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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
TO FORM 8-K FILED FEBRUARY 3, 1999
PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Event Reported: January 19, 1999
MATRIA HEALTHCARE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 0-20619 58-2205984
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(State or other jurisdiction of (Commission (I.R.S. Employer
incorporation or organization) File Number) Identification No.)
1850 Parkway Place, 12th Floor, Marietta, Georgia 30067
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(Address of principal executive offices) (Zip Code)
(770) 423-4500
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(Registrant's telephone number, including area code)
N/A
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(Former name or former address, if changed since last report)
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The undersigned registrant hereby amends the following items of its
Current Report on Form 8-K, filed February 3, 1999, as set forth in the pages
below:
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements:
(1) Gainor Medical Management, LLC
Audited:
Report of Independent Auditors - KPMG, LLP
Report of Independent Public Accountants-Arthur Andersen, LLP
Consolidated Balance Sheet as of December 31, 1998.
Combined Balance Sheet as of December 31, 1997.
Consolidated Statement of Operations for the year ended
December 31, 1998.
Combined Statements of Operations for the years ended
December 31, 1997 and 1996.
Consolidated Statement of Members' Equity and
Comprehensive Income for the year ended December 31, 1998.
Combined Statements of Members' Equity and Comprehensive
Income for the years ended December 31, 1997 and 1996.
Consolidated Statement of Cash Flows for the year ended
December 31, 1998.
Combined Statements of Cash Flows for the years ended
December 31, 1997 and 1996.
Notes to Consolidated and Combined Financial Statements.
(b) Pro forma Financial Information:
Consolidated Condensed Balance Sheet
Consolidated Condensed Statement of Earnings (Loss)
Notes to Pro forma Consolidated Condensed Financial Statements
(c) Exhibits:
(23.1) Consent of Arthur Andersen, LLP to incorporation by
reference in the Registrant's Registration Statement
Nos.333-69347, 333-02283, 333-01883 and 333-01539.
(23.2) Consent of KPMG, LLP to incorporation by reference in
the Registrant's Registration Statement Nos.333-69347
333-02283, 333-01883 and 333-01539.
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INDEPENDENT AUDITORS' REPORT
The Members
Gainor Medical Management, LLC:
We have audited the accompanying consolidated balance sheet of Gainor Medical
Management, LLC and subsidiaries ("Gainor Medical") as of December 31, 1998 and
the related consolidated statements of operations, members' equity and
comprehensive income, and cash flows for the year then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The accompanying combined financial statements of Gainor Medical as
of December 31, 1997 and for the years ended December 31, 1997 and 1996, were
audited by other auditors whose report thereon dated January 28, 1998, expressed
an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 1998 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Gainor
Medical Management, LLC and subsidiaries as of December 31, 1998, and the
results of their operations and their cash flows for the year then ended in
conformity with generally accepted accounting principles.
KPMG LLP
Atlanta, Georgia
March 19, 1999
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Gainor Medical:
We have audited the accompanying combined balance sheets of GAINOR MEDICAL
MANAGEMENT, LLC AND AFFILIATED COMPANIES (see Note 1 for a list of affiliated
companies) as of December 31, 1997 and 1996 and the related combined statements
of operations, members' equity and comprehensive income, and cash flows for the
years then ended. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Gainor Medical Management, LLC
and affiliated companies as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 28, 1998
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GAINOR MEDICAL MANAGEMENT, LLC
AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1998
GAINOR MEDICAL MANAGEMENT, LLC
AND AFFILIATED COMPANIES
Combined Balance Sheet
December 31, 1997
ASSETS (note 3) 1998 1997
------------ ----------
Current assets:
Cash and cash equivalents $ 8,328,724 $ 5,707,152
Restricted cash 233,361 1,036,945
Accounts receivable, less allowance for doubtful accounts of
$6,461,594 and $224,264 in 1998 and 1997, respectively 8,332,478 6,809,520
Inventories (notes 6(f) and 7) 8,810,407 4,264,311
Prepaid expenses 181,317 183,765
Other current assets 1,137,281 32,734
------------ -----------
Total current assets 27,023,568 18,034,427
Property and equipment, net (note 1(f)) 1,840,712 974,059
Intangible assets, net (notes 1(j) and 2) 28,385,299 1,926,513
Other assets 397,942 127,937
------------ -----------
Total assets $ 57,647,521 $21,062,936
============ ===========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities:
Accounts payable, principally trade (notes 6(f) and 7) $ 19,889,236 $ 9,326,266
Accrued payroll 1,349,058 787,408
Income taxes payable (note 4) 2,691,864 440,683
Current maturities of long-term debt (note 3) 9,626,222 317,028
Other current liabilities 952,425 740,368
------------ -----------
Total current liabilities 34,508,805 11,611,753
Long-term debt, less current portion (note 3) 10,588,998 378,919
Deferred revenue 70,903 363,651
------------ -----------
Total liabilities 45,168,706 12,354,323
------------ -----------
Commitments and contingencies (note 6)
Members' equity:
Members' capital 6,010,527 6,122,944
Subscriptions receivable (8,400) (8,400)
Accumulated other comprehensive income (loss) (237) (3,244)
Retained earnings 6,476,925 2,597,313
------------ -----------
Total members' equity 12,478,815 8,708,613
------------ -----------
Total liabilities and members' equity $ 57,647,521 21,062,936
============ ===========
See accompanying notes to consolidated and combined financial statements.
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GAINOR MEDICAL MANAGEMENT, LLC
AND SUBSIDIARIES
Consolidated Statement of Operations
Year ended December 31, 1998
GAINOR MEDICAL MANAGEMENT, LLC
AND AFFILIATED COMPANIES
Combined Statements of Operations
Years ended December 31, 1997 and 1996
1998 1997 1996
----------- ---------- ----------
Revenues $78,410,106 40,880,154 25,938,867
----------- ---------- ----------
Cost of revenues (note 7) 53,039,427 28,984,530 19,028,906
Selling and administrative expense (note 7) 13,475,010 6,162,402 5,310,520
Provision for doubtful accounts 1,226,081 146,288 22,154
Amortization of goodwill and intangibles 1,807,002 217,793 --
----------- ---------- ----------
69,547,520 35,511,013 24,361,580
----------- ---------- ----------
Operating income 8,862,586 5,369,141 1,577,287
Interest income (197,326) (193,615) (52,598)
Interest expense 2,259,240 184,865 189,487
Write-down on asset held for sale (note 1(g)) -- -- 565,095
Loss on sale of property and equipment (note 1(g)) -- 29,815 280,166
Other (income) expense, net (2,962) 49,917 113,914
----------- ---------- ----------
Income before income
tax expense 6,803,634 5,298,159 481,223
Income tax expense (note 4) 1,374,122 459,529 23,123
----------- ---------- ----------
Net income $ 5,429,512 4,838,630 458,100
=========== ========== ==========
See accompanying notes to consolidated and combined financial statements.
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GAINOR MEDICAL MANAGEMENT, LLC
AND SUBSIDIARIES
Consolidated Statement of Members' Equity and Comprehensive Income
Year ended December 31, 1998
GAINOR MEDICAL MANAGEMENT, LLC
AND AFFILIATED COMPANIES
Combined Statements of Members' Equity and Comprehensive Income
Years ended December 31, 1997 and 1996
ACCUMULATED
OTHER
COMPREHENSIVE MEMBERS' SUBSCRIPTION COMPREHENSIVE
INCOME CAPITAL RECEIVABLE INCOME
------------- ---------- ------------ -------------
Balance, December 31, 1995 $ 104,000 -- (4,524)
Comprehensive income:
Net income $ 458,100 -- -- --
Other comprehensive income (loss)- translation adjustment 16,454 -- -- 16,454
----------
Total comprehensive income $ 474,554
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Member contribution 11,390 -- --
Other 200 -- --
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Balance, December 31, 1996 115,590 -- 11,930
Comprehensive income:
Net income $4,838,630 -- --
Other comprehensive income (loss)- translation adjustment (15,174) -- (15,174)
----------
Total comprehensive income $4,823,456
==========
Member contribution 5,121,427 (8,400) --
Conversion of long-term debt to equity 885,927 -- --
---------- ------------ -------------
Balance, December 31, 1997 6,122,944 (8,400) (3,244)
Comprehensive income:
Net income $5,429,512 -- -- --
Other comprehensive income (loss)- translation adjustment 3,007 -- -- 3,007
----------
Total comprehensive income $5,432,519
==========
Distributions to members -- -- --
Reorganization of consolidated group (103,537) -- --
Stock issuance costs (8,880) -- --
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Balance, December 31, 1998 $6,010,527 (8,400) (237)
========== ============ =============
RETAINED
EARNINGS
(DEFICIT) TOTAL
----------- -----------
Balance, December 31, 1995 (2,699,417) (2,599,941)
Comprehensive income:
Net income 458,100 458,100
Other comprehensive income (loss) translation adjustment -- 16,454
Total comprehensive income
Shareholder contribution -- 11,390
Other -- 200
----------- -----------
Balance, December 31, 1996 (2,241,317) (2,113,797)
Comprehensive income:
Net income 4,838,630 4,838,630
Other comprehensive income (loss) translation adjustment -- (15,174)
Total comprehensive income
Shareholder contribution -- 5,113,027
Conversion of long-term debt to equity -- 885,927
----------- -----------
Balance, December 31, 1997 2,597,313 8,708,613
Comprehensive income:
Net income 5,429,512 5,429,512
Other comprehensive income (loss) translation adjustment -- 3,007
Total comprehensive income
Distributions to shareholders (1,653,437) (1,653,437)
Reorganization of consolidated group 103,537 --
Stock issuance costs -- (8,880)
----------- -----------
Balance, December 31, 1998 6,476,925 12,478,815
=========== ===========
See accompanying notes to consolidated and combined financial statements.
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GAINOR MEDICAL MANAGEMENT, LLC
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year ended December 31, 1998
GAINOR MEDICAL MANAGEMENT, LLC
AND AFFILIATED COMPANIES
Combined Statements of Cash Flows
Years ended December 31, 1997 and 1996
1998 1997 1996
------------ ---------- ----------
Cash flows from operating activities:
Net income $ 5,429,512 4,838,630 458,100
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,532,363 649,732 433,733
Other amortization 571,828 -- --
Provision for doubtful accounts 1,226,081 146,288 22,154
Loss on disposal of property -- 29,815 280,166
Write-down of asset held for sale -- -- 565,095
Deferred income taxes (211,000) -- --
Changes in assets and liabilities, net of effects of
acquisitions:
(Increase) decrease in accounts receivable 4,523,746 (3,093,949) (437,438)
Increase in inventory (933,710) (1,796,726) (492,557)
(Increase) decrease in prepaid expenses and other (955,993) (140,417) 50,986
Increase (decrease) in accounts payable 846,222 2,633,687 (189,746)
Increase (decrease) in accrued expenses and other (1,796,299) 1,052,616 (451,170)
Increase (decrease) in deferred revenue (292,748) 269,183 35,078
Increase in income tax payable 1,294,905 402,879 --
------------ ---------- ----------
Net cash provided by operating activities 12,234,907 4,991,738 274,401
------------ ---------- ----------
Cash flows from investing activities:
Restructuring expenditures -- (241,129) (382,973)
Proceeds from sale of property -- 410,316 323,025
Increase in cash surrender value of life insurance -- (2,714) (63,827)
Liquidation of investments -- 47,783 23,231
Purchase of property, plant, and equipment (193,086) (148,331) --
Acquisitions, net of cash acquired (15,958,810) (1,346,891) --
(Increase) decrease in restricted cash 803,585 (1,036,945) --
------------ ---------- ----------
Net cash used in investing activities (15,348,311) (2,317,911) (100,544)
------------ ---------- ----------
Cash flows from financing activities:
Repayment of long-term debt (10,076,147) (3,805,617) (154,321)
Proceeds from long-term debt 17,470,433 810,857 127,024
Equity contributions, net of costs incurred (8,880) 5,113,027 11,590
Distributions to members (1,653,437) -- --
Change in cumulative translation adjustment 3,007 (15,174) 16,454
------------ ---------- ----------
Net cash provided by financing activities 5,734,976 2,103,093 747
------------ ---------- ----------
(Continued)
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GAINOR MEDICAL MANAGEMENT, LLC
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
Year ended December 31, 1998
GAINOR MEDICAL MANAGEMENT, LLC
AND AFFILIATED COMPANIES
Combined Statements of Cash Flows
Years ended December 31, 1997 and 1996
1998 1997 1996
----------- ------------- -------------
Net increase in cash during the year $ 2,621,572 4,776,920 174,604
Cash and cash equivalents, beginning of year 5,707,152 930,232 755,628
----------- ------------- -------------
Cash and cash equivalents, end of year $ 8,328,724 5,707,152 930,232
=========== ============= =============
Noncash financing and investing activities:
Conversion of long-term debt to equity $ -- 885,927 --
=========== ============= =============
Debt issued for acquisitions $11,310,960 835,000 --
=========== ============= =============
Reduction of officer/member loan $ -- -- (409,905)
=========== ============= =============
Net book value of property sold $ -- 1,300,000 1,424,691
=========== ============= =============
Retirement of debt $ -- (859,869) (821,500)
=========== ============= =============
Supplemental disclosure of cash flow information:
Interest paid $ 1,348,471 187,277 424,000
=========== ============= =============
Income taxes paid $ 868,859 52,422 --
=========== ============= =============
See accompanying notes to consolidated and combined financial statements.
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GAINOR MEDICAL MANAGEMENT, LLC
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1998
GAINOR MEDICAL MANAGEMENT, LLC
AND AFFILIATED COMPANIES
Notes to Combined Financial Statements
December 31, 1997 and 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Gainor Medical Management, LLC (the "Company") is a global
distributor of disposable medical supplies related to diabetes
care, with operations in the United States and Europe. The Company
sells directly and through mail-order, diabetes-related products
to diabetics and provides diabetes disease-management services to
companies.
For the years ended December 31, 1997 and 1996, the financial
statements were combined to include the accounts of Gainor Medical
Management, LLC; Gainor Medical USA, Inc.; Gainor Medical North
America, LLC; Gainor Medical International, LLC; Gainor Medical
Direct, LLC; A. R. Medical Supplies, Inc.; Packaging Science
International, LLC; Bryan Medical, Inc.; Gainor Medical Global;
Gainor Medical Worldwide; and Gainor Medical Europe (collectively,
"Gainor Medical" or the "Company"). Gainor Medical USA, Inc. is a
member of Gainor Medical Management, LLC as a result of its
transfer of assets and liabilities to Gainor Medical Management,
LLC in 1997.
In 1998 and 1997, the Company acquired businesses which sell
diabetes-related products directly to and by mail order to
individuals with diabetes.
As a result of an investment agreement between the Company and SZ
Investments ("SZI"), the Company was reorganized in June 1997 to
exclude the accounts of Gainor Medical USA, Inc. and Bryan
Medical, Inc. and to result in Gainor Medical Management LLC
becoming the parent of the previously mentioned companies. Mark
Gainor beneficially owns greater than 80% of the outstanding
shares of common stock or membership interests of Gainor Medical.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial
statements of Gainor Medical Management, LLC and its wholly owned
subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
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(C) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
(D) CASH EQUIVALENTS
Cash and cash equivalents include highly liquid investments with
original purchase maturities of three months or less. Restricted
cash includes an amount of $233,361 and $1,036,945 in 1998 and
1997, respectively, which is held in an escrow account to pay
certain debt maturities payable related to the acquisition of
Diabetic Supply Center, Inc. as they come due.
(E) INVENTORIES
Inventories, which consist of various disposable medical products
used in the treatment of diabetes, are stated at the lower of cost
or market. Cost is determined using the first-in, first-out
method.
(F) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost, less accumulated
depreciation and amortization. Depreciation is provided for using
the straight-line method over estimated useful lives of three to
seven years for office furniture, fixtures, and vehicles as well
as machinery and equipment. Computers and software are depreciated
over three years. Leasehold improvements are amortized over the
shorter of the lease term or estimated useful life.
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At December 31, 1998 and 1997, property and equipment were
comprised of the following items:
1998 1997
---------- ---------
Land $ 341,000 341,000
Office furniture, fixtures, and vehicles 1,261,990 663,015
Machinery and equipment 1,209,293 502,057
Computers and software 2,088,567 909,702
Leasehold improvements 155,853 --
---------- ---------
5,056,703 2,415,774
Less accumulated depreciation and amortization 3,215,991 1,441,715
---------- ---------
$1,840,712 974,059
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(G) LONG-LIVED ASSETS
The Company accounts for long-lived assets in accordance with the
provisions of SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of.
This statement requires that long-lived assets and certain
identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to sell. In
accordance with SFAS No. 121, during 1997 the Company recognized a
loss of $29,815 on certain real estate located in Long Beach,
California that was written down to its net realizable value in
1996 and sold in 1997.
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(H) FOREIGN CURRENCY TRANSLATION
All monetary asset and liability accounts of foreign companies are
translated into U.S. dollars at the rate of exchange in effect at
the balance sheet date. All income statement accounts of foreign
companies are translated at average exchange rates during the
year. Resulting translation adjustments arising from these
transactions are charged or credited directly to members'
equity. Gains or losses on foreign currency transactions are
included in income as incurred.
(I) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates that the carrying amount of the Company's
long-term debt approximates the fair value based on the rates
currently offered to the Company for debt of the same remaining
maturities.
(J) INTANGIBLE ASSETS
At December 31, 1998 and 1997, intangible assets were comprised of
the following items:
1998 1997
----------- ---------
Covenant not to compete $ 650,000 650,000
Goodwill 29,593,684 1,327,896
Organization costs 166,410 166,410
----------- ---------
30,410,094 2,144,306
Less accumulated amortization 2,024,795 217,793
----------- ---------
$28,385,299 1,926,513
=========== =========
The noncompete agreement is for five years and is being amortized
on a straight-line basis over a period of five years. Goodwill,
which represents the excess of purchase price over fair value of
net assets acquired, is being amortized on a straight-line basis
over a 15-year period. The organization costs are being amortized
over a period of five years. The Company assesses the
recoverability of the goodwill by determining whether the
amortization of the goodwill over its
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remaining life can be recovered through undiscounted future
operating cash flows of the acquired operation. The amount of
goodwill impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate
reflecting a rate commensurate with the risk involved. The
assessment of recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
In April 1998, Statement of Position (SOP) 98-5, Reporting on the
Costs of Start-Up Activities, was issued. SOP 98-5 requires
entities to expense as incurred all organization costs that are
not otherwise capitalizable as long-lived assets. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998.
Restatement of previously issued financial statements is not
permitted by SOP 98-5, and entities are not required to report the
pro forma effects of the retroactive application of the new
accounting standard. The Company's adoption of the
expense-as-incurred accounting principle required by SOP 98-5 will
involve the recognition of the cumulative effect of the change in
accounting principle required by SOP 98-5 as a one-time charge
against earnings, net of any related income tax effect,
retroactive to the beginning year of adoption. The Company will
adopt SOP 98-5 in the first quarter of 1999. The adoption of this
change in accounting method is expected to result in a one-time
charge of approximately $113,000, less applicable income taxes.
(K) REVENUES AND ALLOWANCES FOR DOUBTFUL ACCOUNTS
The Company derives its revenues through two reportable business
segments, Microsampling and Disease Management (note 5).
Revenues for Microsampling are recognized as products are shipped
and are net of any contractual discounts and early payment
discounts. Revenues for the Disease Management are recognized as
products are shipped to or received by patients and are net of
contractual allowances and other allowances based upon reasonable
and customary fees. There are adjustments made to these allowances
due to changes in third-party reimbursement policies. Accordingly,
the ultimate collectibility of a substantial portion of the
Company's trade accounts receivable is susceptible to changes in
third-party reimbursement policies.
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A provision for doubtful accounts is made for revenues estimated
to be uncollectible and is adjusted periodically based upon the
Company's evaluation of current industry conditions, historical
collection experience, and other relevant factors.
(L) SIGNIFICANT CUSTOMER CONCENTRATION
During the years ended December 31, 1998, 1997, and 1996, three
customers accounted for 51%, 81%, and 77% of the Company's total
revenue, respectively.
(M) COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for
reporting and presentation of comprehensive income and its
components in a full set of financial statements. For the Company,
comprehensive income consists of net income and foreign currency
translation adjustments and is presented in the consolidated
statements of members' equity and comprehensive income. The
statement requires only additional disclosures in the financial
statements; it does not affect the Company's financial position or
results of operations.
(N) SEGMENT REPORTING
On January 1, 1998, the Company adopted SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information. SFAS 131
established standards for reporting operating segments in annual
financial statements.
(O) RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred and
amounted to $104,551, $170,132, and $151,750 in 1998, 1997, and
1996, respectively.
(P) INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and
liabilities and their respective tax
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bases and operating loss and tax credit carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date.
(Q) RECLASSIFICATIONS
Certain amounts in the 1997 and 1996 financial statements have
been reclassified to conform to classifications adopted in 1998.
(2) ACQUISITIONS
On January 28, 1998, Gainor Medical Management, LLC acquired all of the
outstanding shares of Diabetes Self Care, Inc. ("DSCI") and USCI
Healthcare Management Solutions, Inc. ("USCI") and certain operating
assets from Universal Self Care, Inc. and its subsidiaries ("Universal")
for a purchase price of $27,984,678, which consisted of cash of
$9,167,401, assumption of liabilities of $9,049,077, and the issuance to
Universal of a convertible subordinated promissory note up to
$17,000,000, subject to adjustment as defined in the asset purchase
agreement. The note has been adjusted in accordance with the agreement to
$13,842,641 and was discounted, using a 17% rate, to a present value of
$9,768,200. DSCI, USCI, and Universal provide disease management programs
and are mail-order suppliers of diabetes related products. The purchase
price was allocated to the assets acquired and liabilities assumed based
on their estimated fair values resulting in goodwill of $20,455,832 which
is being amortized on a straight-line basis over 15 years. This
acquisition is being accounted for under the purchase method of
accounting and, accordingly, the results of operations of DSCI, USCI, and
Universal for the period from January 28, 1998 are included in the
accompanying consolidated financial statements.
On July 31, 1998, Gainor Medical Management, LLC acquired the stock of
Dia Real GmbH ("Dia Real") and the operating assets of Spreth GmbH
("Spreth"), businesses which are located in Germany and supply diabetes
related products to individuals. The purchase price for the assets of
Spreth was $3,570,200, which consisted of cash paid of $1,308,753,
liabilities assumed of $661,109, and the
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issuance of a note payable to the former owners of $1,600,338. The
purchase price was allocated to the fair value of the assets acquired and
liabilities assumed based on their estimated fair values resulting in
goodwill of $2,156,747. The purchase price for the stock in Dia Real was
$10,657,025, which consisted of cash paid of $6,695,879 and liabilities
assumed of $3,961,146. The purchase price was allocated to the assets
acquired and liabilities assumed based on their estimated fair values
resulting in goodwill of $5,799,888. The funding for these acquisitions
was from bank financing, which was paid in full in January 1999. The
goodwill is being amortized on a straight-line basis over a 15-year
period. This acquisition is being accounted for under the purchase method
of accounting and, accordingly, the results of operations of Dia Real and
Spreth for the period from August 1, 1998 are included in the
accompanying consolidated financial statements.
On January 10, 1997, Gainor Medical Direct, LLC acquired all of the
outstanding shares of A. R. Medical Supplies, Inc., a mail-order supplier
of diabetes-related products, for consideration of $1,225,000. This
consideration consisted of $750,000 in cash and $650,000 in a
noninterest-bearing note to be paid over a three-year period in 12 equal
payments of $54,167 beginning on April 5, 1997 and ending January 5,
2000. The noninterest-bearing note was discounted, using an 18% rate, to
a present value of $475,000. This acquisition is being accounted for
under the purchase method of accounting and, accordingly, the results of
operations of A.R. Medical Supplies, Inc. are included in the Company's
combined financial statements for 1997.
On April 25, 1997, Gainor Medical Direct, LLC purchased certain assets of
Diabetic Supply Center, Inc., a mail-order supplier of diabetes-related
products, for consideration of $960,000. This consideration consisted of
$600,000 in cash and $360,000 in a promissory note, subject to adjustment
as defined in the asset purchase agreement. The note has been adjusted in
accordance with the agreement to $330,799. The promissory note bears
interest at 8.75% and is to be paid in 60 equal monthly payments of
$6,722. This acquisition is being accounted for under the purchase method
of accounting and, accordingly, the results of operations of Diabetic
Supply Center, Inc. for the period from May 1, 1997 are included in the
accompanying combined financial statements.
17
18
(3) LONG-TERM DEBT
At December 31, 1998 and 1997, long-term debt consisted of the following:
1998 1997
----------- -----------
Note payable to former shareholder of A.R. Medical Supplies, Inc.,
unsecured; imputed interest at 18% through December 31, 1997,
noninterest-bearing, payable in 12 equal payments
through January 2000 $ 270,833 357,613
Note payable to former shareholder of Diabetic Supply Center, Inc.,
unsecured; interest at 8.75%, payable in 60 equal monthly payments
through May 2002 237,325 295,867
Subordinated convertible note payable to Universal Self Care, Inc.;
net of unamortized discount of $3,502,613; imputed interest at
17%, interest payable quarterly at 7.8% through January 2003,
principal due January 2003 10,340,028 --
Notes payable to LaSalle Bank, secured by substantially all the
assets of the Company; interest at 8.75%; principal and
interest due January 3, 1999 and February 4, 1999 8,286,389 --
Note payable to Rolf Michael Spreth and Hans MW Spreth,
unsecured; interest at 5%, principal and interest due
July 31, 1999 970,932 --
Other 109,713 42,467
----------- -------
20,215,220 695,947
Less current maturities 9,626,222 317,028
----------- -------
$10,588,998 378,919
=========== =======
The subordinated convertible note payable to Universal Self Care, Inc. is
subordinated to principal and unpaid interest of all other notes payable, and is
convertible into equity securities of the Company in case of an initial public
offering by the Company.
The notes payable to LaSalle Bank were paid in full on January 19, 1999.
18
19
Future aggregate annual maturities of long-term debt are as follows as
of December 31, 1998:
1999 $ 9,626,222
2000 136,966
2001 79,095
2002 32,908
2003 13,842,641
Thereafter --
-----------
$23,717,832
===========
(4) INCOME TAXES
Income tax expense (benefit) for the year ended December 31, 1998
consists of the following:
CURRENT DEFERRED TOTAL
----------- ---------- ---------
Federal $ 329,599 (178,000) 151,599
State and local 75,000 (33,000) 42,000
Foreign 1,180,523 -- 1,180,523
----------- ---------- ---------
$ 1,585,122 (211,000) 1,374,122
=========== ========== =========
Pre-tax income of $6,803,634 is comprised of foreign source income of
$2,239,209 and domestic source income of $4,564,425. A portion of the
domestic source income, $4,111,000, is generated by limited liability
companies which are not subject to tax at the corporate level;
therefore, no income
19
20
taxes have been provided on this income. Income tax expense for the
year ended December 31, 1998 differed from the amounts computed by
applying the U.S. Federal income tax rate of 35% to pretax income as a
result of the following:
Computed "expected" tax expense $ 2,381,272
Increase (reduction) in income taxes resulting from:
State taxes, net 27,300
Foreign taxes in excess of domestic rate 397,000
Other 7,550
Income exempt from tax at Corporate level (1,439,000)
-----------
$ 1,374,122
===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets at December 31, 1998 are presented
below:
Reserves not currently deductible $166,825
Acquisition costs 37,782
Other 6,393
--------
Net deferred tax asset $211,000
========
The Company has not recorded a valuation allowance at December 31,
1998. Based upon the level of historical taxable income and projections
for future taxable income over the periods for which the deferred tax
assets are deductible, management believes it is more likely than not
that all of the deferred tax assets will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in
the near term if estimates of future taxable income attained.
For the years ended December 31, 1997 and 1996, the companies
comprising Gainor were primarily limited liability corporations and S
corporations, with one exception. As such, the majority of the
Company's income was not subject to corporate-level taxes; rather, the
income or losses of those companies flowed through to the shareholders.
20
21
In 1997, Gainor Medical USA, Inc. elected S corporation status. Gainor
Medical USA, Inc. was previously a C corporation and was subject to
federal and state taxes. The income tax provision of $459,529 for 1997
and $23,123 for 1996 represents international and state income taxes
that could not be offset with state operating loss carryforwards.
(5) SEGMENT DISCLOSURES
(A) DESCRIPTION OF THE TYPES OF PRODUCTS AND SERVICES FROM WHICH
EACH REPORTABLE SEGMENT DERIVES ITS REVENUES
At December 31, 1998, the Company has two reportable segments:
Microsampling and Disease Management. The Microsampling
segment sells diabetes disposable products to three main
distributors. The Disease Management segment sells disposable
diabetes products directly to individuals, by mail-order and
through pharmacies.
Prior to 1998, the Company's business consisted primarily of
Microsampling. The Disease Management segment originated in
1998 with the acquisitions of DSCI, USCI, Universal, Dia Real,
and Spreth (note 2).
(B) MEASUREMENT OF SEGMENT PROFIT OR LOSS AND SEGMENT ASSETS.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
The Company accounts for intersegment sales and transfers as
if the sales or transfers were to third parties, that is, at
current market prices.
(C) FACTORS MANAGEMENT USED TO IDENTIFY ENTERPRISE'S REPORTABLE
SEGMENTS
The Company's reportable segments are strategic business units
that service different customer bases. The Company has
operations in the United States, Germany, and the United
Kingdom.
21
22
DISCLOSURE OF REPORTED SEGMENT PROFIT AND LOSS AND SEGMENT ASSETS
DISEASE CORPORATE AND
MICROSAMPLING MANAGEMENT ELIMINATIONS CONSOLIDATED
------------- ---------- -------------- --------------
Income statement information:
Revenues $ 41,037,158 37,576,692 2) (203,744) 78,410,106
Intersegment revenues (203,744) -- 2) 203,744 --
Depreciation and amortization 348,453 2,157,785 -- 2,506,238
Interest expense 742 120,864 1) 2,137,634 2,259,240
Income before income taxes 9,471,324 828,054 1)(3,495,744) 6,803,634
Balance sheet information:
Total assets 14,863,196 41,735,632 3) 1,048,693 57,647,521
Capital expenditures 88,244 104,842 -- 193,086
1) Corporate includes general/corporate expenses and interest expenses not
allocable to segments.
2) Eliminations impact only gross and intersegment revenues.
3) Corporate assets not allocable to segments.
(D) DISCLOSURE OF GEOGRAPHIC INFORMATION
LONG-LIVED
REVENUES ASSETS
----------- ----------
United States $57,217,391 22,209,265
International 21,192,715 8,414,688
----------- ----------
$78,410,106 30,623,953
=========== ==========
(6) COMMITMENTS AND CONTINGENCIES
(A) LEASES
In December 1996, the Company entered into an agreement for
the sale and leaseback of the Company's headquarters facility.
The facility was sold for $1,200,000, $323,025 in cash and
$821,500 as a retirement of the remaining debt. The Company
recorded a loss of $280,166 on the transaction. The lease has
a term of 15 years and requires minimum annual rental payments
of $150,000 for the years 1997 through 2001 and $1,854,375 in
the aggregate for years subsequent to 2001.
22
23
The Company leases office space and office equipment from
unrelated parties under lease agreements expiring over various
terms. Rental expense under these operating leases was $464,283,
$152,137 and $4,255 in 1998, 1997 and 1996, respectively.
Future minimum lease payments for noncancelable leases were as
follows at December 31, 1998:
Year ending:
1999 $ 546,386
2000 518,953
2001 298,055
2002 302,029
2003 284,861
Thereafter 1,621,736
----------
$3,572,020
==========
(B) BENEFIT PLAN
Gainor Medical USA, Inc. has a 401(k) plan covering all
salaried employees. An employee is eligible to enroll on the
first day of the following quarterly enrollment period after
the hire date. Participants may contribute up to 15% of their
compensation, up to a maximum of $9,500 to the plan. The
Company matches 25% of these contributions, up to a maximum of
$1,500 per employee per year. Contributions were $43,140,
$19,148 and $17,009 in 1998, 1997 and 1996, respectively.
(C) LITIGATION
The Company is involved in various claims and legal actions
arising in the ordinary course of business. Management is of
the opinion, based upon advice of counsel, that the ultimate
resolution of these matters will not have a material effect on
the consolidated results of operations or financial condition
of the Company.
23
24
(D) EMPLOYMENT AGREEMENT
On June 13, 1997, the Company agreed to employ Mark Gainor on
a full-time basis as chairman of the management committee,
president, and chief executive officer. The term of employment
extends for three years through June 13, 2000. The agreement
is renewable after June 13, 2000 in one-year increments.
(E) REGISTRATION RIGHTS AGREEMENT
In connection with an investment agreement between SZI and the
Company dated June 13, 1997, certain additional rights and
restrictions relating to the management and control of the
Company have been established. The Company agreed to establish
a management committee consisting of two members appointed by
the Company and one member appointed by SZI. The management
committee is required to approve various actions by the
Company including salary increases for executive officers or
key employees, making or modifying loans, loan guaranties,
redemption of equity securities, mergers, joint ventures,
partnerships, and any transactions with the Company involving
consideration in excess of $20,000. The Company and SZI each
have a right of first refusal to purchase all or any portion
of any offered shares at the proposed purchase price.
The Company has the right to require SZI to make additional
contributions to the Company of up to $5,000,000 in
consideration for additional units of the Company if the
Company meets an EBITDA (as defined) target of $2,000,000 for
a 12-month period.
In connection with the SZI investment in June 1997, the
Company agreed to grant SZI and Nissho Corporation ("Nissho"),
(together, the "Holders") certain registration rights with
respect to the shares owned. The Holders have the right
subsequent to the consummation of an initial public offering
and until the filing of a shelf registration statement to make
up to two written requests to register the Holders' shares (a
demand registration). The Holders also have the right at any
time after the consummation of an initial public offering and
until the filing of a shelf registration statement to register
their shares along with a registration statement filed by the
Company under the Securities Act of 1933 with respect to an
underwritten public offering (a piggyback registration). The
Company agrees to file on the first business day after the
one-year anniversary of the consummation of an initial public
offering, or as soon as practicable thereafter, a shelf
registration statement providing for the sale by the Holders
of all shares held.
24
25
(F) SECURITY AGREEMENT
The Company has entered into an agreement with Nissho to
secure Nissho, a supplier of Gainor Medical, for obligations
related to Nissho's deliveries of medical goods. Under the
terms of the agreement, the Company agrees to grant a security
interest in all inventory acquired from Nissho (excluding
inventory sold to third parties in the ordinary course of
business). Additionally, the Company agrees to maintain a
letter of credit or escrow for an initial amount equal to 50%
of all trade payables to Nissho in excess of inventory on
hand. Under the terms of the agreement, inventory on hand and
the letter of credit or escrow must be at least equal to 50%
of all trade payables to Nissho based upon a calculation in
the agreement. Accordingly, based upon the calculation
required under the agreement at December 31, 1998 and 1997,
the Company was not required to have a letter of credit or
maintain an escrow account.
(G) YEAR 2000 (UNAUDITED)
In 1998, the Company initiated a plan ("Plan") to identify,
assess, and remediate "Year 2000" issues within each of its
significant computer programs and certain equipment which
contain micro-processors. The Plan is addressing the issue of
computer programs and embedded computer chips being unable to
distinguish between the year 1900 and the year 2000, if a
program or chip uses only two digits rather than four to
define the applicable year. The Company has divided the Plan
into five major phases--assessment, planning, conversion,
implementation and testing. The assessment and planning phases
were completed in mid-1998. The Company is currently in the
conversion, implementation and testing phases. Systems which
have been determined not to be Year 2000 compliant are being
either replaced or reprogrammed, and thereafter tested for
Year 2000 compliance. The Plan anticipates that by mid-1999,
the conversion, implementation and testing phases will be
completed.
The Company is in the process of identifying and contacting
critical suppliers and customers regarding their plans and
progress in addressing their Year 2000 issues. The Company has
received varying information from such third parties on the
state of compliance or expected compliance.
25
26
The failure to correct a material Year 2000 problem could
result in an interruption in or a failure of, certain normal
business activities or operations. Such failures could
materially and adversely affect the Company's operations,
liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in
part from the uncertainty of the Year 2000 readiness of
third-party suppliers and customers, the Company is unable to
determine at this time whether the consequences of Year 2000
failures will have a material impact on the Company's
operations, liquidity, or financial condition.
(7) RELATED PARTY TRANSACTIONS
(a) The Company purchases medical products from Nissho which has
an equity interest in the Company. Purchases from Nissho were
$26,648,759, $23,774,728, and $14,532,708 in 1998, 1997, and
1996, respectively. At December 31, 1998 and 1997, amounts
owed to Nissho were $10,377,226 and $7,424,791, respectively.
(b) The Company paid fees for services to various companies
affiliated with a company which has an equity interest. Fees
paid were $391,634 and $25,000 for 1998 and 1997,
respectively.
(c) The Company paid $60,000 for consulting services in 1998 to a
relative of an individual with an equity interest.
(8) SUBSEQUENT EVENTS
On January 19, 1999, Matria Healthcare, Inc. acquired the membership
interests and other equity interests in subsidiaries of Gainor Medical
Management, LLC for approximately $130 million. The acquisition
agreement also provides for an additional contingent purchase price of
up to $35 million based on 1999 financial performance. The acquisition
was effective as of January 1, 1999.
26
27
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro forma consolidated condensed financial
information and explanatory notes are presented to reflect the acquisition of
substantially all of the operating assets and assumption of operating
liabilities of Gainor Medical Management, LLC ("Gainor Medical") by Matria
Healthcare, Inc. ("Matria"). The Pro Forma Consolidated Condensed Balance Sheet
as of December 31, 1998 assumes the acquisition occurred on December 31, 1998
and the Pro Forma Consolidated Condensed Statement of Earnings (Loss) for the
year ended December 31, 1998 assumes the acquisition occurred on January 1,
1998.
The pro forma adjustments are based upon currently available
information and upon certain assumptions that management of Matria believes are
reasonable. The acquisition will be recorded based upon the estimated fair
market value of Gainor Medical's net assets acquired and liabilities assumed at
date of acquisition. The adjustments included in the pro forma financial
information presented herein are management's preliminary determination of these
adjustments based upon available information. The actual adjustments which will
be based on an evaluation of assets, liabilities and circumstances at the
acquisition date, are not expected to differ significantly from the pro forma
adjustments.
The Pro Forma Consolidated Condensed Financial Statements are not
necessarily indicative of either future results of operations or results that
might have been achieved if the Merger actually had been consummated as of the
indicated dates. The pro forma financial statements should be read in
conjunction with the historical financial statements of Gainor Medical together
with related notes thereto included in this Form 8-K and the consolidated
financial statements and related notes of Matria, included in Matria's Annual
Report on Form 10-K for the year ended December 31, 1998 as filed with the
Securities and Exchange Commission.
27
28
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
(Amounts in thousands)
December 31, 1998
-------------------------------------------------------
Historical Historical Pro Forma Pro Forma
Matria Gainor Adjustments Matria
---------- ---------- ----------- ---------
ASSETS
Current assets:
Cash, cash equivalents and short term investments $ 11,968 8,562 (6,574)(A) 13,956
Trade accounts receivable, net 37,311 8,333 (714)(A) 44,930
Inventories 1,699 8,810 -- 10,509
Prepaid expenses and other current assets 4,556 1,319 (17)(A) 5,858
-------- ------ ------- -------
Total current assets 55,534 27,024 (7,305) 75,253
Property and equipment, net 16,865 1,841 (833)(A) 17,873
Intangible assets 16,261 28,385 (28,385)(A) 133,711
117,450 (A)
Deferred income tax asset -- -- 20,000 (B) 20,000
Other Assets 8,374 398 (321)(A) 8,451
-------- ------ ------- -------
$ 97,034 57,648 100,606 255,288
======== ====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt and obligations
under capital leases 718 9,626 (8,378)(A) 13,966
12,000 (C)
Accounts payable, principally trade 8,939 19,889 (51)(A) 28,777
Income taxes payable -- 2,692 (2,692)(A) --
Accrued liabilities 9,536 2,302 1,194 (A) 17,876
4,844 (A)
-------- ------ ------- -------
Total current liabilities 19,193 34,509 6,917 60,619
Long-term debt and obligations under capital leases,
excluding current installments 18,385 10,589 (10,589)(A) 90,142
71,757 (C)
Other long-term liabilities 9,575 71 -- 9,646
-------- ------ ------- -------
Total liabilities 47,153 45,169 68,085 160,407
Preferred stock:
Series A convertible, redeemable preferred stock -- -- 10,000(D) 10,000
Series B redeemable preferred stock, redemption value $35,000 30,585(D) 30,585
Shareholders' equity:
Preferred stock -- -- -- --
Common stock 364 -- -- 364
Additional paid in capital 280,585 6,002 (6,002)(A) 285,000
4,415 (D)
Accumulated earnings (deficit) (227,533) 6,477 (6,477)(A) (227,533)
Notes receivable from officer (3,535) -- -- (3,535)
-------- ------ ------- -------
Total shareholders equity 49,881 12,479 (8,064) 54,296
-------- ------ ------- -------
$ 97,034 57,648 100,606 255,288
======== ====== ======= =======
28
29
MATRIA HEALTHCARE, INC AND SUBSIDIARIES
PROFORMA CONSOLIDATED CONDENSED STATEMENT OF EARNINGS (LOSS)
(Amounts in thousands, except share and per share amounts)
(Unaudited)
Year ended December 31, 1998
---------------------------------------------------------
Historical Historical Pro Forma Pro Forma
Matria Gainor Adjustments Matria
---------- ---------- ----------- ---------
Revenues $ 135,215 78,410 -- 213,625
Costs of revenues 53,385 53,039 -- 106,424
Selling and administrative expenses 63,028 13,475 -- 76,503
Provision for doubtful accounts 6,662 1,226 -- 7,888
Amortization of intangibles 28,155 1,807 6,330(E) 36,292
Assets impairment 82,885 -- -- 82,885
Acquired in-process research and development 2,482 -- -- 2,482
--------- ----- ------- --------
Operating earnings (loss) (101,382) 8,863 (6,330) (98,849)
Interest income 475 197 -- 672
Interest expense (1,083) (2,259) (5,208)(F) (8,550)
Other income 448 3 -- 451
--------- ----- ------- --------
Earnings (loss) before income tax expense (101,542) 6,804 (11,538) (106,276)
Income tax expense -- 1,374 (719)(G) 655
--------- ----- ------- --------
Net earnings (loss) (101,542) 5,430 (10,819) (106,931)
Preferred stock dividends -- -- (3,200)(H) (3,200)
Accretion of discount on preferred stock -- -- (442)(I) (442)
--------- ----- ------- --------
Net earnings (loss) available to common shareholders (101,542) 5,430 (14,461) (110,573)
========= ===== ======= ========
Basic and diluted net loss per common share $ (2.78) (3.02)
========= ========
Weighted average shares outstanding 36,580 36,580
========= ========
29
30
MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED CONDENSED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(A) Reflects the purchase of substantially all of the assets and assumption
of substantially all of the operating liabilities of Gainor Medical by
Matria, the resulting excess purchase price over the estimated fair
value of net tangible assets acquired and operating liabilities
assumed, the elimination of net assets not acquired and liabilities not
assumed, and the elimination of paid in capital and retained earnings
of Gainor Medical. An analysis of the purchase price is as follows:
Cash paid at closing $ 83,758
Issuance of redeemable preferred stock and warrants 45,000
Transaction costs 5,337
---------
Total purchase consideration 134,095
Liabilities assumed in excess of fair
value of net tangible assets acquired 3,355
Deferred income tax asset (20,000)
---------
Excess purchase price $ 117,450
=========
The fair value of net tangible assets was determined as follows:
- Cash and short-term investments are at current realizable
values.
- Accounts receivable and payable are at book value since
receivables are expected to be recovered and payables are
expected to be settled both, within 120 days.
- Inventories, which are primarily microsampling lancets and
patient supplies, are at book value since these inventories
turn over in one to two months.
- Property and equipment are at net book value since net book
value approximates fair value.
- Previous goodwill and other intangible assets have been
eliminated in accordance with generally accepted accounting
principles.
Excess purchase price has been allowed to intangibles as follows:
Patient Lists - Domestic Disease Management $ 1,300
Patient Lists - Foreign Disease Management 2,000
Noncompete Agreements 500
Goodwill 113,650
--------
$117,450
========
30
31
(B) To reflect the estimated deferred tax asset, arising from the tax
benefits of Matria net operating loss carry forwards resulting from the
acquisition, based upon expected combined future operating results.
(C) To reflect issuance of new debt to finance a portion of the purchase
price. New debt is comprised of $125,000 five-year bank credit facility
which the Company entered into in January 1999. The credit facility
consists of an $80,000 term loan facility and a $45,000 revolving
credit facility. Borrowings under this agreement bear interest at the
LIBOR rate plus 1.5% to 2.5%.
(D) To reflect preferred stock issued as partial consideration for the
purchase. As part of the purchase price, Matria issued $10,000 of
Series A, 4% Convertible Preferred Stock and $35,000 of Series B, 8%
redeemable Preferred Stock with warrants to purchase 4 million shares
of Common stock of Matria at $3.00 per share. The $35,000 redemption
value of Series B was allocated $4,415 to the warrants and $30,585 to
preferred stock. The value of the warrants will be recorded to
additional paid in capital. The discount on the Preferred Stock of
$4,415 will be accreted over the 10 year term of the preferred stock
through periodic charges to paid in capital.
(E) Reflects additional amortization of excess purchase price using the
straight-line method over fifteen years for goodwill, five years for
Domestic Disease Management Patient Lists, ten years for Foreign
Disease Management Patient lists, and five years for Noncompete
Agreements. A significant amount of the amortization will be deductible
for income tax purposes. The Pro Forma Consolidated Condensed Financial
Statements do not include any cost savings. No material cost savings
are expected to be realized in connection with the acquisition.
(F) To reflect the increase in interest expense resulting from the issuance
of debt to finance a portion of the purchase price. The interest rate
on new debt is assumed to be 7.75 percent.
(G) To reduce income tax expense resulting from purchase adjustments that
would eliminate Gainor Medical's U.S. taxable income. Remaining income
tax expense relates to Gainor Medical's foreign operations.
(H) To reflect dividends on preferred stock.
(I) To reflect the accretion of the discount on Series B convertible
preferred stock over 10 years.
31
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Matria Healthcare, Inc.
By: /s/ Yvonne V. Scoggins
----------------------------------------
Yvonne V. Scoggins
Vice President, Chief Accounting Officer
And Treasurer
Date: April 5, 1999
32