In connection with the preparation of its Annual Report on Form 10-K for the year ended December 31, 2006, Matria Healthcare, Inc. (the “Company”) discovered that, in its previously-issued unaudited consolidated financial statements for the three and nine months ended September 30, 2006, the after-tax gain on the disposition of its former subsidiary, Facet Technologies, LLC (“Facet”), was understated by $7.3 million. As a result, on March 13, 2007, the Audit Committee of the Company’s Board of Directors, upon recommendation from management and after discussion with KPMG LLP, the Company’s independent registered public accounting firm, concluded that, due to the error, the previously issued unaudited consolidated financial statements for the three and nine months ended September 30, 2006, which were contained in the Company’s Quarterly Report on Form 10-Q filed on November 8, 2006, should not be relied upon.
The Company acquired Facet in 1999 as part of the purchase of substantially all of the assets of Gainor Medical Management, LLC (“Gainor”). In connection with the purchase of Gainor, the Company incorrectly calculated the purchase price allocation made for tax purposes. Because the original purchase price allocation made in 1999 was incorrect, when the Company disposed of Facet in September 2006, the calculation of the after-tax gain on the disposition also was incorrect. As a result, the Company’s income tax expense on the gain on disposal of Facet was overstated by approximately $7.3 million. The corrected financial statements for the three and nine months ended September 30, 2006, reflect an increase of $5.5 million in the long-term portion of deferred tax assets, a decrease of $1.8 in income taxes payable, and a corresponding decrease of $7.3 million in income tax expense. The net result is an increase in the gain on the disposal of Facet, net of income taxes, and an increase in diluted earnings per share from discontinued operations of $7.3 million and $0.34, respectively, for the three and nine months ended September 30, 2006.
As explained above, these adjustments, which were detected by the Company’s year-end internal controls, were the result of an isolated event in 1999, when the tax basis for the entities acquired from Gainor was originally calculated. These adjustments do not affect the Company’s earnings from continuing operations for these periods as previously reported.
In connection with the filing of this Current Report on Form 8-K, the Company will file an amendment on Form 10-Q/A to its Quarterly Report on Form 10-Q for the quarter ended September 30, 2006.
