent and abusive practices in relation to those
programs. These rules include the illegal remuneration provisions of
the Social Security Act (sometimes referred to as the “Anti-Kickback” statute),
which impose criminal and civil sanctions on persons who knowingly and willfully
solicit, offer, receive or pay any remuneration, whether directly or indirectly,
in return for, or to induce, the referral of a patient covered by a federal
healthcare program to a particular provider of healthcare products or
services. Related federal laws make it unlawful, in certain
circumstances, for a physician to refer patients covered by federal healthcare
programs to a healthcare entity with which the physician and/or the physician's
family have a financial relationship. Additionally, a large number of
states have laws similar to the federal laws aimed at curtailing fraud and abuse
and physician “self-referrals.” These rules have been interpreted
broadly such that any financial arrangement between a provider and potential
referral source may be suspect. While we believe our business
arrangements are in compliance with these laws and regulations, the government
could take a contrary position or could investigate our practices.
In addition to the laws described
above, the Federal False Claims Act imposes civil liability on individuals or
entities that submit false or fraudulent claims for payment to the
government. HIPAA created two new federal crimes: “Healthcare Fraud”
and “False Statements Relating to Healthcare Matters.” The Healthcare
Fraud statute prohibits knowingly and willfully executing a scheme or
7
artifice
to defraud any healthcare benefit program. The False Statements
Relating to Healthcare Matters statute prohibits knowingly and willfully
falsifying, concealing or covering up a material fact by any trick, scheme or
device or making any materially false, fictitious or fraudulent statement in
connection with the delivery of or payment for healthcare benefits, items or
services. The Federal False Claims Act allows actions to be brought
on the government's behalf by individuals under the Federal False Claims Act’s
“qui tam”
provision. Violation of these and other applicable rules can result
in substantial fines and penalties, required repayment of monies previously
recognized as income, as well as exclusion from future participation in
government-sponsored healthcare programs.
There can
be no assurance that we will not become the subject of a regulatory or other
investigation or proceeding or that our interpretations of applicable laws and
regulations will not be challenged. The defense of any such challenge
could result in adverse publicity, substantial cost to us and diversion of
management's time and attention. Thus, any such challenge could have
a material adverse effect on our business, regardless of whether it ultimately
is sustained.
The
Medicare Prescription Drug Improvement and Modernization Act of 2003 (the “Act”)
provided funding for disease management demonstration programs to be implemented
in targeted geographic areas across the country, and indicates that if the
programs are successful, the programs will be expanded
nationwide. The expansion of these programs could represent a
significant opportunity for our disease and condition management
business.
Employees. As of December
31, 2007, we employed a total of 1,803 regular full-time and 65 regular
part-time employees in our continuing operations. Also, the health
enhancement business employed an additional 844 part-time clinical employees to
provide, among other things, patient training and back-up support on an “as
needed” basis. None of these employees is represented by a union, and
we consider our relationship with our employees to be good.
Discontinued
Operations. On June 30, 2004, the Company completed the sale
of substantially all of the assets, excluding trade and certain other
receivables, of our former domestic direct-to-consumer pharmacy and supplies
business and discontinued the related lab business. In December 2005,
we announced our strategic plan to divest Facet and Dia Real, and we completed
the sale of Facet on September 1, 2006, and closed the sale of Dia Real on
October 17, 2006. As a result of these divestitures, the
accompanying consolidated financial statements reflect the operations of these
divisions as discontinued operations for all periods presented.
Available
Information.
The Company’s Annual Report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
will be made available free of charge on or through our website at www.matria.com as soon as
reasonably practicable after the reports are filed with, or furnished to, the
SEC. Matria’s Corporate Governance Guidelines and Code of Conduct
were filed as exhibits to previous Exchange Act reports filed with the SEC and
are available on our website. Any waivers of the Guidelines or Code
will be disclosed in an SEC filing on Form 8-K.
Item
1A. Risk Factors.
Our
business is subject to certain risks, including the risks described under the
headings “Customers and Third-Party Payors,” “Billing and Revenue Recognition,”
“Seasonality,” “Competition,” “Research and Development” and “Governmental
Regulation” in Item 1, “Legal Proceedings” in Item 3, and those described
below. Readers of this Annual Report on Form 10-K should take such
risks into account in evaluating any investment decision involving our common
stock. This Item 1A does not describe all risks applicable to our business and
is intended only as a summary of certain material factors that affect our
operations in the industries in which we operate. More detailed
information concerning these and other risks is contained in other sections of
this Annual Report on Form 10-K.
8
The
health enhancement business is an evolving component of the overall healthcare
industry.
Health
enhancement and wellness services are relatively new components of the overall
healthcare industry. Accordingly, some of our potential customers
have not had significant experience in purchasing, evaluating or monitoring such
services, which can result in a lengthy sales cycle. The success of
our business plan relative to our disease and condition management and wellness
services depends on a number of factors. These factors
include:
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·
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Our
ability to differentiate our products and service offerings from those of
our competitors;
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The
extent and timing of the acceptance of our services as a replacement for,
or supplement to, traditional managed care
offerings;
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The
effectiveness of our sales and marketing
efforts;
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·
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Our
ability to implement new and additional services beneficial to health
plans and employers;
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·
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Our
ability to effect and sufficiently communicate cost savings for health
plans and employers through the use of our programs;
and
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·
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Our
ability to improve patient compliance with the complex drug therapies
offered by our pharmaceutical
customers.
|
Since the
disease and condition management and wellness businesses are continually
evolving, we may not be able to anticipate and adapt to the developing
market. Moreover, we cannot predict with certainty the future growth
rate or the ultimate size of the market.
We
are highly dependent on payments from our customers, which may implement cost
reduction measures that adversely affect our business and
operations.
Healthcare
payors continue to face cost reduction pressures that may cause them to curtail
their use of or reimbursement for health enhancement services, to negotiate
reduced fees or other concessions or to delay payment. These
financial pressures could have an adverse impact on our business.
Government
regulations may adversely affect our business.
We are
subject to extensive and frequently changing federal, state and local
regulations. Changes in laws or regulations or new interpretations of existing
laws or regulations can have a dramatic effect on operating methods, costs and
reimbursement amounts provided by government and third-party payors. There can
be no assurance that we are or have been in compliance with all applicable
existing laws and regulations or that we will be able to comply with new laws or
regulations. Changes in applicable laws or any failure to comply with existing
or future laws, regulations or standards could have a material adverse effect on
our results of operations, financial condition, business and
prospects.
A
portion of our disease management fees are contingent upon
performance.
Some of
our existing disease management agreements contain savings or other guarantees,
which typically provide that we will repay all or some of our fees if the
payor’s cost savings as a result of our disease and condition management and
wellness programs do not meet expectations or if other quality performance
measures are not met. There is no guarantee that we will accurately
forecast cost savings and clinical outcome improvements under our disease and
condition management and wellness agreements or meet the performance criteria
necessary to avoid repayment of fees under the
agreements. Additionally, untimely, incomplete or inaccurate data
from our customers or their vendors, or flawed analysis of such data, could have
a material adverse impact on our ability to recognize revenues.
9
Our
operating results have fluctuated in the past and could fluctuate in the
future.
Our
operating results have varied in the past and may fluctuate significantly in the
future due to a variety of factors, many of which are outside of our
control. These factors include, but are not limited to:
|
·
|
the
impact of substantial divestitures and
acquisitions;
|
|
·
|
the
loss or addition of customers and referral
sources;
|
|
·
|
investments
required to support growth and
expansion;
|
|
·
|
changes
in the mix of our products and
customers;
|
|
·
|
changes
in healthcare reimbursement policies and
amounts;
|
|
·
|
length
of sales cycle and implementation process for new disease management
customers;
|
|
·
|
increases
in costs of revenues and operating
expenses;
|
|
·
|
recognition
of deferred revenues;
|
|
·
|
incurrence
of performance penalties;
|
|
·
|
increases
in selling, general and administrative
expenses;
|
|
·
|
increased
or more effective competition; and
|
|
·
|
regulatory
changes.
|
In
addition, revenues from our high-risk pregnancy management services are
historically lower during the first and fourth calendar quarters than during the
second and third calendar quarters. The seasonal variability of
demand for these services significantly affects, and we believe will continue to
affect, our quarterly operating results.
If
our costs of providing products or services increase, we may not be able to pass
these cost increases on to our customers.
In many
of our markets, due to competitive pressures, we have very little control over
the price at which we sell our products and services. If our costs
increase, we may not be able to increase our prices, which would adversely
affect results of operations. Accordingly, any increase in our costs
could reduce our overall profit margin.
Our proposed merger with Inverness
may not be consummated or may be delayed, which may adversely affect our
anticipated results of operations and financial condition, or
both.
In
January 2008, we announced that we had signed a definitive merger agreement with
Inverness pursuant to which Inverness would acquire Matria. The merger is
expected to close in the second quarter of 2008, subject to the satisfaction of
customary closing conditions, including the receipt of regulatory and Matria
shareholder approvals to the merger. There can be no assurance that all of these
conditions will be satisfied. If these conditions are not satisfied or waived,
we may be unable to complete the merger.
Upon
completion of the merger, each share of common stock of Matria issued and
outstanding immediately prior to the effective time will be converted into the
right to receive: (i) a portion of a share of Inverness convertible preferred
stock having a stated value of $32.50, and (ii) $6.50 in cash. The value of
Inverness common stock might decline prior to the completion of the merger or at
any time thereafter. Inverness Series B preferred stock is convertible into
Inverness common stock under certain limited circumstances. As a result, the
value of the Series B preferred stock is affected by, among other things,
fluctuations in the price of Inverness common stock. Accordingly, if the price
of Inverness common stock declines prior to the completion of the merger, the
value of the Series B preferred stock to be received by Matria stockholders
in the merger will decrease as compared to the value on the date the merger was
announced. As of the date hereof, the price of Inverness common stock has
declined approximately 43%
relative to the price on the day of the merger agreement.
As is
typical with change of control transactions, Matria employees may experience
uncertainty about their future role with the combined company. These employees
may leave the Company prior to or after the closing of the merger. This may
adversely affect our performance and customer relationships. This
uncertainty also may adversely affect the Company’s ability to attract and
retain key management, sales, marketing, technical and other personnel, pending
the closing of the merger. Similarly, Matria’s customers may, in response to the
announcement of the merger, delay or defer purchasing decisions. Any delay or
deferral in purchasing decisions by the Company’s customers could harm the
business of the Company in the short-term, and the combined company in the
long-term.
10
If the
merger is not completed, the price of the Company common stock may decline to
the extent that the current market price of the Company reflects a market
assumption that the merger will be completed. The management team would have
been distracted from running the business and the Company will incur significant
costs related to the merger, such as legal, accounting and some of the fees and
expenses of their financial advisors, some of which costs must be paid even
if the merger is not completed.
Although
the Company and Inverness intend that the merger will result in benefits to the
combined company, those benefits may not be realized. The integration of the
companies will be a complex, time consuming and expensive process and may
disrupt the companies’ businesses, if not completed in an efficient
manner. Failure to realize the expected benefits and/or disruption to the
Company’s business could materially harm the business and operating results of
the combined company.
Recent
and future acquisitions may cause integration problems, disrupt our business and
strain our resources.
In 2005
and 2006, we made three strategic business acquisitions, and may continue with
such acquisitions in the future. Our success will depend, to a
certain extent, on the future performance of these acquired business
entities. These acquisitions, either individually or as a whole,
could divert management attention from other business concerns and expose us to
unforeseen liabilities or risks associated with entering new markets and
integrating these new entities. Further, the integration of these
entities may cause us to lose key employees or key
customers. Integrating newly acquired organizations and technologies
could be expensive and time consuming and may strain our
resources. Consequently, we may not be successful in integrating
these acquired businesses or technologies and may not achieve anticipated
revenue and cost benefits.
We
may face costly litigation that could force us to pay damages and harm our
reputation.
Like
other participants in the healthcare market, we are subject to lawsuits alleging
negligence or other similar legal theories, many of which involve large claims
and significant defense costs. Any of these claims, whether with or
without merit, could result in costly litigation, and divert the time,
attention, and resources of our management. Although we currently
maintain liability insurance intended to cover such claims, there can be no
assurance that the coverage limits of such insurance policies will be adequate
or that all such claims will be covered by insurance. In addition,
these insurance policies must be renewed annually. Although we have
been able to obtain liability insurance, such insurance may not be available in
the future on acceptable terms, if at all. A successful claim in
excess of the insurance coverage could have a material adverse effect on our
results of operations or financial condition.
If
we do not manage our growth successfully, our growth and profitability may slow,
decline or stop.
If we do
not manage our growth successfully, our growth and profitability may slow,
decline or stop. We have expanded our operations rapidly in recent
years. This expansion has created significant demands on our
administrative, operational and financial personnel and other
resources. Additional expansion in existing or new markets could
strain our resources and increase our need for capital. Our
personnel, systems, procedures, controls and existing space may not be adequate
to support further expansion. In addition, because our business
strategy emphasizes growth, the failure to achieve our stated growth objectives
or the growth expectations of investors could cause our stock price to
decline.
11
Our
data management and information technology systems are critical to maintaining
and growing our business.
Our
health enhancement services are dependent on the effective use of information
technology. Although we believe that our systems provide us with a
competitive advantage, we are exposed to technology failure or
obsolescence. In addition, data acquisition, data quality control and
data analysis, which are a cornerstone of our disease management programs, are
intense and complex processes subject to error.
Untimely,
incomplete or inaccurate data, flawed analysis of such data or our inability to
properly integrate, implement and update systems could have a material adverse
impact on our business and results of operations.
We
have recorded a significant amount of intangible assets, the value of which
could become impaired.
Our acquisitions have resulted in the
recognition of intangible assets, primarily goodwill. Goodwill, which
represents the excess of cost over the fair value of net assets of businesses
acquired, and other intangible assets was approximately $543.5 million, net of
amortization, at December 31, 2007, representing approximately 79% of our
total assets. On an ongoing basis, we will make an evaluation to
determine whether events and circumstances indicate that all or a portion of the
carrying value of intangible assets may no longer be recoverable, in which case
a charge to earnings may be necessary. Any future determinations
requiring an asset impairment of a significant portion of intangible assets
could materially affect our results of operations for the period in which the
adjustment occurs.
The
competition for staff may cause us to restrict growth in certain areas or to
realize increased labor costs in existing areas.
Our operations are dependent on the
services provided by qualified management and staff, including nurses and other
healthcare professionals, for which we compete with other health care
providers. In addition, our opportunities for growth are limited by
our ability to attract and retain such personnel. In certain markets,
there is a shortage of nurses and other medical providers, thereby increasing
competition and requiring us to improve working conditions, including wages and
benefits, for such personnel. Our potential inability to maintain and
grow an appropriate workforce may inhibit our expansion and could have a
material adverse effect on our financial results.
We
derive a significant portion of our revenues from health plan
customers.
Although no customer accounts for more
than 10% of our revenues, the recent expansion of our large health plan customer
base in our disease and condition management business has created greater
revenue concentration. Consolidation in the health plan industry may
cause us to lose business if one of our health plan customers is acquired by
another health plan that has its own health enhancement solution or if one of
our existing health plan customers internally develops or acquires a health
enhancement solution. Loss of one or more of these customers or their
inability or refusal to pay for our services, whatever the reason, could
materially and adversely affect our results of operations, cash flows and
financial condition. Additionally, a reduction in the number of
covered lives enrolled with our health plan customers or a reduction in the
scope of their programs could adversely affect our results of
operations.
Our
actual financial results might vary from our publicly disclosed
forecasts.
Our
actual financial results might vary from those anticipated by us, and these
variations could be material. Our forecasts reflect numerous assumptions
concerning our expected performance, as well as other factors, which are beyond
our control, and which might not turn out to have been correct. Although we
believe that the assumptions underlying the projections are reasonable, actual
results could be materially different. Our financial results are subject to
numerous risks and uncertainties, including those identified throughout these
“Risk Factors” and elsewhere in this Annual Report on Form
10-K.
12
Our
substantial leverage could materially adversely impact our financial
condition.
As of
December 31, 2007, our total outstanding long-term debt, including current
installments, was approximately $283 million, and we had approximately $39
million of additional available borrowings under our credit facilities. Our
substantial indebtedness could have a material adverse effect on our financial
condition by, among other things:
|
·
|
increasing
our vulnerability to adverse economic conditions or increases in
prevailing interest rates, particularly with respect to any of our
borrowings at variable interest
rates;
|
|
·
|
limiting
our ability to obtain any additional financing we may need to operate,
develop and expand our business;
|
|
·
|
requiring
us to dedicate a substantial portion of any cash flow from operations to
service our debt, which reduces the funds available for operations and
future business opportunities; and
|
|
·
|
potentially
making us more highly leveraged than our competitors, which could
potentially decrease our ability to compete in our
industry.
|
Our
ability to make interest payments and pay the principal amounts under our credit
facilities will depend upon our future operating performance, which is subject
to general economic and competitive conditions, and to financial, business and
other factors, many of which we cannot control. If the cash flow from our
operating activities is insufficient, we may take actions such as delaying or
reducing capital expenditures, attempting to restructure or refinance our debt,
selling assets or operations or seeking additional equity capital. In
addition, the terms of our credit facilities may limit our ability to take
several of these actions. Our failure to undertake any of these actions
successfully could have a material adverse effect on our business, results of
operations and financial condition.
Additionally,
our credit facilities contain a number of affirmative, negative, and financial
covenants, which limit our ability to take certain actions and require us to
comply with specified financial ratios and other performance covenants. If we
are unable to comply with our financial covenants or make required payments in
the future, our lenders could pursue their contractual remedies, including
requiring the immediate repayment in full of all amounts outstanding, if any.
Additionally, we cannot be certain that, if the lenders demanded immediate
repayment of any amounts outstanding, we would be able to secure adequate or
timely replacement financing on acceptable terms or at all.
Forward-Looking
Statements. This Annual Report on Form 10-K, including the
information incorporated by reference herein, contains various forward-looking
statements and information that are based on our beliefs and assumptions, as
well as information currently available to us. 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
Annual Report on Form 10-K and in such other statements, are intended to
identify forward-looking statements, although some statements may use other
phrasing. All statements that express expectations and projections
with respect to future matters, including, without limitation, statements
relating to growth, new lines of business and general optimism about future
operating results, are forward-looking statements. All
forward-looking statements and information in this Annual Report are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Exchange Act, 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,
the risk factors set forth above under Item 1A, “Risk Factors.” These
factors are not intended to be an all-encompassing list of risks and
uncertainties that may affect the operations, performance, development and
results of our business. 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. In providing
forward-looking statements, the Company expressly disclaims any obligation to
update publicly or otherwise these statements, whether as a result of new
information, future events or otherwise except to the extent required by
law.
13
Item 1B. Unresolved Staff
Comments.
Not
applicable.
Item
2. Properties
Our principal executive and
administrative offices are located at 1850 Parkway Place, Marietta, Georgia, and
total approximately 95,500 square feet. The facility is leased
through February 28, 2010.
In 2007,
our wellness and disease management businesses had eight locations, with main
care centers in Marietta, Georgia and Sunrise, Florida. The eight
locations, which include the CorSolutions’ locations described herein, total
approximately 145,700 square feet and have lease terms expiring on various dates
through June 2011. CorSolutions has four locations with its principal
offices located in Rosemont, a suburb of Chicago, Illinois, and three call
centers in Florida, Pennsylvania and Arizona. These facilities total
approximately 77,000 square feet with lease terms expiring on various dates from
2009 to 2015. Our high-risk pregnancy management services are
provided through a network of 38 patient service centers. These
patient service centers are typically located in suburban office parks and range
between 250 and 5,800 square feet of space, with an average of approximately
1,500 square feet. Total square footage for these facilities is
approximately 54,000 square feet. These facilities are leased for
terms expiring on various dates through 2010. Additionally, we lease
approximately 10,400 square feet under a lease expiring September 2011 for this
business’s customer support center.
These facilities are generally in good
condition, and we believe that they are adequate for and suitable to our
requirements.
Item
3. Legal Proceedings
In
connection with our acquisition of CorSolutions, we are pursuing a claim for
fraudulent misrepresentation and concealment before the American Arbitration
Association in Chicago, Illinois, seeking damages in an unspecified
amount. There is no assurance that we will prevail in this
proceeding.
In
addition, we are subject to various legal claims and actions incidental to our
business and the businesses of our predecessors, including product liability
claims and professional liability claims. We maintain insurance, including
insurance covering professional and product liability claims, with customary
deductible amounts. There can be no assurance, however, that (i)
additional suits will not be filed against us in the future, (ii) our prior
experience with respect to the disposition of litigation is representative of
the results that will occur in pending or future cases or (iii) adequate
insurance coverage will be available at acceptable prices for incidents arising
or claims made in the future. There are no other pending legal or
governmental proceedings to which we are a party that we believe would, if
adversely resolved, have a material adverse effect on us.
Item
4. Submission of Matters to a Vote of Security Holders
Not applicable.
14
Special
Item. Executive Officers of the Company
The
following sets forth certain information with respect to the executive officers
of the Company:
|
Name
|
Age
|
Position with the
Company
|
|
Parker
H. Petit
|
68
|
Chairman
of the Board and Chief Executive Officer
|
|
Thomas
D. Underwood
|
49
|
President
and Chief Operating Officer
|
|
Richard
M. Hassett, M.D.
|
52
|
Former
President and Chief Operating Officer
|
|
Yvonne
V. Scoggins
|
58
|
Senior
Vice President – Business Analysis
|
|
Roberta
L. McCaw
|
52
|
Senior
Vice President, General Counsel and Secretary
|
|
Thornton
A. Kuntz, Jr.
|
54
|
Senior
Vice President and Chief Administrative Officer
|
|
Jeffrey
L. Hinton
|
44
|
Senior
Vice President and Chief Financial
Officer
|
The executive officers of the Company
are elected annually and serve at the pleasure of the Board of
Directors.
Mr. Petit has served as Chairman of the
Board of the Company since the formation of the Company through the merger of
Healthdyne Maternity Management, a division of Healthdyne, Inc. (“Healthdyne”)
and Tokos Medical Corporation on March 8, 1996 and as Chief Executive Officer
since October 5, 2000, and as President and Chief Executive Officer from October
5, 2000, to February 22, 2003. Mr. Petit was the founder of Healthdyne and
served as its Chairman of the Board of Directors and Chief Executive Officer
from 1970 until 1996. Mr. Petit is also a director of Intelligent Systems
Corporation and Logility, Inc.
Mr.
Underwood has served as President and Chief Operating Officer since January 29,
2008. Mr. Underwood previously served as Executive Vice
President of Technology since June 2007. Prior to joining the Company,
Mr. Underwood served in various positions at First Consulting Group from
February 2003 to June 2007, including President-Software Services,
Executive Vice President-Healthcare and, most recently, President-Global
Services. Mr. Underwood served as President and Chief Executive Officer of
Paragon Solutions from January 2000 until February 2003.
Dr. Hassett served as President and
Chief Operating Officer from November 7, 2005, to January 29, 2008, and was a
member of the Board of Directors from May 31, 2006, through February 26,
2008. He previously served as Executive Vice President and Chief
Strategic Officer of the Company from November 14, 2004, to November 6,
2005. From August 2002 to April 2004, Dr. Hassett was Chief Executive
Officer and served on the board of Coordinated Care Solutions, a provider of
medical care management services, and from September 2000 to July 2002, he was
President and Chief Executive Officer and served on the board of Vivra Asthma
& Allergy, Inc., a specialty disease management company. Dr.
Hassett previously held executive positions with Accordant Health Services, a
healthcare services and technology company from 1997 to August 2000, last
serving as Executive Vice President and Chief Medical Officer and as a member of
the board.
Ms. Scoggins has served as Senior Vice
President – Business Analysis since October 20, 2006, and previously was
appointed Senior Vice President – Corporate Finance of the Company from February
22, 2006, to October 20, 2006. She previously served as Vice
President - Corporate Finance from July 22, 2004,to February 21,
2006. She was Vice President – Financial Planning and Analysis from
February 28, 2001, to July 22, 2004, and previously was Vice President,
Treasurer and Chief Accounting Officer of the Company from December 15, 1997, to
February 28, 2001, and also Vice President and Controller from March 8, 1996 to
December 15, 1997. Prior thereto, she was Vice President and
Controller of Healthdyne from May 1995 to March 8, 1996; Vice President –
Planning and Analysis of Healthdyne from May 1993 to May 1995; and Vice
President and Chief Financial Officer of Home Nutritional Services, Inc., a
former majority owned subsidiary of Healthdyne, from February 1990 to April
1993.
Ms. McCaw
was appointed Senior Vice President, General Counsel and Secretary of the
Company on February 22, 2006. She previously served as Vice President
– Legal, General Counsel and Secretary from April 23, 1998, to February 21,
2006. She was Assistant General Counsel and Assistant Secretary of
the Company
15
Mr. Kuntz was appointed Senior Vice
President and Chief Administrative Officer of the Company on February 22,
2006. He previously served as Vice President – Administration from
February 24, 1998, to February 21, 2006, and Vice President – Human Resources of
the Company from March 8, 1996, to February 24, 1998. Prior thereto,
he served as Vice President – Administration of Healthdyne from August 1992, to
March 1996.
Mr. Hinton was appointed Senior Vice
President and Chief Financial Officer of the Company on March 20,
2006. From 2004 to March 2006, Mr. Hinton was Vice President,
Internal Controls of HealthSouth Corporation. He was Strategic
Financial Consultant for Synavant, Inc. from 2002 to 2003. Mr. Hinton
held Chief Financial Officer positions with various public and private
companies, including SURGICOE Corporation from 2000 to 2002, Wise Business
Forms, Inc. from 1997 to 2000, and Notify MD from 1996 to 1997.
16
PART
II
|
|
Item
5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
|
(a) Market
Information. Matria’s common stock is listed on the Nasdaq
Global Select Market (“NASDAQ”) under the symbol “MATR.”
The
following table sets forth, for the calendar quarters indicated, the high and
low sales prices of Matria’s common stock as quoted on NASDAQ from January 1,
2006, through December 31, 2007:
|
Quarter
|
Low
|
High
|
||||||
|
2006
|
||||||||
|
First
|
$ | 32.70 | $ | 45.00 | ||||
|
Second
|
$ | 19.77 | $ | 38.21 | ||||
|
Third
|
$ | 21.00 | $ | 27.98 | ||||
|
Fourth
|
$ | 25.10 | $ | 30.41 | ||||
|
2007
|
||||||||
|
First
|
$ | 24.27 | $ | 28.98 | ||||
|
Second
|
$ | 25.56 | $ | 32.49 | ||||
|
Third
|
$ | 23.80 | $ | 31.60 | ||||
|
Fourth
|
$ | 20.62 | $ | 29.17 | ||||
(b) Holders. The
approximate number of stockholders of the Company as of February 29, 2008, was
1,900 holders of record and approximately 7,000 beneficial holders.
(c) Dividends. Matria
has not paid any cash dividends with respect to its common stock and does not
intend to declare any dividends in the near future. The Company’s
credit facilities contain covenants restricting the payment of dividends on and
repurchases of the Company’s common stock.
(d) Purchases of Equity
Securities. During the fourth quarter of 2007, Matria did not
repurchase any of its outstanding equity securities.
17
Item
6. Selected Financial Data
The following table sets forth selected
consolidated financial data with respect to the Company’s
operations. The data should be read in conjunction with Management’s
Discussion and Analysis of Financial Condition and Results of Operations and the
consolidated financial statements and related notes thereto. The
statement of operations data for each of the five years ended December 31, 2007,
and the related balance sheet data have been derived from the audited
consolidated financial statements (in thousands, except per share
data).
|
Years
Ended December 31,
|
|||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Consolidated statements of
operations data:
(1)
|
|||||||||||||||||||||
|
Revenues
from continuing operations
|
$ | 352,235 | $ | 336,139 | $ | 179,231 | $ | 145,087 | $ | 123,196 | |||||||||||
|
Earnings
(loss) from continuing operations
|
21,065 | 18,475 | 4,014 | (20,077 | ) | (2) | (8,505 | ) | |||||||||||||
|
Earnings
(loss) from continuing operations per share:
|
|||||||||||||||||||||
|
Basic
|
$ | 0.99 | $ | 0.88 | $ | 0.21 | $ | (1.29 | ) | $ | (0.56 | ) | |||||||||
|
Diluted
|
0.96 | 0.85 | 0.20 | (1.29 | ) | (0.56 | ) | ||||||||||||||
|
December
31,
|
|||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||||
|
Consolidated
balance sheet data:
|
|||||||||||||||||||||
|
Total
assets
|
$ | 686,238 | $ | 711,373 | $ | 323,207 | $ | 307,392 | $ | 333,482 | |||||||||||
|
Long-term
debt, excluding current installments
|
238,688 | 275,938 | 2,099 | 85,751 | 121,005 | ||||||||||||||||
|
(1) Consolidated
statements of operations data includes the results from the following
acquisitions: CorSolutions Medical, Inc. effective January 1, 2006;
WinningHabits, Inc. effective October 1, 2005; and Miavita LLC effective
April 1, 2005.
|
|||||||||||||||||||||
|
(2) Includes
a charge of $22.9 million, or $14.1 million net of taxes, resulting from
the retirement of $120 million in aggregate principal amount of the
Company's 11% Senior Notes.
|
|||||||||||||||||||||
18
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis
should be read in conjunction with the consolidated financial statements and
related notes and other financial information appearing elsewhere in this Annual
Report. The discussion contains forward-looking statements that
involve risks and uncertainties. Actual results could differ
materially from those anticipated in the forward-looking statements as a result
of a variety of factors, including those discussed in “Risk Factors” in this
Annual Report. The historical results of operations are not
necessarily indicative of future results.
Executive
Overview
We are a leading provider of
comprehensive, integrated programs and services focused on wellness, disease and
condition management, productivity enhancement and informatics. This suite of
services, which we call “Health Enhancement,” is designed to reduce health
related costs and enhance the health and quality of life of the individuals we
serve. We are dedicated to developing better educated, motivated and
self-enabled healthcare consumers and supporting clinicians in managing the care
of their patients. We provide services to self-insured employers,
private and government sponsored health plans, pharmaceutical companies and
patients. Our employer clients are primarily Fortune 1000 companies that
self-insure the medical benefits provided to their employees, dependents and
retirees. Our health plan customers are regional and national health
plans, as well as government-sponsored health plans, such as state Medicaid
programs.
Our
on-line, interactive wellness programs address issues such as: smoking
cessation, weight loss, exercise, healthier diet, stress relief, healthy aging,
and productivity enhancement. These programs are designed to help employees and
health plan members live healthier and longer lives while reducing their
healthcare costs and increasing their productivity.
Our
disease and condition management programs focus on the most costly medical
conditions including, without limitation, diabetes, cardiovascular diseases,
respiratory disorders, depression, musculoskeletal and chronic pain, hepatitis
C, cancer and high-risk pregnancies. We assist individuals to better
manage their conditions by increasing their knowledge about their illnesses or
conditions, potential complications and the importance of medication and
treatment plan compliance. Depending on acuity, our specialized nurses
proactively contact participants to monitor their progress and ensure they are
following the plan of care set by their physician.
Acquisitions
and Dispositions
On
January 19, 2006, we completed the acquisition of CorSolutions Medical, Inc.
(“CorSolutions”), a disease management, health and wellness and productivity
enhancement organization. The results of CorSolutions’ operations are
included in our results of operations effective January 1, 2006.
On
October 1, 2005, we completed the acquisition of WinningHabits, Inc.
(“WinningHabits”), a premier provider of corporate wellness
programs. On April 1, 2005, we completed the acquisition of the
business and assets of Miavita LLC (“Miavita”), a leading provider of on-line
health and wellness programs. Results of operations of these
businesses were included in the results of operations from the respective
acquisition dates.
During
the third and fourth quarters of 2006, we completed the divestitures of Facet
Technologies LLC (“Facet”) and our foreign diabetes service operations in
Germany (“Dia Real”), respectively. We made the strategic decision to
divest Facet and Dia Real in the fourth quarter of 2005. On June 30, 2004, we
completed the sale of substantially all of the assets, excluding trade and
certain other receivables, of our domestic direct-to-consumer pharmacy and
supplies business. In the accompanying consolidated financial
statements, the results of operations of these businesses are included in
discontinued operations for all periods presented.
19
Financial
and Performance Highlights of 2007
For the
year ended December 31, 2007, we reported $352.2 million in net revenues, a
growth of 4.8% over the year ended December 31, 2006. We also
reported $21.1 million of earnings from continuing operations, a
growth of 14.1%, compared to $18.5 million earnings from continuing operations
for the year ended December 31, 2006. Our diluted earnings per share from
continuing operations increased to $0.96 per common share, compared to $0.85 per
common share in 2006.
Business
Strategy
Our goal
is to position ourselves as an industry leader in the health enhancement
market. We seek to achieve this goal by pursuing the following
strategies:
Capitalize on our
Position as a Pure Play in the Health Enhancement Market. We believe our
extensive experience, scalable, established infrastructure and demonstrated
clinical and financial outcomes will provide us a significant competitive
advantage as we seek to capitalize on the growing market for health
enhancement. Including our predecessor organizations, we have more
than 15 years of experience in providing disease management and related
services. Our established infrastructure includes our proprietary
informatics technology platform, care center operations located throughout the
United States and a national network of skilled multi-disciplinary
clinicians.
Leverage Our
Information Technology. We will continue to
make significant investments in our information technology systems in order to
better identify participants for intervention and improve treatment plans for
these identified participants by reducing variations in care by consistent
applications of national criteria and standards of care. We expect to
leverage this technology through the expansion of our informatics
business.
Further Penetrate
All Key Segments of the Growing Health
Enhancement
Market. We
intend to expand our customer base within the employer, health plan, state and
federal governments, and pharmaceutical markets. We believe there is
a significant opportunity to expand our health enhancement business by
cross-selling other products and services to existing customers as they realize
the cost savings and superior clinical outcomes that our programs
provide.
Results
of Operations
The
following table summarizes key components in our financial statements for
continuing operations expressed as a percentage of revenues.
|
Years
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Cost
of revenues
|
30.5 | % | 32.7 | % | 40.7 | % | ||||||
|
Gross
margin
|
69.5 | % | 67.3 | % | 59.3 | % | ||||||
|
Selling
and administrative expenses
|
49.6 | % | 47.3 | % | 52.6 | % | ||||||
|
Provision
for doubtful accounts
|
1.5 | % | 1.2 | % | 1.9 | % | ||||||
|
Amortization
of intangible assets
|
2.0 | % | 2.1 | % | 0.2 | % | ||||||
|
Operating
earnings
|
16.4 | % | 16.6 | % | 4.5 | % | ||||||
|
Interest
expense, net
|
6.3 | % | 7.7 | % | 0.9 | % | ||||||
|
Other
income, net
|
0.1 | % | 0.4 | % | 0.1 | % | ||||||
|
Earnings
from continuing operations before income taxes
|
10.1 | % | 9.3 | % | 3.8 | % | ||||||
|
Income
tax expense
|
4.1 | % | 3.8 | % | 1.5 | % | ||||||
|
Earnings
from continuing operations
|
6.0 | % | 5.5 | % | 2.2 | % | ||||||
20
2007
Compared to 2006
Revenues
increased by $16.1 million, or 4.8%, to $352.2 million for the year ended
December 31, 2007, from $336.1 million for 2006. The increases were due
primarily to the implementation of new and expanded disease management and
wellness contracts, net of attrition, and the favorable impact of achieving
certain performance targets. Disease and condition management program revenues
increased $9.4 million, or 4.5%, to $218.6 million for the year ended December
31, 2007. Wellness program revenues increased $8.3 million, or 42.9%, to $27.8
million in 2007 from $19.4 million in 2006. Maternity management program
revenues decreased $1.6 million, or 1.5%, to $105.9 million for the year ended
December 31, 2007, primarily due to decreased preterm labor management revenues
resulting from a decline in census and patient days, partially offset by higher revenues from our
MaternaLink®
services.
Cost of
revenues consists primarily of clinical labor and supplies related to the
provision of services. Cost of revenues as a percentage of revenues decreased to
30.5% for the twelve-month period ended December 31, 2007, from 32.7% in
2006. This decrease was primarily due to (i) an increase in our
high-margin disease management and wellness revenues, and (ii) the availability
of a lower cost generic drug for Zofran, which is used for nausea and vomiting
in our maternity management services. These decreases in cost of revenues as a
percentage of revenue were partially offset by increases in cost as a percentage
of revenues for certain clinical services for preterm labor
management.
Selling
and administrative expenses increased $15.6 million, or 9.8%, to $174.6 million
for the year ended December 31, 2007, from $159.0 million in 2006. Our costs for
salaries and other personnel-related expenses increased $9.4 million due
primarily to additional
costs in our information technology area. Depreciation and
amortization expense increased $1.7 million as a result of our increased
technology investments. Share-based compensation expense increased $4.9 million
due to an increase in expense related to our restricted stock awards, which are
performance-based and service-based and have shorter vesting periods than
certain stock options with grants dating back to 2003 that have expense
continuing into 2007 and 2008. Selling and administrative expenses as
a percentage of revenues increased to 49.6% in 2007 from 47.3% in
2006.
The
provision for doubtful accounts as a percentage of revenues was 1.5% for the
year ended December 31, 2007, compared to 1.2% in 2006. The
provision, which is recorded primarily for our maternity management program
revenues, is adjusted periodically based upon our quarterly evaluation of
historical collection experience, recoveries of amounts previously provided,
industry reimbursement trends and other relevant factors. The percentage
increase results from an increase in bad debts for our disease and condition
management and wellness revenues.
We
recorded $7.1 million expense in both 2007 and 2006 from the amortization of
intangible assets. The amortization expense results from our
acquisitions of CorSolutions in 2006 and WinningHabits and Miavita in
2005.
Interest
expense decreased $3.7 million to $23.9 million in 2007, from $27.6 million in
2006 due primarily to lower interest rates due to refinancing the Second Lien
Facility of our Credit Facilities, combined with a lower outstanding balance of
our Credit Facilities, which we entered into in January 2006 in conjunction with
our acquisition of CorSolutions. In November 2006, we amended the terms of our
Credit Facilities, effectively reducing the interest rate on certain outstanding
indebtedness to LIBOR plus 2.0%, a 475 basis point reduction. In 2006, we
allocated $9.8 million of interest expense and amortization expense of deferred
financing fees related to the Credit Facilities to discontinued operations in
accordance with Emerging Issues Task Force (“EITF”) Issue 87-24, Allocation of Interest to
Discontinued Operations (“EITF 87-24”). EITF 87-24 states that
interest on debt that must be repaid when the disposal of discontinued
operations occurs should be allocated to discontinued operations. In
accordance with the terms of the Credit Facilities, we used the net proceeds
from the sales of Facet in the third quarter of 2006 and Dia Real in the fourth
quarter of 2006 to repay a portion of the outstanding indebtedness. The weighted
average interest rates, including amortization of debt discount and expense, on
all outstanding indebtedness were 8.24% and 9.29% for the years ended December
31, 2007 and 2006, respectively.
21
Other
income, net, decreased to $227,000 in 2007 from $1.3 million in
2006. In 2006, we recorded a $741,000 gain from the settlement of the
forward exchange agreement we entered into with a bank to eliminate the
potential impact of foreign exchange fluctuations on the U.S. dollar equivalent
of the expected euro proceeds from the sale of Dia Real. Under the terms of the
agreement, we sold €26.0 million at the forward rate and received approximately
$33.4 million on the settlement date. We reported the forward exchange agreement
at fair value until settled in October 2006. Other income also includes
collections of notes and receivables that were previously written-off, royalties
and other miscellaneous items in both periods.
Income
tax expense was $14.5 million and $12.8 million for the twelve months ended
December 31, 2007 and 2006, respectively. Our effective income tax
rates were 40.8% in 2007 and 40.9% in 2006. The effective income tax rate is
higher than the statutory federal tax rate due to state income taxes and certain
non-deductible expenses for tax purposes. Cash outflows for income
taxes for continuing and discontinued operations in 2007 and 2006 were $3.7
million and $6.7 million, respectively, comprised of federal alternative minimum
taxes, state income taxes and, in 2006, foreign taxes. As of December
31, 2007, our remaining net operating loss carryforwards were $47.8 million,
which we expect will be available to offset future taxable income, subject to
certain limitations. We expect to use approximately $21.6 million of our net
operating loss carryforwards in 2008.
Discontinued
operations in 2007 and 2006 include the operations of Facet and Dia Real. The
loss from discontinued operations for the year ended December 31, 2007, was
$86,000, net of tax, compared to earnings of $5.3 million in 2006. In
2007, we recorded a credit of $896,000 to Gain on disposal of discontinued
operations, which related primarily to the increased utilization of foreign tax
credits in our 2006 federal tax return. We also recorded $447,000 of
tax expense for an increase in the liability for the tax benefits recognized
which may not be sustained as a result of our adoption of the provisions of
Financial Accounting Standards Board (“FASB”) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes (“FIN 48”) on January 1, 2007. Discontinued operations
in 2006 include a pre-tax charge of $9.8 million for the allocation of interest
and deferred financing fees related to the Credit Facilities. On
September 1, 2006, we completed the sale of Facet for net cash proceeds of
$121.9 million and recorded a gain on the sale of $26.6 million, or $23.9
million, net of income taxes. We wrote-off $76.2 million of goodwill and
recorded $541,000 for unamortized share-based compensation expense resulting
from the accelerated vesting of options granted to the Facet employees. On
October 17, 2006, we completed the sale of Dia Real for net cash proceeds of
$33.3 million. The gain on the sale was $9.1 million, or $5.0 million
net of income taxes, and included charges of $3.6 million for net goodwill and
intangibles and $67,000 for unamortized share-based compensation. The net
proceeds from these divestitures were used to repay a portion of the outstanding
indebtedness under our First Lien Credit Facility (see below).
2006
Compared to 2005
Revenues
from continuing operations increased by $156.9 million, or 87.5%, to $336.1
million for the year ended December 31, 2006, from $179.2 million in
2005. This increase was due primarily to our acquisitions of
CorSolutions effective January 1, 2006, Winning Habits on October 1, 2005, and
Miavita on April 1, 2005. Revenues from these acquired businesses
contributed $135.9 million, or 86.6%, to the 2006 increase. Also
contributing to the revenue growth was the addition of new and expanded accounts
that were implemented in 2005 and 2006. Excluding maternity management program
revenues, disease and condition management program revenues, including wellness
program revenues, increased $151.2 million, or 195.4%, to $228.6 million for the
year ended December 31, 2006. Wellness program revenues were $19.4 million for
the year ended December 31, 2006, compared to $4.9 million in
2005. Maternity management program revenues increased $5.7 million,
or 5.6%, to $107.5 million for the year ended December 31, 2006. This increase
was due to an increase in the days of service and an increase in the portion of
our maternity management programs generating revenues as a result of electronic
identification of potential patients.
Cost of
revenues, which consists primarily of clinical labor and supplies related to the
provision of services, as a percentage of revenues decreased to 32.7% for the
year ended December 31, 2006, from 40.7% in 2005. This decrease was
primarily due to the growth in the disease management and wellness program
revenues and improved margins from these programs resulting from the leveraging
impact of higher revenues.
22
Selling
and administrative expenses increased $64.7 million to $159.0 million for the
year ended December 31, 2006, compared to $94.3 million in 2005. We incurred
increased costs as a result of our 2005 and 2006 acquisitions, primarily for
salaries and other personnel-related expenses and increased depreciation and
amortization expenses related to our technology investments. Also included in
our 2006 expense is approximately $7.0 million of share-based compensation
associated with the adoption of FASB Statement of Financial Accounting Standards
(“SFAS”) No. 123(R), Share-Based Payment (“SFAS
123(R)”). As a percentage of revenues, selling and administrative
expenses decreased to 47.3% in 2006, compared to 52.6% in 2005, primarily due to
the leveraging impact of higher revenues and the synergies realized from the
integration of the CorSolutions acquisition in 2006.
The
provision for doubtful accounts as a percentage of revenues was 1.2% in 2006
compared to 1.9% in 2005. The provision, which is recorded primarily
for our maternity management program revenues, is adjusted periodically based
upon our quarterly evaluation of historical collection experience, recoveries of
amounts previously provided, industry reimbursement trends and other relevant
factors. The percentage decrease results from an increase in the portion of
revenues from our non-maternity management program sources.
We
recorded $7.1 million and $365,000 of expense in 2006 and 2005, respectively,
from the amortization of intangible assets. The increase in
amortization expense resulted primarily from our 2006 acquisition of
CorSolutions.
Interest
expense, net, increased to $26.0 million in 2006 from $1.6 million in
2005. This increase was primarily the result of the Credit Facilities
we entered into in January 2006 in conjunction with our acquisition of
CorSolutions (discussed below under “Liquidity and Capital Resources – Financing
Activities”). In 2006, we allocated $9.8 million of interest expense and
amortization expense of deferred financing fees related to the Credit Facilities
to discontinued operations in accordance with EITF 87-24 as noted
above. The weighted average interest rates, including amortization of
debt discount and expense and net gains from interest rate swap transactions, on
all outstanding indebtedness were 9.29% and 6.80% for years ended December 31,
2006 and 2005, respectively.
Other
income (expense), net, increased to $1.3 million in 2006 from $226,000 in
2005. In 2006, we recorded a $741,000 gain from the settlement of the
forward exchange agreement we entered into with a bank to eliminate the
potential impact of foreign exchange fluctuations on the U.S. dollar equivalent
of the expected euro proceeds from the sale of Dia Real. Under the terms of the
agreement, we sold €26.0 million at the forward rate and received approximately
$33.4 million on the settlement date. We reported the forward exchange agreement
at fair value until settled in October 2006. Other income also includes
collections of notes and receivables that were previously written-off, royalties
and other miscellaneous items in both periods and favorable currency adjustments
on a euro-denominated receivable in 2005.
Income
tax expense for the year ended December 31, 2006, reflects a higher effective
tax rate than the statutory federal tax rate due to state income taxes and
certain non-deductible expenses for tax purposes. Our effective
income tax rates were 40.9% in 2006 and 40.5% in 2005. The effective income tax
rate is higher than the statutory federal tax rate due to state income taxes and
certain non-deductible expenses for tax purposes. Cash outflows for
income taxes for continuing and discontinued operations in 2006 and 2005 were
$6.7 million and $4.0 million, respectively, comprised of foreign, federal
alternative minimum taxes and state income taxes.
Earnings
(loss) from discontinued operations for the years ended December 31, 2006 and
2005, include the operations of Facet, Dia Real and our domestic direct to
consumer pharmacy and supplies business (sold on June 30,
2004). Earnings from discontinued operations were $5.3 million, net
of tax, in 2006 compared to $9.9 million in 2005. Discontinued
operations in 2006 include a pre-tax expense of $9.8 million for the allocation
of interest and deferred financing fees to Facet and Dia Real related to the
Credit Facilities as described above; $1.1 million of this amount was charged to
the gain on disposal of discontinued operations. In 2005, we recorded
a $10 million pre-tax charge for the settlement of the qui tam claims related to our
pharmacy and supplies business. The purchaser of the pharmacy and
supplies business did not assume the liability for these
23
claims.
Our earnings from discontinued operations in 2005 also include a $2 million
charge for the write-off of the remaining accounts receivable of our pharmacy
and supplies business, which we retained after the sale. The
collection efforts for these receivables were outsourced to a third party in the
first quarter of 2005.
On
September 1, 2006, we completed the sale of Facet for net cash proceeds of
$121.9 million and recorded a gain on the sale of $26.6 million, or $23.9
million, net of income taxes. We wrote-off $76.2 million of goodwill and
recorded $541,000 for unamortized share-based compensation expense resulting
from the accelerated vesting of options granted to the Facet employees. On
October 17, 2006, we completed the sale of Dia Real for net cash proceeds of
$33.3 million. The gain on the sale was $9.1 million, or $5.0 million
net of income taxes, and included charges of $3.6 million for net goodwill and
intangibles and $67,000 for unamortized share-based compensation. The net
proceeds from these sales were used to repay a portion of the outstanding
indebtedness under our First Lien Credit Facility (see below).
Liquidity
and Capital Resources
Operating
Activities
As of
December 31, 2007, we had cash and cash equivalents of $19.5
million. Net cash from continuing operations provided
$60.7 million in 2007, compared to $27.4 million in 2006 and $5.0 million in
2005. In 2007, we had an increase in earnings from continuing
operations and increases in non-cash charges for depreciation and amortization,
provision for doubtful accounts and share-based compensation. Also in
2007, the change in accounts receivable provided $1.8 million as compared to a
use of cash of $7.9 million in 2006 and $8.1 million in 2005. Days’
sales outstanding, or DSO, improved to 47 days in 2007, from 54 days and 63 days
at December 31, 2006 and 2005, respectively. Though revenue increased
year-over-year, the decline in DSO reflects the continuing improvement in
receivables management. In 2006, accrued and other liabilities used
cash for the payment of transaction-related expenses incurred in the
CorSolutions acquisition.
Cash
flows from discontinued operations were $(1.4) million, $(3.1) million and $20.0
million for the years ended December 31, 2007, 2006 and 2005, respectively. Net
cash used in discontinued operations in 2007 is driven primarily by the payment
of certain expenses related to the sale of Facet and Dia Real. In
2006, cash flows used in discontinued operations included a $10.0 million
settlement payment, net of $150,000 insurance reimbursement, for the two qui tam actions filed against
the Company and its former subsidiary, Diabetes Self Care, Inc. This
charge was included in earnings from discontinued operations for the year ended
December 31, 2005. The 2006 period also reflects the allocation of
$9.8 million in interest expense (before taxes) discussed above.
Investing
Activities
Net cash used in investing activities
totaled $60.2 million, $299.4 million and $28.9 million in 2007, 2006 and 2005,
respectively. The increase in net cash used in investing activities is driven
primarily by our acquisition and divestiture activities. The results of
operations of our acquired businesses have been included in our consolidated
statements of operations since their respective acquisition dates.
On
January 19, 2006, we completed the acquisition of CorSolutions for a cash
payment of $434.7 million, net of cash acquired. Pursuant to the
CorSolutions’ merger agreement, we pursued a claim before a
contractually-designated settlement accountant for certain post-closing
adjustments, including a $4.0 million claim relating to a liability resulting
from CorSolutions’ pre-closing performance under a customer
contract. On September 20, 2007, the settlement accountant awarded us
$3.9 million related to the undisclosed liability described
above. That award was offset by $1.3 million related to certain
payroll taxes arising from the deemed exercise of options by employees of the
sellers who subsequently became employees of the Company, resulting in a net
award of $2.6 million. These amounts, when included in the
post-closing adjustment mechanism pursuant to the merger agreement, resulted in
the Company receiving $1.6 million plus $199,000 of interest. As a result, the
purchase price consideration, excluding cash acquired, was decreased by $1.6
million. We also decreased goodwill by $1.6 million in 2007 for the
consideration received as a result of this adjustment.
24
Additionally
in 2006, we successfully completed the divestitures of Facet on September 1,
2006, for cash proceeds of $119.8 million, net of transaction costs, and Dia
Real on October 19, 2006, for cash proceeds of $30.5 million, net of transaction
costs.
In
2005, cash used in investing activities included $19.7 million for the
acquisition of two businesses. On April 1, 2005, we acquired the business and
assets of Miavita for a net cash payment of $4.8 million, with additional
amounts to be paid in future periods under an earn-out agreement. On
October 1, 2005, we acquired the business of WinningHabits for a net cash
payment of $14.9 million, with additional amounts to be paid in 2007 under an
earn-out agreement. In May 2006, we paid $1.7 million of additional
consideration for the first earn-out period of Miavita acquisition as a result
of certain operating milestones being achieved. During the second quarter of
2007, we paid a total of $50.7 million of additional earn-out consideration for
the acquisitions of Miavita ($22.0 million) and WinningHabits ($28.7
million). These payments were recorded as additional
goodwill. For the Miavita acquisition, additional consideration may
be payable in future periods through 2010 based on a percentage of specified
revenues from certain Miavita customer agreements. We estimate the additional
consideration payable to be less than $500,000.
We used $12.5 million in 2007, $13.1
million in 2006 and $11.1 million in 2005 for capital expenditures for
continuing operations. These investments in our property and
equipment relate primarily to the replacement and enhancement of computer
information systems and to the replacement of medical devices used in our
maternity management programs. Discontinued operations’ capital
expenditures of $379,000 in 2006 and $1.5 million in 2005 relate primarily to
purchases of machinery and equipment and computer information
systems.
Financing
Activities
Net cash
provided by (used in) financing activities was $547,000, $271.7 million and
$(8.2) million for 2007, 2006 and 2005, respectively.
During
2007, our borrowings included $40.0 million under our Revolving Credit Facility
(described below). We repaid $44.2 million of short-term indebtedness
and capital lease obligations during the twelve-month period ended December 31,
2007. Our 2007 repayments include $10.3 million for our Credit
Facilities, $30.0 million for the Revolving Credit Facility and $2.0 million to
redeem our remaining outstanding unsecured 11% Senior Notes, $120 million of
which had been redeemed in June 2004. During the third quarter of 2006, we made
prepayments of $125.0 million toward the reduction of the Credit Facility, using
$115.0 proceeds from the Facet divestiture and $10.0 million from operating cash
flows.
During
2006, we used proceeds of $444.0 million, net of debt issuance costs of $11.0
million, from our Credit Facilities to fund the acquisition of CorSolutions on
January 19, 2006.
The
Credit Facilities consist of term loans and revolving credit loans pursuant to a
credit agreement and a second lien term loan facility with Bank of America,
N.A., as administrative and collateral agent. The Credit Facilities, as amended,
provide for borrowings of up to an aggregate of $485 million and were divided
between a First Lien Credit Facility and a Second Lien Credit
Facility. The Credit Facilities replaced our previous revolving
credit facility, which was terminated on January 13, 2006. There were no amounts
outstanding under the revolving credit facility at the time of
termination.
The
Credit Facilities mature on January 19, 2012. Amounts borrowed under the Credit
Facilities, as amended, accrue interest at a variable spread over LIBOR, with
the applicable spread determined by the Company’s consolidated leverage ratio,
as described in the applicable credit agreement. Interest rates for
the Credit Facilities are reset quarterly. Amounts borrowed are fully and
unconditionally guaranteed on a joint and several basis by substantially all of
our subsidiaries. As of December 31, 2007, the outstanding balance under the
Credit Facilities was $266.9 million, excluding the Revolving Credit Facility
noted below.
25
The
Credit Facilities also provide for a Revolving Credit
Facility. Amounts borrowed under the Revolving Credit Facility accrue
interest at a variable spread over LIBOR or the prime rate, at our option, with
the
applicable spread determined by reference to our consolidated leverage ratio, as
described in the credit agreement. At December 31, 2007, $10.0
million was outstanding under the Revolving Credit Facility, and the available
balance was $38.6 million.
In
November 2006, we amended the terms of the Credit Facilities. Under
the amended agreement, the First Lien Credit Facility was increased by $65.0
million, the proceeds of which were used to prepay the Second Lien Credit
Facility. Borrowings under the First Lien Credit Facility bore
interest at LIBOR plus 2.00%, a 475 basis point reduction from the Second Lien
Credit Facility. All the other terms and conditions of the Credit
Agreement (other than those relating to the increased amount of the First Lien
Credit Facility and those that are no longer applicable because they relate
solely to the Second Lien Credit Facility) remain unchanged. We
incurred fees and expenses of approximately $1.7 million, which were recorded as
deferred financing costs and are being amortized over the term of the First Lien
Credit Facility (January 2012). On February 23, 2007, we entered into
a third amendment to the Credit Facilities, the terms of which increased our
borrowing capacity under the Revolving Credit Facility from $30.0 million to
$50.0 million. All other terms of the Credit Facilities, as amended,
remain unchanged.
The
Credit Facilities contain, among other things, various representations,
warranties and affirmative, negative and financial covenants customary for
financings of this type. The negative covenants include, without limitation,
certain limitations on transactions with affiliates, liens, making investments,
the incurrence of debt, sales of assets, and changes in business. The financial
covenants contained in the Credit Facilities include a consolidated leverage
ratio and a consolidated fixed charges coverage ratio. At December 31, 2007, we
were in compliance with all covenants of the Credit Facilities.
In
February and May 2006, we entered into two interest rate swap agreements
totaling $200.0 million notional amount to hedge our exposure to fluctuations in
interest rates related to the Credit Facilities. The swap agreements
had the economic effect of converting $200.0 million of our floating-rate debt
under the Credit Facilities to fixed-rate debt. Under the terms of
the agreements, we will pay the bank fixed base rates of 5.065% and 5.350%,
respectively, and the bank will pay us floating rates based on three-month LIBOR
(5.015% and 4.830%, respectively, at December 31, 2007). In August
2007, we entered into two additional interest rate swap agreements, each with
notional amounts of $100.0 million. These swap agreements are
scheduled to become effective after the termination of the swaps noted above
(February and May 2008). These agreements also have two-year terms, and have the
economic effect of converting $200.0 million of floating-rate debt to fixed-rate
debt. We will pay the bank fixed base rates of 4.890% and 4.910%,
respectively, under these swap arrangements, and the bank will pay us floating
rates based on three-month LIBOR.
We
reflected the interest rate swap agreements on the consolidated balance sheet at
a fair value of $5.1 million and $62,000 at December 31, 2007 and 2006,
respectively, based upon the estimated amount we would pay upon settlement of
the agreements taking into account interest rates on those dates. For
the years ended December 31, 2007 and 2006, we recognized net gains of $264,000
and $79,000, respectively, from the cash flow hedges. These amounts are included
in Interest expense in the consolidated statements of operations.
.
In
September 2006, we entered into a forward exchange agreement with a bank to
eliminate the potential impact of foreign exchange fluctuations on the U.S.
dollar equivalent of the expected euro proceeds from the sale of Dia
Real. Under the terms of the agreement, we agreed to sell €26.0
million at the forward rate (1.2837) and receive approximately $33.4 million on
the settlement date. We reported the forward exchange agreement at
fair value on our consolidated balance sheet until it was settled in October
2006.
On April
27, 2005, we issued a notice of our intention to redeem $86.3 million in
aggregate principal amount of 4.875% convertible senior subordinated notes on
May 27, 2005. In response to the redemption notice, all noteholders
converted their notes into shares of the Company’s common stock prior to the
redemption date, and the Company issued approximately 4.4 million shares of
common stock ($19.61 per share). In addition, the redemption also
required us to make a “make-whole payment” equal to the present value, as of the
redemption date, of all remaining scheduled interest payments on the notes
through May 1, 2009. We paid the noteholders the “make-whole payment”
totaling $15.5 million ($3.52 per share), which
26
included
$294,000 of accrued but unpaid interest. The “make-whole payment,” excluding the
accrued but unpaid interest, was accounted for in accordance with SFAS No. 84,
Induced Conversion of
Convertible Debt. Since the conversion was pursuant to the
original conversion terms and no inducement was made to the noteholders, no loss
was recognized with respect to the “make-whole payment,” excluding the accrued
but unpaid interest, or the shares issued.
We received $2.6 million, $6.0 million
and $7.3 million from participants under our stock purchase and stock option
plans in 2007, 2006 and 2005, respectively.
We
believe that our cash, other liquid assets, operating cash flows and Credit
Facilities, taken together, will provide adequate resources to fund ongoing
operating requirements, planned capital expenditures and contractual obligations
through the remainder of 2008.
Contractual
Obligations, Commitments and Off-Balance Sheet Arrangements
We have
various contractual obligations that are appropriately recorded as liabilities
in our consolidated financial statements. Certain other items, such as operating
lease obligations, are not recognized as liabilities in our consolidated
financial statements but are required to be disclosed. The following sets forth
our future minimum payments required under contractual obligations as of
December 31, 2007 (in thousands):
|
Payments
Due by Year
|
||||||||||||||||||||||||
|
Total
|
Less
than 1 Year
|
1
- 3 Years
|
3
- 5 Years
|
More
than 5 Years
|
||||||||||||||||||||
|
Long-term
debt obligations
|
(1) | $ | 335,224 | $ | 31,169 | $ | 38,784 | $ | 265,271 | $ | - | |||||||||||||
|
Capital
lease obligations
|
23 | 23 | - | - | - | |||||||||||||||||||
|
Operating
lease obligations
|
23,366 | 8,059 | 9,906 | 2,945 | 2,456 | |||||||||||||||||||
|
Other
long-term obligations
|
4,076 | 1,697 | 2,379 | - | - | |||||||||||||||||||
| $ | 362,689 | $ | 40,948 | $ | 51,069 | $ | 268,216 | $ | 2,456 | |||||||||||||||
|
(1)
|
Includes
projected interest payments.
|
Scheduled
principal and interest payments of $13.3 million and $17.2 million,
respectively, under the Credit Facilities and Revolving Credit Facilites are
payable in 2008. We intend to make voluntary, unscheduled payments of
$30.0 million in 2008. Capital expenditures of approximately $12.0
million are estimated in 2008 as we continue to enhance our computer information
systems.
As of
December 31, 2007, we did not have any significant off-balance sheet
arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, except for
our indemnification obligations related to potential breaches of the
representations and warranties contained in the definitive agreements to sell
Facet and Dia Real, which obligations are capped at $12.5 million and $9.9
million, respectively.
Other
Factors Affecting Liquidity
In
connection with our acquisition of Miavita, we will be required to pay
additional earn-out consideration in future periods through 2010, based upon
specified revenues pertaining to certain customer agreements. We
estimate the additional consideration payable to be less than
$500,000. In accordance with SFAS No. 141, Business Combinations, we
accrue contingent consideration obligations upon attainment of the objectives.
Additionally, any such payments would result in increases in
goodwill.
Uncertainties
We are
subject to various legal claims and actions incidental to our business and the
businesses of our predecessors, including product liability claims and
professional liability claims. We maintain insurance, including
insurance covering professional and product liability claims, with customary
deductible amounts. There can be no assurance, however, that (i)
lawsuits will not be filed against us in the future, (ii) our prior
27
experience
with respect to the disposition of litigation is representative of the results
that will occur in pending or future cases or (iii) adequate insurance coverage
will be available at acceptable prices, if at all, for incidents arising or
claims made in the future. There are no pending legal or governmental
proceedings to which we are a party that we believe would, if adversely
resolved, have a material adverse effect on us. For a discussion of other risks
and uncertainties that may affect our business, see “Risk Factors” in Item 1A of
this Annual Report on Form 10-K.
|
|
Critical
Accounting Policies and Estimates
|
Critical accounting policies are those
policies that require management to make the most challenging, subjective or
complex judgments, often because they must estimate the effect of matters that
are inherently uncertain and may change in subsequent
periods. Critical accounting policies involve judgments and
uncertainties that are sufficiently sensitive to result in materially different
results under different assumptions and conditions. We believe our most critical
accounting policies are described below.
Revenue
Recognition and Allowances for Uncollectible Accounts. Our
services are provided telephonically and, in some cases, in a patient’s home
from care centers located throughout the United States. In addition, our
services are provided through access to our online health and wellness based
tools. Revenues are recognized as the related services are rendered and are net
of contractual allowances and related discounts.
Our
services are paid for primarily on the basis of (i) monthly fees for each
employee or member enrolled in a health plan, (ii) each member identified with a
particular chronic disease or condition under contract, (iii) each member
enrolled in our programs, (iv) fee-for-service, or (v) a fixed rate per
case. Billings for certain services occur in advance of services
being performed. Such amounts are recorded as Unearned revenues in
the consolidated balance sheets. Such amounts are subsequently recognized as
revenue as services are performed.
Some
contracts provide that a portion of our fees are at-risk (i.e., refundable) if
our programs do not achieve certain financial cost savings and clinical
performance criteria. Revenues subject to refund are not recognized if (i)
sufficient information is not available to calculate performance measurements,
or (ii) interim performance measurements indicate that we are not meeting
performance targets. If either of these two conditions exists, we
record the amounts as Unearned revenues in the consolidated balance
sheets. If we do not meet performance levels by the end of the
operations period under the contract, we are contractually obligated to refund
some or all of the at-risk fees.
In 2007,
revenues from continuing operations were derived from the following types of
customers and third-party payors: approximately 54% from health plans, 36% from
employers, 7% from government payors and 3% from administrative services only
(“ASO”) self-insured employer clients.
A
significant portion of our revenues is billed to third-party reimbursement
sources. Therefore, the collectibility of all of our accounts
receivable varies based on payor mix, general economic conditions and other
factors. A provision for doubtful accounts is made for revenues estimated to be
uncollectible and is adjusted periodically based upon our evaluation of current
industry conditions, historical collection experience, recoveries of amounts
previously provided, industry reimbursement trends and other relevant factors
which, in the opinion of management, deserve recognition in estimating the
allowance for uncollectible accounts. The evaluation is performed at
each reporting period for each operating unit with an overall assessment at the
consolidated level. While estimates and judgments are involved and
factors impacting collectibility may change, management believes adequate
provision has been made for any adjustments that may result from final
determination of amounts to be collected.
Goodwill and
Identifiable Intangible Assets. Goodwill
represents the excess of cost over fair value of identifiable net assets
acquired. Goodwill arising from business combinations is accounted
for under the provision of SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and
Other Intangible Assets, and is not amortized. Our identifiable
intangible assets are amortized over their respective estimated useful
28
lives. As
of December 31, 2007, we reported goodwill and identifiable intangible assets at
net carrying amounts of $494.7 million and $48.8 million, respectively. The
total of $543.5 million represents approximately 79% of our total assets as of
December 31, 2007.
We review
goodwill and identifiable intangibles for impairment annually as of December 31
and whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. In testing for impairment, we compare the book value of
net assets to the fair value of the related reporting units that have goodwill
and indefinite life intangibles assigned to them. If the fair value
is determined to be less than book value, a second step is performed to compute
the amount of impairment. We estimate the fair values of the
reporting units based upon earnings multiples for similar precedent transactions
as well as the present value of estimated future free cash flows. The approach
utilized is dependent on a number of factors, including estimates of future
revenues and operating costs, appropriate discount rates and other
variables. We base our estimates on assumptions that we believe to be
reasonable, but which are unpredictable and inherently
uncertain. Therefore, future impairments could result if actual
results differ from those estimates. Based on our evaluation, we
concluded that no impairment of recorded goodwill and intangibles existed at
December 31, 2007.
Accounting for
Income Taxes. We account for income taxes using an asset and
liability approach. Deferred income taxes are recognized for the tax
consequences of “temporary differences” by applying enacted statutory tax rates
applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities and net
operating loss and tax credit carryforwards. Additionally, the effect
on deferred taxes of a change in tax rates is recognized in earnings in the
period that includes the enactment date.
We
adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”) on January
1, 2007. As a result of the implementation, we recognized a liability of
$524,000 for tax benefits recognized which may not be sustained and $144,000 of
related interest and penalties, which increased our Accumulated deficit at
January 1, 2007. FIN 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
The
income tax expense for continuing operations was $14.5 million, $12.8 million
and $2.7 million for the years ended December 31, 2007, 2006 and 2005,
respectively. Reflected in each year were various non-deductible
permanent differences between tax and financial reporting. As of
December 31, 2007, our remaining net operating loss carryforwards of $49.4
million, the tax effect of which is reflected as an asset on the balance sheet
in Deferred income taxes, will be available to offset future taxable income
liabilities, subject to certain limitations. Based on projections of
taxable income in 2008 and future years, we believe that it is more likely than
not that we will fully realize the value of the recorded deferred income tax
assets. The amount of the deferred tax asset considered realizable,
however, could be reduced if estimates of future taxable income during the
carryforward period are reduced.
Share-Based
Compensation. On January 1, 2006, we adopted
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment
(“SFAS 123(R)”). SFAS 123(R) establishes standards for the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of the enterprise or
liabilities that are based on the fair value of the enterprise’s equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS 123(R) eliminates the ability to account for share-based compensation
transactions, as we formerly did, using the intrinsic value method as prescribed
by Accounting Principles Board, (“APB”), Opinion No. 25, Accounting for Stock Issued to
Employees, and generally requires that such transactions be accounted for
using a fair-value-based method. Changes in assumptions as to the employee
forfeitures assumptions, exercise dates and volatility could have a significant
impact on the stock compensation fair value determinations.
29
The above
listing is not intended to be a comprehensive list of all of our accounting
policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for management’s judgment in their
application. There are also areas in which management’s judgment in
selecting any available alternative would not produce a materially different
result. See the Notes to Consolidated Financial Statements in this
Annual Report on Form 10-K, which contain additional accounting policies and
other disclosures required by generally accepted accounting
principles.
Our
senior management has discussed the development and selection of our critical
accounting estimates, and this disclosure, with the Audit Committee of our Board
of Directors.
Recently
Issued and Recently Adopted Accounting Standards
Business
Combinations. In December 2007,
the FASB issued SFAS No. 141R, Business Combinations (“SFAS
141R”), which replaces FASB Statement No. 141, Business Combinations (“SFAS
141”). SFAS 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree and the goodwill acquired. The Statement also
establishes disclosure requirements that will enable users to evaluate the
nature and financial effects of the business combination. SFAS 141R
is effective as of the entity’s fiscal year that begins after December 15,
2008. We are currently evaluating the potential impact, if any, of
the adoption of SFAS 141R on our results of operations or financial
position.
Noncontrolling
Interests. In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS
160”). SFAS 160 requires that accounting and reporting for minority
interests will be recharacterized as noncontrolling interests and classified as
a component of equity. SFAS 160 also establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interest of the parent and the interests of the
noncontrolling owners. SFAS 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will
affect only those entities that have an outstanding noncontrolling interest in
one or more subsidiaries or that deconsolidate a subsidiary. This
standard is effective as of the beginning of an entity’s first fiscal year
beginning after December 15, 2008. Based upon our December 31, 2007
balance sheet, the impact of adopting SFAS 160 will have an immaterial impact on
our financial position.
Fair Value
Option. In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115 (“SFAS 159”), which permits entities to choose to measure many
financial instruments and certain other items at fair value. Entities that elect
the fair value option will report unrealized gains and losses in earnings at
each subsequent reporting date. The fair value option may be elected
on an instrument-by-instrument basis with a few exceptions. SFAS 159
also establishes presentation and disclosure requirements to facilitate
comparisons between companies that choose different measurement attributes for
similar assets and liabilities. The requirements of SFAS 159 are
effective for our fiscal year beginning January 1, 2008. We are
currently assessing the potential impact of implementing this
standard. However, we do not expect the implementation to have a
material adverse effect on our results of operations or financial
position.
Accounting for
Uncertainty in Income Taxes. In June 2006, the FASB published
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109 (“FIN
48”). FIN 48 prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. We adopted the
provisions of FIN 48 on January 1, 2007, the effective date of the
interpretation. As a result of the implementation, we recognized a
liability of $524,000 for tax benefits recognized which may not be sustained and
$144,000 of related interest and penalties, which increased our Accumulated
deficit at January 1, 2007.
30
Fair Value
Measurements. In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value in GAAP and
expands disclosures about fair value measurements. SFAS 157 will be
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. We
are currently evaluating the requirements of this new standard and have not
determined the impact, if any, on our results of operations or financial
position.
Prior Year
Misstatements. In September 2006, the Securities and Exchange
Commission (“SEC”) issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”). SAB 108 addresses quantifying the
financial statement effects of misstatements, specifically, how the effects of
prior year uncorrected errors must be considered in quantifying misstatements in
current year financials. Under the provisions of SAB 108, a reporting
entity must quantify and evaluate errors using a balance sheet approach and an
income statement approach. After considering all relevant
quantitative and qualitative factors, if either approach results in a
misstatement that is material, a reporting entity’s financial statements must be
adjusted. SAB 108 is effective for fiscal years ending after November
15, 2006.
We
adopted the provisions of SAB 108 in the fourth quarter of 2006 and recorded a
cumulative effect adjustment of $813,000, net of income taxes of $518,000, to
our January 1, 2006 consolidated balance sheet. We identified two
uncorrected misstatements for consideration under SAB 108, each of which was
considered immaterial to our results of operations in any reporting period when
using only the income statement approach we historically used to assess the
materiality of unrecorded errors:
|
|
1.
|
An
unrecorded liability for drugs and supplies from a major vendor, which is
included in Accounts payable on the consolidated balance sheets, resulted
from an accumulation of unrecorded costs over several periods prior to
2003. This misstatement was identified in 2003. The final amount required
to correct the liability balance at January 1, 2006, would result in a
$600,000 charge to our results of operations in
2006.
|
|
|
2.
|
During
2006, we discovered that our medical device inventory, which is included
in Property and equipment on the consolidated balance sheets, was
overstated due to improper recording of disposed and lost medical devices
and the related depreciation expense. The misstatement
originated in 2003 and accumulated over subsequent periods. The
amount required to correct the medical device inventory at January 1,
2006, would result in a $731,000 charge to our results of operations in
2006.
|
Under the
balance sheet approach and the income statement approach, or the dual approach,
we determined that correcting the above misstatements would be material to our
2006 financial statements and recorded the cumulative effect adjustment to our
January 1, 2006, consolidated balance sheet upon our initial application of SAB
108.
31
Item
7A. Quantitative and Qualitative Disclosure about Market
Risk
We are
exposed to market risk from changes in interest rates on our long-term debt
obligations.
Our
primary interest rate risk relates to the Credit Facilities and our interest
rate swap facilities. In February 2006 and May 2006, we entered into
interest rate swap agreements with notional amounts totaling $200 million with a
bank under which we will pay the bank fixed base rates of interest of 5.065% and
5.350%, respectively, and the bank will pay us floating rates based on
three-month LIBOR (5.015% and 4.830%, respectively, at December 31,
2007). The agreements, which have a two-year term, have the economic
effect of converting a portion of our floating rate debt to fixed rate
debt. In August 2007, we entered into two additional interest rate
swap agreements, each with notional amounts of $100.0 million. These
swap agreements are scheduled to become effective after the termination of the
swaps noted above (February and May 2008). These agreements also have two-year
terms, and have the economic effect of converting $200.0 million of
floating-rate debt to fixed-rate debt. We will pay the bank fixed
base rates of 4.890% and 4.910%, respectively, under these swap arrangements,
and the bank will pay us floating rates based on three-month
LIBOR. Based upon the total amount of debt outstanding at December
31, 2007, not covered by interest rate swaps, a hypothetical two percentage
point increase in the interest rates for a duration of one year would result in
additional interest expense of approximately $1.3 million.
32
Item
8. Financial Statements and Supplementary Data
Our consolidated financial statements
are included as pages F-1 through F-30 of this Annual Report on Form
10-K:
|
PAGE
|
||
|
Management's
Report on Internal Controls Over Financial Reporting
|
F-1
|
|
|
Report
of Independent Registered Public Accounting Firm on Effectiveness
of
|
||
|
Internal
Controls
|
F-2
|
|
|
Report
of Independent Registered Public Accounting Firm on
Consolidated
|
||
|
Financial
Statements
|
F-3
|
|
|
Consolidated
Balance Sheets - December 31, 2007 and 2006
|
F-4
|
|
|
Consolidated
Statements of Operations - Years Ended
|
||
|
December
31, 2007, 2006 and 2005
|
F-5
|
|
|
Consolidated
Statements of Shareholders' Equity and
|
||
|
Comprehensive
Earnings (Loss) - Years Ended December 31, 2007, 2006 and
2005
|
F-6
|
|
|
Consolidated
Statements of Cash Flows - Years Ended
|
||
|
December
31, 2007, 2006 and 2005
|
F-7
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
|
|
|
Item
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
|
None.
Item
9A. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
The Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the design and operation of our disclosure controls and procedures (as such
term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange
Act of 1934, as amended (the “Exchange Act”)) as of December 31,
2007. No process, no matter how well designed and operated, can
provide absolute assurance that the objectives of the process are met in all
cases. However, our disclosure controls and procedures are designed
to provide reasonable assurance that the certifying officers will be alerted on
a timely basis to material information relating to the Company (including the
Company’s consolidated subsidiaries) required to be included in our reports
filed or submitted under the Exchange Act.
Based on
such evaluation, such officers have concluded that our disclosure controls and
procedures were effective as of December 31, 2007, to provide reasonable
assurance that the objectives of the disclosure controls and procedures were
met.
33
Management’s
Report on Internal Control Over Financial Reporting and Report of Independent
Registered Public Accounting Firm
“Management’s
Report on Internal Control Over Financial Reporting” and “Report of Independent
Registered Public Accounting Firm” assessing the effectiveness
of internal controls are included on pages F-1 and F-2 of this Annual
Report on Form 10-K.
Changes
in Internal Control over Financial Reporting
There
have been no significant changes in the Company’s internal control over
financial reporting during the period ended December 31, 2007, that have
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Item
9B. Other Information
None.
34
PART
III
Item
10. Directors, Executive Officers of the Registrant and Corporate
Governance.
Except as
set forth below, information required by this item will be included under the
captions “Election of Directors,” “Corporate Governance and Nominating
Committee,” “Board Committees, Attendance and Communications with Board of
Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the
Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders or in an
amendment to this Form 10-K to be filed with the Commission and 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.
Information
relating to the Company’s Corporate Governance Guidelines and Code of Conduct is
included under the caption “Available Information” in Part I, Item 1
of this Annual Report on Form 10-K.
Item
11. Executive Compensation.
Information required by this item will
be contained under the captions “Compensation Committee Interlocks and Insider
Participation,” “Executive Compensation” and “Compensation Committee
Report” in the Company’s Proxy Statement for the 2008 Annual Meeting
of Stockholders or in an amendment to this Form 10-K to be filed with the
Commission and incorporated by reference herein.
Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.
Except as
set forth below, information required by this item will be contained under the
caption “Security Ownership of Certain Beneficial Owners and Management” in the
Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders or in an
amendment to this Form 10-K to be filed with the Commission and incorporated by
reference herein.
For
purposes of determining the aggregate market value of the Company’s common stock
held by non-affiliates as shown on the cover page of this report, 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 rules of the Commission.
Equity Compensation Plan Information.
The following table gives information about the Company’s common stock
that may be issued upon the exercise of options, warrants and rights under all
existing equity compensation plans as of December 31, 2007:
|
Plan
Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
and Rights
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
|
Number
of Securities Remaining Available for Future Issuance Under Equity
Compensation Plans (1)
|
|||||||||||||
|
(a)
|
(b)
|
|||||||||||||||
|
Equity
compensation plans approved by security holders (2)
|
2,883,031 | $ | 22.17 | 979,110 | (3 | ) | ||||||||||
|
Equity
compensation plans not approved by security holders (4)
|
2,886 | $ | 11.96 | -- | ||||||||||||
|
Total
|
2,885,917 | $ | 22.16 | 979,110 | ||||||||||||
|
|
(1) Excluding
securities reflected in first
column.
|
|
|
(2) Shares
of restricted stock awards are included in column (a) of the table, but
are not included in column (b) for purposes of the weighted average
exercise price of stock options.
|
|
|
(3) Includes
securities available for future issuance under shareholder-approved
compensation plans as follows: 842,181 shares under the Long-Term Stock
Incentive Plan, 4,933 shares under the 2002 Stock Incentive Plan, 2,097
shares under the 2001 Stock Incentive Plan, 69,687 shares under the 2005
Directors’ Non-qualified Stock Option Plan, and 16,473 shares under the
2000 Stock Incentive Plan. Also includes 43,739 shares that
remain available for purchase under the 2005 Stock Purchase
Plan.
|
35
|
|
(4) Represents
options for 2,886 shares assumed by the Company in connection with the
acquisition of MarketRing on June 14, 2002, which options were granted by
MarketRing under the MarketRing 1999 Stock Option and Stock Appreciation
Rights Plan prior to the acquisition. The exercise price for these
options, originally set by MarketRing, was determined by reference to the
exchange ratio prescribed for converting shares of MarketRing common stock
into shares of the Company’s common stock pursuant to the
acquisition. The assumed options vested in increments of 25%
annually, and were fully vested on June 14, 2007, with such options
expiring five to ten years from the date of grant or upon termination of
employment.
|
Item
13. Certain Relationships and Related Transactions and Director
Independence.
Information
required by this item will be contained under the captions “Certain
Relationships and Related Transactions” and “Corporate Governance” in the
Company’s Proxy Statement for the 2008 Annual Meeting of Stockholders or in an
amendment to this Form 10-K to be filed with the Commission and incorporated by
reference herein.
Item
14. Principal Accountant Fees and Services
Information required by this item will
be contained under the caption “Audit Fees” in the Company’s Proxy Statement for
the 2008 Annual Meeting of Stockholders or in an amendment to this Form 10-K to
be filed with the Commission and incorporated by reference
herein.
36
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(a)(1) Financial
Statements
See Part
II, Item 8 for an index to our financial statements and supplementary
data.
|
|
(a)(2) The
following supporting financial statement schedule and report of
independent registered public accounting firm thereon are included as part
of this Annual Report on Form 10-K:
|
|
PAGE
|
|
|
Report
of Independent Registered Public Accounting Firm
|
45
|
|
Schedule
II - Valuation and Qualifying Accounts
|
46
|
|
|
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:
|
2.1
|
Asset
Purchase Agreement, dated June 22, 2004, by and among Matria Healthcare,
Inc., Diabetes Management Solutions, Inc., Diabetes Self Care, Inc. and
DEGC Enterprises (U.S.), Inc. (incorporated by reference to Exhibit 2.1 to
the Company's Current Report on Form 8-K filed July 15,
2004).
|
|||||||||||||||||||||||||||||
|
2.1.1
|
Amendment
No. 1 to Asset Purchase Agreement, dated June 30, 2004, by and among
Matria Healthcare, Inc., Diabetes Management Solutions, Inc., Diabetes
Self Care, Inc. and DEGC Enterprises (U.S.), Inc. (incorporated by
reference to Exhibit 2.2 to the Company's Current Report on Form 8-K filed
July 15, 2004).
|
|||||||||||||||||||||||||||||
|
2.2
|
Asset
Purchase Agreement dated March 9, 2005, by and between Miavita LLC and
Matria Healthcare, Inc. (incorporated by reference to Exhibit 99.1 to the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
2005).
|
|||||||||||||||||||||||||||||
|
2.3
|
Agreement
and Plan of Merger by and among Matria Healthcare, Inc., WHI Acquisition
Corp. and WinningHabits, Inc., dated September 19, 2005 (incorporated by
reference to Exhibit 2.3 to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2005).
|
|||||||||||||||||||||||||||||
|
2.4
|
Agreement
and Plan of Merger dated as of December 14, 2005, by and among
CorSolutions Medical, Inc., Matria Healthcare, Inc. and Coral Acquisition
Corp. (incorporated by reference to Exhibit 2.5 to the Company's Annual
Report on Form 10-K for the year ended December 31, 2005).
|
|||||||||||||||||||||||||||||
|
2.5
|
Membership
Interest Purchase Agreement dated July 26, 2006 by and among Matria
Healthcare, Inc., Facet Technologies, LLC and Facet Acquisition, LLC
(incorporated by reference to Exhibit 2.1 to the Company's Current Report
on Form 8-K filed July 31, 2006).
|
|||||||||||||||||||||||||||||
|
2.6
|
Sale
and Purchase Agreement dated September 22, 2006, by and among Matria
Healthcare, Inc., Diabetes Acquisition, Inc., OPG Holding GmbH and OPG
Groep N.V. (incorporated by reference to Exhibit 2.1 to the Company's
Current Report on Form 8-K filed September 27, 2006).
|
|||||||||||||||||||||||||||||
|
2.7
|
Agreement
and Plan of Merger, dated as of January 27, 2008, among Inverness Medical
Innovations, Inc., Milano MH Acquisition Corp., Milano MH Acquisition LLC
and Matria Healthcare, Inc. (incorporated by reference to the Company's
Current Report on Form 8-K filed January 29, 2008).
|
|||||||||||||||||||||||||||||
37
|
3.1
|
Certificate
of Incorporation of Matria Holding Company, Inc., dated as of December 28,
2004 (incorporated by reference to Exhibit 3.1 to the Company's Current
Report on Form 8-K filed January 6, 2005).
|
|||||||||||||||||||||||||
|
3.2
|
Certificate
of Ownership and Merger merging Matria Mergeco, Inc. with and into Matria
Holding Company, Inc., dated December 31, 2004 (incorporated by reference
to Exhibit 3.2 to the Company's Current Report on Form 8-K filed January
6, 2004).
|
|||||||||||||||||||||||||
|
3.3
|
Amended
Bylaws of Matria Healthcare, Inc. (incorporated by reference to the
Company's Current Report on Form 8-K filed July 30, 2007).
|
|||||||||||||||||||||||||
|
*10.1
|
1996
Stock Incentive Plan (incorporated by reference to Appendix F-1 to the
Joint Proxy Statement/Prospectus filed as a part of the Company's
Registration Statement No. 333-781 on Form S-4 filed on February 7,
1996).
|
|||||||||||||||||||||||||
|
*10.2
|
1996
Directors' Non-Qualified Stock Option Plan (incorporated by reference to
Appendix F-11 to the Joint Proxy Statement/Prospectus filed as a part of
the Company's Registration Statement No. 333-781 on Form S-4 filed on
February 7, 1996).
|
|||||||||||||||||||||||||
|
*10.3
|
1997
Stock Incentive Plan (incorporated by reference to Exhibit A to the
Company's Definitive Proxy Statement filed with the Commission on April
16, 1998).
|
|||||||||||||||||||||||||
|
*10.4
|
2000
Stock Incentive Plan (incorporated by reference to Exhibit A to the
Company's Definitive Proxy Statement filed with the Commission on April
14, 2000).
|
|||||||||||||||||||||||||
|
*10.5
|
2000
Director's Non-Qualified Stock Option Plan (incorporated by reference to
the Company's Definitive Proxy Statement filed with the Commission on
April 14, 2000).
|
|||||||||||||||||||||||||
|
*10.6
|
Amendment
to the 1996 Directors' Non-Qualified Stock Option Plan approved by the
Company's stockholders on May 18, 1998 (incorporated by reference to
Exhibit 10.23 to the Company's Form 10-K for the year ended December 31,
2000).
|
|||||||||||||||||||||||||
|
*10.7
|
Amendment
to the 2000 Directors' Non-Qualified Stock Option Plan, approved by the
Company's stockholders on May 24, 2001 (incorporated by reference to the
Company's Definitive Proxy Statement filed with the Commission April 26,
2001).
|
|||||||||||||||||||||||||
|
*10.8
|
2001
Stock Incentive Plan (incorporated by reference to the Company's
Definitive Proxy Statement filed with the Commission April 26,
2001).
|
|||||||||||||||||||||||||
|
*10.9
|
2002
Stock Incentive Plan (incorporated by reference to Appendix C to the
Prospectus/Proxy Statement/Solicitation Statement filed as part of the
Company's Registration Statement No. 333-90944 on Form S-4 filed June 21,
2002).
|
|||||||||||||||||||||||||
|
*10.10
|
MarketRing.com,
Inc. 1999 Stock Option and Stock Appreciation Rights Plan, effective
September 30, 1999, assumed by the Company (incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2002).
|
|||||||||||||||||||||||||
|
*10.11
|
MarketRing.com,
Inc. Amendment No. 1 to 1999 Stock Option and Stock Appreciation Rights
Plan, dated July 14, 2000, assumed by the Company (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 2002).
|
|||||||||||||||||||||||||
|
*10.12
|
2005
Stock Purchase Plan (incorporated by reference to Appendix A to the
Company's Definitive Proxy Statement filed with the Commission on April
25, 2005).
|
|||||||||||||||||||||||||
38
|
*10.13
|
Long-Term
Stock Incentive Plan (incorporated by reference to Appendix A to the
Company's Definitive Proxy Statement filed with the Commission on April
30, 2007).
|
||||||||||||||||||||||||||
|
*10.14
|
2005
Directors' Non-Qualified Stock Option Plan (incorporated by reference to
Appendix C to the Company's Definitive Proxy Statement filed with the
Commission on April 25, 2005).
|
||||||||||||||||||||||||||
|
10.15
|
NewMarket
Building Lease Agreement, dated September 4, 2002, between Matria
Healthcare, Inc. and Trizec Realty, Inc. (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002).
|
||||||||||||||||||||||||||
|
10.16
|
One
Parkway Center Lease Agreement, dated November 8, 2002, between Matria
Healthcare, Inc. and Atlanta Parkway Investment Group, Inc. (incorporated
by reference to Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 2002).
|
||||||||||||||||||||||||||
|
*10.17
|
Supplemental
Executive Retirement Plan between the Company and Roberta L. McCaw, dated
January 1, 2003 (incorporated by reference to Exhibit 10.31 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2002).
|
||||||||||||||||||||||||||
|
*10.18
|
Supplemental
Executive Retirement Plan between the Company and Thornton A. Kuntz, Jr.,
dated January 1, 2003 (incorporated by reference to Exhibit 10.32 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2002).
|
||||||||||||||||||||||||||
|
*10.19
|
Trust
Under the Matria Healthcare, Inc. Supplemental Executive Retirement Plan,
dated February 4, 2003 (incorporated by reference to Exhibit 10.37 to the
Company's Annual Report on Form 10-K for the year ended December 31,
2002).
|
||||||||||||||||||||||||||
|
*10.20
|
First
Amendment to the Trust under the Matria Healthcare, Inc. Supplemental
Retirement Plan effective February 4, 2003 (incorporated by reference to
Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003.)
|
||||||||||||||||||||||||||
|
10.21
|
First
Amendment of Lease, dated May 9, 2003, to the New Market Building Lease
Agreement between Matria Healthcare, Inc. and Trizec Realty, Inc.
(incorporated by reference to Exhibit 10 to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 2003).
|
||||||||||||||||||||||||||
|
10.22
|
First
Amendment to Lease Agreement dated December 11, 2003, by and between
Atlanta Parkway Investment Group, Inc., and Matria Healthcare, Inc.
(incorporated by reference to Exhibit 10.34 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2003).
|
||||||||||||||||||||||||||
|
10.23
|
Second
Amendment to Lease Agreement dated December 11, 2003, between Atlanta
Parkway Investment Group, Inc., and Matria Healthcare, Inc. (incorporated
by reference to Exhibit 10.35 to the Company's Annual Report on Form 10-K
for the year ended December 31, 2003).
|
||||||||||||||||||||||||||
|
10.24
|
Second
Amendment of Lease, dated February 3, 2004, to the New Market Building
Lease between Matria Healthcare, Inc., and Trizec Realty, Inc.,
(incorporated by reference to Exhibit 10.43 to the Company's Annual Report
on Form 10-K for the year ended December 31, 2003).
|
||||||||||||||||||||||||||
|
*10.25
|
Amendment
to the Matria Healthcare, Inc. 2000 Directors' Non-Qualified Stock Option
Plan (incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 2004).
|
||||||||||||||||||||||||||
|
10.26
|
Third
Amendment of Lease, dated March 30, 2004, to the New Market Building Lease
between the Company and Trizec Realty, Inc. (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004).
|
||||||||||||||||||||||||||
39
|
10.27
|
Matria
Healthcare, Inc. Form of Stock Option Agreement (incorporated by reference
to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 2004).
|
||||||||||||||||||||||||||||||||
|
*10.28
|
Letter
Agreement dated as of November 7, 2005, by and between Matria Healthcare,
Inc. and Richard M. Hassett, M.D. (incorporated by reference to Exhibit
10.1 to the Company's Current Report on Form 8-K filed November 10,
2005).
|
||||||||||||||||||||||||||||||||
|
10.29
|
Credit
Agreement, dated January 19, 2006, by and among Matria, certain of its
domestic subsidiaries, as guarantors and Bank of America, N.A. as issuing
bank swing lender, administrative agent and collateral agent (incorporated
by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K
filed January 25 2006).
|
||||||||||||||||||||||||||||||||
|
10.3
|
Term
Loan Agreement, dated January 19, 2006, by and among Matria, certain of
its domestic subsidiaries, as guarantors and Bank of America, N.A. as
administrative agent and collateral agent (incorporated by reference to
Exhibit 10.2 to the Company's Current Report on Form 8-K filed January 25,
2006).
|
||||||||||||||||||||||||||||||||
|
10.31
|
First
Amendment to Credit Agreement, dated February 2, 2006, by and among
Matria, certain of its domestic subsidiaries, as guarantors and Bank of
America, N.A., as issuing bank, swingline lender, administrative agent and
collateral agent (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed February 7,
2006).
|
||||||||||||||||||||||||||||||||
|
10.32
|
First
Amendment to Term Loan Agreement, dated February 2, 2006, by and among
Matria, certain of its domestic subsidiaries, as guarantors and Bank of
America, N.A. as administrative agent and collateral agent (incorporated
by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K
filed February 7, 2006).
|
||||||||||||||||||||||||||||||||
|
*10.33
|
Letter
Agreement dated as of March 8, 2006, by and between Matria Healthcare,
Inc. and Jeffrey L. Hinton (incorporated by reference to Exhibit 10.1 to
the Company's Current Report on Form 8-K filed March 8,
2006).
|
||||||||||||||||||||||||||||||||
|
10.34
|
Form
of Restricted Stock Agreement to be issued under the Long-Term Stock
Incentive Plan prior to 2007 (incorporated by reference to the Company's
Current Report on Form 8-K filed April 26, 2006).
|
||||||||||||||||||||||||||||||||
|
10.35
|
Second
Amendment to the Credit Agreement and Consent, effective November 2, 2006,
by and among Matria, certain of its domestic subsidiaries, as guarantors
and Bank of America, N.A., as administrative agent and collateral agent
(incorporated by reference to the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2006).
|
||||||||||||||||||||||||||||||||
|
10.37
|
Settlement
Agreement and Release dated November 6, 2006, between Matria and MAJ
Industries LLC (fka Miavita LLC) (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 2006).
|
||||||||||||||||||||||||||||||||
|
*10.37
|
Severance
Compensation and Restrictive Covenant Agreement between Matria and Yvonne
V. Scoggins dated November 6, 2006 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 2006).
|
||||||||||||||||||||||||||||||||
|
*10.38
|
Severance
Compensation and Restrictive Covenant Agreement between Matria and Richard
M. Hassett, M.D. dated April 26, 2006 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 2006).
|
||||||||||||||||||||||||||||||||
40
|
*10.39
|
Change-in-Control
Severance Compensation and Restrictive Covenant Agreement between Matria
and Richard M. Hassett, M.D. dated April 26, 2006 (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2006).
|
|||||||||||||||||||||||||||||
|
*10.40
|
Severance
Compensation and Restrictive Covenant Agreement between Matria and Jeffrey
L. Hinton dated April 26, 2006 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2006).
|
|||||||||||||||||||||||||||||
|
*10.41
|
Change-in-Control
Severance Compensation and Restrictive Covenant Agreement between Matria
and Jeffrey L. Hinton dated April 26, 2006 (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006).
|
|||||||||||||||||||||||||||||
|
*10.42
|
Severance
Compensation and Restrictive Covenant Agreement between Matria and Roberta
L. McCaw dated April 26, 2006 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2006).
|
|||||||||||||||||||||||||||||
|
*10.43
|
Change-in-Control
Severance Compensation and Restrictive Covenant Agreement between Matria
and Roberta L. McCaw dated April 26, 2006 (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2006).
|
|||||||||||||||||||||||||||||
|
*10.44
|
Severance
Compensation and Restrictive Covenant Agreement between Matria and Parker
H. Petit dated April 26, 2006 (incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30,
2006).
|
|||||||||||||||||||||||||||||
|
*10.45
|
Change-in-Control
Severance Compensation and Restrictive Covenant Agreement between Matria
and Parker H. Petit dated April 26, 2006 (incorporated by reference to the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 2006).
|
|||||||||||||||||||||||||||||
|
*10.46
|
Change-in-Control
Severance Compensation and Restrictive Covenant Agreement between Matria
and Yvonne V. Scoggins dated April 26, 2006 (incorporated by reference to
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2006).
|
|||||||||||||||||||||||||||||
|
10.47
|
Matria
Healthcare, Inc. Board of Directors' Charter of Corporate Governance and
Nominating Committee (incorporated by reference to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30,
2007).
|
|||||||||||||||||||||||||||||
|
10.48
|
Third
Amendment to the Credit Agreement dated February 25, 2007, by and among
Matria, certain of its domestic subsidiaries, as guarantors, and Bank of
America, N.A., as administrative agent and collateral agent (incorporated
by reference to the Company's Current Report on Form 8-K filed February
28, 2007).
|
|||||||||||||||||||||||||||||
|
10.49
|
Matria's
Charter of the Audit Committee, as amended December 14, 2006 (incorporated
by reference to the Company's Annual Report on Form 10-K for the year
ended December 31, 2006).
|
|||||||||||||||||||||||||||||
|
*10.50
|
Severance
Compensation and Restrictive Covenant Agreement between Matria and
Thornton A. Kuntz, Jr. dated April 26, 2006 (incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended December 31,
2006).
|
|||||||||||||||||||||||||||||
|
*10.51
|
Change-in-Control
Severance Compensation and Restrictive Covenant Agreement between Matria
and Thornton A. Kuntz, Jr. dated April 26, 2006 (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December
31, 2006).
|
|||||||||||||||||||||||||||||
41
|
*10.52
|
Form
of Restricted Stock Agreement to be issued under the Company's Stock
Incentive Plans for Performance-Based Awards (incorporated by reference to
the Company's Annual Report on Form 10-K for the year ended December 31,
2006).
|
||||||||||||||||||||||
|
*10.52.1
|
Form
of Restricted Stock Agreement to be issued under the Company's Stock
Incentive Plans for Time-Based Awards. Awards (incorporated by reference
to the Company's Annual Report on Form 10-K for the year ended December
31, 2006).
|
||||||||||||||||||||||
|
*+10.53
|
2007
Management Incentive Plan (incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31,
2006).
|
||||||||||||||||||||||
|
10.54
|
Form
of Indemnification Agreement (incorporated by reference to the Company's
Current Report on Form 8-K filed January 29, 2008).
|
||||||||||||||||||||||
|
14
|
Code
of Conduct of Matria Healthcare, Inc., as amended October 19, 2004
(incorporated by reference to Exhibit 14 to the Company's Current Report
on Form 8-K filed October 25, 2004).
|
||||||||||||||||||||||
The
following exhibits are filed as part of this Report:
|
*10.55
|
Severance
Compensation and Restrictive Covenant Agreement between Matria and Thomas
D. Underwood dated June 4, 2007.
|
||||||||||||||
|
*10.56
|
Change-in-Control
Severance Compensation and Restrictive Covenant Agreement between Matria
and Thomas D. Underwood dated June 4, 2007.
|
||||||||||||||
|
21
|
List
of Subsidiaries
|
||||||||||||||
|
23
|
Consent
of Independent Registered Public Accounting Firm
|
||||||||||||||
|
24
|
Power
of Attorney (included in signature page to this report)
|
||||||||||||||
|
31.1
|
Rule
13a-14(a)/15d-14(a) Certification by Parker H. Petit
|
||||||||||||||
|
31.2
|
Rule
13a-14(a)/15d-14(a) Certification by Jeffrey L. Hinton
|
||||||||||||||
|
32.1
|
Section
1350 Certification by Parker H. Petit
|
||||||||||||||
|
32.2
|
Section
1350 Certification by Jeffrey L. Hinton
|
||||||||||||||
|
*
|
Management
contract or compensatory plan or
arrangement.
|
|
+
|
Confidential
treatment pursuant to Rule 24b-2 under the Securities Exchange Act has
been requested regarding certain portions of the indicated Exhibit, which
portions have been filed separately with the
Commission.
|
42
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.
February 29,
2008 By:
/s/ Parker
H. Petit
Parker H. Petit
Chairman
of the Board and
Chief Executive Officer
(Principal
Executive Officer)
/s/ Jeffrey
L. Hinton
Jeffrey L.
Hinton
Senior
Vice President and
Chief
Financial Officer
(Principal Financial Officer)
/s/ Joseph
A. Blankenship
Joseph A. Blankenship
Vice President – Controller
(Principal Accounting Officer)
KNOW ALL MEN BY THESE PRESENTS, that
each person whose signature appears below constitutes and appoints Parker H.
Petit as his or her true and lawful attorney-in-fact and agent, with full power
of substitution and re-substitution, 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 10-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.
43
|
Signature
|
Title |
|
Date |
|
||||||
|
/s/
Parker H. Petit
|
Chairman
of the Board
|
February
29, 2008
|
||||||||
|
Parker
H. Petit
|
and
Chief Executive Officer
|
|||||||||
|
/s/
Joseph G. Bleser
|
Director
|
February
29, 2008
|
||||||||
|
Joseph
G. Bleser
|
||||||||||
|
/s/
J. Terry Dewberry
|
Director
|
February
29, 2008
|
||||||||
|
J.
Terry Dewberry
|
||||||||||
|
/s/
Donald J. Lothrop
|
Director
|
February
29, 2008
|
||||||||
|
Donald
J. Lothrop
|
||||||||||
|
/s/
Myldred H. Mangum
|
Director
|
February
29, 2008
|
||||||||
|
Myldred
H. Mangum
|
||||||||||
|
/s/
Guy W. Millner
|
Director
|
February
29, 2008
|
||||||||
|
Guy
W. Millner
|
||||||||||
|
/s/
Kaaren J. Street
|
Director
|
February
29, 2008
|
||||||||
|
Kaaren
J. Street
|
||||||||||
|
/s/
Thomas S. Stribling
|
Director
|
February
29, 2008
|
||||||||
|
Thomas
S. Stribling
|
||||||||||
|
/s/
Wayne P. Yetter
|
Director
|
February
29, 2008
|
||||||||
|
Wayne
P. Yetter
|
||||||||||
44
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders
Matria
Healthcare, Inc.:
Under
date of February 29, 2008, we reported on the consolidated balance sheets of
Matria Healthcare, Inc. and subsidiaries (the “Company”) as of December 31, 2007
and 2006, and the related consolidated statements of operations, shareholders’
equity and comprehensive earnings (loss) and cash flows for each of the years in
the three-year period ended December 31, 2007, as contained in the 2007 annual
report to shareholders. These consolidated financial statements and
our report thereon are included in the annual report on Form 10-K for the year
2007. In connection with our audits of the aforementioned
consolidated financial statements, we also audited the related 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 audits.
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.
As
discussed in Note 1 and Note 8 to the consolidated financial statements, the
Company adopted the provisions of FASB No. 48, Accounting for Uncertainty in Income
Taxes, as of January 1, 2007. As discussed in Note 1 to
the consolidated financial statements, the Company adopted the provisions of
Staff Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, as of January 1, 2006. Additionally, as discussed
in Notes 1 and 9 to the consolidated financial statements, the Company adopted
Statement of Financial Accounting Standards No. 123R, Share Based Payment, as of
January 1, 2006.
/s/ KPMG LLP
Atlanta,
Georgia
February
29, 2008
45
Matria
Healthcare, Inc. and Subsidiaries
Schedule
II
Valuation
and Qualifying Accounts
(Amounts
in thousands)
|
Additions
|
||||||||||||||||||||
|
Balance
at
|
Charges
to
|
Charges
to
|
Balance
at
|
|||||||||||||||||
|
Beginning
|
Costs
and
|
Other
|
End
of
|
|||||||||||||||||
|
Description
|
of
Period
|
Expenses
|
Accounts
|
Deductions
|
Period
|
|||||||||||||||
|
Year
ended December 31, 2005
|
$ | 2,292 | 3,493 | 15 | 1 | (1,914 | ) | $ | 3,886 | |||||||||||
|
Year
ended December 31, 2006
|
$ | 3,886 | 4,093 | 50 | 2 | (3,632 | ) | $ | 4,397 | |||||||||||
|
Year
ended December 31, 2007
|
$ | 4,397 | 5,252 | - | (5,090 | ) | $ | 4,559 | ||||||||||||
|
1 Represents
beginning balances in allowance for doubtful accounts of acquired
companies (WinningHabits)
|
||||||||||||||||||||
|
2 Represents
beginning balances in allowance for doubtful accounts of acquired
companies (CorSolutions)
|
||||||||||||||||||||
See
accompanying report of Independent Registered Public Accounting
Firm.
46
Management’s
Report on Internal Control Over Financial Reporting
The
management of Matria Healthcare, Inc. (the “Company”) is responsible for
establishing and maintaining adequate internal control over financial reporting
as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934. The Company maintains accounting and internal control systems
which are intended to provide reasonable assurance that assets are safeguarded
against loss from unauthorized use or disposition, transactions are executed in
accordance with management’s authorization and accounting records are reliable
for preparing financial statements in accordance with accounting principles
generally accepted in the United States of America.
Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent
limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal
control over financial reporting also can be circumvented by collusion or
improper management override. Because of such limitations, there is a
risk that material misstatements may not be prevented or detected on a timely
basis by internal control over financial reporting. However, these
inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, risk.
The
Company’s management assessed the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2007. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations (COSO) of the Treadway Commission in Internal Control – Integrated
Framework.
Based on
our assessment management believes that, as of December 31, 2007, the Company’s
internal control over financial reporting is effective based on those
criteria.
The
effectiveness of internal control over financial reporting as of December 31,
2007, has been audited by KPMG LLP, the independent registered public accounting
firm who also audited the Company’s consolidated financial
statements. KPMG LLP’s attestation report on the effectiveness of the
Company’s internal control over financial reporting appears on page F-2
hereof.
By:
/s/ Parker H.
Petit /s/ Jeffrey L.
Hinton
Parker
H.
Petit
Jeffrey L. Hinton
Chairman
of the Board
and
Senior Vice President and
Chief
Executive
Officer
Chief Financial Officer
F - 1
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders
Matria
Healthcare, Inc.:
We have
audited Matria Healthcare, Inc.’s internal control over financial reporting as
of December 31, 2007, based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
Matria Healthcare, Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report of Internal Controls over Financial
Reporting. Our
responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and
testing and evaluating the design and operating effectiveness of internal
control based on the assessed risk. Our audit also included performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our
opinion, Matria Healthcare, Inc. maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2007, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Matria
Healthcare, Inc.’s as of December 31, 2007 and 2006, and the related
consolidated statements of operations, shareholders’ equity and comprehensive
earnings (loss), and cash flows for each of the years in the three-year period
ended December 31, 2007, and our report dated February 29, 2008 expressed an
unqualified opinion on those consolidated financial statements.
/s/
KPMG LLP
Atlanta,
Georgia
February
29, 2008
F - 2
Report
of Independent Registered Public Accounting Firm
The
Board of Directors and Shareholders
Matria Healthcare,
Inc.:
We have
audited the accompanying consolidated balance sheets of Matria Healthcare, Inc.
and subsidiaries (the “Company”) as of December 31, 2007 and 2006, and the
related consolidated statements of operations, shareholders’ equity and
comprehensive earnings (loss), and cash flows for each of the years in the
three-year period ended December 31, 2007. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Matria Healthcare, Inc. as
of December 31, 2007 and 2006, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
2007, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 1 and Note 8 to the consolidated financial statements, the
Company adopted the provisions of FASB No. 48, Accounting for Uncertainty in Income
Taxes, as of January 1, 2007. As discussed in Note 1 to the
consolidated financial statements, the Company adopted the provisions of Staff
Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, as of January 1, 2006. Additionally, as discussed
in Notes 1 and 9 to the consolidated financial statements, the Company adopted
Statement of Financial Accounting Standards No. 123R, Share Based Payment, as of
January 1, 2006.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Matria Healthcare Inc.’s internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated February
29, 2008 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
/s/ KPMG
LLP
Atlanta,
Georgia
February
29, 2008
F - 3
MATRIA
HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
(Amounts
in thousands, except per share amounts)
|
December
31,
|
||||||||
|
ASSETS
|
2007
|
2006
|
||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 19,501 | $ | 19,839 | ||||
|
Restricted
cash
|
- | 1,372 | ||||||
|
Trade
accounts receivable, less allowances of $4,559 and
|
||||||||
|
$4,397
at December 31, 2007 and 2006, respectively
|
45,968 | 52,985 | ||||||
|
Prepaid
expenses
|
4,811 | 4,768 | ||||||
|
Other
current assets
|
6,668 | 9,466 | ||||||
|
Deferred
income taxes
|
15,308 | 8,087 | ||||||
|
Total
current assets
|
92,256 | 96,517 | ||||||
|
Property
and equipment, net
|
40,013 | 38,950 | ||||||
|
Goodwill,
net
|
494,718 | 500,830 | ||||||
|
Other
intangibles, net
|
48,746 | 55,891 | ||||||
|
Deferred
income taxes
|
- | 5,564 | ||||||
|
Other
assets
|
10,505 | 13,621 | ||||||
|
Total
Assets
|
$ | 686,238 | $ | 711,373 | ||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable, principally trade
|
$ | 8,365 | $ | 13,846 | ||||
|
Current
installments of long-term debt
|
43,988 | 4,197 | ||||||
|
Unearned
revenues
|
10,097 | 13,493 | ||||||
|
Acquisition
contingent consideration
|
- | 54,223 | ||||||
|
Accrued
liabilities
|
19,584 | 22,661 | ||||||
|
Total
current liabilities
|
82,034 | 108,420 | ||||||
|
Long-term
debt, excluding current installments
|
238,688 | 275,938 | ||||||
|
Deferred
income taxes
|
7,257 | - | ||||||
|
Other
long-term liabilities
|
7,019 | 8,039 | ||||||
|
Total
liabilities
|
334,998 | 392,397 | ||||||
|
Shareholders'
equity:
|
||||||||
|
Preferred
stock, $.01 par value. Authorized 50,000
shares;
|
||||||||
|
none
outstanding at December 31, 2007 and 2006
|
- | - | ||||||
|
Common
stock, $.01 par value. Authorized 50,000
shares;
|
||||||||
|
issued
and outstanding 21,420 and 21,255 at December 31, 2007
|
||||||||
|
and
2006, respectively
|
214 | 213 | ||||||
|
Additional
paid-in capital
|
430,531 | 415,950 | ||||||
|
Accumulated
deficit
|
(76,389 | ) | (97,149 | ) | ||||
|
Accumulated
other comprehensive earnings
|
(3,116 | ) | (38 | ) | ||||
|
Total
shareholders' equity
|
351,240 | 318,976 | ||||||
|
Total
Liabilities and Shareholders' Equity
|
$ | 686,238 | $ | 711,373 | ||||
See accompanying notes to
consolidated financial statements.
F - 4
MATRIA
HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
(Amounts
in thousands, except per share amounts)
|
Years
ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues
|
$ | 352,235 | $ | 336,139 | $ | 179,231 | ||||||
|
Cost
of revenues
|
107,513 | 109,924 | 72,972 | |||||||||
|
Selling
and administrative expenses
|
174,622 | 159,021 | 94,291 | |||||||||
|
Provision
for doubtful accounts
|
5,252 | 4,093 | 3,493 | |||||||||
|
Amortization
of intangible assets
|
7,144 | 7,144 | 365 | |||||||||
|
Total
costs and operating expenses
|
294,531 | 280,182 | 171,121 | |||||||||
|
Operating
earnings from continuing operations
|
57,704 | 55,957 | 8,110 | |||||||||
|
Interest
income
|
1,601 | 1,548 | 829 | |||||||||
|
Interest
expense
|
(23,933 | ) | (27,591 | ) | (2,418 | ) | ||||||
|
Other
income, net
|
227 | 1,329 | 226 | |||||||||
|
Earnings
from continuing operations before income taxes
|
35,599 | 31,243 | 6,747 | |||||||||
|
Income
tax expense
|
(14,534 | ) | (12,768 | ) | (2,733 | ) | ||||||
|
Earnings
from continuing operations
|
21,065 | 18,475 | 4,014 | |||||||||
|
Discontinued
Operations:
|
||||||||||||
|
Earnings
(loss) from discontinued operations, net of income taxes
|
(86 | ) | 5,293 | 9,949 | ||||||||
|
Gain
on disposal of discontinued operations, net of income
taxes
|
449 | 28,922 | - | |||||||||
|
Earnings
from discontinued operations
|
363 | 34,215 | 9,949 | |||||||||
|
Net
earnings
|
$ | 21,428 | $ | 52,690 | $ | 13,963 | ||||||
|
Net
earnings per common share:
|
||||||||||||
|
Basic:
|
||||||||||||
|
Continuing
operations
|
$ | 0.99 | $ | 0.88 | $ | 0.21 | ||||||
|
Discontinued
operations
|
0.01 | 1.63 | 0.53 | |||||||||
| $ | 1.00 | $ | 2.51 | $ | 0.74 | |||||||
|
Diluted:
|
||||||||||||
|
Continuing
operations
|
$ | 0.96 | $ | 0.85 | $ | 0.20 | ||||||
|
Discontinued
operations
|
0.02 | 1.58 | 0.50 | |||||||||
| $ | 0.98 | $ | 2.43 | $ | 0.70 | |||||||
|
Weighted
average shares outstanding:
|
||||||||||||
|
Basic
|
21,361 | 21,025 | 18,795 | |||||||||
|
Diluted
|
21,865 | 21,665 | 19,874 | |||||||||
See
accompanying notes to consolidated financial statements.
F - 5
MATRIA
HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated
Statements of Shareholders’ Equity and Comprehensive Earnings
(Loss)
(Amounts
in thousands)
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Other
|
Total
|
||||||||||||||||||||||
|
Common
stock
|
Paid-in
|
Accumulated
|
Comprehensive
|
Shareholders'
|
||||||||||||||||||||
|
Shares
|
Amount
|
Capital
|
Deficit
|
Earnings
(loss)
|
Equity
|
|||||||||||||||||||
|
Balance,
December 31, 2004
|
15,860 | $ | 159 | $ | 321,181 | $ | (162,989 | ) | $ | 1,309 | $ | 159,660 | ||||||||||||
|
Issuance
of common stock:
|
||||||||||||||||||||||||
|
Exercise
of employee stock options
|
553 | 5 | 6,433 | - | - | 6,438 | ||||||||||||||||||
|
Employee
stock purchase plan
|
31 | - | 814 | - | - | 814 | ||||||||||||||||||
|
Conversion
of 4.875% notes
|
4,388 | 44 | 68,005 | - | - | 68,049 | ||||||||||||||||||
|
Exercise
of warrant
|
- | - | 3 | - | - | 3 | ||||||||||||||||||
|
Tax
benefit from exercise of employee stock options
|
- | - | 4,052 | - | - | 4,052 | ||||||||||||||||||
|
Net
earnings
|
- | - | - | 13,963 | - | 13,963 | ||||||||||||||||||
|
Change
in foreign currency translation adjustment, net tax
|
- | - | - | - | (1,041 | ) | (1,041 | ) | ||||||||||||||||
|
Comprehensive
earnings
|
- | - | - | 13,963 | (1,041 | ) | 12,922 | |||||||||||||||||
|
Balance,
December 31, 2005
|
20,832 | 208 | 400,488 | (149,026 | ) | 268 | 251,938 | |||||||||||||||||
|
Cumulative
effects of adjustments resulting from adoption of SAB 108, net of
tax
|
- | - | - | (813 | ) | - | (813 | ) | ||||||||||||||||
|
Issuance
of common stock:
|
||||||||||||||||||||||||
|
Exercise
of employee stock options
|
359 | 4 | 4,531 | - | - | 4,535 | ||||||||||||||||||
|
Employee
stock purchase plan
|
64 | 1 | 1,452 | - | - | 1,453 | ||||||||||||||||||
|
Tax
benefit from exercise of employee stock options
|
- | - | 1,885 | - | - | 1,885 | ||||||||||||||||||
|
Share-based
compensation
|
- | - | 6,986 | - | - | 6,986 | ||||||||||||||||||
|
Share-based
compensation-discontinued operations
|
- | - | 608 | - | - | 608 | ||||||||||||||||||
|
Change
in fair value of interest rate swap
|
- | - | - | - | (62 | ) | (62 | ) | ||||||||||||||||
|
Net
earnings
|
- | - | - | 52,690 | - | 52,690 | ||||||||||||||||||
|
Change
in foreign currency translation adjustment, net of tax
|
- | - | - | - | (244 | ) | (244 | ) | ||||||||||||||||
|
Comprehensive
earnings
|
- | - | - | 52,690 | (306 | ) | 52,384 | |||||||||||||||||
|
Balance,
December 31, 2006
|
21,255 | 213 | 415,950 | (97,149 | ) | (38 | ) | 318,976 | ||||||||||||||||
|
Adoption
of FIN 48
|
- | - | - | (668 | ) | - | (668 | ) | ||||||||||||||||
|
Issuance
of common stock:
|
||||||||||||||||||||||||
|
Exercise
of employee stock options
|
90 | 1 | 1,134 | - | - | 1,135 | ||||||||||||||||||
|
Restricted
stock awards released
|
8 | - | (94 | ) | - | - | (94 | ) | ||||||||||||||||
|
Employee
stock purchase plan
|
67 | - | 1,528 | - | - | 1,528 | ||||||||||||||||||
|
Tax
benefit from exercise of employee stock options
|
- | - | 79 | - | - | 79 | ||||||||||||||||||
|
Share-based
compensation
|
- | - | 11,934 | - | - | 11,934 | ||||||||||||||||||
|
Change
in fair value of interest rate swap, net of tax
|
- | - | - | - | (3,078 | ) | (3,078 | ) | ||||||||||||||||
|
Net
earnings
|
- | - | - | 21,428 | - | 21,428 | ||||||||||||||||||
|
Comprehensive
earnings
|
- | - | - | 21,428 | (3,078 | ) | 18,350 | |||||||||||||||||
|
Balance,
December 31, 2007
|
21,420 | $ | 214 | $ | 430,531 | $ | (76,389 | ) | $ | (3,116 | ) | $ | 351,240 | |||||||||||
See
accompanying notes to consolidated financial statements.
F - 6
MATRIA
HEALTHCARE, INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(Amounts
in thousands)
|
Years
ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||||
|
Net
earnings
|
$ | 21,428 | $ | 52,690 | $ | 13,963 | ||||||
|
Less
earnings from discontinued operations, net of income taxes
|
(363 | ) | (34,215 | ) | (9,949 | ) | ||||||
|
Earnings
from continuing operations
|
21,065 | 18,475 | 4,014 | |||||||||
|
Adjustments
to reconcile earnings from continuing operations to
|
||||||||||||
|
net
cash provided by operating activities:
|
||||||||||||
|
Depreciation
and amortization (including debt discount and expenses)
|
21,634 | 20,777 | 6,657 | |||||||||
|
Provision
for doubtful accounts
|
5,252 | 4,093 | 3,493 | |||||||||
|
Deferred
income taxes
|
9,684 | 11,713 | 1,925 | |||||||||
|
Share
based-compensation
|
11,934 | 6,986 | - | |||||||||
|
Excess
tax benefits from share-based compensation arrangements
|
(381 | ) | (1,386 | ) | - | |||||||
|
Imputed
interest on acquisition consideration
|
- | 1,747 | - | |||||||||
|
Other
|
198 | - | 294 | |||||||||
|
Changes
in assets and liabilities:
|
||||||||||||
|
Trade
accounts receivable
|
1,765 | (7,885 | ) | (8,083 | ) | |||||||
|
Prepaid
expenses and other current assets
|
2,658 | 3,822 | (451 | ) | ||||||||
|
Other
noncurrent assets
|
(481 | ) | (482 | ) | (971 | ) | ||||||
|
Accounts
payable
|
(5,480 | ) | (880 | ) | 766 | |||||||
|
Accrued
and other liabilities
|
(7,121 | ) | (29,571 | ) | (2,644 | ) | ||||||
|
Net
cash provided by continuing operations
|
60,727 | 27,409 | 5,000 | |||||||||
|
Net
cash provided by (used in) discontinued operations
|
(1,363 | ) | (3,114 | ) | 19,954 | |||||||
|
Net
cash provided by operating activities
|
59,364 | 24,295 | 24,954 | |||||||||
|
Cash
Flows from Investing Activities:
|
||||||||||||
|
Purchases
of property and equipment
|
(12,499 | ) | (13,139 | ) | (11,072 | ) | ||||||
|
Acquisition
of businesses, net of cash received
|
1,623 | (434,727 | ) | (19,678 | ) | |||||||
|
Payment
of acquisition obligations
|
(50,745 | ) | (1,677 | ) | - | |||||||
|
Proceeds
from the sale of businesses, net of transaction costs
|
- | 150,315 | - | |||||||||
|
Decrease
in restricted cash
|
1,372 | 233 | 3,273 | |||||||||
|
Purchases
of property and equipment related to discontinued
operations
|
- | (379 | ) | (1,452 | ) | |||||||
|
Net
cash used in investing activities
|
(60,249 | ) | (299,374 | ) | (28,929 | ) | ||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||
|
Proceeds
from the issuance of debt, net of transaction costs
|
41,799 | 446,533 | 2,083 | |||||||||
|
Payment
of debt refinancing fees
|
- | (1,733 | ) | - | ||||||||
|
Principal
repayments of debt
|
(44,204 | ) | (180,519 | ) | (2,224 | ) | ||||||
|
Proceeds
from issuance of common stock
|
2,571 | 5,989 | 7,252 | |||||||||
|
Excess
tax benefits from share-based compensation arrangements
|
381 | 1,386 | - | |||||||||
|
Net
payment for conversion of 4.875% convertible senior notes and related
transaction costs
|
- | - | (15,332 | ) | ||||||||
|
Net
cash provided by (used in) financing activities
|
547 | 271,656 | (8,221 | ) | ||||||||
|
Effect
of exchange rate changes on cash and cash equivalents
|
- | 504 | (363 | ) | ||||||||
|
Net
decrease in cash and cash equivalents
|
(338 | ) | (2,919 | ) | (12,559 | ) | ||||||
|
Cash
and cash equivalents at beginning of year
|
19,839 | 22,758 | 35,317 | |||||||||
|
Cash
and cash equivalents at end of period
|
$ | 19,501 | $ | 19,839 | $ | 22,758 | ||||||
|
Supplemental
disclosure of cash paid for:
|
||||||||||||
|
Interest
|
$ | 21,835 | $ | 30,746 | $ | 3,234 | ||||||
|
Income
taxes
|
$ | 3,651 | $ | 6,716 | $ | 4,047 | ||||||
|
Supplemental
disclosure of non-cash transactions:
|
||||||||||||
|
Conversion
of debt to equity
|
$ | - | $ | - | $ | 83,381 | ||||||
See accompanying notes to consolidated financial statements.
F - 7
MATRIA
HEALTHCARE, INC. AND SUBSIDIARIES
Notes
to Consolidated Financial Statements
December
31, 2007, 2006 and 2005
(1) Summary
of Significant Accounting Policies
|
|
(a)
|
Business. Matria
Healthcare, Inc. (“Matria,” the “Company” or “we”) provides comprehensive,
integrated programs and services focused on wellness, disease and
condition management, productivity enhancement and informatics. We call
this suite of services “Health Enhancement.” These services are designed
to reduce health-related costs and enhance the health and quality of life
of the individuals we serve. We provide services to self-insured
employers, private and government sponsored health plans, pharmaceutical
companies, administrative services only customers, and patients. Our
employer clients are primarily Fortune 1000 companies that self-insure the
medical benefits provided to their employees, dependents and
retirees. Our health plan customers are regional and national
health plans, as well as government-sponsored health plans, such as state
Medicaid programs. Our service offerings include wellness programs,
disease and condition management programs and
informatics.
|
Our
wellness programs address issues such as: smoking cessation, weight loss,
exercise, healthy diet, stress relief, healthy aging, and productivity
enhancement. These programs help employees and health plan members live better
and longer while reducing their healthcare costs and increasing their
productivity.
The
disease and condition management programs assist individuals to better manage
their conditions by increasing their knowledge about their illnesses or
condition, potential complications and the importance of medication and
treatment plan compliance. Our specialized nurses proactively contact patients
to monitor their progress and ensure they are following the plan of care set by
their physician. The chronic and episodic disease and condition management
programs include programs for diabetes, cardiovascular diseases, respiratory
disorders, end-stage renal disorder, depression, chronic pain, hepatitis C,
cancer and high-risk pregnancies.
On
January 19, 2006, we completed the acquisition of CorSolutions Medical, Inc.
(“CorSolutions”), a disease management, health and wellness and productivity
enhancement organization. The results of CorSolutions are included in
our results of operations effective January 1, 2006.
In
September 2006, to address the needs of the long-term care insurance industry,
we invested in and formed a strategic alliance with Secured Independence, Inc.
(“Secured Independence”), a privately-held company. The assets, liabilities and
results of operations of Secured Independence are included in our consolidated
financial statements effective September 30, 2006.
On April
1, 2005, we acquired the business and assets of Miavita LLC (“Miavita”) for a
net cash payment of $4.8 million, with potential additional amounts to be paid
under an earn-out agreement, of which $1.7 million and $22.0 million were paid
during 2006 and 2007, respectively. On October 1, 2005, we acquired of business
of WinningHabits, Inc. (“WinningHabits”) for a net cash payment of $14.9
million, with an additional $28.7 million paid in 2007 under an earn-out
agreement. Results of operations of these businesses have been included in our
consolidated results of operations since their respective acquisition
dates.
F - 8
On
September 1, 2006, we completed the sale of Facet Technologies, LLC (“Facet”) to
a private equity firm in a cash transaction valued at approximately $122.0
million. On October 17, 2006, we completed the sale of our foreign
diabetes service operations in Germany (“Dia Real”) for approximately $33.3
million. The results of operations of these business units are included in
discontinued operations for all periods presented.
On
January 27, 2008, we entered into an Agreement and Plan of Merger with Inverness
Medical Innovations, Inc., a global leader in rapid point-of-care diagnostics
and the development of near-patient diagnosis, monitoring and health management,
including disease management and wellness programs that enables individuals to
take charge of improving their health and quality of life. See note
18.
|
|
(b)
|
Basis of
Financial Statement Presentation and Principles of
Consolidation. The consolidated financial statements
have been prepared in conformity with accounting principles generally
accepted in the United States (“GAAP”). Our consolidated
financial statements include the accounts of the Company and its majority
owned subsidiaries and partnerships. The consolidated financial
statements also include the accounts of Secured Independence, a variable
interest entity as defined by Financial Accounting Standards Board
(“FASB”) Interpretation No. 46 (Revised December 2003), Consolidation of Variable
Interest Entities (“FIN 46R”). We concluded that we are
the primary beneficiary as defined by FIN-46R and, as a result, we have
consolidated the assets, liabilities and results of operations of Secured
Independence in our consolidated financial
statements.
|
|
|
All
significant intercompany balances and transactions have been eliminated in
consolidation.
|
|
(c)
|
Use of
Estimates. In preparing financial statements, it is
necessary for management to make assumptions and estimates affecting the
amounts reported in the consolidated financial statements and related
notes. These estimates and assumptions are developed based upon
all information available. Actual results could materially
differ from estimated amounts under different assumptions or conditions.
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.
|
|
|
(d)
|
Cash and
Cash Equivalents. Cash and cash equivalents consist of
cash and interest-bearing deposits. We consider all highly
liquid debt instruments with maturities of three months or less when
purchased to be cash equivalents, other than those amounts designated for
other than current operations.
|
|
|
(e)
|
Restricted
Cash. Restricted cash consists of funds designated for a
particular use and not available for current operations. We had
$1.4 million of restricted funds at December 31, 2006, for amounts held in
escrow related to customer contracts and as collateral for insurance
policies. Funds were held in interest-bearing investment
accounts or in certificates of deposit with maturity dates that coincide
with insurance policy termination dates. There
were no restricted funds outstanding at December 31,
2007.
|
|
|
(f)
|
Revenue
Recognition and Allowances for Uncollectible
Accounts. Our services are provided telephonically and,
in some cases, in a patient’s home from care centers located throughout
the United States. In addition, our services are provided through access
to our online health and wellness based tools. Revenues are recognized as
the related services are rendered and are net of contractual allowances
and related discounts.
|
F - 9
Our
services are paid for primarily on the basis of (i) monthly fees for each
employee or member enrolled in a health plan, (ii) each member identified with a
particular chronic disease or condition under contract, (iii) each member
enrolled in our programs, (iv) fee-for-service, or (v) a fixed rate per
case. Billings for certain services occur in advance of services
being performed. Such amounts are recorded as Unearned revenues in
the consolidated balance sheets. Such amounts are subsequently recognized as
revenue as services are performed.
Some
contracts provide that a portion of our fees are at-risk (i.e., refundable) if
our programs do not achieve certain financial cost savings and clinical
performance criteria. Revenues subject to refund are not recognized if (i)
sufficient information is not available to calculate performance measurements,
or (ii) interim performance measurements indicate that we are not meeting
performance targets. If either of these two conditions exists, we
record the amounts as Unearned revenues in the consolidated balance
sheets. If we do not meet performance levels by the end of the
operations period under the contract, we are contractually obligated to refund
some or all of the at-risk fees.
A
significant portion of our revenues is billed to third-party reimbursement
sources. Therefore, the collectibility of all of our accounts
receivable varies based on payor mix, general economic conditions and other
factors. A provision for doubtful accounts is made for revenues estimated to be
uncollectible and is adjusted periodically based upon our evaluation of current
industry conditions, historical collection experience, recoveries of amounts
previously provided, industry reimbursement trends and other relevant factors
which, in the opinion of management, deserve recognition in estimating the
allowance for uncollectible accounts. The evaluation is performed at
each reporting period for each operating unit with an overall assessment at the
consolidated level. While estimates and judgments are involved and
factors impacting collectibility may change, management believes adequate
provision has been made for any adjustments that may result from final
determination of amounts to be collected.
|
|
(g)
|
Concentrations
of Credit Risk. Financial instruments, which potentially
expose us to concentrations of credit risk, consist primarily of accounts
receivable from third-party payors. The collectibility of
accounts receivable from third-party payors is directly affected by
conditions and changes in the insurance industry and governmental
programs, which we take into account in computing and evaluating our
allowances for uncollectible accounts. At December 31, 2007,
and 2006, no single customer exceeded 10% of our consolidated trade
accounts receivable.
|
|
|
(h)
|
Property
and Equipment. Property and equipment are stated at
cost, less accumulated depreciation and
amortization. Depreciation for property and equipment is
provided primarily on the straight-line method over the estimated useful
lives of the related assets, which generally ranges 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.
|
Property
and equipment includes amounts capitalized for the development of software for
internal use. Capitalized costs include external costs of materials
and services and payroll costs of employees devoted to the specific software
development. These costs are capitalized based upon Statement of
Position (“SOP”) 98-1, Accounting for the Costs of Computer
Software Development or Obtained for Internal
Use. Internal-use software development costs are capitalized
once (i) the preliminary project stage is completed, (ii) management authorizes
and commits to funding a computer software project, and (iii) it is probable
that the project will be completed, and the software will be used to perform the
function intended. Costs incurred prior to meeting these
qualifications are expensed as incurred. Capitalization of costs
ceases when the project is substantially complete and ready for its intended
use. Internal–use software development costs are amortized using on
the straight-line basis over estimated useful lives of the underlying
software,
F - 10
which
generally ranges from three to ten years. The capitalization and
ongoing assessment of recoverability of development costs requires considerable
judgment by us with respect to certain external factors, including, but not
limited to, technological and economic feasibility, and estimated economic
life. For the years ended December 31, 2007, 2006 and 2005, we
capitalized software development costs of $6.3 million, $4.9 million and $3.1
million, respectively. As of December 31, 2007 and 2006, the net book
value of capitalized software costs totaled $15.6 million and $12.2 million,
respectively.
|
|
(i)
|
Goodwill
and Other Intangible Assets. Goodwill represents the
excess purchase price over the estimated fair value of identifiable net
assets acquired in our business combinations. Intangible assets
consist of trade names, content, customer relationships, current
technology and covenants not to compete. Intangible assets are
amortized on a straight-line basis over periods ranging from five to ten
years.
|
We
account for goodwill and other intangible assets in accordance with SFAS No.
142, Goodwill and Other
Intangible Assets (“SFAS 142”). SFAS 142 requires that
goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually at the
reporting unit level. The Company evaluated the fair values of its reporting
units as of December 31, 2007 and 2006, and concluded that no impairment of
recorded goodwill exists. As a result, no impairment of goodwill was
identified during any of the periods presented.
SFAS 142
also requires that intangible assets with estimable useful lives be amortized
over their respective estimated useful lives to their estimated residual values,
and that such assets be reviewed for impairment in accordance with SFAS No.
144, Accounting for the
Impairment or Disposal of Long-Lived Assets (“SFAS 144”). We reassessed
the useful lives, residual values and classification of its identifiable
intangible assets and determined that they continue to be
appropriate.
|
|
(j)
|
Impairment
of Long-lived Assets. We account for long-lived assets,
other than goodwill with an indefinite useful life, in accordance with
SFAS 144. We review long-lived assets, such as property
and equipment and intangibles subject to amortization, including contract
acquisition costs and certain computer software, 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 estimated undiscounted operating cash flows expected to be
generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of an asset exceeds
the fair value of the asset.
|
Assets to
be disposed of are separately presented in the balance sheet and reported at the
lower of the carrying amount or fair value less costs to sell, and are no longer
depreciated. The assets and liabilities of a disposal group
classified as held for sale are presented separately in the appropriate asset
and liability sections of the balance sheets.
As of
December 31, 2007 or 2006, there was no impairment of our long-lived
assets.
|
|
(k)
|
Derivative
Financial Instruments. We use derivative financial
instruments to manage our risk associated with fluctuations in interest
rates and foreign currency exchange rates. We account for
derivative instruments in accordance with SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”), which requires
that all derivative instruments be recorded on the balance sheet at their
respective fair values. We do not use derivative financial instruments for
trading or speculative purposes.
|
F - 11
|
|
(l)
|
Fair Value
Disclosure of Financial Instruments. We estimate the
fair values of cash and cash equivalents, accounts and notes receivable,
accounts payable and accrued liabilities approximates their carrying value
due to the short-term maturities of these assets and
liabilities. We estimate that the fair value of our
long-term debt approximates its carrying value because these debt
instruments bear interest at a variable rate which resets quarterly based
on the then current market rate.
|
|
|
(m)
|
Unearned
Revenues. Unearned revenues represent billings in
advance of services being performed and at-risk
revenues.
|
|
|
(n)
|
Income
Taxes. We account for income taxes in accordance
with SFAS No. 109, “Accounting for Income
Taxes” (“SFAS 109”), using an asset and liability
approach. Deferred income taxes are recognized for the tax
consequences of “temporary differences” by applying enacted statutory tax
rates applicable to future years to differences between the financial
statement carrying amounts and the tax bases of existing assets and
liabilities and net operating loss and tax credit
carryforwards. Additionally, the effect on deferred taxes of a
change in tax rates is recognized in earnings in the period that includes
the enactment date.
|
|
|
(o)
|
Share-based
Compensation. On January 1, 2006, we adopted SFAS No.
123 (revised 2004), Share-Based Payment
(“SFAS 123(R)”), which requires us to measure and recognize compensation
expense for all share-based payment awards based on estimated fair values
at the date of grant. SFAS 123(R) establishes standards for the accounting
for share-based payment transactions in which an enterprise receives
employee services in exchange for either equity instruments of the
enterprise or liabilities that are based on the fair value of the
enterprise’s equity instruments or that may be settled by the issuance of
such equity instruments. SFAS 123(R) eliminates the ability to account for
share-based compensation transactions, as we formerly did, using the
intrinsic value method as prescribed by Accounting Principles Board
(“APB”) Opinion No. 25, Accounting for Stock Issued to
Employees (“APB 25”), and generally requires that such transactions
be accounted for using a fair-value-based
method.
|
Share-based
compensation expense recognized during the period is based on the value of the
portion of share-based payment awards that is ultimately expected to vest.
Share-based compensation expense recognized in the consolidated statement of
operations during the period ended December 31, 2006, included compensation
expense for share-based payment awards granted prior to, but not yet vested, as
of December 31, 2005, based on the grant date fair value estimated in accordance
with the pro forma provisions of SFAS No. 148, Accounting for Stock-Based
Compensation-Transition and Disclosure (“SFAS 148”), and compensation
expense for the share-based payment awards granted subsequent to December 31,
2005, based on the grant date fair value estimated in accordance with SFAS
123(R). Since share-based compensation expense recognized in the consolidated
statement of operations for the period ended December 31, 2006, is based on
awards ultimately expected to vest, it has been reduced for estimated
forfeitures. SFAS 123(R) requires forfeitures to be estimated at the
time of grant and, if necessary, revised in subsequent periods if actual
forfeitures differ from those estimates. In the pro forma information required
under SFAS 148 for the periods prior to 2006, we estimated forfeitures at the
time of grant and, if necessary, revised the estimates in subsequent periods if
actual forfeitures differed from those estimates.
|
|
(p)
|
Net
Earnings Per Share of Common Stock. Basic net earnings
per common share is based on the weighted average number of common shares
outstanding. Diluted net earnings per common share is based on
the weighted average number of common shares outstanding and dilutive
potential common shares, such as dilutive stock options and restricted
stock awards, determined using the treasury stock method, and dilutive
contingent convertible debt, determined using the if-converted
|
F - 12
method.
|
|
(q)
|
Comprehensive
Earnings (Loss). Comprehensive earnings (loss) generally
include all changes in equity during a period except those resulting from
investments by owners and distributions to
owners. Comprehensive earnings (loss) consist of net earnings,
foreign currency translation adjustments (net of income taxes) and changes
in the fair value of derivative financial instruments (net of income
taxes).
|
|
|
(r)
|
Interest
Allocated to Discontinued Operations. We allocated
interest expense to discontinued operations in accordance with Emerging
Issues Task Force (“EITF”) Issue 87-24, Allocation of Interest to
Discontinued Operations (“EITF 87-24”). Under EITF 87-24, interest
on debt that must be repaid upon disposal of discontinued operations must
be allocated to discontinued operations. In accordance with the
terms of our credit facilities, we used the net proceeds from the sale of
Facet on September 1, 2006, and Dia Real on October 17, 2006, to repay a
portion of the outstanding
indebtedness.
|
(s) Recently Issued or Adopted
Accounting Standards
Business
Combinations. In December 2007,
the FASB issued SFAS No. 141R, Business Combinations (“SFAS
141R”), which replaces FASB Statement No. 141, Business Combinations (“SFAS
141”). SFAS 141R establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, and any non-controlling interest in
the acquiree and the goodwill acquired. SFAS 141R also establishes
disclosure requirements that will enable users to evaluate the nature and
financial effects of the business combination. SFAS 141R is effective
as of the entity’s fiscal year that begins after December 15,
2008. We are currently evaluating the potential impact, if any, of
the adoption of SFAS 141R on our results of operations or financial
position.
Noncontrolling
Interests. In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No. 51 (“SFAS
160”). SFAS 160 requires that accounting and reporting for minority
interests will be recharacterized as noncontrolling interests and classified as
a component of equity. SFAS 160 also establishes reporting
requirements that provide sufficient disclosures that clearly identify and
distinguish between the interest of the parent and the interests of the
noncontrolling owners. SFAS 160 applies to all entities that prepare
consolidated financial statements, except not-for-profit organizations, but will
affect only those entities that have an outstanding noncontrolling interest in
one or more subsidiaries or that deconsolidate a subsidiary. This
standard is effective as of the beginning of an entity’s first fiscal year
beginning after December 15, 2008. Based upon our December 31, 2007,
balance sheet, the impact of adopting SFAS 160 will have an immaterial impact on
our financial position.
Fair Value
Option. In February 2007,
the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities – Including an Amendment of FASB Statement No.
115 (“SFAS 159”), which permits entities to choose to measure many
financial instruments and certain other items at fair value. Entities that elect
the fair value option will report unrealized gains and losses in earnings at
each subsequent reporting date. The fair value option may be elected
on an instrument-by-instrument basis with a few exceptions. SFAS 159
also establishes presentation and disclosure requirements to facilitate
comparisons between companies that choose different measurement attributes for
similar assets and liabilities. The requirements of SFAS 159 are
effective for our fiscal year beginning January 1, 2008. We are
currently assessing the potential impact of implementing this
standard. However, we do not expect the implementation to have a
material adverse effect on our results of operations or financial
position.
F - 13
Accounting for
Uncertainty in Income Taxes. In June 2006, the FASB published
Interpretation No. 48, Accounting for Uncertainty in Income
Taxes, an
interpretation of FASB Statement No. 109 (“FIN 48”). FIN 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. We adopted the provisions of FIN 48 on
January 1, 2007, the effective date of the interpretation. See note
8.
Fair Value
Measurements. In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements
(“SFAS 157”), which defines fair value, establishes a framework for measuring
fair value in GAAP and expands disclosures about fair value
measurements. SFAS 157 will be effective for financial statements
issued for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. We are currently evaluating the
requirements of this new standard and have not determined the impact, if any, on
our results of operations and financial position.
Prior Year
Misstatements. In September 2006, the Securities and Exchange
Commission (“SEC”) issued Staff Accounting Bulletin No. 108, Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements (“SAB 108”). SAB 108 addresses quantifying the
financial statement effects of misstatements, specifically, how the effects of
prior year uncorrected errors must be considered in quantifying misstatements in
current year financials. Under the provisions of SAB 108, a reporting
entity must quantify and evaluate errors using a balance sheet approach and an
income statement approach. After considering all relevant
quantitative and qualitative factors, if either approach results in a
misstatement that is material, a reporting entity’s financial statements must be
adjusted. SAB 108 is effective for fiscal years ending after November
15, 2006.
We
adopted the provisions of SAB 108 in the fourth quarter of 2006 and recorded a
cumulative effect adjustment of $813,000, net of income taxes of $518,000, to
our January 1, 2006 consolidated balance sheet. We identified two
uncorrected misstatements for consideration under SAB 108, each of which was
considered immaterial to our results of operations in any reporting period when
using only the income statement approach we historically used to assess the
materiality of unrecorded errors:
|
|
1.
|
An
unrecorded liability for drugs and supplies from a major vendor, which is
included in Accounts payable on the consolidated balance sheets, resulted
from an accumulation of unrecorded costs over several periods prior to
2003. This misstatement was identified in 2003. The final amount required
to correct the liability balance at January 1, 2006, would result in a
$600,000 charge to our results of operations in
2006.
|
|
|
2.
|
During
2006, we discovered that our medical device inventory, which is included
in Property and equipment on the consolidated balance sheets, was
overstated due to improper recording of disposed and lost medical devices
and the related depreciation expense. The misstatement
originated in 2003 and accumulated over subsequent periods. The
amount required to correct the medical device inventory at January 1,
2006, would result in a $731,000 charge to our results of operations in
2006.
|
Under the
balance sheet approach and the income statement approach, or the dual approach,
we determined that correcting the above misstatements would be material to our
2006 financial statements and recorded the cumulative effect adjustment to our
January 1, 2006, consolidated balance sheet upon our initial application of SAB
108.
F - 14
|
(2)
|
Acquisitions
|
CorSolutions
Medical, Inc. On January 19, 2006, we completed the
acquisition of CorSolutions Medical, Inc., a Delaware corporation
(“CorSolutions”), pursuant to the Agreement and Plan of Merger (the “Merger
Agreement”), dated as of December 14, 2005, by and among Matria, Coral
Acquisition Corp. (“Merger Sub”), an indirect wholly owned subsidiary of Matria,
and CorSolutions. CorSolutions is a leading provider of disease management
services to employers, health plans and government-sponsored healthcare
programs. The effective date of the acquisition for accounting purposes was
January 1, 2006. Accordingly, the results of CorSolutions are included in the
consolidated financial statements from January 1, 2006.
Pursuant
to the Merger Agreement, Merger Sub merged with and into CorSolutions (the
“Merger”), with CorSolutions continuing as the surviving corporation and an
indirect wholly owned subsidiary of Matria. In the Merger, all outstanding
capital stock, together with options and warrants to purchase capital stock of
CorSolutions, were converted into the right to receive a pro rata portion of the
initial merger consideration, which approximated $470.8 million, subject to
adjustment.
We funded
the Merger with the proceeds of term loans and revolving credit loans pursuant
to a credit agreement with Bank of America, N.A., as administrative and
collateral agent, as amended, (the “First Lien Credit Facility”), and with the
proceeds of a second lien term loan facility pursuant to a term loan agreement,
with Bank of America, N.A., as administrative agent and collateral
agent (the “Second Lien Credit Facility” and, together with the First Lien
Credit Facility, the “Credit Facilities”).
The total
purchase price, excluding cash acquired, was $431.4 million, which was
determined as follows (in thousands):
|
Purchase
price consideration, excluding cash acquired
|
$ 427,850
|
|
Acquisition-related
transaction costs
|
5,254
|
|
Imputed
interest from January 1, 2006 through January 19, 2006
|
(1,747)
|
|
Total
purchase price
|
$ 431,357
|
In
accordance with SFAS 141, the Company increased interest expense and reduced the
cost of CorSolutions by approximately $1.7 million. As the operations
of CorSolutions are included in the consolidated statements of operations
effective January 1, 2006, and the consideration was not delivered until January
19, 2006, this adjustment represents the amount of interest on the debt imputed
during the interim period.
Under
business combination accounting, the total purchase price is allocated to
CorSolutions’ net tangible and identifiable intangible assets based on their
estimated fair values. The excess of the purchase price over the net tangible
and identifiable intangible assets is recorded as goodwill. The allocation of
the purchase price used in the consolidated financial statements is based upon a
valuation. The estimated fair values of certain assets and liabilities have been
determined with the assistance of an independent third-party valuation
firm.
Goodwill
from this transaction is not deductible for income tax purposes. The amount of
the purchase price allocated to goodwill was the result of a variety of factors,
including, but not limited to:
|
·
|
A
significant amount of competition within the disease management industry
comes from market participants of similar size or smaller than either
CorSolutions or us before the acquisition of
CorSolutions. Therefore, the combination of these two companies
resulted in a business that is broader in scope and with significantly
higher revenues than these other competitors, making it
|
F - 15
more difficult for them to match
our combined market presence and providing an advantage in winning new
business.
|
·
|
The
acquisition expanded our presence in the health plan market, rendering us
more competitive in that arena.
|
|
·
|
The
acquisition presented an opportunity for significant operating margin
improvement due to synergies in the cost of delivering services and in
general and administrative
expenditures.
|
The
following table represents the allocation of the acquisition cost to the assets
acquired and liabilities assumed, based on their fair values (in
thousands):
|
Accounts
receivable, net
|
$ | 14,160 | ||
|
Other
current assets
|
7,433 | |||
|
Property
and equipment
|
10,400 | |||
|
Other
long-term assets
|
198 | |||
|
Net
deferred tax asset
|
13,920 | |||
|
Amortizable
intangible assets
|
56,100 | |||
|
Goodwill
|
372,963 | |||
|
Accounts
payable
|
(3,450 | ) | ||
|
Other
accrued expenses
|
(36,880 | ) | ||
|
Unearned
revenue
|
(3,487 | ) | ||
|
Total
purchase price allocation
|
$ | 431,357 |
The
components of the amortizable intangible assets are as follows (in
thousands):
|
Useful
|
||||||||
|
Fair
|
Life
|
|||||||
|
Value
|
(Years)
|
|||||||
|
Customer
contracts
|
$ | 46,900 | 10 | |||||
|
Developed
technology
|
7,700 | 7 | ||||||
|
Tradename
|
1,500 | 7 | ||||||
| $ | 56,100 | |||||||
The
following unaudited pro forma consolidated results of operations have been
prepared as if the acquisition of CorSolutions had occurred at January 1, 2005
(in thousands, except per share amounts):
|
Years
Ended December 31,
|
|||||||||
|
2006
|
2005
|
||||||||
|
Revenues
|
$ | 336,139 | $ | 303,503 | |||||
|
Operating
earnings from continuing operations
|
$ | 55,957 | $ | 33,079 |
(a)(b)
|
||||
|
Net
earnings from continuing operations
|
$ | 18,475 | $ | 3,208 |
(a)(b)(c)(d)
|
||||
|
Net
earnings from continuing operations per share:
|
|||||||||
|
Basic
|
$ | 0.88 | $ | 0.17 | |||||
|
Diluted
|
$ | 0.85 | $ | 0.16 | |||||
|
(a)
|
Adjusted
to decrease the depreciation expense resulting from the difference between
the preliminary estimate of the fair value and the historical amount of
CorSolutions’ property and
equipment.
|
|
(b)
|
Adjusted
to reflect the increase in amortization expense resulting from the
preliminary estimate of the fair value of amortizable intangible
assets.
|
|
(c)
|
Adjusted
to reflect the interest and amortization expense resulting from the
issuance of debt and related underwriting
fees.
|
|
(d)
|
Adjusted
to include the tax benefit on pro forma adjustments noted
above.
|
Pursuant
to the CorSolutions’ merger agreement, we pursued a claim before a
contractually-designated settlement accountant for certain post-closing
adjustments, including a $4.0 million claim relating to a
F - 16
liability
resulting from CorSolutions’ pre-closing performance under a customer
contract. On September 20, 2007, the settlement accountant
awarded us $3.9 million related to the liability described
above. That award was offset by $1.3 million related to certain
payroll taxes arising from the deemed exercise of options by employees of the
sellers who subsequently became employees of the Company, resulting in a net
award of $2.6 million. These amounts, when included in the
post-closing adjustment mechanism pursuant to the merger agreement, resulted in
the Company receiving $1.6 million plus $199,000 of interest. As a result, the
purchase price consideration, excluding cash acquired, was decreased by $1.6
million. We decreased goodwill by $1.6 million in 2007 for the consideration
received as a result of this adjustment.
We are
also pursuing a related claim for fraudulent misrepresentation and concealment
before the American Arbitration Association in Chicago, Illinois, seeking
damages in an unspecified amount. There is no assurance that we will
prevail in this proceeding. See note 12.
Other
Acquisitions. On April 1, 2005, we acquired the business
and assets of Miavita, a leading provider of on-line wellness programs, for
total consideration including transaction costs of $4.8 million, net of cash
received. The assets acquired and liabilities assumed in this
transaction, including goodwill and intangible assets resulting from the
purchase price allocation of $3.1 million and $1.6 million,
respectively. The intangible assets are being amortized on a
straight-line basis over ten years. Goodwill from this transaction is not
deductible for income tax purposes.
On
October 1, 2005, we acquired the business and assets of WinningHabits, a leading
provider of corporate wellness programs, for total consideration including
transaction costs of $14.9 million, net of cash received. The
transaction resulted in goodwill and intangible assets from the purchase price
allocation of $11.5 million and $5.7 million, respectively. The
intangible assets are being amortized on a straight-line basis over five to
seven years. Goodwill from this transaction is deductible for income tax
purposes over 15 years.
In
connection with our acquisition of WinningHabits, we are required to pay
additional consideration in future periods, based upon the financial performance
of this business. As of December 31, 2006, we estimated that the
additional consideration pursuant to the terms of our earn-out agreement for the
WinningHabits acquisition was $32.2 million, which was included in Acquisition
contingent consideration on the consolidated balance sheet and was based on the
attainment of the operating objectives for the year ended December 31, 2006. At
March 31, 2007, we computed the additional consideration pursuant to the terms
of our earn-out agreement to be $27.9 million. On May 1, 2007, the
sellers filed a notice of objection, objecting to certain aspects of the
calculation. The sellers agreed to accept $28.7 million of additional
consideration, which we paid on June 8, 2007. Goodwill was decreased by $3.4
million in 2007 as a result of the agreed upon final settlement of the earn-out
consideration.
Also
included in Acquisition contingent consideration on the consolidated balance
sheet at December 31, 2006, was $22.0 million of earn-out consideration for the
second earn-out period ending March 31, 2007, for the Miavita acquisition. On
November 6, 2006, the Company and the seller entered into a Settlement Agreement
and Release that effectively amended the terms of the original acquisition
agreement to fix the amount payable for the second earn-out period at $20.0
million plus 3.575 times net revenues from certain new customers between
November 6, 2006, and March 31, 2007, provided that no payment would be payable
in respect of the second earn-out period unless payments received from such new
customers between November 6, 2006, and May 1, 2007, were at least $500,000. The
$500,000 threshold was met, and the Company paid a total of $22.0 million during
the second quarter of 2007 with respect to the second earn-out
period. Additional earn-out payments will be payable in future
periods through 2010 based on a percentage of specified revenues pertaining to
certain customer agreements. We estimate the additional consideration payable to
be less than $500,000.
F - 17
(3) Property
and Equipment
Property
and equipment at December 31, 2007 and 2006, consisted of the following (in
thousands):
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Computer
hardware and software
|
$ | 54,262 | $ | 45,335 | ||||
|
Medical
equipment
|
8,638 | 8,027 | ||||||
|
Machinery,
office equipment and fixtures
|
7,959 | 8,061 | ||||||
|
Leasehold
improvements
|
4,527 | 4,821 | ||||||
| 75,386 | 66,244 | |||||||
|
Less
accumulated depreciation and amortization
|
35,373 | 27,294 | ||||||
| $ | 40,013 | $ | 38,950 | |||||
Depreciation
and amortization expense for property and equipment was $11.8 million, $10.3
million and $5.3 million for the years ended December 31, 2007, 2006 and 2005,
respectively.
(4) Goodwill
and Intangible Assets
Changes
in the carrying amount of goodwill at December 31, 2007 and 2006, are as follows
(in thousands):
|
Goodwill
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Carrying
value at January 1
|
$ | 500,830 | $ | 69,248 | ||||
|
Additional
goodwill from acquisitions (Note 2)
|
- | 375,682 | ||||||
|
Purchase
price adjustment (Note 2)
|
(1,623 | ) | - | |||||
|
Adjustments
to CorSolutions' deferred tax assets
|
(1,096 | ) | - | |||||
|
Acquisition
contingent consideration
|
(3,393 | ) | 55,900 | |||||
|
Carrying
value at December 31
|
$ | 494,718 | $ | 500,830 | ||||
The
components of identifiable intangible assets, which resulted from our 2007 and
2006 acquisitions, were as follows (in thousands):
|
Intangibles
|
||||||||
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Gross
carrying amounts:
|
||||||||
|
Customer
relationship
|
$ | 49,100 | $ | 49,100 | ||||
|
Current
technology
|
10,500 | 10,500 | ||||||
|
Content
|
1,600 | 1,600 | ||||||
|
Covenants
not-to-compete
|
700 | 700 | ||||||
|
Trade
name
|
1,500 | 1,500 | ||||||
|
Total
|
63,400 | 63,400 | ||||||
|
Accumulated
amortization
|
(14,654 | ) | (7,509 | ) | ||||
| $ | 48,746 | $ | 55,891 | |||||
F - 18
Amortization expense for the years ended December 31, 2007, 2006 and 2005, was $7.1 million, $7.1 million and $365,000, respectively. Estimated amortization expense for the next five years and thereafter is as follows (in thousands):
|
Year ended
December 31,
|
||||
|
2008
|
$ | 7,144 | ||
|
2009
|
7,144 | |||
|
2010
|
6,999 | |||
|
2011
|
6,565 | |||
|
2012
|
6,464 | |||
|
Thereafter
|
14,430 | |||
| $ | 48,746 | |||
(5) Accrued
Liabilities
Significant
components of accrued liabilities at December 31, 2007 and 2006, are summarized
as follows (in thousands):
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Accrued
compensation and related liabilities
|
$ | 13,013 | $ | 12,379 | ||||
|
Other
accrued expenses
|
6,571 | 10,282 | ||||||
| $ | 19,584 | $ | 22,661 | |||||
F - 19
(6) Long-Term
Debt
Our
long-term debt balances at December 31, 2007 and 2006, consisted of the
following (in thousands):
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Term
Loan B Facility, accrues interest at LIBOR plus 2.0%, interest rates
ranging between 7.00% to 7.20% at December 31, 2007; interest
payable quarterly; interest rate reset quarterly, maturing January 2012,
including $5,100 of fair value of interest rate swaps
|
$ | 214,800 | $ | 212,412 | ||||
|
Term
Loan B-2 Facility, accrues interest at LIBOR plus 2.0%, interest rate of
7.20% at December 31, 2007; interest payable quarterly; interest rate
reset quarterly, maturing January 2012
|
57,188 | 64,838 | ||||||
|
Revolving
Credit Facility, accrues interest at LIBOR plus 2.5%, interest rate was
7.40% at December 31, 2007; matures quarterly (March 10,
2008)
|
10,000 | - | ||||||
|
Unsecured
11% senior notes, net of unamortized discount of $34 at December 31, 2006,
plus unamortized deferred gains of $6 resulting from the termination of
interest rate swaps, interest was payable semi-annually on May 1 and
November 1. Paid in May 2007.
|
- | 1,972 | ||||||
|
Capital
lease obligations; interest ranging from approximately 6% to 10.8% with
various monthly payments; maturing at various dates through July
2008
|
23 | 144 | ||||||
|
Other
debt; interest rate 5.91%; payable in monthly installments through May
2008
|
665 | 769 | ||||||
|
Total
long-term debt
|
282,676 | 280,135 | ||||||
|
Less
current installments
|
43,988 | 4,197 | ||||||
|
Long-term
debt, excluding current installments
|
$ | 238,688 | $ | 275,938 | ||||
Approximate
aggregate minimum annual payments due on long-term debt for the five years
subsequent to December 31, 2007, and thereafter are as follows (in
thousands):
|
2008
|
$ | 43,988 | ||
|
2009
|
3,300 | |||
|
2010
|
8,400 | |||
|
2011
|
214,050 | |||
|
2012
|
12,938 | |||
|
Thereafter
|
- | |||
| $ | 282,676 |
The $44.0
million of annual minimum payments in 2008 includes $30.0 million of voluntary,
unscheduled repayments on our Credit Facilities that we intend to make in
addition to our required, scheduled repayments.
Credit
Facilities.
On
January 19, 2006, in connection with our acquisition of CorSolutions, we entered
into a $485.0 million credit agreement and a second lien term loan facility with
Bank of America, N.A., as administrative and collateral agent (the “Credit
Facilities”). Amounts borrowed under the Credit Facilities, as
amended, accrue interest at a variable spread over LIBOR, with the applicable
spread determined by the Company’s consolidated leverage ratio, as described in
the applicable credit agreement. Interest rates for the Credit
Facilities are reset quarterly. The Credit Facilities replaced the
F - 20
Company’s
previous revolving credit facility, which was terminated on January 13, 2006.
There were no amounts outstanding under the revolving credit facility at the
time of termination. The Credit Facilities mature on January 19, 2012. As of
December 31, 2007, the outstanding balance under the Credit Facilities was
$266.9 million, excluding the Revolving Credit Facility noted
below.
Amounts
borrowed under the Credit Facilities are fully and unconditionally guaranteed on
a joint and several basis by substantially all of the subsidiaries of the
Company. Amounts borrowed under the First Lien Credit Facility are secured by a
first priority lien on substantially all of the assets of the Company and the
subsidiary guarantors.
The
Credit Facilities contain, among other things, various representations,
warranties and affirmative, negative and financial covenants customary for
financings of this type. The negative covenants include, without limitation,
certain limitations on transactions with affiliates, liens, making investments,
the incurrence of debt, sales of assets, and changes in business. The financial
covenants contained in both of the credit agreements include a consolidated
leverage ratio and a consolidated fixed charges coverage ratio. At December 31,
2007, we were in compliance with all covenants of the Credit
Facilities.
The
proceeds from the Credit Facilities used to fund the CorSolutions acquisition
were $444.0 million, net of debt issuance costs of $11.1 million. During the
third and fourth quarters of 2006, prepayments of $175.0 million were made
toward the reduction of the First Lien Credit Facility. Of this
amount, $115.0 million and $30.0 million were paid from the net proceeds from
the Facet and Dia Real divestitures, respectively, and $30.0 million was paid
from our operating cash flows. During 2007, prepayments of $7.0 million were
made toward the reduction of the Credit Facilities.
In
November 2006, we amended the terms of the Credit Facilities. Under
the amended agreement, the First Lien Credit Facility was increased by $65.0
million, the proceeds of which were used to prepay the Second Lien Credit
Facility. Borrowings under the First Lien Credit Facility bore
interest at LIBOR plus 2.00%, a 475 basis point reduction from the Second Lien
Credit Facility. All the other terms and conditions of the Credit
Agreement (other than those relating to the increased amount of the First Lien
Credit Facility and those that are no longer applicable because they relate
solely to the Second Lien Credit Facility) remain unchanged. We
incurred fees and expenses of approximately $1.7 million, which were recorded as
deferred financing costs and are being amortized over the term of the First Lien
Credit Facility (January 2012).
The
Credit Facilities also provide for a Revolving Credit
Facility. Amounts borrowed under the Revolving Credit Facility accrue
interest at a variable spread over LIBOR or the prime rate, at our option, with
the applicable spread determined by reference to our consolidated leverage
ratio, as described in the credit agreement. On February 23, 2007, we
entered into a third amendment to the Credit Facilities, the terms of which
increased our borrowing capacity under the Revolving Credit Facility from $30.0
million to $50.0 million. All other terms of the Credit Facilities,
as amended, remain unchanged. At December 31, 2007, there was $10.0
million outstanding under the Revolving Credit Facility, and the available
balance was $38.6 million.
The
weighted average interest rates, including amortization of debt discount and
expense, on all outstanding indebtedness were 8.24% and 9.29% for the years
ended December 31, 2007 and 2006, respectively.
Other.
On April
27, 2005, we issued a notice of our intention to redeem $86.3 million in
aggregate principal amount of 4.875% convertible senior subordinated notes on
May 27, 2005. In response to the redemption notice, all noteholders
converted their notes into shares of the Company’s common stock prior to the
redemption date, and the Company issued approximately 4.4 million shares of
common stock ($19.61 per share). In addition, the redemption also
required us to make a “make-whole payment” equal to the present value, as of the
redemption date, of all remaining scheduled interest payments on the notes
through May 1, 2009. We paid the noteholders the “make-whole payment”
totaling $15.5 million ($3.52 per share), which included $294,000 of accrued but
unpaid interest. The “make-whole payment,” excluding the accrued but unpaid
interest, was accounted for in accordance with SFAS No. 84, Induced Conversion of Convertible
Debt. Since the conversion was pursuant to the original
conversion terms and no inducement was made to the noteholders, no loss was
recognized with respect to the “make-whole payment,” excluding the accrued but
unpaid interest, or the shares issued.
(7) Derivative
Financial Instruments
In
February and May 2006, we entered into two interest rate swap agreements, each
with a notional amount of $100.0 million, to hedge exposure to fluctuations in
interest rates related to our Credit
F - 21
Facilities. The
agreements, which have two-year terms, have the economic effect of converting
$200.0 million of floating-rate debt under the Credit Facilities to fixed-rate
debt. The provisions of the agreements provide that we pay the bank
fixed base rates of 5.065% and 5.350%, respectively, and the bank will pay us
floating rates based on three-month LIBOR (5.015% and 4.830%, respectively, at
December 31, 2007). The variable rates are reset quarterly.
In August
2007, we entered into two additional interest rate swap agreements, each with
notional amounts of $100.0 million. The terms of these agreements are
scheduled to become effective after the termination of the swaps noted above
(February and May 2008). These agreements also have two-year terms and have the
economic effect of converting $200.0 million of floating-rate debt to fixed-rate
debt. We will pay the bank fixed base rates of 4.890% and 4.910%,
respectively, under these swap arrangements, and the bank will pay us floating
rates based on three-month LIBOR.
On the
dates the interest rate swap derivative contracts were entered into, we
designated the derivatives as hedges of the variability of cash flow to be paid
(“cash flow” hedge). Under cash flow hedge accounting, changes in the
fair value of a derivative that is qualified, designated and highly effective as
a cash flow hedge are recorded in other comprehensive income until earnings are
affected by the variability of cash flows. We reflected the interest
rate swap agreements on the consolidated balance sheet at fair value
(liabilities of $5.1 million and $62,000 at December 31,
2007 and 2006, respectively), which was based upon the estimated amounts we
would pay upon settlement of the agreements taking into account interest rates
at December 31, 2007 and 2006. For the years ended December 31, 2007
and 2006, we recognized net gains of $264,000 and $79,000 from the cash flow
hedges, which is included in Interest expense in the consolidated statements of
operations.
In
September 2006, we entered into a forward exchange agreement with a bank to
eliminate the potential impact of foreign exchange fluctuations on the U.S.
dollar equivalent of the expected euro proceeds from the sale of Dia Real. Under
the terms of the agreement, we sold €26.0 million at the forward rate and
received approximately $33.4 million on the settlement date, resulting in a net
gain of $741,000. We reported the forward exchange agreement at fair
value until its termination in October 2006.
(8) Income
Taxes
The
components of the income tax expense from continuing operations consisted of (in
thousands):
|
Years
ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Current
tax expense:
|
||||||||||||
|
U.S.
federal
|
$ | 3,157 | $ | 679 | $ | - | ||||||
|
State
and local
|
1,693 | 376 | 808 | |||||||||
|
Total
current tax expense
|
4,850 | 1,055 | 808 | |||||||||
|
Deferred
tax expense (benefit):
|
||||||||||||
|
U.S.
federal
|
10,349 | 10,517 | 2,518 | |||||||||
|
State
and local
|
(665 | ) | 1,196 | (593 | ) | |||||||
|
Total
deferred tax expense
|
9,684 | 11,713 | 1,925 | |||||||||
|
Total
income tax expense
|
$ | 14,534 | $ | 12,768 | $ | 2,733 | ||||||
F - 22
Below is
a reconciliation of the expected income tax expense from continuing operations
(based on the U.S. federal statutory income tax rate of 35%) to the actual
income tax expense (in thousands):
|
|
Years
ended December 31,
|
|||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Computed
expected income tax expense
|
$ | 12,460 | $ | 10,935 | $ | 2,361 | ||||||
|
Effect
of:
|
||||||||||||
|
State
and local income taxes, net of federal effect
|
1,209 | 1,089 | 140 | |||||||||
|
Nondeductible
share-based compensation
|
495 | 515 | - | |||||||||
|
Other
nondeductible expenses
|
395 | 405 | 273 | |||||||||
|
Nontaxable
income of captive insurance subsidiary
|
2 | (347 | ) | (142 | ) | |||||||
|
Valuation
allowance
|
(30 | ) | 97 | |||||||||
|
Other,
net
|
3 | 74 | 101 | |||||||||
|
Income
tax expense
|
$ | 14,534 | $ | 12,768 | $ | 2,733 | ||||||
At
December 31, 2007 and 2006, the deferred income tax assets consist of
future tax benefits attributable to (in thousands):
|
December
31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Deferred
income tax assets (liabilities)
|
||||||||
|
Current:
|
||||||||
|
Net
operating loss carryforwards
|
$ | 7,572 | $ | - | ||||
|
Credit
carryforwards
|
1,403 | - | ||||||
|
Allowance
for doubtful accounts and other receivables
|
1,065 | 1,304 | ||||||
|
Accruals
and reserves not deducted for tax purposes
|
3,638 | 4,142 | ||||||
|
Deferred
revenues
|
1,600 | 2,642 | ||||||
|
Other
|
30 | (1 | ) | |||||
|
Current deferred
tax assets
|
15,308 | 8,087 | ||||||
|
Non-current:
|
||||||||
|
Depreciation
and amortization
|
(29,963 | ) | (29,267 | ) | ||||
|
Accruals
and reserves not deducted for tax purposes
|
826 | 1,033 | ||||||
|
Supplemental
executive retirement plan
|
1,366 | 1,801 | ||||||
|
Share-based
compensation
|
5,921 | 2,290 | ||||||
|
Net
operating loss carryforwards
|
13,552 | 27,074 | ||||||
|
Credit
carryforwards
|
3,368 | 7,705 | ||||||
|
Other
|
1,984 | (20 | ) | |||||
|
Non-current deferred
tax liabilities
|
(2,946 | ) | 10,616 | |||||
|
Valuation
allowance
|
(4,311 | ) | (5,052 | ) | ||||
|
Net
deferred tax liabilities
|
(7,257 | ) | 5,564 | |||||
|
Total
deferred income tax assets
|
$ | 8,051 | $ | 13,651 | ||||
As of
December 31, 2005, we had approximately $56.5 million of federal net operating
loss carryforwards ("NOLs"). In 2006, we added $84.9 million of
federal NOLs through the acquisition of CorSolutions. We utilized
approximately $21.6 million and $72.4 million of federal NOLs to offset taxable
income in 2007 and 2006, respectively. The Company has federal NOLs
related to our investment in Secured Independence of $1.8 million and $200,000
in 2007 and 2006, respectively. Our federal NOLs as of December 31, 2007,
were $49.4 million, subject to annual limitations by the Internal revenue Code
Section 382, to approximately $21.6 million.
F - 23
At
December 31, 2007, we had the following estimated operating loss
carryforwards available for federal income tax reporting purposes to be applied
against future taxable income with the corresponding tax year of expiration (in
thousands):
|
2019
|
$ | 422 | ||
|
2020
|
1,339 | |||
|
2021
|
782 | |||
|
2022
|
415 | |||
|
2024
|
127 | |||
|
2025
|
44,369 | |||
|
2026
|
182 | |||
|
2027
|
1,765 | |||
| $ | 49,401 |
We also
have available alternative minimum tax (“AMT”) credit carryforwards of
approximately $1.4 million 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
$52.8 million as of December 31, 2007.
We
reduced our federal income taxes payable by utilizing approximately $11.2
million of foreign tax credits in 2006 related to the disposition of Dia Real.
In addition, we realized a tax benefit from exercises of employee stock options
and issuance of restricted stock awards of approximately $539,000 and $1.9
million in 2007 and 2006, respectively, of which $369,000 and $1.9 million were
recorded as increases to shareholder’s equity in 2007 and 2006,
respectively.
As of
December 31, 2007, we had a valuation allowance of $4.3 million, comprised of
$3.4 million of foreign tax credits related to the disposition of Dia Real and
$944,000 of state NOLs, which primarily relate to the acquisition of
CorSolutions.
The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. We consider the scheduled reversal of
deferred tax liabilities, including the impact of available carryback and
carryforward periods, projected future taxable income and tax-planning
strategies in making this assessment. In order to fully realize the
deferred tax asset, the Company will need to generate future taxable income of
approximately $49.4 million prior to the expiration of the NOL carryforwards in
2027. Taxable income for the years ended December 31, 2007 and 2006,
was $39.2 million and $104.3 million, respectively. Based on
projections of taxable income in 2008 and future years, management believes that
it is more likely than not that the Company will fully realize the net value of
the deferred income tax assets. The amount of the deferred tax asset
considered realizable, however, could be reduced if estimates of future taxable
income during the carryforward period are reduced.
We
adopted the provisions of FIN 48 on January 1,
2007. As a result of the implementation, we recognized a liability of
$524,000 for tax benefits recognized which may not be sustained, which
also increased our Accumulated deficit at January 1, 2007. A
reconciliation of unrecognized tax benefits is as follows (in
thousands):
|
Balance
at January 1, 2007
|
$ | 524 | ||
|
Additions
based on tax positions related to the current year
|
- | |||
|
Additions
for tax positions of prior years
|
447 | |||
|
Reductions
for tax positions of prior years
|
- | |||
|
Settlements
|
- | |||
|
Balance
at December 31, 2007
|
$ | 971 | ||
F - 24
We
recognize interest and penalties related to unrecognized tax benefits in
Interest expense and Selling and administrative expenses, respectively, on the
consolidated statements of operations. At December 31, 2007 and 2006,
we accrued $213,000 and $144,000, respectively, for the payment of interest and
penalties, which is included in Accrued liabilities on the consolidated balance
sheets.
We
undergo audits of our various tax returns from time to time. We
record refunds from audits when receipt is assured and assessments when the loss
is probable.
(9) Shareholders’
Equity
Stock
Option Plans
During
2007, the Board of Directors amended and restated the Long-Term 2004 Stock
Incentive Plan to increase the number of shares available for issuance from 1.6
million shares to 2.5 million shares. The plan is available for employees,
officers, independent contractors and consultants of the Company. The
Long-Term Incentive Plan has three components: a stock option component, a stock
bonus/stock purchase component and a stock appreciation rights
component. The Long-Term Stock Incentive Plan contains a $100,000
limitation on the aggregate fair market value of incentive stock options which
first become exercisable by an optionee in any calendar year. Also,
the maximum number of shares of stock with respect to which stock appreciation
rights or options to acquire stock may be granted, or sales or bonus grants of
stock may be made, to any individual per calendar year shall not exceed 100,000
shares. The term of each stock option is ten years from the date of
grant, and five years in the case of an incentive stock option granted to a
person owning more than ten percent of the combined voting power of the Company
or an affiliate. Options vest over a period of years (generally three
to five), subject to eligibility status as specified in the individual option
agreement. Restricted stock vests over a period of years (generally
three), subject to eligibility status and, in some cases, satisfactory
achievement of performance goals, in each case as specified in the individual
restricted stock agreement.
During
2005, our Board of Directors adopted the 2005 Directors’ Non-Qualified Stock
Option Plan, which provides for the issuance of non-qualified stock options to
the Company’s non-employee directors. Under the terms of this plan, a
total of 165,000 shares of common stock were reserved for
issuance. The options are granted with an exercise price equal to the
fair market value of the Company’s common stock on the date of grant and vest
monthly over 12 months from the date of grant. The term of each
option is ten years from the date of grant.
During
2002, our Board of Directors of the Company adopted the 2002 Stock Incentive
Plan for employees, officers, independent contractors and consultants of the
Company. The 2002 Stock Incentive Plan also has three components: a
stock option component, a stock bonus/stock purchase component and a stock
appreciation rights component. Options, stock bonuses and rights to
purchase the Company’s common stock may be granted to exercise or purchase an
aggregate of not more than 375,000 shares of the Company’s common
stock. The 2002 Stock Incentive Plan contains a $100,000 limitation
on the aggregate fair market value of incentive stock options which first become
exercisable by an optionee in any calendar year. Also, the maximum
number of shares of stock with respect to which stock appreciation rights or
options to acquire stock may be granted, or sales or bonus grants of stock may
be made, to any individual per calendar year shall not exceed 100,000
shares. The term of each option is ten years from the date of
grant. Options vest over a period of years (generally three to five),
subject to eligibility status as specified in the individual stock option
agreement.
The
Company also has options and shares available for grant under various other
plans, the provisions of which are similar to the plans described
above. Due to forfeitures of previously issued grants, at December
31, 2007, there were approximately 19,000 options and shares available for grant
under these plans.
F - 25
Employee
Stock Purchase Plan
We
maintain 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 187,500 shares of the Company’s common stock
by eligible employees of the Company and its subsidiaries. Under the Purchase
Plan, the eligible participants 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 the lesser of 10% of the employee’s
compensation or 375 shares of common stock per quarter. A participant
immediately ceases to be a participant in the plans upon termination of his or
her employment for any reason. During 2007, 2006 and 2005, we issued
approximately 67,000, 64,000 and 31,000 shares of common stock, respectively,
under the Purchase Plan. At December 31, 2007, approximately 44,000
shares were reserved for purchase under the Purchase Plan.
Implementation
of SFAS 123(R)
Prior to
January 1, 2006, we accounted for stock compensation arrangements using the
intrinsic value method, which followed the recognition and measurement
principles of APB 25, Accounting for Stock Issued to
Employees, and the related Interpretations.
Beginning
January 1, 2006, we adopted SFAS 123(R) using the modified prospective
transition method. Accordingly, in 2006, we recorded share-based compensation
expense for awards granted prior to, but not yet vested, as of December 31,
2005, as if the estimated grant date fair value method required for pro forma
disclosure under SFAS 123 (the Black-Scholes option-pricing model) were in
effect for expense recognition purposes, as adjusted for estimated forfeitures.
For share-based awards granted after December 31, 2005, we recognized
compensation expense based on the estimated grant date fair value method using
the Black-Scholes option-pricing model and used a straight-line amortization
method.
SFAS
123(R) requires us to calculate an initial “pool” of excess tax benefits
available at the adoption to absorb any tax deficiencies that may be recognized
under SFAS 123(R). The pool includes the net excess tax benefits that
would have been recognized if we had adopted SFAS 123 for recognition purposes
on its effective date. In accordance with SFAS 123(R), tax benefits
from the exercise of stock options are classified as financing cash flows rather
than operating cash flows.
Valuation
Assumptions
The fair
value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model. The weighted average fair values of the
options granted during 2007, 2006 and 2005 were $13.22, $14.26 and $18.03,
respectively, on the date of grant. The following assumptions were
used for each respective period:
|
2007
|
2006
|
2005
|
||||||||||
|
Risk-free
interest rates
|
4.95 | % | 4.75 | % | 4.02 | % | ||||||
|
Expected
lives (in years)
|
4
|
4 | 5 | |||||||||
|
Dividend
yield
|
NA
|
NA
|
NA
|
|||||||||
|
Expected
volatility
|
46 | % | 53 | % | 68 | % | ||||||
Our
computations of expected volatility for grants awarded in 2007 and 2006 were
based on historical daily volatility. Prior to 2006, our computation of expected
volatility was based on historical monthly volatility. The computations of
expected lives were determined based on historical experience of similar awards,
giving consideration to the contractual terms of the share-based awards, vesting
schedules and expectations of future employee behavior. The risk-free interest
rate is based on the U.S. Treasury yield in effect at the time of
grant.
F - 26
The
following table summarizes our stock option activity during the years ended
December 31, 2007, 2006 and 2005 (shares in thousands):
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Exercise
|
Exercise
|
Exercise
|
||||||||||||||||||||||
|
Shares
|
Price
|
Shares
|
Price
|
Shares
|
Price
|
|||||||||||||||||||
|
Outstanding
at beginning of year
|
2,487 | $ | 22.26 | 2,790 | $ | 20.19 | 2,498 | $ | 12.62 | |||||||||||||||
|
Granted
|
42 | $ | 31.41 | 364 | $ | 31.07 | 1,096 | $ | 31.81 | |||||||||||||||
|
Exercised
|
(90 | ) | $ | 12.61 | (359 | ) | $ | 12.63 | (553 | ) | $ | 11.64 | ||||||||||||
|
Canceled
|
(173 | ) | $ | 30.46 | (308 | ) | $ | 25.03 | (251 | ) | $ | 14.89 | ||||||||||||
|
Outstanding
at the end of year
|
2,266 | $ | 22.16 | 2,487 | $ | 22.26 | 2,790 | $ | 20.19 | |||||||||||||||
|
Options
exercisable at end of year
|
1,551 | $ | 19.75 | 1,214 | $ | 19.00 | 1,043 | $ | 12.53 | |||||||||||||||
The total
aggregate intrinsic value of options exercised during the years ended December
31, 2007, 2006 and 2005, was $1.3 million, $6.3 million and $12.3 million,
respectively. The following table summarizes our options outstanding and options
exercisable as of December 31, 2007 (shares in thousands):
|
Outstanding
|
Exercisable
|
|||||||||||||||||
|
Range
of Exercise Prices
|
Shares
Outstanding
|
Weighted
Average Exercise Price
|
Shares
Exercisable
|
Weighted
Average Exercise Price
|
||||||||||||||
| $ | 4.57 - $10.00 | 212 | $ | 7.35 | 181 | $ | 7.58 | |||||||||||
| $ | 10.01 - $20.00 | 849 | $ | 13.22 | 731 | $ | 12.76 | |||||||||||
| $ | 20.01 - $30.00 | 694 | $ | 28.14 | 337 | $ | 28.00 | |||||||||||
| $ | 30.01 - $40.33 | 511 | $ | 35.04 | 302 | $ | 34.76 | |||||||||||
| 2,266 | $ | 22.16 | 1,551 | $ | 19.75 | |||||||||||||
|
Weighted
average remaining
|
||||||||||||||||||
|
contractual
life (years)
|
6.1 | 5.5 | ||||||||||||||||
|
Aggregate
intrinsic value
|
$ | 12,492 | $ | 11,010 | ||||||||||||||
In 2006,
we began issuing shares of unvested restricted stock. The following
table summarizes our restricted stock award activity for the years ended
December 31, 2007 and 2006 (shares in thousands):
|
2007
|
2006
|
|||||||||||||||
|
Weighted
|
Weighted
|
|||||||||||||||
|
Average
|
Average
|
|||||||||||||||
|
Grant
Date
|
Grant
Date
|
|||||||||||||||
|
Shares
|
Fair Value
|
Shares
|
Fair Value
|
|||||||||||||
|
Nonvested
at beginning of year
|
221 | $ | 28.10 | - | $ | - | ||||||||||
|
Awarded
|
476 | 27.89 | 233 | 28.10 | ||||||||||||
|
Released
|
(8 | ) | 28.16 | - | - | |||||||||||
|
Forfeited,
cancelled
|
(69 | ) | 27.81 | (12 | ) | 28.16 | ||||||||||
|
Nonvested
at end of year
|
620 | $ | 27.97 | 221 | $ | 28.10 | ||||||||||
F - 27
The
impact on our results of operations of recording all share-based compensation
for the years ended December 31, 2007 and 2006, was as follows:
|
Years
Ended December 31,
|
||||||||
|
2007
|
2006
|
|||||||
|
Share-based
compensation expense
|
$ | 11,934 | $ | 6,986 | ||||
|
Income
tax benefit
|
(4,073 | ) | (2,145 | ) | ||||
|
Share-based
compensation expense, net of income taxes
|
$ | 7,861 | $ | 4,841 | ||||
|
Effect
on diluted earnings per share
|
$ | (0.36 | ) | $ | (0.23 | ) | ||
Share-based
compensation expense is included in Selling and administrative expenses on the
consolidated statement of operations. We did not capitalize any share-based
compensation costs in any period.
At
December 31, 2007, the total compensation cost related to unvested share-based
awards granted to employees under stock option plans but not yet recognized was
approximately $16.9 million, after estimating forfeitures and before income
taxes. Of this amount, approximately $7.0 million relates to shares of unvested
restricted stock. The expense of all unvested share-based awards is
expected to be recognized over an estimated weighted average period of 2.1
years. Our restricted stock awards are performance-based and
service-based. Expense for restricted stock awards is recognized
using the tranche method (performance-based awards) or the straight line method
(service-based awards) over the vesting period. The remaining unrecognized
compensation expense for the performance-based restricted stock awards may vary
each reporting period based on changes in the expected achievement of
performance measures.
Cash
received from option exercises under all share-based payment arrangements for
the years ended December 31, 2007, 2006 and 2005 was $2.6 million, $6.0 million
and $7.3 million, respectively.
During 2006, we recorded a charge of $608,000 to Gain on disposal of
discontinued operations for unamortized share-based compensation expense related
to the accelerated vesting of options granted to the Facet and Dia
Real employees. We completed the sale of Facet on September 1, 2006,
and Dia Real on October 17, 2006.
Pro forma
Information for Periods Prior to the Adoption of SFAS 123(R)
Share-based
compensation for the year ended December 31, 2005 was determined using the
intrinsic value method under APB 25. The following table illustrates the effect
on net income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS 123 to share-based compensation for the year
ended December 31, 2005 (in thousands, except per share data):
|
2005
|
||||
|
Earnings
from continuing operations, as reported
|
$ | 4,014 | ||
|
Deduct:
Share-based compensation, net of tax effects
|
(2,616 | ) | ||
|
Pro
forma earnings from continuing operations
|
$ | 1,398 | ||
|
Earnings
per share from continuing operations:
|
||||
|
Basic
- as reported
|
$ | 0.21 | ||
|
Basic
- pro forma
|
$ | 0.07 | ||
|
Diluted
- as reported
|
$ | 0.20 | ||
|
Diluted
- pro forma
|
$ | 0.07 | ||
F - 28
|
(10)
|
Employee
Benefit Plans
|
We
maintain a 401(k) defined contribution plan for the benefit of our employees.
Our obligation for contributions under the 401(k) plan is limited to each
participant’s contribution but not more than 3% of the participant’s
compensation. Discretionary Company contributions are allowed under
the plan. Contributions to the plan in the years ended
December 31, 2007, 2006 and 2005, were approximately $3.9 million, $1.4
million and $1.3 million, respectively.
We
maintain a Supplemental Executive Retirement Plan (“SERP”) for certain executive
employees. Benefits vest under the SERP based on age and years of service with
100% vesting obtained at age 55 and 15 years of service. Earlier
vesting may occur upon a change in control or other events as defined in the
agreement. During 2007, 2006 and 2005, $117,000, $175,000 and
$172,000, respectively, were expensed related to the SERP, and an additional
$162,000 is expected to be expensed over the next three years of expected
service by the respective current employees. The liability under the
SERP plan as of December 31, 2007 and 2006, was $3.7 million and $4.7 million,
respectively, and is recorded in Other long-term liabilities on the consolidated
balance sheets. The fair value of the assets in the SERP of $3.0
million and $3.9 million at December 31, 2007 and 2006, respectively, is
recorded in Other assets on the consolidated balance sheets.
(11) Commitments
We are
committed under noncancelable 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, 2007 are
as follows (in thousands):
|
Years
ending December 31,
|
Operating
Leases
|
Capital
Leases
|
||||||
|
2008
|
$ | 8,058 | $ | 23 | ||||
|
2009
|
6,522 | - | ||||||
|
2010
|
3,384 | - | ||||||
|
2011
|
1,929 | - | ||||||
|
2012
|
1,016 | - | ||||||
|
Thereafter
|
2,457 | - | ||||||
| $ | 23,366 | 23 | ||||||
|
Less
interest
|
- | |||||||
|
Present
value of future minimum
|
||||||||
|
capital
lease payments
|
$ | 23 | ||||||
Amortization
of capital leased assets is included in depreciation expense. Rental
expense for cancelable and noncancelable leases was approximately $8.4 million,
$9.0 million and $5.0 million for the years ended December 31, 2007, 2006 and
2005, respectively.
|
(12)
|
Contingencies
and Concentrations
|
In
connection with the CorSolutions’ acquisition, we are pursuing a claim for
fraudulent misrepresentation and concealment before the American Arbitration
Association in Chicago, Illinois, seeking damages in an unspecified amount.
There is no assurance that we will prevail in this proceeding.
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.
F - 29
|
|
(13) Divestitures
|
During
the fourth quarter of 2005, we made the strategic decision to divest the
operations of Facet and Dia Real. As a result, the accompanying consolidated
financial statements reflect the operations of these divisions as discontinued
operations for all periods presented.
On
September 1, 2006, the Company completed the sale of Facet for net cash proceeds
of $121.9 million. The sale resulted in a gain of $26.6 million, or
$23.9 million net of income taxes. The assets sold consisted
primarily of accounts receivable, inventories, property and equipment and other
assets, and the buyer assumed certain accrued liabilities. Goodwill
of $76.2 million was charged against the gain. In connection with the
sale, the Company recorded transaction-related costs of $4.1 million, of which
$2.4 million related to cash transactions paid during 2006, $541,000 related to
unamortized share-based compensation expense for the accelerated vesting of
options granted to Facet employees, and $1.2 million was accrued for other
liabilities related to the sale.
On
October 17, 2006, we completed the sale of Dia Real for net cash proceeds of
$33.3 million, resulting in a gain of $9.1 million, or $5.0 million net of
income taxes. Accounts receivable, inventories, property and equipment and
other assets, as well as certain accrued liabilities, were acquired by the
purchaser. Goodwill and intangibles totaling $3.6 million were
charged against the gain. Also, we recorded transaction-related costs
of $3.0 million, of which $2.9 million and $71,000 related to cash
transactions paid during 2006 and 2007, respectively, and $67,000 related to
unamortized share-based compensation expense for the accelerated vesting of
options granted to Dia Real employees.
On June
30, 2004, we discontinued the operations of our direct-to-consumer laboratory
business and completed the sale of substantially all of the assets of our
direct-to-consumer pharmacy and supplies business. The accounts
receivable of the business and certain other assets and liabilities were
excluded from the sale and retained by us. In April 2006, we paid
$10.0 million for the settlement of the qui tam claim filed against
us and this business, which we had accrued in December 2005. The
purchaser did not assume liability for the qui tam claim. There
were no remaining liabilities related to this sale.
A
reconciliation of the accrued liability balance for all discontinued operations
is as follows (in thousands):
|
Type
of Charge
|
Employee
Termination Benefits
|
Contractual
Obligations
|
Qui tam Settlement
Costs
|
Other
Accruals
|
Total
|
|||||||||||||||
|
Balance,
January 1, 2005
|
$ | 330 | $ | 330 | $ | - | $ | 258 | $ | 918 | ||||||||||
|
Charges
|
- | 304 | 10,000 | - | 10,304 | |||||||||||||||
|
Payments
|
(309 | ) | (113 | ) | - | (16 | ) | (438 | ) | |||||||||||
|
Adjustments
|
(21 | ) | (21 | ) | - | (192 | ) | (234 | ) | |||||||||||
|
Balance,
December 31, 2005
|
- | 500 | 10,000 | 50 | 10,550 | |||||||||||||||
|
Charges
|
290 | 872 | - | 124 | 1,286 | |||||||||||||||
|
Payments
|
- | (487 | ) | (10,000 | ) | (8 | ) | (10,495 | ) | |||||||||||
|
Adjustments
|
- | (13 | ) | - | (42 | ) | (55 | ) | ||||||||||||
|
Balance,
December 31, 2006
|
290 | 872 | - | 124 | 1,286 | |||||||||||||||
|
Charges
|
6 | - | - | 10 | 16 | |||||||||||||||
|
Payments
|
(296 | ) | (872 | ) | - | (123 | ) | (1,291 | ) | |||||||||||
|
Adjustments
|
- | - | - | (11 | ) | (11 | ) | |||||||||||||
|
Balance,
December 31, 2007
|
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
The $1.3
million of accrued liabilities at December 31, 2006, related to the Facet and
Dia Real divestitures. Of this amount, $629,000 was included in Accrued
liabilities, and the remaining $657,000
F - 30
was
included in Other long-term liabilities on the consolidated balance sheet at
December 31, 2006.
The
operating results of discontinued operations are as follows (in
thousands):
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Revenues
|
$ | - | $ | 102,610 | $ | 152,395 | ||||||
|
Earnings
(loss) from discontinued operations, net of income tax benefit (expense)
of $54, ($3,347) and ($7,221) in 2007, 2006 and 2005,
respectively
|
$ | (86 | ) | $ | 5,293 | $ | 9,949 | |||||
|
Gain
on disposal of discontinued operations, net of income tax benefit
(expense) of $449 and ($6,797) in 2007 and 2006,
respectively
|
449 | 28,922 | - | |||||||||
|
Earnings
from discontinued operations, net of tax
|
$ | 363 | $ | 34,215 | $ | 9,949 | ||||||
In 2007,
we recorded a tax benefit of $896,000 primarily related to the increased
utilization of our foreign tax credits in our 2006 federal tax
return. We also recorded $447,000 of tax expense for an increase in
the liability for tax benefits which may not be sustained as a result of our
adoption of the provisions of FIN 48 on January 1, 2007 (See note
8). Earnings from discontinued operations for the year ended December
31, 2006, included a charge of $8.7 million for interest expense and
deferred financing fees related to the Credit Facilities. Gain on disposal of
discontinued operations for the year ended December 31, 2006, includes $1.1
million for the pro rata share of deferred financing fees written off as a
result of the prepayment of debt using the net proceeds from the Facet and Dia
Real divestitures. These amounts were allocated in accordance
with EITF 87-24, which provides that interest on debt that must be repaid
upon disposal of discontinued operations must be allocated to discontinued
operations. The terms of the Credit Facilities required that we
use the net proceeds from the sale of Facet and Dia Real to repay a portion of
the outstanding indebtedness.
F - 31
(14) Earnings
Per Share
The
computations for basic and diluted net earnings per common share are as follows
(in thousands, except per share amounts):
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Net
earnings - basic and diluted:
|
||||||||||||
|
Continuing
operations
|
$ | 21,065 | $ | 18,475 | $ | 4,014 | ||||||
|
Discontinued
operations
|
363 | 34,215 | 9,949 | |||||||||
|
Net
earnings available to common shareholders
|
$ | 21,428 | $ | 52,690 | $ | 13,963 | ||||||
|
Shares:
|
||||||||||||
|
Weighted
average common shares outstanding - basic
|
21,361 | 21,025 | 18,795 | |||||||||
|
Dilutive
effect of:
|
||||||||||||
|
Stock
options and employee stock purchase plan
|
475 | 488 | 1,079 | |||||||||
|
Unvested
restricted stock awards
|
29 | 152 | - | |||||||||
|
Weighted
average common shares outstanding - diluted
|
21,865 | 21,665 | 19,874 | |||||||||
|
Basic:
|
||||||||||||
|
Continuing
operations
|
$ | 0.99 | $ | 0.88 | $ | 0.21 | ||||||
|
Discontinued
operations
|
0.01 | 1.63 | 0.53 | |||||||||
| $ | 1.00 | $ | 2.51 | $ | 0.74 | |||||||
|
Diluted:
|
||||||||||||
|
Continuing
operations
|
$ | 0.96 | $ | 0.85 | $ | 0.20 | ||||||
|
Discontinued
operations
|
0.02 | 1.58 | 0.50 | |||||||||
| $ | 0.98 | $ | 2.43 | $ | 0.70 | |||||||
The
calculation of diluted earnings per share excluded the antidilutive effect of
1.6 million, 1.3 million and 482,500 shares of stock options and unvested
restricted stock awards in the years ended December 31, 2007, 2006 and 2005,
respectively. The restricted stock awards were excluded from the
computation because the performance conditions as defined in the restricted
stock agreements were not met. In 2005, the diluted earnings per
share computation also excluded 1.8 million shares from the assumed conversion
of the 4.875% convertible senior subordinated notes, since the effect would be
antidilutive.
F - 32
(15) Quarterly
Financial Information – Unaudited
Presented
below is a summary of the unaudited consolidated quarterly financial information
for the years ended December 31, 2007 and 2006 (in thousands, except per share
amounts).
|
2007:
|
Quarter
|
|||||||||||||||
|
Fourth
|
Third
|
Second
|
First
|
|||||||||||||
|
Revenues
|
$ | 88,487 | $ | 89,604 | $ | 88,120 | $ | 86,024 | ||||||||
|
Net
earnings (loss)
|
||||||||||||||||
|
Continuing
operations
|
$ | 5,295 | $ | 5,894 | $ | 4,915 | $ | 4,961 | ||||||||
|
Discontinued
operations
|
(461 | ) | 984 | (6 | ) | (154 | ) | |||||||||
| $ | 4,834 | $ | 6,878 | $ | 4,909 | $ | 4,807 | |||||||||
|
Net
earnings (loss) per diluted common share
|
||||||||||||||||
|
Continuing
operations
|
$ | 0.24 | $ | 0.27 | $ | 0.22 | $ | 0.23 | ||||||||
|
Discontinued
operations
|
(0.02 | ) | 0.04 | - | (0.01 | ) | ||||||||||
| $ | 0.22 | $ | 0.31 | $ | 0.22 | $ | 0.22 | |||||||||
|
2006:
|
Quarter
|
|||||||||||||||
|
Fourth
|
Third
|
Second
|
First
|
|||||||||||||
|
Revenues
|
$ | 88,420 | $ | 84,186 | $ | 82,627 | $ | 80,906 | ||||||||
|
Net
earnings
|
||||||||||||||||
|
Continuing
operations
|
$ | 5,693 | $ | 4,532 | $ | 4,834 | $ | 3,416 | ||||||||
|
Discontinued
operations
|
4,812 | 25,505 | 2,391 | 1,507 | ||||||||||||
| $ | 10,505 | $ | 30,037 | $ | 7,225 | $ | 4,923 | |||||||||
|
Net
earnings per diluted common share
|
||||||||||||||||
|
Continuing
operations
|
$ | 0.26 | $ | 0.21 | $ | 0.22 | $ | 0.16 | ||||||||
|
Discontinued
operations
|
0.22 | 1.18 | 0.11 | 0.07 | ||||||||||||
| $ | 0.48 | $ | 1.39 | $ | 0.33 | $ | 0.23 | |||||||||
(16) Supplemental
Disclosures Regarding Revenue
We have
one reportable segment that includes our disease and condition management
services, wellness programs and maternity management services. The following
table summarizes our revenues for these services and programs (amounts in
thousands):
|
Year
Ended December 31,
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Disease
and Condition Management
|
$ | 218,608 | $ | 209,205 | $ | 72,519 | ||||||
|
Wellness
|
27,769 | 19,433 | 4,875 | |||||||||
|
Maternity
Management
|
105,858 | 107,501 | 101,837 | |||||||||
|
Total
Revenues
|
$ | 352,235 | $ | 336,139 | $ | 179,231 | ||||||
(17) Variable
Interest Entity
In
September 2006, the Company entered into a Stock Purchase and Loan Agreement
with Secured Independence, a privately-held business, forming a strategic
alliance to address the needs of the long-term care insurance industry. Our
initial investment of $552,500 purchased 95 shares of Secured Independence
common stock, which constituted a 19% equity investment in Secured
Independence. Under the terms of the agreement, the Company is
required to make working capital advances up to an aggregate of $1.9
million.
F - 33
Also, we
are entitled to purchase additional shares of Secured Independence common stock,
which when added to our initial investment would constitute up to 100% of the
shares Secured Independence common stock on a fully diluted basis. As of
December 31, 2007, we had made working capital advances to Secured Independence
totaling $1.6 million.
For the
years ended December 31, 2007 and 2006, Secured Independence’s pretax losses
totaled $1.4 million and $183,000, respectively.
(18) Subsequent
Event
On
January 27, 2008, we entered into an Agreement and Plan of Merger (the “Merger
Agreement”) with Inverness Medical Innovations, Inc. (“Inverness”), pursuant to
which Inverness will acquire Matria. Inverness is a global leader in
rapid point-of-care diagnostics and the development of near-patient diagnosis,
monitoring and health management, including disease management and wellness
programs that enables individuals to take charge of improving their health and
quality of life.
At the
effective time of the merger, by virtue of the merger and without any action on
the part of the holders of any capital stock of Matria, each share of common
stock of Matria issued and outstanding immediately prior to the effective time
will be converted into the right to receive: (i) a portion of a share of
Inverness convertible preferred stock having a stated value of $32.50 (the $400
liquidation value of a share of Inverness convertible preferred stock multiplied
by 0.08125, which is the exchange ratio of the issuance of Inverness convertible
preferred stock in the merger), and (ii) $6.50 in cash. The merger has been
approved by the Boards of Directors of both companies. The completion
of the merger is subject to various closing conditions, including obtaining the
approval of Matria shareholders and filings under the Hart-Scott-Rodino
Antitrust Improvements Act and is expected to be completed in the second quarter
of 2008. Matria and Inverness will continue to operate separately
until the transaction closes. Inverness has filed a registration statement on
Form S-4 with the SEC in connection with the proposed merger, which
includes additional information related to the proposed merger and Matria’s
proxy statement and Inverness’s prospectus for the proposed
transaction.
F - 34