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SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
  þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934for the fiscal year
ended December 31, 2005 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934for the transition period from to
 Commission File No. 0-20619
 
 MATRIA HEALTHCARE, INC.
  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    20-2091331
(IRS Employer Identification No.)1850 Parkway Place
Marietta, Georgia
(Address of principal executive offices)
    
    30067
(Zip Code)
 (770) 767-4500
  Title of each class
    
    Name of each exchange on which registeredNone
    
    None
  Common Stock, par value $0.01 per share
  þ o
  o þ
  þ o
 þ
  o þ o
  o þ
  DOCUMENTS INCORPORATED BY REFERENCE




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##### 



MATRIA HEALTHCARE, INC.
2005 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
 PART IItem 1.
    
    Business
    
    
    3Item 1A.
    
    Risk Factors
    
    
    10Item 1B.
    
    Unresolved Staff Comments
    
    
    15Item 2.
    
    Properties
    
    
    15Item 3.
    
    Legal Proceedings
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    16Special Item
    
    Executive Officers of the Company
    
    
    17PART IIItem 5.
    
    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    19Item 6.
    
    Selected Financial Data
    
    
    21Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 7A.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    35Item 8.
    
    Financial Statements and Supplementary Data
    
    
    36Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    36Item 9A.
    
    Controls and Procedures
    
    
    36Item 9B.
    
    Other Information
    
    
    37PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    38Item 11.
    
    Executive Compensation
    
    
    38Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    38Item 13.
    
    Certain Relationships and Related Transactions
    
    
    38Item 14.
    
    Principal Accountant Fees and Services
    
    
    38PART IVItem 15.
    
    Exhibits and Financial Statement Schedules
    
    
    39SIGNATURES
    
    
    
    
    47EX-2.5 AGREEMENT AND PLAN OF MERGEREX-11 COMPUTATION OF EARNINGS (LOSS) PER SHAREEX-21 LIST OF SUBSIDIARIESEX-23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMEX-31.1 SECTION 302, CERTIFICATION OF PARKER H. PETITEX-32.1 SECTION 302, CERTIFICATION OF STEPHEN M. MENGERTEX-32.1 SECTION 906, CERTIFICATION OF PARKER H. PETITEX-32.2 SECTION 906, CERTIFICATION OF STEPHEN M. MERGERT
  2




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##### Table of Contents



PART I
 
 Item 1. Business
 General.
  Development of our Business .
   Our Business Today
 Health Enhancement .
 3




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
    
    Sophisticated data analysis to identify and preliminarily stratify individuals at
risk for chronic diseases and high cost conditions;
    
    Administration of a multi-condition risk assessment, the results of which we use
to build a detailed medical profile in our proprietary information systems;
    
    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;
    
    Development of risk-specific care plans based on national clinical standards;
    
    Ongoing patient education, motivation and support;
    
    Monitoring of the patients utilization of medication and supplies, the frequency
of periodic laboratory testing and adherence to care plans;
    
    For some patients and participants, biometric monitoring of weight, blood
glucose, blood pressure and/or uterine activity; and
    
    Reporting of clinical and financial outcomes.
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Customers and Third-Party Payors .
   Seasonality .
 5




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Competition .
 Research and Development . Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.
 Governmental Regulation .
    6




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qui tam
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Employees .
 Discontinued Operations.
    Customers .
  8




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Competition .
   Patents.
  Research and Development
 Governmental Regulation
 Employees.
 9




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Available Information
 www.matria.com
 
 Item 1A. Risk Factors .
  The health enhancement business is an evolving component of the overall healthcare industry.
  
    
    Our ability to differentiate our products and service offerings from those of our
competitors;
    
    The extent and timing of the acceptance of our services as a replacement for, or
supplement to, traditional managed care offerings;
    
    Our ability to implement new and additional services beneficial to health plans and
employers;
    
    Our ability to effect cost savings for health plans and employers through the use of
our programs; and
    
    Our ability to improve patient compliance with the complex drug therapies offered by
our pharmaceutical customers.
  We are highly dependent on payments from our customers and third-party healthcare payors, which may
implement cost reduction measures that adversely affect our business and operations.
  10




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Government regulations may adversely affect our business.
  A portion of our disease management fees are contingent upon performance.
  Our operating results have fluctuated in the past and could fluctuate in the future.
  
    
    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;
    
    increases in selling, general and administrative expenses;
    
    increased or more effective competition; and
    
    regulatory changes.
  If our costs of providing products or services increase, we may not be able to pass these cost
increases on to our customers.
  Recent and future acquisitions may cause integration problems, disrupt our business and strain our
resources.
  11




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We may face costly litigation that could force us to pay damages and harm our reputation.
  If we do not manage our growth successfully, our growth and profitability may slow, decline or
stop.
  Our data management and information technology systems are critical to maintaining and growing our
business.
  We have recorded a significant amount of intangible assets, the value of which could become
impaired.
  12




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The competition for staff may cause us to restrict growth in certain areas or to realize increased
labor costs in existing areas.
  The development of improved technologies for glucose monitoring that eliminate the need for
consumable testing supplies could adversely affect Facets business.
  Some of our operations are substantially dependent on a few customers.
  Facet is highly dependent on supplies from limited sources.
  Facet operates in an industry that is becoming increasingly influenced by price competition.
  Our foreign operations are subject to additional risks.
  13




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Facets inventory management is complex, and excess inventory may harm our results of operations.
  Impairment of Facets intellectual property rights could negatively affect its business.
   Our actual financial results might vary from our publicly disclosed forecasts.
  Forward-Looking Statements.
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Item 1B. Unresolved Staff Comments
  
 Item 2. Properties
  15




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Item 3. Legal Proceedings
 qui tam
  
 Item 4. Submission of Matters to a Vote of Security Holders
  16




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Special Item. Executive Officers of the Company
  Name
    
    Age
    
    Position with the CompanyParker H. Petit
    
    66
    
    Chairman of the Board and Chief Executive OfficerRichard M. Hassett, M.D.
    
    50
    
    President and Chief Operating OfficerStephen M. Mengert
    
    56
    
    Senior Vice President and Chief Financial Officer (1)Yvonne V. Scoggins
    
    56
    
    Senior Vice President  Corporate FinanceRoberta L. McCaw
    
    50
    
    Senior Vice President, General Counsel and SecretaryThornton A. Kuntz, Jr.
    
    52
    
    Senior Vice President and Chief Administrative OfficerJeffrey L. Hinton
    
    41
    
    Senior Vice President and Chief
Financial Officer (2)
 
 (1)
    
    Mr. Mengert has resigned from the Company effective March 16, 2006 .(2)
    
    Mr.  Hinton will assume this position effective March 20, 2006.      17




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PART II
 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
 (a) Market Information.
  Quarter
    
    Low
    
    High2004First
    
    $
    14.25
    
    
    $
    21.17Second
    
    
    11.93
    
    
    
    17.35Third
    
    
    15.33
    
    
    
    19.73Fourth
    
    
    18.09
    
    
    
    26.432005First
    
    $
    24.31
    
    
    $
    32.01Second
    
    
    25.23
    
    
    
    33.00Third
    
    
    31.88
    
    
    
    39.61Fourth
    
    
    30.23
    
    
    
    42.16
 (b) Holders.
 (c) Dividends.
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(d) Equity Compensation Plan Information.
  Number of SecuritiesRemaining Available forNumber of Securities
    
    
    Weighted-Average
    
    
    Future Issuance Underto be Issued Upon
    
    
    Exercise Price of
    
    
    Equity CompensationExercise of
    
    
    Outstanding
    
    
    Plans (ExcludingOutstanding Options,
    
    
    Options, Warrants
    
    
    Securities Reflected inPlan Category
    
    Warrants and Rights
    
    
    and Rights
    
    
    1st Column)Equity compensation
plans approved by
security holders
    
    
    2,754,933
    
    
    $
    20.25
    
    
    
    878,016
    (1)Equity
compensation plans
not approved by
security holders
(2)
    
    
    35,098
    
    
    $
    15.40
    
    
    
    Total
    
    
    2,790,031
    
    
    $
    20.19
    
    
    
    878,016
 
 (1)
    
    Includes securities available for future issuance under shareholder-approved compensation
plans as follows: 533,672 shares under the Long-Term Stock Incentive Plan, 6,000 shares under
the 2002 Stock Incentive Plan, 675 shares under the 2001 Stock Incentive Plan, 129,687 shares
under the 2005 Directors Non-qualified Stock Option Plan, 13,250 shares under the 2000 Stock
Incentive Plan, and 3,249 shares under the 1996 Stock Incentive Plan. Also includes 41,483
shares that remain available for purchase under the 2002 Stock Purchase Plan and 150,000
shares under the 2005 Stock Purchase Plan.(2)
    
    This total includes options for: (1) 14,019 shares granted to certain key employees (other
than executive officers) on October 20, 1997 and 15,000 shares granted to non-employee members
of the Companys Board of Directors on February 24, 1998. All of these options were granted
at exercise prices equal to the fair market value of a share of the Companys stock on the
date of grant and all expire ten years from the date of the grant. The October 20, 1997
grants vested and became fully exercisable on October 20, 2000. The February 24, 1998 grants
vested on February 24, 1999; (2) 6,079 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, has been 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
generally vest in increments of 25% annually, beginning on the second anniversary of the date
of grant, with such options expiring five to ten years from the date of grant or upon
termination of employment. 20




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Item 6. Selected Financial Data
  Years Ended December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(In thousands, except per share data)Consolidated statements of operations data:Revenues from continuing operations
    
    $
    179,231
    
    
    $
    145,087
    
    
    $
    123,196
    
    
    $
    106,044
    
    
    $
    107,768Earnings (loss) from continuing operations
    
    
    4,014
    
    
    
    (20,077
    ) (1)
    
    
    (8,505
    )
    
    
    (26,425
    ) (2)
    
    
    (3,849
    )Earnings (loss) from continuing operations per
common share:Basic
    
    $
    0.21
    
    
    $
    (1.29
    )
    
    $
    (0.56
    )
    
    $
    (1.89
    )
    
    $
    (0.29
    )Diluted
    
    
    0.20
    
    
    
    (1.29
    )
    
    
    (0.56
    )
    
    
    (1.89
    )
    
    
    (0.29
    )December 31,2005
    
    2004
    
    2003
    
    2002
    
    2001(In thousands)Consolidated balance sheet data:Total assets
    
    $
    323,207
    
    
    $
    307,392
    
    
    $
    333,482
    
    
    $
    291,407
    
    
    $
    260,623Long-term debt, excluding current installments
    
    
    2,099
    
    
    
    85,751
    
    
    
    121,005
    
    
    
    118,215
    
    
    
    114,575
 
 (1)
    
    Other expense for 2004 included a $22,886 charge resulting from the
retirement of $120 million in aggregate principal amount of the Companys 11%
Senior Notes. See Notes to Consolidated Financial Statements included herein.(2)
    
    In 2002, the Company recorded a charge of $14,247 in connection with the
termination and restructuring of its split-dollar life insurance plan. See
Notes to Consolidated Financial Statements included herein. 21




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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 other financial
information and consolidated financial statements and related notes 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
     Acquisitions and Dispositions
     22




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Segment Reporting
 Disclosures About Segments of an
Enterprise and Related Information
  Financial and Performance Highlights of 2005
   
    
    Implemented 42 new contracts during the year. Additionally,
for 11 of our existing
clients, we expanded our programs and services or expanded the covered lives accessing
our services during the year;
    
    Called for redemption of all of our outstanding convertible senior subordinated
notes of which $86.2 million was converted by noteholders into 4,388,000 shares of our
common stock;
 23




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
    
    Issued 5,298,000 additional shares of common stock pursuant to a three-for-two stock
split;
    
    Acquired two companies and signed a definitive agreement to acquire a third,
allowing us to address the full continuum of care ranging from wellness and prevention
to disease management for chronic and high-cost conditions;
    
    Entered into an agreement with a major client to offer health management services to
Japanese insurance companies;
    
    Capitalized on our information systems technology and data analysis expertise by
offering our informatics services as an adjunct service to our wellness and disease and
condition management services; and
    
    Made the strategic decision to divest Facet and Foreign Diabetes, allowing us to
focus on our health enhancement business.
 Business Strategy
  Capitalize on our Position as an Industry Leader in the Health Enhancement Market .
 Leverage Our Information Technology.
 Further Penetrate All Key Segments of the Growing Health Enhancement Market.
 Components of Revenues and Expenses
 Revenues.
  24




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Cost of Revenues .
 Selling and Administrative Expenses .
 Results of Operations
  Years Ended December 31,2005
    
    2004
    
    2003Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues
    
    
    40.7
    %
    
    
    44.8
    %
    
    
    46.5
    %Gross margin
    
    
    59.3
    %
    
    
    55.2
    %
    
    
    53.5
    %Selling and administrative expenses
    
    
    52.8
    %
    
    
    54.7
    %
    
    
    52.2
    %Provision for doubtful accounts
    
    
    1.9
    %
    
    
    1.7
    %
    
    
    2.7
    %Interest expense, net
    
    
    0.9
    %
    
    
    6.6
    %
    
    
    11.0
    %Other
income (expense), net
    
    
    0.1
    %
    
    
    0.5
    %
    
    
    1.1
    %Loss on retirement of Senior Notes
    
    
    
    
    
    
    15.8
    %
    
    
    Earnings (loss) from continuing operations before income taxes
    
    
    3.8
    %
    
    
    (23.0
    %)
    
    
    (11.3
    %)Income tax (expense) benefit
    
    
    (1.4
    %)
    
    
    9.2
    %
    
    
    4.4
    %Earnings (loss) from continuing operations
    
    
    2.2
    %
    
    
    (13.8
    %)
    
    
    (6.9
    %)
 2005 Compared to 2004
  25




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qui tam
 26




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2004 Compared to 2003
         27




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Liquidity and Capital Resources
 Operating Activities
  Investing Activities
      28




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Financing Activities
    Induced Conversion of Convertible Debt
   29




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qui tam
 Contractual Obligations, Commitments and Off-Balance Sheet Arrangements
  Payments Due by Year(Amounts in thousands)Total
    
    
    2006
    
    
    2007-2008
    
    
    2009-2010
    
    
    ThereafterLong-term debt obligations (1)
    
    $
    2,772
    
    
    $
    772
    
    
    $
    2,000
    
    
    $
    
    
    
    $
    Capital lease obligations
    
    
    395
    
    
    
    249
    
    
    
    146
    
    
    
    
    
    
    
    Operating lease obligations
    
    
    21,689
    
    
    
    5,563
    
    
    
    9,888
    
    
    
    5,663
    
    
    
    575Other long-term obligations
    
    
    5,319
    
    
    
    467
    
    
    
    2,775
    
    
    
    1,106
    
    
    
    971Total
    
    $
    30,175
    
    
    $
    7,051
    
    
    $
    14,809
    
    
    $
    6,769
    
    
    $
    1,546
 
 (1)
    
    Does not include the interest expense associated with the long-term debt obligations or
the new credit facilities.    Other Factors Affecting Liquidity
  qui tam
 31




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Uncertainties
   Critical Accounting Policies and Estimates
  Revenue Recognition and Allowances for Uncollectible Accounts.
     32




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Goodwill and Identifiable Intangible Assets . Business Combinations Goodwill and Other
Intangible Assets
  Accounting for Income Taxes.
   33




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Recently Issued Accounting Standards
 Share-Based Payment. Share-Based Payment
  Accounting Changes and Error Corrections. Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20 and Statement No. 3
 American Jobs Creation Act.
  34




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Item 7A. Quantitative and Qualitative Disclosure about Market Risk
  35




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Item 8. Financial Statements and Supplementary Data
  PAGEReport of Independent Registered Public Accounting Firm on Consolidated
Financial Statements
    
    F-1Report of Independent Registered Public Accounting Firm on Managements
Assessment of Internal Controls
    
    F-2Managements Report on Internal Controls Over Financial Reporting
    
    F-3Consolidated Balance Sheets   December 31, 2005 and 2004
    
    F-4Consolidated Statements of Operations   Years Ended
December 31, 2005, 2004 and 2003
    
    F-5Consolidated Statements of Shareholders Equity and
Comprehensive Earnings (Loss)   Years Ended December 31, 2005, 2004 and 2003
    
    F-6Consolidated Statements of Cash Flows   Years Ended
December 31, 2005, 2004 and 2003
    
    F-7Notes to Consolidated Financial Statements
    
    F-8
 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
   36




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Managements Report on Internal Control Over Financial Reporting and Report of Independent
Registered Public Accounting Firm
  Changes in Internal Control over Financial Reporting
  
 Item 9B. Other Information
  37




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PART III
 
 Item 10. Directors and Executive Officers of the Registrant.
  
 Item 11. Executive Compensation.
  
 Item 12. Security Ownership of Certain Beneficial Owners and Management.
   
 Item 13. Certain Relationships and Related Transactions.
  
 Item 14. Principal Accountant Fees and Services
  38




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PART IV
 
 Item 15. Exhibits and Financial Statement Schedules
 (a)(1)
 PAGEReport of Independent Registered Public Accounting Firm on Consolidated
Financial Statements
    
    F-1Report of Independent Registered Public Accounting Firm on Managements
Assessment of Internal Controls
    
    F-2Managements Report on Internal Controls Over Financial Reporting
    
    F-3Consolidated Balance Sheets   December 31, 2005 and 2004
    
    F-4Consolidated Statements of Operations  Years Ended
December 31, 2005, 2004 and 2003
    
    F-5Consolidated Statements of Shareholders Equity and
Comprehensive Earnings (Loss)   Years Ended December 31, 2005, 2004 and 2003
    
    F-6Consolidated Statements of Cash Flows  Years Ended
December 31, 2005, 2004 and 2003
    
    F-7Notes to Consolidated Financial Statements
    
    F-8
 (a)(2)
 PAGEReport of Independent Registered Public Accounting Firm
    
    49Schedule II  Valuation and Qualifying Accounts
    
    50
  39




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(a)(3) Exhibits:
  ExhibitNumber
    
    Description2.1
    
    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
    
    Agreement and Plan of Merger and Plan of Reorganization among Matria Healthcare, Inc., Matria
MergerSub, Inc. and Matria Holding Company, Inc., dated December 30, 2004 (incorporated by
reference to Exhibit 10.2 to the Companys Current Report on Form 8-K filed January 6, 2005).2.3
    
    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).2.4
    
    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).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
    
    Bylaws of Matria Healthcare, Inc., dated as of December 28, 2004 (incorporated by reference
to Exhibit 3.3 to the Companys Current Report on Form 8-K filed January 6, 2004).4.1
    
    Indenture, dated as of July 9, 2001, by and among Matria Healthcare, Inc., the Guarantors
named therein and Wells Fargo Minnesota, National Association as Trustee, relating to the
Companys 11% Senior Notes due 2008 (incorporated by reference to Exhibit 99.2 to the
Companys Current Report on Form 8-K filed July 19, 2001).4.2
    
    Registration Rights Agreement, dated as of July 9, 2001, by and among Matria Healthcare,
Inc., the Guarantors named therein and the Initial Purchasers named therein, relating to the
Companys 11% Senior Notes due 2008 (incorporated by reference to Exhibit 99.3 to the
Companys Current Report on Form 8-K filed July 19, 2001).
 40




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ExhibitNumber
    
    Description4.3
    
    Supplemental Indenture, dated June 21, 2002, between the Company and Wells Fargo Bank
Minnesota, N.A. (Incorporated by reference to Exhibit 4.10 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2002).4.4
    
    Supplemental Indenture, dated August 1, 2002, between the Company and Wells Fargo Bank
Minnesota, N.A. (Incorporated by reference to Exhibit 4.11 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2002).4.5
    
    Supplemental Indenture, dated October 4, 2002, between the Company and Wells Fargo Bank
Minnesota, N.A. (Incorporated by reference to Exhibit 4.12 to the Companys Annual Report on
Form 10-K for the year ended December 31, 2002).4.6
    
    Supplemental Indenture, dated April 19, 2004, by and among Matria Healthcare, Inc., the
Companys subsidiary guarantors listed therein and Wells Fargo Bank, N.A. (incorporated by
reference to Exhibit 4.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended June
30, 2004).4.7
    
    Supplemental Indenture, dated December 31, 2004 among Matria Healthcare, Inc., Matria Holding
Company, Inc., the subsidiary guarantors listed therein and Wells Fargo Bank, N.A., as Trustee,
amending the Indenture, dated July 9, 2001 by and among Matria Healthcare, Inc., the subsidiary
guarantors listed therein and Wells Fargo Bank, N.A., as Trustee (incorporated by reference to
Exhibit 4.2 to the Companys Current Report on Form 8-K filed January 6, 2005).*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
    
    2002 Employee Stock Purchase Plan (incorporated by reference to
Appendix D to the Proxy Statement/Prospectus/Solicitation Statement
filed as a part of the Companys Registration Statement No.
333-90944 on Form S-4 filed June 30, 2002).*10.4
    
    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).*10.5
    
    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).*10.6
    
    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).*10.7
    
    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).*10.8
    
    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).
 41




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##### Table of Contents



ExhibitNumber
    
    Description*10.9
    
    2001 Stock Incentive Plan (incorporated by reference to the
Companys Definitive Proxy Statement filed with the Commission
April 26, 2001).*10.10
    
    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).*10.11
    
    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).*10.12
    
    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).*10.13
    
    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).*10.14
    
    Long-Term Stock Incentive Plan (incorporated by reference to
Appendix B to the Companys Definitive Proxy Statement filed with
the Commission on April 25, 2005).*10.15
    
    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).*10.16
    
    Change in Control Severance Compensation and Restrictive Covenant
Agreement between the Company and Parker H. Petit, effective
February 19, 2002 (incorporated by reference to Exhibit 10.3 to the
Companys Quarterly Report on Form 10-Q for the quarter ended June
30, 2002).*10.17
    
    Employment Letter Agreement, dated August 5, 2002, between the
Company and Stephen M. Mengert (incorporated by reference to
Exhibit 10.1 to the Companys Quarterly Report on Form 10-Q for the
quarter ended September 30, 2002).10.18
    
    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).10.19
    
    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).*10.20
    
    Split Dollar Termination Agreement between the Company and Roberta
L. McCaw, dated January 1, 2003 (incorporated by reference to
Exhibit 10.27 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2002).*10.21
    
    Split Dollar Termination Agreement between the Company and Thornton
A. Kuntz, Jr., dated January 1, 2003 (incorporated by reference to
Exhibit 10.28 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2002).*10.22
    
    Split Dollar Termination Agreement between the Company and Parker
H. Petit, dated January 1, 2003 (incorporated by reference to
Exhibit 10.29 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2002).
 42




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##### Table of Contents



ExhibitNumber
    
    Description*10.23
    
    Split Dollar Termination Agreement between the Company and Yvonne
V. Scoggins, dated January 1, 2003 (incorporated by reference to
Exhibit 10.30 to the Companys Annual Report on Form 10-K for the
year ended December 31, 2002).*10.24
    
    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).*10.25
    
    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).*10.26
    
    Supplemental Executive Retirement Plan between the Company and
Yvonne V. Scoggins, dated January 1, 2003 (incorporated by
reference to Exhibit 10.33 to the Companys Annual Report on Form
10-K for the year ended December 31, 2002).*10.27
    
    Change in Control Severance Compensation and Restrictive Covenant
Agreement between the Company and Stephen M. Mengert, dated March
17, 2003 (incorporated by reference to Exhibit 10.35 to the
Companys Annual Report on Form 10-K for the year ended December
31, 2002).*10.28
    
    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).*10.29
    
    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.)10.30
    
    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).10.31
    
    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).10.32
    
    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).10.33
    
    Matrias Board of Directors Corporate Governance and Nominating Charter (incorporated by
reference to Exhibit 10.36 to the Companys Annual Report on Form 10-K for the year ended December
31, 2003).10.34
    
    Matrias Corporate Governance Guidelines (incorporated by reference to Exhibit 10.37 to the
Companys Annual Report on Form 10-K for the year ended December 31, 2003).10.35
    
    Matrias Charter of the Audit Committee of the Board of Directors (incorporated by reference
to Exhibit 10.38 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003).*10.36
    
    Change in Control Severance Compensation and Restrictive Covenant Agreement dated as of
February 19, 2002 between the Company and Thornton A. Kuntz, Jr., (incorporated by reference to
Exhibit 10.39 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003).
 43




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##### Table of Contents



ExhibitNumber
    
    Description*10.37
    
    Change in Control Severance Compensation and Restrictive Covenant Agreement dated as of
February 19, 2002 between the Company and Roberta L. McCaw (incorporated by reference to Exhibit
10.40 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003).*10.38
    
    Change in Control Severance Compensation and Restrictive Covenant Agreement dated as of
February 19, 2002 between the Company and Yvonne V. Scoggins (incorporated by reference to Exhibit
10.41 to the Companys Annual Report on Form 10-K for the year ended December 31, 2003).*10.39
    
    Severance Compensation and Restrictive Covenant Agreement dated as of April 27, 2002 between
the Company and Yvonne V. Scoggins (incorporated by reference to Exhibit 10.42 to the Companys
Annual Report on Form 10-K for the year ended December 31, 2003).10.40
    
    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).10.41
    
    Registration Rights Agreement, dated May 5, 2004, by and among the Company, the Companys
subsidiary guarantors named therein and UBS Securities LLC (incorporated by reference to
Exhibit 10.1 to the Companys Current Report on Form 8-K filed May 6, 2004).*10.42
    
    Amendment to the Severance Compensation and Restrictive Covenant Agreement between the
Company and Yvonne V. Scoggins, dated April 22, 2004 (incorporated by reference to Exhibit 10.1 to
the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).*10.43
    
    Amendment to Change in Control Severance Compensation and Restrictive Covenant Agreement
between the Company and Yvonne V. Scoggins, dated April 22, 2004 (incorporated by reference to
Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004).10.44
    
    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).10.45
    
    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).10.46
    
    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).10.47
    
    Consent and Waiver Agreement and Amendment No. 6, dated December 31, 2004, to the Loan and
Security Agreement between Matria Healthcare, Inc. and HFG Healthco-04, LLC. (incorporated by
reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed January 6, 2005).10.48
    
    Guarantee, dated as of January 21, 2005, by Matria Healthcare, Inc. in favor of HFG
Healthco-4 LLC (incorporated by reference to Exhibit 10.1 to the Companys Current Report on
Form 8-K filed January 27, 2005).10.49
    
    Pledge Agreement, dated as of January 21, 2005, between Matria Healthcare, Inc., and HFG
Healthco-4 LLC (incorporated by reference to Exhibit 10.2 to the Companys Current Report on
Form 8-k filed January 27, 2005).
 44




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##### Table of Contents



ExhibitNumber
    
    Description*10.50
    
    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).*10.51
    
    Change in Control Severance Compensation and Restrictive Covenant
Agreement dated as of November 7, 2005 between Matria Healthcare,
Inc. and Richard M. Hassett, M.D. (incorporated by reference to
Exhibit 10.2 to the Companys Current Report on Form 8-K filed
November 10, 2005).10.52
    
    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).10.53
    
    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).10.54
    
    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).10.55
    
    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).*10.56
    
    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 ).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).
  2.5
    
    Agreement and Plan of Merger dated as of December 14, 2005, by and among CorSolutionsMedical, Inc, Matria Healthcare, Inc. and Coral Acquisition Corp.11
    
    Computation of Earnings (Loss) per Share21
    
    List of Subsidiaries23
    
    Consent of Independent Registered Public Accounting Firm24
    
    Power of Attorney (included in signature page to this report)31.1
    
    Rule 13.a-15(e)/15d-15(e) Certification by Parker H. Petit31.2
    
    Rule 13.a-15(e)/15d-15(e) Certification by Stephen M. Mengert
 45




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##### Table of Contents



32.1
    
    Section 1350 Certification by Parker H. Petit32.2
    
    Section 1350 Certification by Stephen M. Mengert
 
 *
    
    Management contract or compensatory plan or arrangement 46




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##### Table of Contents



SIGNATURES
  MATRIA HEALTHCARE, INC.March 15, 2006
    By:
    /s/  Parker H. PetitParker H. PetitChairman of the Board and
Chief Executive Officer
(Principal Executive Officer) /s/  Stephen M. MengertStephen M. Mengert, Senior Vice
Presidentand Chief Financial Officer
(Principal Financial Officer) /s/  Joseph A. BlankenshipJoseph A. BlankenshipVice President  Controller
(Principal Accounting Officer)   Signature
    
    Title
    
    Date/s/ Parker H. Petit

Parker H. Petit
    
    Chairman of the Board
and Chief Executive Officer
    
    March 15, 2006/s/ Joseph G. Bleser

Joseph G. Bleser
    
    Director
    
    March 14, 2006
 47




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##### Table of Contents



Signature
    
    Title
    
    Date/s/ Frederick E. Cooper

Frederick E. Cooper
    
    Director
    
    March 14, 2006Guy W. Millner
    
    Director/s/ Carl E. Sanders

Carl E. Sanders
    
    Director
    
    March 14, 2006/s/ Kaaren J. Street

Kaaren J. Street
    
    Director
    
    March 15, 2006/s/ Thomas S. Stribling

Thomas S. Stribling
    
    Director
    
    March 14, 2006/s/ Donald W. Weber

Donald W. Weber
    
    Director
    
    March 14, 2006/s/ Morris S. Weeden

Morris S. Weeden
    
    Director
    
    March 14, 2006/s/ Wayne P. Yetter

Wayne P. Yetter
    
    Director
    
    March 14, 2006/s/ Frederick P. Zuspan, M.D.

Frederick P. Zuspan, M.D.
    
    Director
    
    March 14, 2006
 48




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 The Board of Directors and Shareholders
Matria Healthcare, Inc.:
   KPMG LLP
 
 49




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##### Table of Contents



Matria Healthcare, Inc. and Subsidiaries
 
 Schedule II
 Valuation and Qualifying Accounts
  AdditionsBalance at
    
    Charges to
    
    Charges to
    
    
    
    
    
    Balance atBeginning
    
    Costs and
    
    Other
    
    
    
    
    
    End ofDescription
    
    of Period
    
    Expenses
    
    Accounts
    
    Deductions
    
    PeriodAllowance for doubtful accountsYear ended December 31, 2003
    
    $
    2,522
    
    
    
    3,382
    
    
    
    
    
    
    
    (2,964
    )
    
    $
    2,940Year ended December 31, 2004
    
    $
    2,940
    
    
    
    2,412
    
    
    
    
    
    
    
    (3,060
    )
    
    $
    2,292Year ended December 31, 2005
    
    $
    2,292
    
    
    
    3,493
    
    
    
    15
    1
    
    
    (1,914
    )
    
    $
    3,886
 
 1
    
    Represents beginning balances in allowance for doubtful accounts of acquired
companies. 50




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 The Board of Directors and Shareholders
Matria Healthcare, Inc.
    Internal
ControlIntegrated Framework .
 /s/ KPMG LLP
 
 F-1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
 The Board of Directors and Shareholders
Matria Healthcare, Inc.:
 Internal ControlIntegrated Framework
    Internal ControlIntegrated Framework Internal ControlIntegrated Framework
 .
 /s/ KPMG LLP
 F-2




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##### Table of Contents



Managements Report on Internal Control Over Financial Reporting
   Internal Control  Integrated Framework.
   By:
    
    /s/ Parker H. Petit
    
    /s/ Stephen M. MengertParker H. Petit
    
    Stephen M. MengertChairman of the Board and
    
    Senior Vice President andChief Executive Officer
    
    Chief Financial Officer
 F-3




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##### Table of Contents



MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
 
 Consolidated Balance Sheets
  December 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalents
    
    $
    22,758
    
    
    $
    35,317Restricted cash
    
    
    550
    
    
    
    3,823Trade accounts receivable, less allowances of $3,886 and
$2,292 at December 31, 2005 and 2004, respectively
    
    
    33,996
    
    
    
    26,716Assets held for sale
    
    
    132,455
    
    
    
    131,503Prepaid expenses and other current assets
    
    
    6,588
    
    
    
    8,927Deferred income taxes
    
    
    8,629
    
    
    
    9,675Total current assets
    
    
    204,976
    
    
    
    215,961Property and equipment, net
    
    
    26,430
    
    
    
    20,047Goodwill, net
    
    
    69,248
    
    
    
    54,665Other intangibles, net
    
    
    6,935
    
    
    
    Deferred income taxes
    
    
    10,666
    
    
    
    11,704Other assets
    
    
    4,952
    
    
    
    5,015$
    323,207
    
    
    $
    307,392LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable, principally trade
    
    $
    10,702
    
    
    $
    9,467Current installments of long-term debt
    
    
    1,021
    
    
    
    865Liabilities related to assets held for sale and other discontinued operations
    
    
    31,042
    
    
    
    24,640Accrued liabilities
    
    
    20,617
    
    
    
    21,692Total current liabilities
    
    
    63,382
    
    
    
    56,664Long-term debt, excluding current installments
    
    
    2,099
    
    
    
    85,751Other long-term liabilities
    
    
    5,788
    
    
    
    5,317Total liabilities
    
    
    71,269
    
    
    
    147,732Shareholders equity:Preferred stock, $.01 par value. Authorized 50,000 shares; none
outstanding at December 31, 2005 and 2004
    
    
    
    
    
    
    Common stock, $.01 par value. Authorized 50,000 shares; issued and
outstanding 20,832 and 15,860 at December 31, 2005 and 2004,
respectively
    
    
    208
    
    
    
    159Additional paid-in capital
    
    
    400,488
    
    
    
    321,181Accumulated deficit
    
    
    (149,026
    )
    
    
    (162,989
    )Accumulated other comprehensive earnings
    
    
    268
    
    
    
    1,309Total shareholders equity
    
    
    251,938
    
    
    
    159,660Commitments and contingencies (Notes 3, 7, 8 and 9)$
    323,207
    
    
    $
    307,392
 See accompanying notes to consolidated financial statements
 F-4




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##### Table of Contents



MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Operations
  Years ended December 31,2005
    
    
    2004
    
    
    2003Revenues
    
    $
    179,231
    
    
    $
    145,087
    
    
    $
    123,196Cost of revenues
    
    
    72,972
    
    
    
    64,938
    
    
    
    57,302Selling and administrative expenses
    
    
    94,656
    
    
    
    79,309
    
    
    
    64,297Provision for doubtful accounts
    
    
    3,493
    
    
    
    2,412
    
    
    
    3,382Total costs and operating expenses
    
    
    171,121
    
    
    
    146,659
    
    
    
    124,981Operating earnings (loss) from continuing operations
    
    
    8,110
    
    
    
    (1,572
    )
    
    
    (1,785
    )Interest income
    
    
    829
    
    
    
    498
    
    
    
    222Interest expense
    
    
    (2,418
    )
    
    
    (10,127
    )
    
    
    (13,730
    )Other income , net
    
    
    226
    
    
    
    681
    
    
    
    1,350Loss on retirement of 11% Senior Notes
    
    
    
    
    
    
    (22,886
    )
    
    
    Earnings (loss) from continuing operations before income taxes
    
    
    6,747
    
    
    
    (33,406
    )
    
    
    (13,943
    )Income tax benefit (expense)
    
    
    (2,733
    )
    
    
    13,329
    
    
    
    5,438Earnings (loss) from continuing operations
    
    
    4,014
    
    
    
    (20,077
    )
    
    
    (8,505
    )Earnings from discontinued operations, net of income taxes
    
    
    9,949
    
    
    
    16,205
    
    
    
    15,811Earnings from disposal of discontinued operations, net of income taxes
    
    
    
    
    
    
    30,938
    
    
    
    Net earnings
    
    $
    13,963
    
    
    $
    27,066
    
    
    $
    7,306Net earnings (loss) per common share:Basic:Continuing operations
    
    $
    0.21
    
    
    $
    (1.29
    )
    
    $
    (0.56
    )Discontinued operations
    
    
    0.53
    
    
    
    3.03
    
    
    
    1.04$
    0.74
    
    
    $
    1.74
    
    
    $
    0.48Diluted:Continuing operations
    
    $
    0.20
    
    
    $
    (1.29
    )
    
    $
    (0.56
    )Discontinued operations
    
    
    0.50
    
    
    
    3.03
    
    
    
    1.04$
    0.70
    
    
    $
    1.74
    
    
    $
    0.48Weighted average shares outstanding:Basic
    
    
    18,795
    
    
    
    15,520
    
    
    
    15,198Diluted
    
    
    19,874
    
    
    
    15,520
    
    
    
    15,198
 See accompanying notes to consolidated financial statements.
 F-5




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##### Table of Contents



MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Shareholders Equity and Comprehensive Earnings (Loss)
  AccumulatedAdditional
    
    
    
    
    
    Other
    
    TotalCommon stock
    
    Paid-in
    
    Accumulated
    
    Comprehensive
    
    ShareholdersShares
    
    Amount
    
    Capital
    
    Deficit
    
    Earnings (Loss)
    
    EquityBalance, January 1, 2003
    
    
    15,077
    
    
    $
    151
    
    
    $
    311,002
    
    
    $
    (197,361
    )
    
    $
    (12
    )
    
    $
    113,780Issuance of common stock:Exercise of employee stock options
    
    
    44
    
    
    
    
    
    
    
    442
    
    
    
    
    
    
    
    
    
    
    
    442Employee stock purchase plan
    
    
    62
    
    
    
    1
    
    
    
    373
    
    
    
    
    
    
    
    
    
    
    
    374Acquisition of businesses
    
    
    101
    
    
    
    1
    
    
    
    1,220
    
    
    
    
    
    
    
    
    
    
    
    1,221Tax benefit from exercise of employee stock options
    
    
    
    
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    10Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,306
    
    
    
    
    
    
    
    7,306Change in foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    440
    
    
    
    440Change in unrealized appreciation on available-for-sale
securities, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (26
    )
    
    
    (26
    )Comprehensive earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,306
    
    
    
    414
    
    
    
    7,720Balance, December 31, 2003
    
    
    15,284
    
    
    
    153
    
    
    
    313,047
    
    
    
    (190,055
    )
    
    
    402
    
    
    
    123,547Issuance of common stock:Exercise of employee stock options
    
    
    527
    
    
    
    5
    
    
    
    6,014
    
    
    
    
    
    
    
    
    
    
    
    6,019Employee stock purchase plan
    
    
    49
    
    
    
    1
    
    
    
    588
    
    
    
    
    
    
    
    
    
    
    
    589Tax benefit from exercise of employee stock options
    
    
    
    
    
    
    
    
    
    
    1,532
    
    
    
    
    
    
    
    
    
    
    
    1,532Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,066
    
    
    
    
    
    
    
    27,066Change in foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    907
    
    
    
    907Comprehensive earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,066
    
    
    
    907
    
    
    
    27,973Balance, December 31, 2004
    
    
    15,860
    
    
    
    159
    
    
    
    321,181
    
    
    
    (162,989
    )
    
    
    1,309
    
    
    
    159,660Issuance of common stock:Exercise of employee stock options
    
    
    553
    
    
    
    5
    
    
    
    6,433
    
    
    
    
    
    
    
    
    
    
    
    6,438Employee stock purchase plan
    
    
    31
    
    
    
    
    
    
    
    814
    
    
    
    
    
    
    
    
    
    
    
    814Conversion of 4.875% notes
    
    
    4,388
    
    
    
    44
    
    
    
    68,005
    
    
    
    
    
    
    
    
    
    
    
    68,049Exercise of warrant
    
    
    
    
    
    
    
    
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    3Tax benefit from exercise of employee stock options
    
    
    
    
    
    
    
    
    
    
    4,052
    
    
    
    
    
    
    
    
    
    
    
    4,052Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,963
    
    
    
    
    
    
    
    13,963Change in foreign currency translation adjustment, net of tax
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,041
    )
    
    
    (1,041
    )Comprehensive earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,963
    
    
    
    (1,041
    )
    
    
    12,922Balance, December 31, 2005
    
    
    20,832
    
    
    $
    208
    
    
    $
    400,488
    
    
    $
    (149,026
    )
    
    $
    268
    
    
    $
    251,938
 See accompanying notes to consolidated financial statements.
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##### Table of Contents



MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
 
 Consolidated Statements of Cash Flows
  Years ended December 31,2005
    
    
    2004
    
    
    2003Cash Flows from Operating Activities:Net earnings
    
    $
    13,963
    
    
    $
    27,066
    
    
    $
    7,306Less, earnings from discontinued operations, net of income taxes
    
    
    (9,949
    )
    
    
    (47,143
    )
    
    
    (15,811
    )Earnings (loss) from continuing operations
    
    
    4,014
    
    
    
    (20,077
    )
    
    
    (8,505
    )Adjustments to reconcile to net cash provided by operating activities:Loss on retirement of 11% Senior Notes
    
    
    
    
    
    
    22,886
    
    
    
    Depreciation and amortization
    
    
    6,359
    
    
    
    4,606
    
    
    
    5,014Amortization of debt discount and expenses
    
    
    298
    
    
    
    939
    
    
    
    1,092Provision for doubtful accounts
    
    
    3,493
    
    
    
    2,412
    
    
    
    3,382Deferred tax expense (benefit)
    
    
    1,925
    
    
    
    (14,240
    )
    
    
    (5,471
    )Payment for termination of interest rate swap agreements
    
    
    
    
    
    
    (993
    )
    
    
    Gain on sale of investment
    
    
    
    
    
    
    
    
    
    
    (56
    )Other
    
    
    294
    
    
    
    
    
    
    
    Changes in assets and liabilities, net of effect of acquisitions:Trade accounts receivable
    
    
    (8,083
    )
    
    
    (4,251
    )
    
    
    (4,131
    )Inventories
    
    
    126
    
    
    
    (124
    )
    
    
    139Prepaid expenses
    
    
    (718
    )
    
    
    (1,273
    )
    
    
    221Other current assets
    
    
    141
    
    
    
    1,403
    
    
    
    (929
    )Intangible and other noncurrent assets
    
    
    (971
    )
    
    
    (1,919
    )
    
    
    (1,333
    )Accounts payable
    
    
    766
    
    
    
    6,219
    
    
    
    614Accrued and other liabilities
    
    
    (2,644
    )
    
    
    810
    
    
    
    (84
    )Net cash provided by (used in) continuing operations
    
    
    5,000
    
    
    
    (3,602
    )
    
    
    (10,047
    )Net cash provided by discontinued operations
    
    
    19,954
    
    
    
    13,735
    
    
    
    20,870Net cash provided by operating activities
    
    
    24,954
    
    
    
    10,133
    
    
    
    10,823Cash Flows from Investing Activities:Purchases of property and equipment
    
    
    (11,072
    )
    
    
    (8,563
    )
    
    
    (7,103
    )Purchases of property and equipment related to discontinued operations
    
    
    (1,452
    )
    
    
    (1,602
    )
    
    
    (4,409
    )Proceeds from disposition of business, net of transaction costs
    
    
    
    
    
    
    101,055
    
    
    
    Payment of acquisition obligation
    
    
    
    
    
    
    (20,480
    )
    
    
    Decrease (increase) in restricted cash
    
    
    3,273
    
    
    
    (3,368
    )
    
    
    (455
    )Net proceeds from (purchases of) investments
    
    
    
    
    
    
    927
    
    
    
    (927
    )Acquisition of businesses, net of cash acquired
    
    
    (19,678
    )
    
    
    (200
    )
    
    
    (603
    )Proceeds from sales of short-term investments
    
    
    
    
    
    
    
    
    
    
    154Net cash provided by (used in) investing activities
    
    
    (28,929
    )
    
    
    67,769
    
    
    
    (13,343
    )Cash Flows from Financing Activities:Net payment for conversion of convertible senior notes and related
transaction costs
    
    
    (15,332
    )
    
    
    
    
    
    
    Proceeds from issuance of convertible senior debt, net of issuance costs
    
    
    
    
    
    
    83,210
    
    
    
    Proceeds from issuance of debt
    
    
    2,083
    
    
    
    2,446
    
    
    
    1,919Net payment for the retirement of 11% Senior Notes
    
    
    
    
    
    
    (136,518
    )
    
    
    Principal repayments of long-term debt
    
    
    (2,224
    )
    
    
    (2,475
    )
    
    
    (1,973
    )Net borrowings (repayments) under credit agreement
    
    
    
    
    
    
    (2,418
    )
    
    
    2,418Proceeds from issuance of common stock
    
    
    7,252
    
    
    
    6,608
    
    
    
    816Net cash provided by (used in) financing activities
    
    
    (8,221
    )
    
    
    (49,147
    )
    
    
    3,180Effect of exchange rate changes on cash and cash equivalents
    
    
    (363
    )
    
    
    907
    
    
    
    1,073Net increase (decrease) in cash and cash equivalents
    
    
    (12,559
    )
    
    
    29,662
    
    
    
    1,733Cash and cash equivalents at beginning of year
    
    
    35,317
    
    
    
    5,655
    
    
    
    3,922Cash and cash equivalents at end of year
    
    $
    22,758
    
    
    $
    35,317
    
    
    $
    5,655Supplemental disclosures of cash paid for:Interest
    
    $
    3,234
    
    
    $
    11,642
    
    
    $
    13,970Income taxes
    
    $
    4,047
    
    
    $
    7,727
    
    
    $
    1,155Supplemental disclosure of noncash investing and financing activities:Conversion of 4.875% convertible notes to equity
    
    $
    83,381
    
    
    
    
    
    
    
    Equipment acquired under capital lease obligations
    
    $
    
    
    
    $
    
    
    
    $
    72
 See accompanying notes to consolidated financial statements.
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##### Table of Contents



MATRIA HEALTHCARE, INC. AND SUBSIDIARIES
 
 Notes to Consolidated Financial Statements
 December 31, 2005, 2004 and 2003
  (1)
    
    Summary of Significant Accounting Policies
 (a)
    
    BusinessMatria Healthcare, Inc. (Matria or the Company) provides comprehensive, integrated
programs and services focused on wellness, disease and condition management, productivity
enhancement and informatics. The Company calls 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. Matria provides services to
self-insured employers, private and government sponsored health plans, pharmaceutical
companies, administrative services only customers, and patients. The Companys employer
clients are primarily Fortune 1000 companies that self-insure the medical benefits
provided to their employees, dependents and retirees. The Companys health plan
customers are regional and national health plans, as well as government-sponsored health
plans, such as state Medicaid programs. The Companys service offerings include wellness
programs, disease and condition management programs and informatics.The Companys 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. Matrias
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.The Companys informatics business involves the aggregation and analysis of data to
enable Matrias customers to better manage health related costs and further improve
outcomes.On April 1, 2005, we acquired the business and assets of Miavita LLC for a net cash
payment of $4,765, with potential additional amounts to be paid under an earnout
agreement. On October 1, 2005, we acquired of business of WinningHabits, Inc. for a net
cash payment of $14,913, with additional potential amounts to be paid under an earnout
agreement. Results of operations of these businesses have been included in our
consolidated results of operations since their respective acquisition dates.During the fourth quarter of 2005, the Company made the decision to divest Facet
Technologies (Facet) and its foreign diabetes service operations in Germany (Foreign
Diabetes). In the accompanying consolidated financial statements, their assets and
liabilities have been reclassified as assets held for sale and liabilities related to
assets held for sale and other discontinued operations, respectively, and their results
of operations are included in discontinued operations for all periods presented.
 F-8




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##### Table of Contents



On February 4, 2005, the Company effected a three-for-two stock split in the form of a
stock dividend. All amounts reflected for common stock and additional paid-in capital,
and all share and per share amounts have been restated to reflect the stock split in all
periods presented (see Note 7). See Note 2 for a detailed discussion of our acquisitions and divestitures. See Note 11
for a discussion of our segment reporting.(b)
    
    Basis of Financial Statement PresentationThe consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States. The consolidated financial
statements include the accounts of the Company and all of its majority owned subsidiaries
and partnerships. All significant intercompany balances and transactions have been
eliminated in consolidation.(c)
    
    Use of EstimatesIn 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 EquivalentsCash and cash equivalents consist of cash and interest-bearing deposits. The Company
considers 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. Cash and cash equivalents include $3,730 and $3,139 as of December
31, 2005 and 2004, respectively, for MHI Insurance, Ltd., the Companys wholly owned
captive insurance company. Such amounts are available to settle claims for certain
insured risks.(e)
    
    Restricted CashRestricted cash consists of funds designated for a particular use and not available for
current operations. The Company had $550 and $3,823 of restricted funds at December 31,
2005 and 2004, respectively. In September 2004, the Company set aside $3,000 pledged as
collateral in an agreement with one of its major suppliers. The agreement expired in May
2005 and the restriction was released. Other restricted funds are collateral for
insurance policies and amounts held in escrow related to customer contracts. Funds are
held in interest-bearing investment accounts or certificates of deposit that coincide
with insurance policy termination dates.(f)
    
    Revenue Recognition and Allowances for Uncollectible AccountsMatrias services are provided telephonically and through home-based nursing services
through care centers located throughout the United States. In addition, services are
provided through access to the Companys online wellness based tools. Revenues are
recognized as the related services are rendered and are net of contractual allowances and
related discounts.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 (iv) a fixed rate per case. Billings for certain services occur in
advance of services being performed. Such amounts are recorded as unearned revenues,
which is included in accrued liabilities in the consolidated balance sheets. Such
amounts are subsequently recognized as revenue as services are performed.
 F-9




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##### Table of Contents



Some contracts provide that a portion of fees are at-risk (i.e., refundable) if the
Companys 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 the Company is not meeting performance targets. If either of
these two conditions exists, the Company records the amounts as unearned revenues. If
performance levels are not met by the end of the operations period under these contracts,
the Company is contractually obligated to refund some or all of the at-risk fees.
Historically, such adjustments have been immaterial to the Companys financial condition
and results of operations. In 2005, 5% of the Companys revenues recognized were at-risk
under these arrangements.A significant portion of the Companys revenues is billed to third-party reimbursement
sources. Accordingly, the ultimate collectibility of a substantial portion of our trade
accounts receivable is susceptible to changes in third-party reimbursement policies. In
addition, 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, audit activity 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. The
evaluation of the monthly estimates of revenues estimated to be uncollectible has not
resulted in material adjustments in any recent period; however, special charges have
resulted from certain specific circumstances affecting collectibility. 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)
    
    Concentration of Credit RiskFinancial instruments, which potentially expose the Company 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 are
taken into account by the Company in computing and evaluating its allowances for
uncollectible accounts.(h)
    
    Property and EquipmentProperty 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 ranging from three to ten years.
Amortization of leasehold improvements and leased equipment is recorded over the shorter
of the lives of the related assets or the lease terms.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 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 ranging from three to ten years.
The capitalization and ongoing assessment of
recoverability of development costs requires
 F-10




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##### Table of Contents



considerable judgment by the Company
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,
2005, 2004 and 2003, the Company capitalized software development costs of $3,117, $1,818
and $3,897, respectively. As of December 31, 2005 and 2004, net capitalized software
costs totaled $8,650 and $6,433, respectively.Depreciation and amortization expense for property and equipment was $5,312, $4,344 and
$5,014 for the years ended December 31, 2005, 2004 and 2003, respectively.Property and equipment are summarized as follows:
 December 31,2005
    
    
    2004Computer hardware and software
    
    $
    30,138
    
    
    $
    22,386Medical equipment
    
    
    7,887
    
    
    
    9,490Machinery, office equipment and fixtures
    
    
    4,384
    
    
    
    5,288Leasehold improvements
    
    
    2,157
    
    
    
    2,17544,566
    
    
    
    39,339Less accumulated depreciation and amortization
    
    
    18,136
    
    
    
    19,292$
    26,430
    
    
    $
    20,047
 (i)
    
    Intangible Assets
 The balance of goodwill as of December 31, 2005 was $69,248, net of accumulated
amortization of $3,988. The changes in the carrying values of goodwill for the year
ended December 31, 2005 were as follows:
 GoodwillCarrying value at January 1, 2005
    
    $
    54,665Additional goodwill from acquisitions (Note 2)
    
    
    14,583Carrying value at December 31, 2005
    
    $
    69,248
 The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets(SFAS 142) effective January 1, 2002. 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. 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 reviewed for impairment in accordance with SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets(SFAS 144).The Company evaluated the fair
values of the reporting units identified under the provisions of SFAS 141, Business
Combinations, and SFAS 142 as of December 31, 2005 and 2004 and concluded that no
impairment of recorded goodwill exists. As a result, no impairment of goodwill was
recorded in 2005 or 2004.
 F-11




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##### Table of Contents



In connection with the adoption of SFAS 142, the Company also reassessed the useful
lives, residual values and classification of its identifiable intangible assets and
determined that they continue to be appropriate. The components of identifiable
intangible assets, which resulted from our 2005 acquisitions (See Note 2), were as follows:
 December 31,2005Gross carrying amounts:Customer relationships
    
    $
    2,200Current technology
    
    
    2,800Content
    
    
    1,600Covenants not-to-compete
    
    
    700Total
    
    
    7,300Accumulated amortization
    
    
    (365
    )$
    6,935
 These costs are amortized on a straight-line basis over periods ranging from five to
ten years. Amortization expense for the year ended December 31, 2005 was $365.
Estimated amortization expense for the five succeeding years and thereafter is as
follows:
 Years ended December 31,2006
    
    $
    1,1402007
    
    
    1,1402008
    
    
    1,1402009
    
    
    1,1402010
    
    
    995Thereafter
    
    
    1,380$
    6,935
 (j)
    
    Impairment of Long-Lived Assets
 In accordance with SFAS No. 144, the Company reviews 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.
 (k)
    

    Income Taxes
 The Company accounts for income taxes in accordance with SFAS No. 109, Accounting 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.
 F-12




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##### Table of Contents



(l)
    
    Fair Value of Financial Instruments
 The carrying amounts and estimated fair values of the Companys financial instruments
are as follows:
 December 31, 2005
    
    December 31, 2004Carrying
    
    Fair
    
    Carrying
    
    FairLiabilities:
    
    Amount
    
    Value
    
    Amount
    
    Value4.875% convertible senior
subordinated notes
(see Note 3)
    
    
    
    
    
    
    
    
    
    $
    83,779
    
    
    $
    133,04111% Senior Notes (see Notes 3 and 4)
    
    $
    1,953
    
    
    $
    2,090
    
    
    
    1,938
    
    
    
    2,110
 At December 31, 2004, the carrying amount of the convertible senior subordinated
notes is net of the unamortized discount, and the estimated fair value is based upon the
quoted market price. The carrying amount of the 11% Senior Notes is net of unamortized
discount and unamortized net deferred gains on terminations of interest rate swaps. At
December 31, 2005, the estimated fair value of the 11% Senior Notes is based upon the
quoted market price, and at December 31, 2004, the estimated fair value is based upon the
redemption price payable for the 11% Senior Notes on May 1, 2005, the first date upon
which the remaining 11% Senior Notes were redeemable.
 (m)
    
    Accrued Liabilities
 Accrued liabilities are summarized as follows:
 December 31,2005
    
    
    2004Accrued compensation and related liabilities
    
    $
    10,293
    
    
    $
    9,313Unearned revenues
    
    
    7,205
    
    
    
    5,535Other accrued expenses
    
    
    3,119
    
    
    
    6,843$
    20,617
    
    
    $
    21,692
 (n)
    
    Stock Option Plans
 As described in Note 6, the Company offers various stock option plans for its employees,
officers, independent contractors and consultants. The Company accounts for those plans
under the recognition and measurement principles of APB Opinion No. 25, Accounting for
Stock Issued to Employees,and related Interpretations. No stock-based employee
compensation cost is reflected in net earnings, as all options granted under those plans
had an exercise price equal to the market value of the underlying common stock on the
date of grant.The following table illustrates the effect on earnings (loss) from continuing operations
and earnings (loss) per share from continuing operations if the Company had applied the
fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based
Compensation(SFAS 123), to stock-based employee compensation.
 Years Ended December 31,2005
    
    
    2004
    
    
    2003Earnings (loss) from continuing
operations available to common
shareholders
    
    $
    4,014
    
    
    $
    (20,077
    )
    
    $
    (8,505
    )Deduct: Stock-based employee
compensation expense determined
under fair value based method
for all awards, net of related
tax effects
    
    
    (2,616
    )
    
    
    (1,408
    )
    
    
    (1,579
    )Pro forma earnings (loss) from
continuing operations available
to common shareholders
    
    $
    1,398
    
    
    $
    (21,485
    )
    
    $
    (10,084
    )Earnings (loss) per common share from continuing operations:Basic   as reported
    
    $
    0.21
    
    
    $
    (1.29
    )
    
    $
    (0.56
    )Basic   pro forma
    
    $
    0.07
    
    
    $
    (1.38
    )
    
    $
    (0.66
    )Diluted   as reported
    
    $
    0.20
    
    
    $
    (1.29
    )
    
    $
    (0.56
    )Diluted   pro forma
    
    $
    0.07
    
    
    $
    (1.38
    )
    
    $
    (0.66
    )
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(o)
    
    Net Earnings (Loss) Per Share of Common Stock
 Basic net earnings (loss) per common share are based on the weighted average number of
common shares outstanding. Diluted net earnings (loss) per common share are based on the
weighted average number of common shares outstanding and dilutive potential common shares, such as dilutive stock options, determined using the treasury stock method, and
dilutive contingent convertible debt, determined using the if-converted method.The computations for basic and diluted net earnings (loss) per common share are as
follows:
 Years ended December 31,Basic
    
    2005
    
    
    2004
    
    
    2003BasicEarnings (loss) from continuing operations
    
    $
    4,014
    
    
    $
    (20,077
    )
    
    $
    (8,505
    )Earnings from discontinued operations
    
    
    9,949
    
    
    
    47,143
    
    
    
    15,811Net earnings
    
    $
    13,963
    
    
    $
    27,066
    
    
    $
    7,306Weighted average number of common shares outstanding
    
    
    18,795
    
    
    
    15,520
    
    
    
    15,198Net earnings (loss) per common share:Continuing operations
    
    $
    0.21
    
    
    $
    (1.29
    )
    
    $
    (0.56
    )Discontinued operations
    
    
    0.53
    
    
    
    3.03
    
    
    
    1.04$
    0.74
    
    
    $
    1.74
    
    
    $
    0.48
 Years ended December 31,Diluted
    
    2005
    
    
    2004
    
    
    2003DilutedEarnings (loss) from continuing operations
    
    $
    4,014
    
    
    $
    (20,077
    )
    
    $
    (8,505
    )Earnings from discontinued operations
    
    
    9,949
    
    
    
    47,143
    
    
    
    15,811Net earnings
    
    $
    13,963
    
    
    $
    27,066
    
    
    $
    7,306Shares:Weighted average number of common shares outstanding
    
    
    18,795
    
    
    
    15,520
    
    
    
    15,198Shares issuable from assumed exercise of options
    
    
    1,079
    
    
    
    
    
    
    
    19,874
    
    
    
    15,520
    
    
    
    15,198Net earnings (loss) per common share:Continuing operations
    
    $
    0.20
    
    
    $
    (1.29
    )
    
    $
    (0.56
    )Discontinued operations
    
    
    0.50
    
    
    
    3.03
    
    
    
    1.04$
    0.70
    
    
    $
    1.74
    
    
    $
    0.48
 The calculation of diluted earnings (loss) per share excludes 482,500, 2,498,100 and
2,584,100 shares in the years ended December 31, 2005, 2004 and 2003, respectively, since
the effect of assumed exercise of the related options would be antidilutive. In 2005 and
2004, the diluted earnings (loss) per share also excludes 1,755,100 and 4,388,000 shares,
respectively, from the assumed conversion of the 4.875% convertible senior subordinated
notes, since the effect would be antidilutive.
 (p)
    
    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 (loss), foreign currency
translation adjustments (net of income taxes) and changes in unrealized appreciation on
available-for-sale securities (net of income taxes).
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(q)
    
    Reclassifications
 Certain amounts in the 2004 and 2003 consolidated financial statements have been
reclassified to conform to presentations adopted in 2005.
 (r)
    
    Recently Issued Accounting Standards
 Share-Based Payment. In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R), Share-Based Payment(SFAS 123(R)). SFAS 123(R)
establishes standards for the accounting for transactions in which an entity exchanges
its equity instruments for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that are based on the fair
value of the entitys equity instruments or that may be settled by the issuance of those
equity instruments. This Statement requires a public entity to measure the costs of
employee services received in exchange for an award of equity instruments based on the
grant-date fair value of the award (with limited exceptions). That cost will be
recognized over the period during which an employee is required to provide service in
exchange for the award.SFAS 123 (R) applies to all awards granted after the required effective date and to
awards modified, repurchased, cancelled or vested after that date. Compensation cost will
be recognized on or after the required effective date for the portion of outstanding
awards, for which the requisite service has not been rendered, based on the grant-date
fair value of those awards calculated under SFAS 123 for either recognition or pro forma
disclosures. Upon issuance, SFAS 123(R) required public companies to apply the
provisions of the Statement in the first interim or annual reporting period beginning
after June 15, 2005. In April 2005, the Securities and Exchange Commission (SEC)
approved a new rule that delayed the effective date, requiring public companies to apply
the Statement in the first annual period beginning after June 15, 2005. Except for the
deferral of the effective date, the guidance in SFAS 123(R) is unchanged. The Company
expects to adopt SFAS 123(R) in its first interim period of 2006 and has concluded that
SFAS 123(R) will have a negative impact on its financial position and results of
operations. The Company expects the impact of expensing stock options currently
outstanding, as well as the impact of any anticipated stock option grants and restricted
stock awards, to be approximately $0.25 to $0.30 per share in 2006. The Company does not
expect the impact of SFAS 123(R) to have a material impact on its cash flow or liquidity.
See Note 6 to the consolidated financial statements for assumptions used calculating the
fair value of employee stock options.Accounting Changes and Error Corrections.On June 7, 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections  a replacement of APB Opinion No. 20 and
Statement No. 3(SFAS 154). SFAS 154 changes the requirements for the accounting for,
and reporting of, a change in accounting principle. Previously, most voluntary changes
in accounting principles were required to be recognized by way of a cumulative effect
adjustment within net income during the period of the change. SFAS 154 requires
retrospective application to prior periods financial statements, unless it is
impracticable to determine either the period-specific effects or the cumulative effect of
the change. SFAS 154 is effective for accounting changes made in fiscal years beginning
after December 15, 2005; however, it does not change the transition provisions of any
existing accounting pronouncements. The Company does not believe the adoption of SFAS
154 will have a material effect on its consolidated financial position, results of
operations or cash flows.American Jobs Creation Act.On October 22, 2004, the United States enacted the American
Jobs Creation Act (AJCA) of 2004. The AJCA provides multi-national companies an
election to deduct from taxable income 85% of eligible dividends repatriated from foreign
subsidiaries. Eligible dividends generally cannot exceed $500 million and must meet
certain business purposes to qualify for the deduction. In addition, there are
provisions which prohibit the use of net operating losses to avoid a tax liability on the
taxable portion of a qualifying dividend. The
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estimated impact to current tax expense in
the U.S. is generally equal to 5.25% of the qualifying dividend.The AJCA generally allowed the Company to take advantage of this special deduction from
November 2004 through the end of calendar year 2005. The Company did not propose a
qualifying plan of repatriation for 2004 or 2005.
 (2)
    
    Acquisitions and Divestitures
 On April 1, 2005, the Company acquired the business and assets of Miavita LLC, a leading
provider of on-line wellness programs, for total consideration including transaction costs of
$4,765, net of cash received. Under the terms of the agreement, potential additional
consideration will be payable under an earnout agreement. The Companys December 31, 2005,
balance sheet reflects the assets acquired and liabilities assumed in this transaction,
including goodwill and intangible assets resulting from the purchase price allocation of
$3,130 and $1,600, respectively. The intangible assets are being amortized on a straight-line
basis over ten years.On October 1, 2005, the Company acquired the business and assets of WinningHabits, Inc., a
leading provider of corporate wellness programs, for total consideration including transaction
costs of $14,913, net of cash received. Under the terms of the agreement, potential
additional consideration will be payable under an earnout agreement. The transaction resulted
in goodwill and intangible assets from the purchase price allocation of $11,453 and $5,700,
respectively. The intangible assets are being amortized on a straight-line basis over five to
seven years.In 2003, the Company purchased the assets of a healthcare management firm specializing in case
and utilization management for consideration, net of cash acquired, of $603. An additional
$200 was paid in 2004 on the anniversary of the acquisition in accordance with the terms of
the agreement.The Companys December 31, 2005, balance sheet reflects the assets acquired and liabilities
assumed in these acquisitions, and the results of operations have been included in the
Companys consolidated statement of operations for the period subsequent to the acquisitions.
The results of operations for periods prior to the acquisitions were not material to the
Companys consolidated statements of operations and, accordingly, pro forma results of
operations have not been presented.During the fourth quarter of 2005, the Company made the strategic decision to divest the
operations of Facet, a leading designer, developer, assembler and distributor of products for
the diabetes market, and Foreign Diabetes. As a result, the accompanying consolidated
financial statements reflect the operations of these divisions as discontinued operations for
all periods presented. In addition, the assets and liabilities of these businesses have been
reclassified as assets held for sale and liabilities related to assets held for sale and
other discontinued operations in the consolidated balance sheets at December 31, 2005 and
2004.On June 30, 2004, the Company discontinued the operations of its direct-to-consumer laboratory
business and completed the sale of substantially all of the assets of its direct-to-consumer
diabetic and respiratory supplies business for total cash proceeds, net of transaction costs,
of $101,055. The sale resulted in a gain of $51,812, or $30,938 net of income taxes. The
assets sold consisted primarily of property and equipment and other assets. The accounts
receivable of the business and certain other assets and liabilities were excluded from the
sale and retained by the Company. In December 2005, the Company recorded a liability of
$10,000 for the settlement of the qui tamclaim filed against the Company and this business
(see Note 9). This settlement is reflected in liabilities related to assets held for sale
and other discontinued operations on
the consolidated balance sheet at December 31, 2005. The purchaser did not assume liability
for any qui tamclaim. The retained accounts and rebates receivable of $2,982, net, were
reflected in prepaid expenses and other current assets on the consolidated balance sheets at
December 31, 2004. In 2005, the Company recorded an additional charge of $1,976 to fully
reserve for the
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remaining accounts receivable balance, therefore there was no balance for
these accounts receivable at December 31, 2005.At December 31, 2005, a liability of $10,550, primarily for the qui tamsettlement costs noted
above and remaining liabilities related to the sale, was included in liabilities related to
assets held for sale and other discontinued operations on the consolidated balance sheets. A
reconciliation of the accrued liability balance follows.
 Balance
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    BalanceDecember 31,
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    December 31,Type of Charge
    
    2004
    
    
    Additions
    
    
    Payments
    
    
    Adjustments
    
    
    2005Employee
termination benefits
    
    $
    330
    
    
    $
    
    
    
    $
    (309
    )
    
    $
    (21
    )
    
    $
    Contractual obligations
    
    
    330
    
    
    
    304
    
    
    
    (113
    )
    
    
    (21
    )
    
    
    500Qui tamsettlement costs
    
    
    
    
    
    
    10,000
    
    
    
    
    
    
    
    
    
    
    
    10,000Other accruals
    
    
    258
    
    
    
    
    
    
    
    (16
    )
    
    
    (192
    )
    
    
    50Total
    
    $
    918
    
    
    $
    10,304
    
    
    $
    (438
    )
    
    $
    (234
    )
    
    $
    10,550
 The additions and adjustments for contractual obligations and other accruals relate to
revisions to estimates for future obligations. The Company estimates remaining payments on the
above liabilities to be paid in 2006.The operating results of discontinued operations are as follows:
 Years Ended December 31,2005
    
    
    2004
    
    
    2003Revenues
    
    $
    152,395
    
    
    $
    190,476
    
    
    $
    203,651Earnings from discontinued operations, net of income tax
expense of $7,221, $10,091 and $10,664 in 2005, 2004 and
2003, respectively
    
    
    9,949
    
    
    
    16,205
    
    
    
    15,811Gain on disposal of discontinued operations, net of income
tax expense of $20,874
    
    
    
    
    
    
    30,938
    
    
    
    Earnings from discontinued operations
    
    $
    9,949
    
    
    $
    47,142
    
    
    $
    15,811
 The components of assets held for sale and liabilities related to assets held for sale
and other discontinued operations are as follows:
 December 31,2005
    
    
    2004Cash and cash equivalents
    
    $
    2,716
    
    
    $
    2,067Accounts receivable, net
    
    
    22,575
    
    
    
    21,889Inventories
    
    
    22,395
    
    
    
    23,169Property and equipment, net
    
    
    3,259
    
    
    
    2,834Goodwill and intangible assets, net
    
    
    80,248
    
    
    
    80,644Other
    
    
    1,262
    
    
    
    900Assets held for sale
    
    
    132,455
    
    
    
    131,503Accounts payable
    
    
    17,013
    
    
    
    21,792Qui tamsettlement costs
    
    
    10,000
    
    
    
    Accrued and other liabilities
    
    
    4,029
    
    
    
    2,848Liabilities related to assets held for sale
and other discontinued operations
    
    $
    31,042
    
    
    $
    24,640
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(3)
    
    Long-Term Debt
 Long-term debt is summarized as follows:
 December 31,2005
    
    
    2004Unsecured 11% senior notes, net of
unamortized discount of $57 and $77 at
December 31, 2005 and 2004, respectively,
plus unamortized deferred gains resulting
from termination of interest rate swaps of
$10 and $15 at December 31, 2005 and 2004,
respectively; interest payable semi-annually
on May 1 and November 1, maturing May 2008
    
    $
    1,953
    
    
    $
    1,938Unsecured 4.875% convertible senior
subordinated notes, net of unamortized
discount of $2,471 at December 31, 2004,
interest payable semi-annually on May 1 and
November 1, converted May 2005
    
    
    
    
    
    
    83,779Capital lease obligations; interest ranging
from approximately 6% to 18.1% with various
monthly payments and maturing at various
dates through July 2008 (Note 8)
    
    
    395
    
    
    
    107Other debt; interest rate 5.15%; payable in
monthly installments through May 2006
    
    
    772
    
    
    
    792Total long-term debt
    
    
    3,120
    
    
    
    86,616Less current installments
    
    
    (1,021
    )
    
    
    (865
    )Long-term debt, excluding current installments
    
    $
    2,099
    
    
    $
    85,751
 On April 27, 2005, the Company issued a notice of its intention to redeem $86,250 in
aggregate principal amount of its 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 an
aggregate of 4,387,772 shares of common stock. In addition, the redemption also required the
Company 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. The Company
paid the noteholders the make-whole payment totaling $15,500, which included $294 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.The 4.875% convertible senior subordinated notes, issued during the second quarter of 2004,
were unsecured and guaranteed by certain of the Companys domestic subsidiaries. Interest was
payable on May 1 and November 1 of each year. The Company used the proceeds, net of discount,
of $83,705 from the issuance of the convertible senior subordinated notes to partially fund
the repurchase of $120,000 in aggregate principal amount of its 11% Senior Notes tendered in
the tender offer as described below. Under the original terms of the 4.875% convertible
senior subordinated notes, if, among other things, the closing price of the Companys common
stock exceeded 150% of the conversion price for at least 20 trading days in any consecutive 30
trading day period, the Company could redeem the notes at a redemption price equal to 100% of
the principal amount of the notes redeemed, plus a make-whole payment. Upon notice of
redemption, the noteholders could elect to receive cash in the redemption or convert the
4.875% convertible senior subordinated notes into shares of the Companys common stock at the
conversion rate of approximately 50.873 shares per $1 principal amount of the notes (equal to
a conversion price of approximately $19.66 per share).In June 30, 2004, the Company completed the repurchase of $120,000 in aggregate principal
amount of its 11% Senior Notes tendered in a tender offer. This repurchase was funded with
proceeds from the issuance of the 4.875% convertible senior subordinated notes (as described
above) and from the sale of certain assets of the direct-to-consumer diabetic and respiratory
supplies business (see Note 2). The retirement of substantially all of the outstanding 11%
Senior Notes resulted in a loss of $22,886, or $14,143 after taxes,
in the second quarter of 2004. Additionally, in connection with the tender offer, the
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holders
of the 11% Senior Notes consented to amend the indenture governing the 11% Senior Notes to
eliminate substantially all of the restrictive covenants, certain related events of default
and certain other terms applicable to the $2,000 of 11% Senior Notes not purchased in the
tender offer.At December 31, 2005, the Company had an available revolving credit facility with a borrowing
capacity of the lesser of $35,000 or 80% of eligible accounts receivable. The facility was
collateralized by cash, accounts receivable, inventories, intellectual property and certain
other of the Companys assets. Borrowings under this facility bear interest at LIBOR plus
2.9% (7.20% at December 31, 2005), and the facility required a non-utilization fee of 0.5% of
the unused borrowing capacity. Interest and the non-utilization fee were payable monthly. In
October 2005, the Company amended the terms of the agreement to extend the term of the credit
facility until October 2006. Additionally, under the terms of the amended agreement, the
Company had the right to terminate the agreement at any time prior to the maturity date upon
one days written notice to the lender, and the Company was not subject to an early
termination fee. As of December 31, 2005, no amounts were outstanding, and approximately
$29,000 was available for borrowing under this credit facility.The revolving credit facility agreement set forth a number of covenants binding on the
Company. These covenants limited the Companys ability to, among other things, incur
indebtedness and liens, pay dividends, repurchase shares, enter into merger agreements, make
investments, engage in new business activities unrelated to the Companys current business or
sell assets. In addition, the Company was required to maintain certain financial ratios. As
of December 31, 2005, the Company was in compliance with the financial covenants in its credit
facility.Approximate aggregate minimum annual payments due on long-term debt, excluding the unamortized
discount and deferred gains on interest rate swaps, for the five years subsequent to December
31, 2005 and thereafter are as follows:
 2006
    
    $
    1,0212007
    
    
    1282008
    
    
    1,971$
    3,120
 On January 13, 2006 the Company terminated the revolving credit facility. Subsequently,
the Company entered into new credit facilities in conjunction with the acquisition of
CorSolutions, which was completed on January 19, 2006. The new credit facilities provide for
borrowings of up to an aggregate of $485,000, structured to include both term loans and a revolving
credit facility (See Note 12).
 (4)
    
    Derivative Financial Instruments
 During 2003 and 2004, the Company periodically used interest rate swap agreements to hedge
against changes in the fair value of the 11% Senior Notes and to lower overall borrowing
rates. The notional amounts of these swap agreements ranged from $25,000 to $100,000. Under
these agreements, the bank was obligated to pay the Company an 11% fixed rate of interest
semi-annually in arrears, and the Company was obligated to pay the bank semi-annually in
arrears a variable rate of interest. During 2004, the Company terminated its interest rate
swap agreements and paid a total of $993 to the bank upon termination.Due to the retirement of a portion of the 11% Senior Notes in June 2004, a proportionate share
of the net unamortized deferred gains resulting from the termination of the interest rate
swaps was included in the loss on retirement of the 11% Senior Notes. The remaining balance of
deferred gain of $10 at December 31, 2005, is being amortized as a decrease to interest
expense over the remaining term of the 11% Senior Notes (May 2008).The Company reflected interest rate swap agreements on the consolidated balance sheet at fair
value, which was based upon the estimated amount required to settle the agreement. The
carrying value of the
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related portion of fixed-rate debt being hedged was adjusted by the change in fair value
of the portion of the debt hedged by the interest rate swap attributable to the interest rate
risk. In addition, the change during the period in the fair value of the interest rate swap
agreements, as well as the change in the adjusted carrying value of the related portion of the
fixed-rate debt that was being hedged, had offsetting effects on net interest expense in the
consolidated statements of operations, since the interest rate swaps were fully
effective. Interest expense was reduced by $685 and $1,104 in 2004 and 2003, respectively, as
a result of the lower variable interest rates on the swaps. There were no swap agreements in
effect as of December 31, 2005 and 2004.(5)
    
    Income TaxesThe components of the income tax expense (benefit) from continuing operations consisted of:
 Years ended December 31,2005
    
    
    2004
    
    
    2003Current tax expense:U.S. federal
    
    $
    
    
    
    $
    788
    
    
    $
    (2
    )State and local
    
    
    808
    
    
    
    123
    
    
    
    35Total current tax expense
    
    
    808
    
    
    
    911
    
    
    
    33Deferred tax expense (benefit):U.S. federal
    
    
    2,518
    
    
    
    (11,475
    )
    
    
    (4,609
    )State and local
    
    
    (593
    )
    
    
    (2,765
    )
    
    
    (862
    )Total deferred tax expense (benefit)
    
    
    1,925
    
    
    
    (14,240
    )
    
    
    (5,471
    )Total income tax expense (benefit)
    
    $
    2,733
    
    
    $
    (13,329
    )
    
    $
    (5,438
    )
  Years ended December 31,2005
    
    
    2004
    
    
    2003Computed expected income tax expense (benefit)
    
    $
    2,361
    
    
    $
    (11,692
    )
    
    $
    (4,880
    )Effect of:State and local income taxes, net of federal effect
    
    
    140
    
    
    
    (1,717
    )
    
    
    (538
    )Nondeductible expenses Nondeductible expenses
    
    
    273
    
    
    
    425
    
    
    
    277Nontaxable income of captive insurance subsidiary
    
    
    (142
    )
    
    
    (270
    )
    
    
    (272
    )Other, net
    
    
    101
    
    
    
    (75
    )
    
    
    (25
    )Income tax expense (benefit)
    
    $
    2,733
    
    
    $
    (13,329
    )
    
    $
    (5,438
    )
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At December 31, 2005 and 2004, the deferred income tax assets consist of future tax
benefits attributable to:
 December 31,2005
    
    
    2004Deferred income tax assets (liabilities):Current:Allowance for doubtful accounts and other receivables
    
    $
    1,284
    
    
    $
    6,029Accruals and reserves not deducted for tax purposes
    
    
    6,240
    
    
    
    2,512Deferred revenue
    
    
    1,110
    
    
    
    1,132Other
    
    
    (5
    )
    
    
    28,629
    
    
    
    9,675Non-current:Depreciation and amortization
    
    
    (16,043
    )
    
    
    (8,523
    )Supplemental executive retirement plan
    
    
    1,645
    
    
    
    1,510Net operating loss carryforwards
    
    
    21,436
    
    
    
    15,564Credit carryforwards
    
    
    3,064
    
    
    
    3,174Other
    
    
    564
    
    
    
    (21
    )10,666
    
    
    
    11,704Total deferred income tax assets
    
    $
    19,295
    
    
    $
    21,379
 Based on projections of taxable income in 2006 and future years, management
believes that it is more likely than not that the Company 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.At December 31, 2005, the Company 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:
 2010
    
    $
    4,5252011
    
    
    4,4962012
    
    
    1,8242018
    
    
    8732019
    
    
    2,5612020
    
    
    2,0702021
    
    
    1,2452022
    
    
    8,9692023
    
    
    15,9012024
    
    
    5552025
    
    
    9,702$
    52,721
 The Company also has available alternative minimum tax (AMT) credit carryforwards of
approximately $2,795 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 $39,347.Due to the Companys decision in the fourth quarter of 2005 to divest its Foreign Diabetes
operations, the Company provided for deferred income taxes on the unremitted earnings of
those foreign operations.The Company undergoes audits of its various tax returns from time to time. The Company
records refunds from audits when receipt is assured and assessments when the loss is
probable.
 (6)
    
    Shareholders EquityStock Option PlansDuring 2005, the Board of Directors of the Company adopted the 2005 Directors Non-Qualified
Stock Option Plan, which provides for the issuance of non-qualified stock options to the
Companys non-
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2005
    
    2004
    
    2003Dividend yield
    
    None
    
    None
    
    NoneVolatility
    
    
    68
    %
    
    
    67
    %
    
    
    72
    %Risk-free interest rate
    
    
    4.02
    %
    
    
    3.43
    %
    
    
    2.97
    %Expected life
    
    5 Years
    
    5 Years
    
    5 Years
  2005
    
    
    2004
    
    
    2003Weighted
    
    
    
    
    
    
    Weighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    
    
    
    
    
    Exercise
    
    
    
    
    
    
    ExerciseShares
    
    
    Price
    
    
    Shares
    
    
    Price
    
    
    Shares
    
    
    PriceOutstanding at
beginning of year
    
    
    2,498,153
    
    
    $
    12.62
    
    
    
    2,584,102
    
    
    $
    10.81
    
    
    
    2,062,338
    
    
    $
    12.01Granted
    
    
    1,096,175
    
    
    $
    31.81
    
    
    
    677,857
    
    
    $
    17.88
    
    
    
    845,829
    
    
    $
    8.85Exercised
    
    
    (553,091
    )
    
    $
    11.64
    
    
    
    (526,619
    )
    
    $
    11.42
    
    
    
    (44,106
    )
    
    $
    10.03Canceled
    
    
    (251,206
    )
    
    $
    14.89
    
    
    
    (237,187
    )
    
    $
    8.90
    
    
    
    (279,959
    )
    
    $
    13.76Outstanding at end of year
    
    
    2,790,031
    
    
    $
    20.19
    
    
    
    2,498,153
    
    
    $
    12.62
    
    
    
    2,584,102
    
    
    $
    10.81Exercisable at end of year
    
    
    1,042,587
    
    
    $
    12.53
    
    
    
    885,134
    
    
    $
    12.29
    
    
    
    854,874
    
    
    $
    13.30
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##### Table of Contents



Options outstanding
    
    
    Options exercisableWeightedAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageRange of
    
    Shares
    
    
    Contractual
    
    
    Exercise
    
    
    Shares
    
    
    ExerciseExercise Price
    
    Outstanding
    
    
    Life (years)
    
    
    Price
    
    
    Exercisable
    
    
    Price$  4.57
 $10.00
    
    
    358,459
    
    
    
    6.61
    
    
    $
    6.88
    
    
    
    211,362
    
    
    $
    7.60$10.00  $20.00
    
    
    1,262,847
    
    
    
    6.75
    
    
    $
    13.94
    
    
    
    763,924
    
    
    $
    12.73$20.00  $30.00
    
    
    652,725
    
    
    
    9.05
    
    
    $
    28.34
    
    
    
    67,301
    
    
    $
    25.73$30.00  $39.00
    
    
    516,000
    
    
    
    9.75
    
    
    $
    34.40
    
    
    
    
    
    
    
    2,790,031
    
    
    
    
    
    
    $
    20.19
    
    
    
    1,042,587
    
    
    $
    12.53
  Employee Stock Purchase Plan
  F-23




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Shareholders Rights PlanIn connection with the 1996 merger of Tokos Medical Corporation (Delaware) and Healthdyne,
Inc., the Company established a Shareholders Rights Agreement. The new holding company
adopted a substantially identical Shareholders Rights Agreement in December 2004. If a
person or group acquired beneficial ownership of 15% or more of the Companys outstanding
common stock or announced a tender offer or exchange that would result in the acquisition of a
beneficial ownership of 20% or more of the Companys outstanding common stock, the rights
would detach from the common stock and would be distributed to shareholders as separate
securities. Each right entitled its holder to purchase one one-hundredth of a share (a unit)
of common stock, at a purchase price of $1.63 per unit. The rights, which did not have voting
power, expired on January 30, 2006.Stock SplitIn December 2004, the Companys Board of Directors approved a three-for-two stock split (in
the form of a stock dividend) of the Companys common stock. The additional shares were
distributed on February 4, 2005 to shareholders of record as of the close of business on
January 19, 2005. Accordingly, all amounts for common stock, additional paid-in capital,
number of shares, except shares authorized, and per share information in the consolidated
financial statements were adjusted to reflect the stock split on a retroactive basis.(7)
    
    Employee Benefit PlansThe Company maintains a 401(k) defined contribution plan for the benefit of its employees.
The Companys obligation for contributions under the 401(k) plan is limited to 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, 2005, 2004 and 2003 were approximately $1,284, $1,232 and $1,019,
respectively.The Company maintains 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 2005, 2004 and 2003, $172, $162
and $170, respectively, were expensed related to the SERP and an additional $513 is expected
to be expensed over the next five years of expected service by the respective current
employees. During 2004, the Company paid benefits of $1,200 in accordance with the plan. The
liability under the SERP plan as of December 31, 2005 and 2004 was $4,229 and $3,882,
respectively, and is recorded in other long-term liabilities on the consolidated balance
sheets. The fair value of the assets in the SERP of $3,609 and $3,435 at December 31, 2005
and 2004, respectively, is recorded in other assets in the consolidated balance sheets.
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##### Table of Contents



(8)
    
    CommitmentsThe Company is 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, 2005 are as follows:
 Operating
    
    
    CapitalYears ending December 31,
    
    Leases
    
    
    Leases2006
    
    $
    5,563
    
    
    $
    2672007
    
    
    5,278
    
    
    
    1342008
    
    
    4,609
    
    
    
    172009
    
    
    3,981
    
    
    
    2010
    
    
    1,683
    
    
    
    Thereafter
    
    
    575
    
    
    
    $
    21,689
    
    
    
    418Less interest
    
    
    
    
    
    
    (23
    )Present value of future minimum capital lease
payments
    
    
    
    
    
    $
    395
 Amortization of capital leased assets is included in depreciation expense. Rental
expense for cancelable and noncancelable leases was approximately $5,029, $4,508, and $4,400
for the years ended December 31, 2005, 2004 and 2003, respectively.(9)
    
    Contingencies and ConcentrationsThe 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.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 tamprovision. Two qui tamclaims were
filed against the Company and its former subsidiary, Diabetes Self Care, Inc., alleging
possible improper claims for Medicare payments in the pharmacy and supplies business that the
Company divested in 2004. The purchaser did not assume liability for any qui tamclaim. On
March 7, 2006, the Company agreed to settle those actions for a total of $10,000, payable on
April 3, 2006 (see Note 2 and Note 12).The Companys subsidiary, Facet, currently purchases approximately 80% of the components for
its products from one supplier, who has been a supplier to Facet for more than 15 years.
Facet is under contract with this supplier through December 31, 2006, with some terms, such as
pricing, negotiated on an annual basis. Inability to extend the agreement or to negotiate a
new agreement with similar terms could cause an interruption in supply and a possible loss of
sales, which would affect operating results adversely.
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##### Table of Contents



(10)
    
    Quarterly Financial Information  UnauditedPresented below is a summary of the unaudited consolidated quarterly financial information for
the years ended December 31, 2005 and 2004.
 QuarterFourth
    
    
    Third
    
    
    Second
    
    
    First2005:Revenues
    
    $
    48,580
    
    
    $
    46,266
    
    
    $
    44,762
    
    
    $
    39,623Net earnings (loss)Continuing operations
    
    $
    1,510
    
    
    $
    1,602
    
    
    $
    756
    
    
    $
    146Discontinued operations
    
    
    (2,864
    )
    
    
    4,835
    
    
    
    4,318
    
    
    
    3,660Total
    
    $
    (1,354
    )
    
    $
    6,437
    
    
    $
    5,074
    
    
    $
    3,806Net earnings (loss) per diluted common shareContinuing operations
    
    $
    0.07
    
    
    $
    0.07
    
    
    $
    0.04
    
    
    $
    0.01Discontinued operations
    
    
    (0.13
    )
    
    
    0.23
    
    
    
    0.23
    
    
    
    0.21Total
    
    $
    (0.06
    )
    
    $
    0.30
    
    
    $
    0.27
    
    
    $
    0.222004:Revenues
    
    $
    38,462
    
    
    $
    37,998
    
    
    $
    36,271
    
    
    $
    32,356Net earnings (loss)Continuing operations
    
    $
    (534
    )
    
    $
    (350
    )
    
    $
    (15,650
    )
    
    $
    (3,543
    )Discontinued operations
    
    
    2,100
    
    
    
    3,643
    
    
    
    36,927
    
    
    
    4,473Total
    
    $
    1,566
    
    
    $
    3,293
    
    
    $
    21,277
    
    
    $
    930Net earnings (loss) per diluted common shareContinuing operations
    
    $
    (0.03
    )
    
    $
    (0.02
    )
    
    $
    (1.01
    )
    
    $
    (0.23
    )Discontinued operations
    
    
    0.13
    
    
    
    0.23
    
    
    
    2.39
    
    
    
    0.29Total
    
    $
    0.10
    
    
    $
    0.21
    
    
    $
    1.38
    
    
    $
    0.06
 The sum of the four quarterly net earnings (loss) per diluted common share amounts may
not equal the annual amount reflected on the consolidated statements of operations due to the
timing of quarterly net earnings (loss) and rounding.(11)
    
    Business Segment InformationSFAS No. 131, Disclosures About Segments of an Enterprise and Related Information, requires
that a public company report annual and interim financial and descriptive information about
its reportable operating segments. Operating segments, as defined, are components of an
enterprise about which separate financial information is available that is evaluated regularly
by the chief operating decision maker in deciding how to allocate resources and in accessing
performance. SFAS No. 131 allows aggregation of similar operating segments into a single
segment if the businesses have similar economic characteristics and are considered similar
under the criteria established by SFAS No. 131.During the fourth quarter of 2005, the Company made the strategic decisions to (i) discontinue
the operations of Facet, the Companys diabetes product design, development, assembly
business, and Foreign Diabetes, the Companys diabetes service operation in Germany (see Note
2), and (ii) acquire CorSolutions Medical, Inc. (CorSolutions), a disease management, health
and wellness and productivity enhancement organization (see Note 12). As a result of these
decisions, the Company re-evaluated its reportable segments and combined its operating
segments into one reportable segment. The operating segments have similar characteristics,
have similar types of customers, operate in a consistent manner and have similar economic and
regulatory characteristics.The Companys continuing operations provides services to self-insured employers, private and
government sponsored health plans, pharmaceutical companies, administrative services only
customers and patients. The Companys health plan customers are regional and national health
plans, as well as government-sponsored health plans, such as state Medicaid programs. The
services provided include
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##### Table of Contents



wellness programs that address issues such as smoking cessation, weight loss, exercise,
healthier diet, stress relief, healthy aging, and productivity enhancement; disease and
condition management programs that include programs for diabetes, cardiovascular diseases,
respiratory disorders, end-stage renal disorder, depression, chronic pain, hepatitis C, cancer
and high-risk pregnancies; and an informatics business that involves the aggregation and
analysis of data to enable our customers to better manage health related costs and further
improve outcomes.During the year ended December 31, 2003, revenues from a single health plan client represented
approximately 10% of consolidated net revenues. No single customer accounted for more than
10% of consolidated net revenues in 2005 or 2004.(12)
    
    Subsequent EventsAcquisition.On January 19, 2006, the Company completed its acquisition of 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 acquisition is a part of the Companys strategic decision to expand its services and
technology to create a comprehensive integrated suite of services offerings.In the Merger, all outstanding capital stock and 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 was approximately $445,000, excluding acquired cash. Of
this amount, $20,300 will be held in escrow (the Escrow Amount) for a period of up to 24
months to satisfy any potential indemnification claims which may be made by Matria under the
terms of the Merger Agreement. Except as to certain specified matters, Matria will only be
permitted to recover damages from the Escrow Amount if such damages exceed $4,500.The Company funded the Merger with the proceeds of term loans and revolving credit loans as
described below under Long-Term Debt.The purchase price will be allocated to the underlying assets acquired and liabilities assumed based upon their estimated
fair values at the effective date of acquisition.  The Company will determine the estimated fair values based on independent valuations,
quoted market prices and estimates made by management.  To the extent that the purchase price exceeds the fair value of the net identifiable
 tangible and intangible assets acquired, such excess will be allocated to goodwill.  It was not practicable for the Company to
complete this purchase price allocation prior to the filing of this Form 10-K.Long Term Debt.On January 19, 2006, in conjunction with the acquisition of CorSolutions,
the Company closed a new credit facility (the New Credit Facilities) with a bank, as
administrative agent and collateral agent, and the lenders from time to time party thereto.
The New Credit Facilities provide for borrowings of up to an aggregate of $485,000, which
includes both term loans and a revolving credit facility and is comprised of a First Lien
Credit Facility and a Second Lien Credit Facility. The New Credit Facilities replaced the
Companys existing revolving credit facility.The First Lien Credit Facility consists of a $245,000 Term Loan B facility (the Term B
Facility), a $125,000 Term Loan C facility (the Term C Facility), and a $30,000 revolving
credit facility (the Revolving Credit Facility). The maturity date for the Term B Facility
is January 19, 2012; the maturity date for the Term C Facility is January 19, 2007, and the
maturity date for the Revolving Credit Facility is January 19, 2011. Amounts borrowed under
the Term B Facility and the Term C Facility accrue interest at a fixed spread over the
Eurodollar Rate or the prime rate, at the Companys option. Amounts borrowed under the
Revolving Credit Facility accrue interest at a variable spread over the Eurodollar Rate or the
prime rate, at the Companys option, with the applicable spread determined by reference to
Matrias consolidated leverage ratio, as described in the Credit Agreement.The Second Lien Credit Facility consists of an $85,000 second lien term loan facility. The
maturity date for the Second Lien Credit Facility is July 19, 2012. Amounts borrowed under the
Second Lien Credit Facility accrue interest at a fixed spread over the Eurodollar Rate or the
prime rate, at the Companys option.
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Derivative Financial Instruments.
 Contingences and Concentrations. qui tam
 F-28