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PROSPECTUS
FILED PURSUANT TO
RULE 424(b)(1)
FILE NO. 333-51895
LOGO
OF PEDIATRIC SERVICES APPEARS HERE
OFFER TO EXCHANGE
10% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A
($75,000,000 PRINCIPAL AMOUNT)
FOR ALL OUTSTANDING
10% SENIOR SUBORDINATED NOTES DUE 2008
($75,000,000 PRINCIPAL AMOUNT OUTSTANDING)
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME
ON JUNE 12, 1998, UNLESS EXTENDED
----------------
Pediatric Services of America, Inc., a Delaware corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus (as the same may be amended or supplemented from time to time, the
"Prospectus") and in the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange up to $75,000,000 aggregate
principal amount of its 10% Senior Subordinated Notes due 2008, Series A (the
"New Notes") for up to $75,000,000 aggregate principal of its outstanding 10%
Senior Subordinated Notes due 2008 (the "Old Notes"). The terms of the New
Notes are identical in all material respects to those of the Old Notes, except
(i) the New Notes have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), and therefore will not be subject to certain
restrictions on transfer applicable to the Old Notes and (ii) the New Notes
will not provide for the payment of Liquidated Damages (as defined herein)
relating to certain registration rights. The New Notes will be issued pursuant
to, and entitled to the benefits of, the Indenture (as defined herein)
governing the Old Notes. The New Notes and the Old Notes are referred to
collectively as the "Notes."
The New Notes will bear interest at the rate of 10% per annum, payable semi-
annually on April 15 and October 15 of each year, commencing October 15, 1998.
Holders of New Notes will receive interest on October 15, 1998, from the date
of initial issuance of the New Notes, plus an amount equal to the accrued
interest on the Old Notes from the date of initial issuance thereof to the date
of exchange thereof pursuant to the Exchange Offer. Interest on the Old Notes
accepted for exchange will cease to accrue upon issuance of the New Notes in
exchange therefor.
(continued on next page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURI-
TIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is May 12, 1998.
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(continued from previous page)
The New Notes are redeemable for cash at any time on or after April 15,
2003, at the option of the Company, in whole or in part, at the redemption
prices set forth herein, plus accrued and unpaid interest to the date of
redemption. In addition, at any time prior to April 15, 2001, the Company may
redeem up to $18,750,000 aggregate principal amount of the Notes with the net
proceeds from one or more public offerings of common stock of the Company at
the redemption price set forth herein plus accrued and unpaid interest to the
date of redemption; provided, that at least $56,250,000 aggregate principal
amount of the Notes would remain outstanding after giving effect to any such
redemption. Upon a Change of Control (as defined herein), the holders of the
Notes will have the right to require the Company to repurchase their Notes, in
whole or in part, at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest to the repurchase date. See
"Description of New Notes."
The New Notes will be general unsecured obligations of the Company,
subordinated in right of payment to all existing and future Senior Debt (as
defined herein) of the Company, including indebtedness under the Credit
Agreement. The New Notes will be guaranteed (the "Subsidiary Guarantees"),
jointly and severally, on a senior subordinated basis by all existing and
future Restricted Subsidiaries (as defined herein) of the Company (the
"Guaranteeing Subsidiaries"). The Subsidiary Guarantees will be subordinated
in right of payment to all existing and future Senior Debt of the Guaranteeing
Subsidiaries, including any guarantees by the Guaranteeing Subsidiaries of the
Company's obligations under the Credit Agreement (as defined herein). As of
April 30, 1998, the Company had approximately $27.0 million of Senior Debt
outstanding. In addition, the Company had approximately $73.0 million
available for borrowing under the Credit Agreement.
The Company will accept for exchange any and all Old Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York City
time, on June 12, 1998, unless extended by the Company in its sole discretion
(the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the Expiration Date. In the event
the Company terminates the Exchange Offer, and does not accept for exchange
any Old Notes with respect to the Exchange Offer, the Company will promptly
return the Old Notes to the holders thereof. The Exchange Offer is not
conditioned upon any minimum principal amount of Old Notes being tendered for
exchange, but is otherwise subject to certain customary conditions. The Old
Notes may be tendered only in integral multiples of $1,000.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Company and the Guaranteeing Subsidiaries contained in the
Registration Rights Agreement dated April 16, 1998 (the "Registration Rights
Agreement"), by and among the Company, the Guaranteeing Subsidiaries and
Salomon Brothers Inc, NationsBanc Montgomery Securities LLC and First Union
Capital Markets, a division of Wheat First Securities, Inc., as the initial
purchasers (the "Initial Purchasers") with respect to the offering of the Old
Notes (the "Initial Offering").
Based on interpretations by the Staff of the Securities and Exchange
Commission (the "Commission"), the New Notes issued pursuant to the Exchange
Offer in exchange for Old Notes may be offered for resale, resold or otherwise
transferred by the respective holders thereof (other than any such holder
which is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act, without compliance with the registration and prospectus
delivery provisions of the Securities Act), provided that the New Notes are
acquired in the ordinary course of such holder's business and such holder has
no arrangement with any person to participate in the distribution of such New
Notes and is not engaged in and does not intend to engage in a distribution of
the New Notes. Each broker-dealer that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within
the meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with the resales of the New Notes received in exchange for Old Notes if such
New Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of 180
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days after the Expiration Date, it will make this Prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Prior to the Exchange Offer, there has been no public market for the New
Notes. There can be no assurance as to the liquidity of any markets that may
develop for the New Notes, the ability of holders to sell the New Notes, or
the price at which holders would be able to sell the New Notes. Future trading
prices of the New Notes will depend on many factors, including among other
things, prevailing interest rates, the Company's operating results and the
market for similar securities. Historically, the market for securities similar
to the New Notes, including non-investment grade debt, has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that any market for the New Notes, if
such market develops, will not be subject to similar disruptions. The Initial
Purchasers have advised the Company that they currently intend to make a
market in the New Notes offered hereby. However, the Initial Purchasers are
not obligated to do so and any market-making activities may be discontinued at
any time without notice.
The Company will not receive any proceeds from the Exchange Offer. The
Company has agreed to pay the expenses incident to the Exchange Offer.
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PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT
THIS PROSPECTUS (INCLUDING THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN)
CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED IN THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995) AND INFORMATION RELATING TO
THE COMPANY THAT IS BASED ON THE BELIEFS OF THE MANAGEMENT OF THE COMPANY, AS
WELL AS ASSUMPTIONS MADE BY AND INFORMATION CURRENTLY AVAILABLE TO THE
MANAGEMENT OF THE COMPANY. WHEN USED IN THIS PROSPECTUS (OR IN THE DOCUMENTS
INCORPORATED BY REFERENCE) THE WORDS "MAY," "COULD," "SHOULD," "WOULD,"
"ESTIMATE," "PROJECT," "BELIEVE," "ANTICIPATE," "INTEND," "EXPECT," "PLAN" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE
STATEMENTS BY THEIR NATURE INVOLVE SUBSTANTIAL RISKS AND UNCERTAINTIES,
CERTAIN OF WHICH ARE BEYOND THE COMPANY'S CONTROL. SUCH STATEMENTS REFLECT THE
CURRENT VIEWS OF THE COMPANY WITH RESPECT TO FUTURE EVENTS AND ARE SUBJECT TO
RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE CONTEMPLATED IN SUCH FORWARD-LOOKING STATEMENTS, INCLUDING THOSE
DISCUSSED UNDER "RISK FACTORS" AS WELL AS GENERAL ECONOMIC CONDITIONS AND
INDUSTRY TRENDS, THE LEVEL OF ACQUISITION OPPORTUNITIES AVAILABLE TO THE
COMPANY AND THE COMPANY'S ABILITY TO NEGOTIATE THE TERMS OF SUCH ACQUISITIONS
ON A FAVORABLE BASIS. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON
THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE
COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO
THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE
DATE HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
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AVAILABLE INFORMATION
The Company and the Guaranteeing Subsidiaries have filed with the Commission
a Registration Statement on Form S-4 under the Securities Act for the
registration of the New Notes offered hereby (the "Registration Statement").
This Prospectus, which constitutes a part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement,
certain items of which are contained in exhibits and schedules to the
Registration Statement as permitted by the rules and regulations of the
Commission. For further information with respect to the Company or the New
Notes offered hereby, reference is made to the Registration Statement,
including the exhibits thereto, which may be inspected without charge at the
public reference facility maintained by the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and copies of which may be obtained from the
Commission at prescribed rates. Statements made in this Prospectus concerning
the contents of any document referred to herein are not necessarily complete.
With respect to each such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission, reference is made to the
exhibit for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements, and other information with the
Commission. Proxy statements, reports and other information concerning the
Company can be inspected and copied at prescribed rates at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 and at the regional offices of the
Commission at Seven World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. In addition, the reports, proxy statements and other information can be
obtained from the Commission's website at http:www.sec.gov. Quotations
relating to the Common Stock of the Company appear on the Nasdaq National
Market. Reports, proxy statements and other information concerning the Company
also can be inspected at the offices of the Nasdaq National Market, 1753 K
Street, N.W., Washington, D.C. 20006 or at the Company's website at
www.psakids.com.
For so long as any Notes remain outstanding, the Company is obligated under
the Indenture to remain subject to the reporting requirements of Section 13 or
Section 15(d) of the Exchange Act and to continue to file with the Commission
such information, documents and other reports which are specified in such
Sections of the Exchange Act. The Company is obligated to file with the
Trustee (as defined herein) and cause to be provided to the holders of the
Notes copies of such annual reports and of the information, documents and
other reports which the Company is required to file with the Commission.
INCORPORATION BY REFERENCE
The following documents heretofore filed by the Company with the Commission
are hereby incorporated herein by reference as of their respective dates:
(1) The Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997;
(2) The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended December 31, 1997; and
(2) The Company's Current Report on Form 8-K dated April 17, 1998.
All reports and documents filed by the Company pursuant to Section 13(a),
13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and prior
to the termination of the Exchange Offer shall be deemed to be incorporated by
reference herein and made a part hereof from the respective dates of the
filing of such documents. Any statement contained in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any subsequently filed document which also is
or is deemed to be incorporated by reference herein modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this Prospectus.
The Company will provide without charge to each person to whom a copy of
this Prospectus is delivered upon the written or oral request of such person,
a copy of any or all of the documents incorporated by reference herein (other
than exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that the Prospectus
incorporates). Requests should be directed to: Susan E. Dignan, General
Counsel, Pediatric Services of America, Inc., 310 Technology Parkway,
Norcross, Georgia 30092, telephone number (770) 441-1580.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the related notes thereto, appearing elsewhere in this Prospectus or
incorporated by reference herein.
THE COMPANY
The Company is a leading provider of children's health care and related
services. The Company is the nation's largest focused pediatric home health
care provider and third largest provider of paramedical testing services. The
Company provides children's health care services through 131 branch offices
located in 29 states and the District of Columbia and paramedical testing
services through over 200 field offices located in all 50 states, Puerto Rico
and Guam. During the quarter ended December 31, 1997, health care and related
services represented approximately 84% of the Company's net revenue and
paramedical testing represented approximately 16% of the Company's net revenue.
The Company's net revenue and EBITDA have increased at a compound annual growth
rate (measured as the yearly percentage growth from the fiscal year ended
September 30, 1992 to the fiscal year ended September 30, 1997) of 53% and 60%,
respectively. For the twelve months ended December 31, 1997, the Company had
net revenue and EBITDA of $219.0 million and $23.8 million, respectively.
The U.S. market for pediatric home health care services is estimated by the
Company to exceed $5 billion. This market is served by a large number of small
entities that operate on a local or regional basis and typically provide a
limited range of health care services. This market is also served by a small
number of national home health care companies that service the pediatric market
as part of a broader product offering. Because of the high degree of
specialization required for effective treatment of pediatric patients and the
broad scope of services required due to pediatric patients' generally high
medical acuity levels, the Company believes that there are significant growth
opportunities for a national provider offering a broad range of health care
services focused on the pediatric patient. The Company also believes that
pediatric health care is a highly distinct and attractive segment of the home
health care market. Pediatric patients typically are medically fragile due to
premature birth, trauma or genetic defects and often require constant, high
acuity, specialized care from trained nurses for extended periods of time.
Third-party reimbursement for pediatric home care is provided predominantly by
private health insurance, with a smaller portion provided by Medicaid. Because
of the special needs of pediatric patients, the acuity of care and the skill
levels of the nurses or therapists providing the care, the rates charged for
nursing and other home health care services for pediatric patients are
generally higher than adult rates. In addition, due to the high medical acuity
of pediatric home care patients and the large variations in patient conditions
and treatment protocols, pediatric home health care is typically not reimbursed
on a capitated basis.
The Company provides a broad range of pediatric health care services,
including nursing, respiratory therapy and other medical equipment, and
pharmacy and infusion therapy. In addition, the Company provides pediatric
rehabilitation services, day treatment centers for medically fragile children,
pediatric well care services and special needs educational services for
pediatric patients. The Company also provides case management services in order
to assist the family and patient by coordinating the provision of services
between the insurer or other payor, the physician, the hospital and other
health care providers. The Company's services are designed to provide a high
quality, lower cost alternative to prolonged hospitalization for medically
fragile children.
The U.S. paramedical testing services market is estimated by the Company to
be approximately $500 million with the majority of services being provided by
four national providers, including the Company, and several regional providers.
Paramedical testing services include taking health histories, obtaining blood
and urine samples and administering physical examinations and
electrocardiograms. Some or all of these tests are typically required by
insurance companies as a prerequisite to underwriting life, health and
disability insurance policies.
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The Company believes that the paramedical testing services market is growing
due to: (i) the implementation of stricter underwriting standards requiring
increased testing as a result of growing concern over substance abuse and AIDS
and other catastrophic illnesses; (ii) technological advances in testing; and
(iii) the aging of the U.S. population. The Company also believes that large
national providers are growing at the expense of local and regional providers
as many insurance companies seek to improve quality and reduce administrative
costs by consolidating their business with fewer providers.
In February 1996, the Company acquired Premier Medical Services, Inc.
("Premier"), thereby extending its home health care operations and entering the
paramedical testing business. In December 1997, the Company acquired the
Physical Measurements Information division ("PMI") of ChoicePoint Services,
Inc. ("ChoicePoint"), consisting of ChoicePoint's paramedical testing assets
and operations, making the Company the nation's third largest provider of
paramedical testing services. The Company provides a broad range of paramedical
testing services, including taking health histories, collecting blood and urine
samples, administering physical examinations and performing electrocardiogram
examinations on insurance applicants. The Company's paramedical testing
services clients include over 1,000 life, health and disability insurance
companies as well as corporations that require drug and alcohol screening,
wellness physical examinations and occupational health services. For the year
ended December 31, 1997, the Company estimates that PMI had approximately $60.0
million in net revenue.
The Company's goal is to be the nation's leading provider of children's
health care services and paramedical testing services. The Company's strategy
to achieve this goal includes: (i) continuing to focus on children's health
care services; (ii) expanding into new geographic markets; (iii) expanding the
range of services offered by the Company in its existing markets; (iv)
providing high quality, cost-effective care; (v) leveraging the quality of the
Company's service offering and its market position to continue to increase the
Company's share of the paramedical testing market; and (vi) continuing to
selectively acquire companies which extend the Company's geographic presence
and service offerings.
THE EXCHANGE OFFER
The New Notes............... The forms and terms of the New Notes are
identical in all material respects to the terms
of the Old Notes for which they may be exchanged
pursuant to the Exchange Offer, except for
certain transfer restrictions and registration
rights relating to the Old Notes described under
"--Terms of New Notes."
The Exchange Offer.......... The Company is offering to exchange up to $75
million aggregate principal amount of 10% Senior
Subordinated Notes due 2008, Series A (the "New
Notes") for up to $75 million aggregate principal
amount of its outstanding 10% Senior Subordinated
Notes due 2008 (the "Old Notes"). Old Notes may
be exchanged only in integral multiples of
$1,000.
Expiration Date; Withdrawal
of Tender..................
The Exchange Offer will expire at 5:00 p.m., New
York City time, on June 12, 1998, or such later
date and time to which it is extended by the
Company (the "Expiration Date"). The tender of
the Old Notes pursuant to the Exchange Offer may
be withdrawn at any time prior to the Expiration
Date. Any Old Notes not accepted for exchange for
any reason will be returned without expense to
the
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tendering holder thereof as promptly as
practicable after the expiration or termination
of the Exchange Offer.
Certain Conditions to the
Exchange Offer.............
The Exchange Offer is subject to certain
customary conditions, which may be waived by the
Company. See "The Exchange Offer -- Certain
Conditions to the Exchange Offer."
Procedures for Tendering Each holder of Old Notes wishing to accept the
Old Notes.................. Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile,
together with such Old Notes and any other
required documentation to the Exchange Agent (as
defined herein) at the address set forth herein.
By executing the Letter of Transmittal, each
holder will represent to the Company that, among
other things, (i) any New Notes to be received by
it will be acquired in the ordinary course of its
business, (ii) it has no arrangement or
understanding with any person to participate in
the distribution of the New Notes and (iii) it is
not an "affiliate", as defined in Rule 405 of the
Securities Act, of the Company or, if it is an
affiliate, it will comply with the registration
and prospectus delivery requirements of the
Securities Act to the extent applicable.
Interest on New Notes....... The New Notes will bear interest at the rate of
10% per annum, payable semi-annually on April 15
and October 15 of each year, commencing October
15, 1998. Holders of the New Notes will receive
interest on October 15, 1998 from the date of
initial issuance of the New Notes, plus an amount
equal to the accrued interest on the Old Notes
from the date of initial issuance of the Old
Notes to the date of exchange thereof pursuant to
the Exchange Offer. Interest on the Old Notes
accepted for exchange will cease to accrue upon
issuance of the New Notes in exchange therefor.
Special Procedures for
Beneficial Owners..........
Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender such Old Notes in the
Exchange Offer should contact such registered
holder promptly and instruct such registered
holder to tender on such beneficial owner's
behalf. If such beneficial owner wishes to tender
on such owner's own behalf, such owner must,
prior to completing and executing the Letter of
Transmittal and delivering his or her Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such owner's name
or obtain a properly completed bond power from
the registered holder. The transfer of registered
ownership may take considerable time and may not
be able to be completed prior to the Expiration
Date.
Guaranteed Delivery Holders of Old Notes who wish to tender their Old
Procedures................. Notes and whose Old Notes are not immediately
available or who cannot deliver their
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Old Notes, the Letter of Transmittal or any other
documents required by the Letter of Transmittal
to the Exchange Agent, prior to the Expiration
Date, must tender their Old Notes according to
the guaranteed delivery procedures set forth in
"The Exchange Offer --Guaranteed Delivery
Procedures."
Registration Requirements... The Company has agreed to use its best efforts to
(i) cause the registration statement of which
this Prospectus constitutes a part to become
effective and (ii) to consummate, no later than
45 days following the date on which such
registration statement becomes effective, the
registered Exchange Offer pursuant to which
holders of the Old Notes will be offered an
opportunity to exchange their Old Notes for the
New Notes which will be issued without legends
restricting the transfer thereof. In the event
the applicable interpretations of the staff of
the Commission do not permit the Company to
effect the Exchange Offer or in certain other
circumstances, the Company has agreed to file a
Shelf Registration Statement (as defined under
"Old Notes; Registration Rights") covering
resales of the Old Notes and to use its best
efforts to cause such Shelf Registration
Statement to be declared effective under the
Securities Act and, subject to certain
exceptions, keep such Shelf Registration
Statement effective until two years after the
effective date thereof.
Certain Federal Income Tax
Considerations.............
For a discussion of certain federal income tax
considerations relating to the exchange of the
New Notes for the Old Notes, see "Certain Federal
Income Tax Considerations Relating to the
Exchange Offer."
Exchange Agent.............. SunTrust Bank, Atlanta is the Exchange Agent. The
address and telephone number of the Exchange
Agent are set forth in "The Exchange Offer--
Exchange Agent."
The Old Notes are currently eligible for trading in the Nasdaq Stock Market's
Portal MarketSM ("Portal"). Following commencement of the Exchange Offer but
prior to its consummation, the Old Notes may continue to be traded in the
Portal market. Following consummation of the Exchange Offer, only Old Notes not
exchanged will be eligible for Portal trading.
TERMS OF NEW NOTES
New Notes................... $75,000,000 principal amount of 10% Senior
Subordinated Notes due 2008, Series A.
Maturity Date............... April 15, 2008.
Interest Payment Dates...... April 15 and October 15 of each year, commencing
October 15, 1998.
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Subordination; Subsidiary The New Notes will be general unsecured
Guarantees................. obligations of the Company, subordinated in right
of payment to all existing and future Senior Debt
of the Company, including indebtedness under the
Credit Agreement (as defined herein). The New
Notes will be guaranteed, jointly and severally,
on a senior subordinated basis by all existing
and future Restricted Subsidiaries of the
Company. The Subsidiary Guarantees will be
subordinated in right of payment to all existing
and future Senior Debt of the Guaranteeing
Subsidiaries, including any guarantees by the
Guaranteeing Subsidiaries of the Company's
obligations under the Credit Agreement. As of
April 30, 1998, the Company had approximately
$27.0 million of Senior Debt outstanding. In
addition, the Company had approximately $73.0
million available for borrowing under the Credit
Agreement. See "Description of Credit Agreement."
Optional Redemption......... Except as provided below, the New Notes are not
redeemable at the Company's option prior to April
15, 2003. Thereafter, the New Notes will be
redeemable, in whole or in part, at the option of
the Company, at the redemption prices set forth
herein plus accrued and unpaid interest to the
date of redemption. In addition, at any time
prior to April 15, 2001, the Company may, at its
option, redeem up to $18,750,000 aggregate
principal amount of Notes with the net proceeds
from one or more public offerings of common stock
of the Company at the redemption price set forth
herein plus accrued and unpaid interest to the
date of redemption; provided that at least
$56,250,000 aggregate principal amount of Notes
would remain outstanding after giving effect to
any such redemption. See "Description of New
Notes -- Optional Redemption."
Change of Control........... In the event of a Change of Control, each holder
of New Notes will have the right to require the
Company to repurchase such holder's New Notes, in
whole or in part, at a purchase price of 101% of
the principal amount thereof plus accrued and
unpaid interest to the date of repurchase. In the
event a Change of Control were to occur, there
can be no assurance that the Company will have
available funds sufficient to repurchase all of
the New Notes that holders elect to tender. In
addition, the Credit Agreement prohibits the
Company from repurchasing the New Notes without
the consent of the lenders. See "Description of
New Notes -- Repurchase at the Option of
Holders -- Change of Control."
Offer to Purchase........... The Company will be required in certain
circumstances to make an offer to purchase New
Notes and certain other indebtedness, at a
purchase price equal to 100% of the principal
amount thereof plus accrued and unpaid interest
to the date of purchase, with the net cash
proceeds of certain asset sales. The Credit
Agreement, however, prohibits the Company from
repurchasing the New Notes without the consent of
the lenders. See "Description of Notes -- Asset
Sales."
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Restrictive Covenants....... The indenture governing the Notes (the
"Indenture") contains covenants including, but
not limited to, covenants with respect to
limitations on the following matters: (i) the
incurrence of additional indebtedness, (ii) the
creation of liens, (iii) restricted payments,
(iv) sales of assets, (v) mergers and
consolidations, (vi) payment restrictions
affecting subsidiaries and (vii) transactions
with affiliates. See "Description of New Notes --
Certain Covenants."
Use of Proceeds............. There will be no cash proceeds to the Company
from the Exchange Offer. See "Use of Proceeds of
the New Notes."
Risk Factors................ See "Risk Factors" beginning on page 13 for a
discussion of certain factors that should be
considered prior to making a decision with
respect to the Exchange Offer.
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SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER
AS ADJUSTED 31, YEAR ENDED SEPTEMBER 30,
TWELVE MONTHS --------------------------- ----------------------------------------------------
ENDED AS
DECEMBER 31, AS ADJUSTED ADJUSTED
1997(1) 1997(2) 1997 1996 1997(2) 1997 1996 1995 1994 1993
------------- ----------- ------- ------- -------- -------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(3):
Net revenue............. $219,027 $ 61,559 $61,559 $46,554 $204,023 $204,023 $163,804 $111,860 $70,686 $52,190
Operating salaries,
wages and employee
benefits............... 94,290 26,081 26,081 19,734 87,943 87,943 72,026 50,078 33,198 26,260
Other operating costs... 80,381 22,943 22,943 17,948 75,386 75,386 60,096 39,087 23,566 15,476
Corporate, general and
administrative......... 13,949 3,836 3,836 2,772 12,885 12,885 10,784 7,217 5,428 4,946
Provision for doubtful
accounts............... 6,698 1,833 1,833 1,375 6,239 6,239 4,708 3,164 1,411 1,335
Depreciation and
amortization........... 6,534 1,847 1,847 1,416 6,103 6,103 4,858 3,656 1,874 1,328
Combination costs....... -- -- -- -- -- -- 1,166 -- -- --
Operating income........ 17,175 5,019 5,019 3,309 15,467 15,467 10,166 8,658 5,209 2,845
Interest expense........ 7,841 1,991 1,466 575 7,800 3,534 1,778 1,643 1,074 872
Minority interest in
loss of subsidiary..... 81 1 1 40 119 119 64 -- -- --
Income taxes............ 3,766 1,212 1,432 1,118 3,114 4,797 3,406 2,803 1,556 574
Extraordinary item, net
of tax................. -- -- -- -- -- -- -- 781 (408) --
Net income.............. $ 5,649 $ 1,817 $ 2,122 $ 1,656 $ 4,672 $ 7,255 $ 5,046 $ 4,993 $ 2,171 $ 1,399
OTHER FINANCIAL DATA:
Depreciation and
amortization........... $ 6,534 $ 1,847 $ 1,847 $ 1,416 $ 6,103 $ 6,103 $ 4,858 $ 3,656 $ 1,874 $ 1,328
Gross interest expense.. 7,841 1,991 1,466 575 7,800 3,534 1,778 1,643 1,074 872
EBITDA(4)............... 23,790 6,867 6,867 4,765 21,689 21,689 15,088 12,314 7,083 4,173
Capital expenditures.... 7,242 1,774 1,774 1,400 6,867 6,867 6,479 3,811 2,682 1,890
AS ADJUSTED FINANCIAL
RATIOS:
Ratio of EBITDA to gross
interest expense(4).... 3.0 3.5 2.8
Ratio of total long-term
obligations to
EBITDA(4).............. 4.0 N.M. 3.5
Ratio of earnings to
fixed charges(5)....... 2.1 2.5 3.3 5.1 1.9 4.0 5.0 4.7 4.4 2.9
<CAPTION>
AT DECEMBER 31, 1997
-------------------------
AS
ACTUAL ADJUSTED(1)
------------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 415 $ 415
Working capital......... 70,646 70,646
Total assets............ 201,517 204,517
Long-term obligations,
including current
portion................ 92,147 95,147
Total stockholders'
equity................. 79,783 79,783
</TABLE>
- --------
(1) Represents the unaudited consolidated statement of operations of the
Company for the three months ended December 31, 1997 combined with the
unaudited consolidated statement of operations of the Company for the nine
months ended September 30, 1997, adjusted to give pro forma effect to the
sale of the Old Notes
11
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and the application of the net proceeds therefrom as described under "Use
of Proceeds of Old Notes" as if such transactions had occurred on January
1, 1997.
(2) Reflects the sale of the Old Notes and the application of the net proceeds
therefrom as described in "Use of Proceeds of Old Notes" as though such
transactions had occurred as of October 1, 1996 for statement of
operations purposes, and as of December 31, 1997 for balance sheet
purposes. Does not give effect to interest income derived from the net
proceeds from the offering of the Old Notes after giving effect to the
repayment of indebtedness or to the acquisition of PMI or certain other
businesses acquired during the period, for which audited financial
statements are not available.
(3) The consolidated financial information has been restated for the effect of
the business combination on February 29, 1996, of the Company and Premier,
which was accounted for using the pooling-of-interests method. See Note 5
of notes to the Company's Consolidated Financial Statements.
(4) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, non-recurring charges, interest and other
income and extraordinary items. EBITDA is included herein because
management believes that certain investors may find it to be a useful tool
for measuring a company's ability to service its debt; however, EBITDA
does not represent cash flow from operations, as defined by generally
accepted accounting principles, and should not be considered as a
substitute for net income as an indicator of the Company's operating
performance or for cash flow as a measure of liquidity.
(5) The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings from operations before income taxes, non-recurring
items and extraordinary items plus fixed charges. Fixed charges include
interest expense, amortization of debt issuance costs and the estimated
interest component of rent expense.
12
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RISK FACTORS
Prospective investors should carefully consider the following factors, as
well as the other information included or incorporated by reference in this
Prospectus, in evaluating an investment in the Notes.
RISKS ASSOCIATED WITH GROWTH STRATEGY; RECENT ACQUISITION
Acquisitions represent an important element of the Company's growth
strategy. Historically the Company has acquired local and regional home health
care companies and paramedical testing companies. In the future, the Company
may seek to acquire health care companies and other businesses and entities
that expand or are complementary to the Company's existing business. There can
be no assurance that acquisitions can be consummated or that acquired
businesses can be integrated successfully into the Company's operations.
Furthermore, there can be no assurance that the Company will be able to obtain
sufficient financing for future acquisitions. Under the Credit Agreement, its
lenders must consent to all acquisitions involving consideration in excess of
$10 million and, prior to September 30, 1998, to any acquisitions or series of
related acquisitions involving cash consideration in excess of $1 million.
There also can be no assurance that past or future acquisitions will not have
an adverse effect upon the Company's operating results, particularly in the
fiscal quarters immediately following consummation of such transactions while
the operations of the acquired business or assets are being integrated into
the Company's operations. The Company also intends to expand its operations by
opening new branch offices in both new and existing markets and expanding the
services currently provided at its existing branch offices. There can be no
assurance that, if established, such start-up branch offices or service line
extensions will be successful. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
In December 1997, the Company purchased PMI, which had revenues of
approximately $60 million for the year ended December 31, 1997. Pursuant to
the terms of the transaction, ChoicePoint provided certain services on behalf
of the Company, including order entry, scheduling, status reporting, billing
and other related services with respect to the acquired operations at no
charge from December 15, 1997 through April 15, 1998, and continues to provide
these services for a monthly fee of approximately $223,000 per month from
April 15, 1998 through June 30, 1998, unless extended by mutual agreement of
the parties. The assets purchased from ChoicePoint included a computer system
under development by ChoicePoint designed to meet the requirements of the
paramedical testing operations (the "PMI System"). The system is designed for
entering orders, scheduling examinations and providing status reports. The
Company anticipates that the PMI System will be implemented in July 1998. The
Company is also developing internally a new paramedical testing billing and
collection system which is designed to integrate with the PMI System. The
Company is completing the development of this billing and collection system
and currently plans to implement it in June 1998. The integration of the PMI
System and the completion of the billing and collection system will require a
significant amount of management's time and attention, and there can be no
assurance that the Company will complete the development of the billing and
collection system or the integration of the operations in a timely manner.
Failure to complete the billing and collection system and integrate the
operations in accordance with management's plans could have a material adverse
effect on the Company's financial condition and results of operations.
Prior to the Company's purchase of PMI, ChoicePoint conducted its
paramedical testing operations as a nonsegregated division within ChoicePoint.
As such, ChoicePoint did not maintain detailed separate financial information
regarding the paramedical testing operations, other than information with
respect to net revenue. As a result, the Company could not obtain from
ChoicePoint sufficient financial information to prepare financial statements
for PMI for periods prior to the Company's acquisition of PMI. Accordingly,
except as to 1997 revenues and certain pro forma revenue information, neither
historical nor pro forma financial information with respect to PMI is included
in this Prospectus. The financial information used by the Company to value
PMI's operations and to create operating models and forecasts based on its
financial position and results of operations are based on numerous estimates
and assumptions. Although the Company believes that these estimates and
assumptions are reasonable, there can be no assurance that they are correct.
As a result, PMI may not contribute
13
<PAGE>
to the Company's results of operations as expected by management, which could
have a material adverse effect on the Company.
REIMBURSEMENT
During the year ended September 30, 1997, the Company derived approximately
64% of its health care related net revenue from private third-party payors,
and 27% and 9% from Medicaid and Medicare, respectively. Federal and state
governments as well as private and third-party payors have taken and continue
to take extensive steps intended to contain or reduce the costs of health
care. These steps have included, among others, reductions in reimbursement
rates, changes in services covered, increased utilization review of services,
negotiated prospective or discounted contract pricing and adoption of a
competitive bid approach to service contracts. Cost containment efforts are
expected to continue in the future. Although home health care, which is
generally less costly than hospital-based care, has benefitted from many of
these cost containment efforts, as expenditures in the home health care market
continue to grow, governmental and private initiatives aimed at reducing the
cost of health care delivery at non- hospital sites are increasing. Many state
Medicaid programs, in an effort to contain the cost of health care and in
light of state budgetary constraints, have reduced their payment rates and
have narrowed the scope of covered services. Likewise, the Federal 1990
Omnibus Budget Reconciliation Act ("OBRA 1990") imposed reimbursement limits
and a national rate system for home medical equipment, including respiratory
equipment. Similar initiatives have been implemented in the past and such
initiatives are expected to continue in the future. There can be no assurance
that these initiatives will not materially and adversely affect the Company's
revenues from these sources and, consequently, its results of operations.
The 1997 Balanced Budget Act ("BBA 1997") contains provisions intended to
significantly reduce Medicare reimbursement to the home health industry. In
addition, BBA 1997 requires that home health and home medical equipment
companies post surety bonds in specified amounts. Furthermore, reimbursement
reductions for oxygen and oxygen equipment are being phased in beginning
January 1, 1998, and home medical equipment fee schedules will be frozen. The
Company believes that health care reform initiatives are likely to continue in
the future. These developments are likely to have an adverse, and may have a
material adverse, effect on the Company. See "Business--Reimbursement."
In recent years, the process of obtaining reimbursement from third-party
payors for services rendered in the health care industry generally, and by the
Company in particular, has become increasingly complex. During this time, the
types of information required by payors has become more detailed and the
protocols for presenting information have become more exacting. As a result,
the payment cycle for the Company's health care services has lengthened. At
December 31, 1997, the Company's average days sales outstanding in accounts
receivable ("DSO") was 125 days, compared to 101 days at September 30, 1996.
Increases in DSO adversely affect the Company's cash flow. Although the
Company has implemented measures designed to shorten its health care services
payment cycle, and consequently lower its DSO, there can be no assurance that
these measures will be effective or that the Company's DSO will not increase.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
REGULATION
The Company's health care business is subject to extensive and frequently
changing state and federal regulation. The Company is subject to state laws
governing and regulating numerous aspects of its business, including home
health care and home infusion services (including certificate of need and
licensure requirements in certain states) and dispensing, distributing and
compounding of prescription products. The Company also is subject to certain
state laws prohibiting remuneration for patient or business referrals and the
provision of services where a financial relationship exists between a
referring physician and the entity providing the service. Federal laws
governing the Company's health care activities include regulations concerning
pharmacy operations and regulations under the Medicare and Medicaid programs
relating to, among other things, certification of home health agencies and
reimbursement. In addition, federal fraud and abuse laws restrict, among other
things,
14
<PAGE>
remuneration to parties in a position to influence or cause the referral of
patients or business. New laws and regulations are enacted from time to time
to regulate new and existing services and products in the home health care
industry. Changes in the law or new interpretations of existing laws also
could have an adverse effect on the Company's methods and costs of doing
business. Further, failure of the Company to comply with such laws could
adversely affect the Company's ability to continue to provide, or receive
reimbursement for, its services and equipment and also could subject the
Company and its officers to civil and criminal penalties. Recently,
enforcement of federal fraud and abuse laws, and regulatory scrutiny
generally, have increasingly focused on the home health care industry. There
can be no assurance that the Company will not become the subject of a
regulatory or other investigation or proceeding or that it will not encounter
regulatory impediments that could adversely affect its ability to open new
branch offices and to expand the services currently provided at its existing
branch offices. There can be no assurance that current or future government
regulation will not have an adverse effect upon the Company's business. See
"Business--Regulation."
IMPLEMENTATION OF NEW INFORMATION SYSTEMS
The business of the Company is dependent upon its ability to store,
retrieve, process and manage billing and collection information for each
patient. The Company is currently in the process of implementing an automated
national patient accounting system (the "NPAS"), which is designed to
facilitate these functions with respect to its home health care business. The
Company believes that when fully implemented, the NPAS will provide each of
the Company's health care locations with immediate access to patient
information and will perform billing and collection services. Also, in
connection with the acquisition of PMI, the Company acquired the PMI System
that was under development by ChoicePoint to manage certain order entry and
billing functions essential to its paramedical testing operations. The Company
anticipates that the PMI System will be implemented in July 1998. The Company
is also currently completing the development of a billing and collection
system and anticipates that it will be implemented in June 1998. The Company
has contracted with ChoicePoint to provide on an interim basis certain order
entry, scheduling, status reporting, billing and other related services. In
addition, the Company expects to begin implementation of a new general ledger,
inventory and accounts receivable system in the first quarter of fiscal 1999.
There can be no assurance that the Company will not experience unanticipated
delays, complications and expenses in the implementation of these systems.
Further, there can be no assurance that these systems, if successfully
implemented, will perform as expected, or that further development will not be
required. Failure by the Company to complete the implementation of its
management information systems successfully, or failure of such systems to
perform as expected, could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Management Information Systems."
PRODUCT AND MALPRACTICE LIABILITY; INSURANCE
As a result of operating in the health care industry, the Company's business
entails an inherent risk of lawsuits alleging malpractice, product liability
or related legal theories, which can involve large claims and significant
defense costs. The Company is, from time to time, subject to such suits. The
Company currently maintains liability insurance intended to cover such claims.
This insurance coverage is provided under a "claims-made" policy which
provides, subject to the terms and conditions of the policy, coverage for
certain types of claims made against the Company during the term of the policy
and does not provide coverage for losses occurring during the terms of the
policy for which a claim is made subsequent to the termination of the policy.
There can be no assurance that the coverage limits of the Company's insurance
policies will be adequate. In addition, while the Company has been able to
obtain liability insurance in the past, such insurance varies in cost, is
difficult to obtain and may not be available in the future on acceptable terms
or at all. In addition, the Company is subject to accident claims arising out
of the normal operation of its fleet of vans and small trucks and maintains
insurance intended to cover such claims. A successful claim against the
Company in excess of the Company's insurance coverage could have a material
adverse effect upon the Company's business. Claims against the Company,
regardless of their merits or eventual outcome, also may have a material
adverse effect upon the Company's reputation and business.
15
<PAGE>
DEPENDENCE ON KEY MANAGEMENT AND HEALTH CARE PROFESSIONALS
The Company is highly dependent upon its senior management team and its
staff of professional nurses and respiratory therapists. Competition for
qualified management personnel and health care professionals is strong. The
loss of key personnel or the inability to attract, retain or motivate
sufficient numbers of qualified health care professionals could adversely
affect the Company's business. Although the Company generally has been able to
meet its staffing requirements for nurses and respiratory therapists, an
increase in competition in the future could have a material adverse effect on
the Company's profitability and on the Company's ability to maintain or
increase its patient base at certain or all of its branch offices. The Company
has an employment agreement with Joseph D. Sansone, the Company's President
and Chief Executive Officer, that expires in August 1999 subject to automatic
renewals of one year terms unless either party gives notice at least 30 days
prior to the expiration of the then current term.
COMPETITION
The markets for the Company's health care services are highly competitive
and are divided among a large number of providers, some of which are national
providers, but most of which are either regional or local providers. In
addition to competing with other home health care companies focusing on
providing services to pediatric patients, the Company competes with several
large national home health care companies that, while not focusing primarily
on the pediatric patient, provide pediatric home health care services as part
of a broader service offering. Certain of the Company's competitors and
potential competitors have significantly greater financial, technical and
marketing and sales resources than the Company and may, in certain locations,
possess licenses or certificates that permit them to provide services that the
Company cannot currently provide. There can be no assurance that the Company
will not encounter increased competition in the future that could limit the
Company's ability to maintain or increase its business and could adversely
affect the Company's operating results. See "Business--Competition."
RISKS ASSOCIATED WITH INTANGIBLE ASSETS
A substantial portion of the Company's assets consists of intangible assets,
principally goodwill (excess of cost over fair value of net assets acquired)
relating to the acquisition of businesses. As of December 31, 1997, the
Company's total assets were approximately $201.5 million of which
approximately $85.5 million, or 42.4%, were intangible assets. The Company
estimates that its annualized amortization expense at December 31, 1997 was
$3.2 million. Future acquisitions could significantly add to the Company's
intangible assets. In the event of any sale or liquidation of the Company or
declining operating results, there can be no assurance that the value of such
intangible assets will be realized. If facts and circumstances indicate that
goodwill will not be recoverable, as determined based on the undiscounted cash
flows of the entity acquired over the remaining amortization period, the
Company's carrying value of the goodwill and related assets will be reduced to
fair value. Any such future determination requiring the write-off of a
significant portion of unamortized intangible assets could adversely affect
the Company's financial position and results of operations for the period in
which any such write-offs occur.
CHANGES IN HEALTH CARE INDUSTRY
In recent years, the health care industry has undergone significant change
driven by various efforts to reduce costs, including efforts at national
health care reform, trends toward managed care, limits in Medicare coverages
and reimbursement levels, consolidation of health care distribution companies
and collective purchasing arrangements by office-based health care
practitioners. The impact of third-party pricing pressures and low barriers to
entry have dramatically reduced profit margins for health care providers.
Continued growth in managed care and capitated plans have pressured health
care providers to find ways of becoming more cost competitive. This has also
led to consolidation of health care providers in the Company's market areas.
The Company's inability to react effectively to these and other changes in the
health care industry could adversely affect its operating results. The Company
cannot predict whether any health care reform efforts will be enacted and what
effect any such reforms may have on the Company or its customers and
suppliers.
16
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SIGNIFICANT LEVERAGE AND DEBT SERVICE
The Company has indebtedness which is substantial in relation to its
stockholders' equity, as well as interest and debt service requirements which
are significant compared to its cash flow from operations. As of December 31,
1997, on a pro forma basis after giving effect to the offering of the Old
Notes and the application of the net proceeds therefrom as described under
"Use of Proceeds of Old Notes," the Company would have had approximately $95.0
million of long-term debt outstanding, including current portion, representing
54.4% of total capitalization. See "Capitalization." In addition, as of
December 31, 1997, on a pro forma basis after giving effect to the offering of
the Old Notes and the application of the net proceeds therefrom, the Company
would have had available borrowing capacity of approximately $86.0 million
under the Company's credit facility (the "Credit Agreement"). See "Description
of Credit Agreement."
The degree to which the Company is leveraged could have important
consequences to holders of the Notes, including, but not limited to the
following: (i) a substantial portion of the Company's cash flow from
operations must be dedicated to debt service and will not be available for
operations and other purposes; (ii) the Company's ability to obtain additional
financing in the future for working capital, capital expenditures,
acquisitions or general corporate purposes may be impaired; and (iii) certain
of the Company's borrowings are and will continue to be at variable rates of
interest, which exposes the Company to the risk of increased interest rates.
The Company's ability to pay interest on the Notes and to satisfy its other
obligations will depend upon the Company's future operating performance, which
will be affected by prevailing economic conditions and financial, business and
other factors, many of which are beyond the Company's control. There can be no
assurance that the Company's operating results will continue to be sufficient
for the Company to meet its obligations. In addition, the Company may be
required to refinance the Notes at maturity. No assurance can be given that,
if required, the Company will be able to refinance the Notes on terms
acceptable to it, if at all. If the Company is unable to service its
indebtedness, it will be forced to adopt an alternative strategy that may
include actions such as reducing or delaying capital expenditures, selling
assets, restructuring or refinancing its indebtedness or seeking additional
equity capital. There can be no assurance that any of these strategies could
be effected on terms acceptable to the Company, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
LIMITATIONS IMPOSED BY CERTAIN INDEBTEDNESS
The Indenture contains certain restrictive covenants which will affect, and
in many respects significantly limit or prohibit, among other things, the
ability of the Company to incur indebtedness, make prepayments of certain
indebtedness, make investments, engage in transactions with affiliates, create
liens, sell assets and engage in mergers and consolidations. The Credit
Agreement contains similar and more restrictive covenants, including a
restriction on the repayment and prepayment of principal on the New Notes, and
also requires the Company to meet certain financial ratios and tests. These
covenants may significantly limit the operating and financial flexibility of
the Company and may limit its ability to respond to changes in its business or
competitive activities. The ability of the Company to comply with such
provisions may be affected by events beyond its control. In the event of any
default under the Credit Agreement or the Notes, the Credit Agreement lenders
could elect to declare all amounts borrowed under the Credit Agreement,
together with accrued interest, to be due and payable. If the Company were
unable to repay such borrowings, the lenders thereunder could proceed against
the collateral securing the Credit Agreement, which consists of the capital
stock of the Company's subsidiaries. If the indebtedness under the Credit
Agreement were to be accelerated, there can be no assurance that the assets of
the Company or those of its subsidiaries would be sufficient to repay such
indebtedness and the Notes (which are subordinated in right of payment to such
indebtedness) in full. See "Description of Credit Agreement."
SUBORDINATION
The payment of principal, premium, if any, interest and liquidated damages,
if any, on the Notes will be subordinated to the prior payment in full of all
existing and future Senior Debt of the Company, including indebtedness under
the Credit Agreement, and, therefore, in the event of the bankruptcy,
liquidation or
17
<PAGE>
reorganization of the Company, the assets of the Company will not be available
to pay obligations under the Notes until all such Senior Debt has been paid in
full. Furthermore, any payment with respect to a Subsidiary Guarantee also
will be subordinated to the payment of Senior Debt of the Guaranteeing
Subsidiary, including the Guaranteeing Subsidiary's guarantee of the Company's
obligations under the Credit Agreement. As a result, there may not be
sufficient assets remaining after such bankruptcy, liquidation or
reorganization to pay amounts due on the Notes. As of April 30, 1998, the
Company had approximately $27.0 million of Senior Debt outstanding. In
addition, as of April 30, 1998, the Company had available borrowing capacity
of approximately $73.0 million under the Credit Agreement. The Indenture
permits the Company to incur additional Senior Debt, subject to certain
limitations.
The subordination provisions of the Indenture provide that no payment may be
made by the Company with respect to the Notes upon the occurrence of a default
in the payment of principal, premium, if any, or interest on Designated Senior
Debt (as defined herein). In addition, upon the occurrence of any other event
entitling the holders of such Designated Senior Debt to accelerate the
maturity thereof and receipt by the Trustee (as defined herein) of written
notice of such occurrence, the holders of such Designated Senior Debt will be
able to block payment on the Notes for specified periods of time. If the
Company fails to make any payment on the Notes when due or within any
applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure would nonetheless constitute an
event of default under the Indenture and would entitle the holders of the
Notes to accelerate the maturity thereof. See "Description of New Notes--
Subordination."
POTENTIAL INABILITY TO EFFECT A CHANGE OF CONTROL OFFER OR AN ASSET SALE OFFER
A Change of Control would require the Company to refinance substantial
amounts of indebtedness. Upon a Change of Control, the holders of the Notes
would be entitled to require the Company to repurchase their Notes at a
purchase price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, to the repurchase date. In
addition, certain asset sales by the Company will require the Company to make
an offer to repurchase Notes and certain other indebtedness with the proceeds
of such asset sales at a purchase price equal to 100% of the principal amount
thereof plus accrued and unpaid interest and liquidated damages, if any, to
the repurchase date. However, the Credit Agreement prohibits the purchase of
the Notes by the Company unless and until the indebtedness under the Credit
Agreement is repaid in full and the Credit Agreement has been terminated. The
Company's failure to purchase the Notes would result in a default under the
Indenture and the Credit Agreement. The inability to repay the indebtedness
under the Credit Agreement, if accelerated, would also constitute an event of
default under the Indenture, which could have adverse consequences to the
Company and the holders of the Notes. In such event, there can be no assurance
that the Company would have sufficient assets to satisfy all of its
obligations under the Credit Agreement and the Notes. See "Description of New
Notes--Repurchase at the Option of Holders."
FRAUDULENT CONVEYANCE; PREFERENTIAL TRANSFER
If the court in a lawsuit brought by an unpaid creditor or representative of
creditors, such as a trustee in bankruptcy of the Company or a Guaranteeing
Subsidiary, as the case may be, as a debtor-in-possession, were to find under
relevant federal or state fraudulent conveyance statutes that the Company or
Guaranteeing Subsidiary, as the case may be, did not receive fair
consideration or reasonably equivalent value for incurring the indebtedness
represented by the Notes or the Subsidiary Guarantees and that, at the time of
such incurrence, the Company or such Guaranteeing Subsidiary (i) was
insolvent, (ii) was rendered insolvent by reason of such incurrence, (iii) was
engaged in a business or transaction for which the assets remaining with the
Company or such Guaranteeing Subsidiary constituted unreasonably small capital
or (iv) intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured, such court, subject to applicable
statutes of limitation, could avoid the Company's obligations under the Notes
or such Guaranteeing Subsidiary's obligations under its Subsidiary Guarantee,
subordinate the Notes or such Subsidiary Guarantee to other indebtedness of
the Company or such Guaranteeing Subsidiary or take other action detrimental
to the holders of the Notes.
18
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The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than all that company's property at a fair valuation, or if the
present fair salable value of that company's assets is less than the amount
that will be required to pay its probable liability on its existing debts as
they become absolute and matured. Moreover, regardless of solvency, a court
could avoid an incurrence of indebtedness, including the Notes or a Subsidiary
Guarantee, if it determined that such transaction was made with intent to
hinder, delay or defraud creditors, or a court could subordinate the
indebtedness, including the Notes or a Subsidiary Guarantee, to the claims of
all existing and future creditors on similar grounds. Based upon financial and
other information currently available to it, management believes the Company
and each Guaranteeing Subsidiary are solvent. However, there can be no
assurance as to what standard a court would apply in order to determine
whether the Company or a Guaranteeing Subsidiary was "insolvent" upon
consummation of the sale of the Notes and the granting of the Subsidiary
Guarantees.
Additionally, under federal bankruptcy or applicable state insolvency law,
if certain bankruptcy or insolvency proceedings were initiated by or against
the Company or a Guaranteeing Subsidiary within 90 days after any payment by
the Company with respect to the Notes or any payment by a Guaranteeing
Subsidiary with respect to its Subsidiary Guarantee or if the Company or a
Guaranteeing Subsidiary anticipated becoming insolvent at the time of such
payment, all or a portion of such payment could be avoided as a preferential
transfer and the recipient of such payment could be required to return such
payment.
ABSENCE OF PUBLIC MARKET; TRANSFER RESTRICTIONS
There is no existing market for the New Notes and there can be no assurance
as to the liquidity of any markets that may develop for the New Notes, the
ability of holders to sell the New Notes or the price at which holders would
be able to sell the New Notes. Future trading prices of the New Notes will
depend on many factors, including, among other things, prevailing interest
rates, the Company's operating results and the market for similar securities.
Historically, the market for securities similar to the New Notes, including
non-investment grade debt, has been subject to substantial volatility. There
can be no assurance that any market for the New Notes, if such market
develops, will not be subject to similar disruptions. The Initial Purchasers
have advised the Company that they currently intend to make a market in the
New Notes. However, the Initial Purchasers are not obligated to do so and any
such market-making activities may be discontinued at any time without notice.
Notwithstanding the registration of the New Notes, holders who are
"affiliates" (as defined in Rule 405 of the Securities Act) of the Company may
publicly offer for sale or resell the New Notes only in compliance with Rule
144 under the Securities Act.
CONSEQUENCES OF FAILURE TO EXCHANGE; POSSIBLE ADVERSE EFFECT ON TRADING MARKET
FOR OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold unless registered under the Securities Act and
applicable state laws, or pursuant to an exemption therefrom. Subject to the
obligation by the Company to file a Shelf Registration Statement covering
resales of Old Notes in certain circumstances, the Company does not intend to
register the Old Notes under the Securities Act and, after consummation of the
Exchange Offer, will not be obligated to do so. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes may be deemed to have received restricted
securities and, if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Additionally, as a result of the Exchange Offer, it is
expected that a substantial decrease in the aggregate principal amount of Old
Notes outstanding will occur. As a result, it is unlikely that a liquid
trading market will exist for the Old Notes at any time. This lack of
liquidity will make transactions more difficult and may reduce the trading
price of the Old Notes. See "The Exchange Offer" and "Old Notes; Registration
Rights."
19
<PAGE>
THE COMPANY
Unless otherwise indicated or the context otherwise requires, all references
herein to the "Company" refer to Pediatric Services of America, Inc., a
Delaware corporation, and its wholly owned subsidiaries. The Company's
executive offices are located at 310 Technology Parkway, Norcross, Georgia
30092, and its telephone number at that location is (770) 441-1580.
USE OF PROCEEDS OF NEW NOTES
This Exchange Offer is intended to satisfy certain obligations of the
Company under the Registration Rights Agreement. The Company will not receive
any proceeds from the issuance of the New Notes offered hereby. In
consideration for issuing the New Notes as contemplated in this Prospectus,
the Company will receive, in exchange, Old Notes in like principal amount. The
form and terms of the New Notes are identical in all material respects to the
form and terms of the Old Notes, except as otherwise described herein under
"The Exchange Offer--Terms of the Exchange Offer." The Old Notes surrendered
in exchange for the New Notes will be retired and canceled and cannot be
reissued. Accordingly, issuance of the New Notes will not result in any
increase in the outstanding debt of the Company.
USE OF PROCEEDS OF ORIGINAL NOTES
The net proceeds to the Company from the sale of the Old Notes, after
deducting the Initial Purchasers' discount and fees and expenses payable by
the Company in connection with the offering of the Old Notes, are estimated to
be $72.0 million. The Company used all of the net proceeds from the Offering
to repay a portion of the then outstanding indebtedness under the Company's
revolving Credit Agreement. See "Description of Credit Agreement."
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at December
31, 1997, and as adjusted to give effect to the sale by the Company of Old
Notes and the application of the estimated net proceeds therefrom as described
in "Use of Proceeds of Original Notes." This table should be read in
conjunction with the Consolidated Financial Statements and related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31,
1997
-----------------
AS
ACTUAL ADJUSTED
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.................................... $ 415 $ 415
======== ========
Current maturities of long-term obligations.................. $ 2,191 $ 2,191
Long-term obligations, net of current maturities:
Credit Agreement........................................... 86,000 14,000
10% Senior Subordinated Notes due 2008..................... -- 75,000
Other notes payable........................................ 3,869 3,869
Capital lease obligations, less current portion.............. 87 87
-------- --------
$ 92,147 $ 95,147
======== ========
Stockholders' equity:
Preferred Stock, $.01 par value per share, 2,000,000 shares
authorized, none issued and outstanding................... -- --
Common Stock, $.01 par value per share, 80,000,000 shares
authorized, 7,019,496 shares issued and outstanding....... 70 70
Additional paid-in capital................................. 57,720 57,720
Retained earnings.......................................... 21,993 21,993
-------- --------
Total stockholders' equity............................... 79,783 79,783
-------- --------
Total capitalization................................... $171,930 $174,930
======== ========
</TABLE>
21
<PAGE>
THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
As a condition to the purchase of the Old Notes by the Initial Purchasers,
the Company entered into the Registration Rights Agreement with the Initial
Purchasers pursuant to which the Company agreed (i) to file, no later than
June 15, 1998, a registration statement (the "Exchange Offer Registration
Statement") with respect to an offer to exchange the Old Notes for New Notes
of the Company with terms substantially identical to the Old Notes, (ii) to
use best efforts to cause the Exchange Offer Registration Statement to become
effective under the Securities Act no later than August 29, 1998 and (iii) to
consummate the Exchange Offer no later than 45 days following the date on
which the Exchange Offer Registration Statement becomes effective. In the
event that applicable law or interpretations of the staff of the Commission do
not permit the Company to file the Registration Statement containing this
Prospectus or to effect the Exchange Offer, or if certain holders of the Old
Notes notify the Company that they are not permitted to participate in, or
would not receive freely tradeable New Notes pursuant to, the Exchange Offer,
the Company will use its best efforts to cause to become effective a Shelf
Registration Statement with respect to the resale of the Old Notes and to keep
the Shelf Registration Statement effective until two years after the effective
date thereof. The Old Notes are subject to the payment of Liquidated Damages
(as defined herein) under certain circumstances if the Company is not in
compliance with its obligations under the Registration Rights Agreement. See
"Old Notes; Registration Rights."
Each holder of the Old Notes who wishes to exchange such Old Notes for New
Notes in the Exchange Offer will be required to make certain representations,
including representations that (i) any New Notes to be received by it will be
acquired in the ordinary course of its business, (ii) it has no arrangement
with any person to participate in the distribution of the New Notes and (iii)
it is not an "affiliate," as defined in Rule 405 of the Securities Act, of the
Company or, if it is an affiliate, it will comply with the registration and
prospectus delivery requirements of the Securities Act to the extent
applicable. See "Old Notes; Registration Rights."
RESALE OF NEW NOTES
Based on interpretations by the staff of the Commission set forth in no-
action letters issued to third parties, the Company believes that, except as
described below, New Notes issued pursuant to the Exchange Offer in exchange
for Old Notes may be offered for resale, resold and otherwise transferred by
any holder thereof (other than a holder which is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such New Notes are acquired in the ordinary course of such
holder's business and such holder does not intend to participate and has no
arrangement or understanding with any person to participate in the
distribution of such New Notes. Any holder who tenders in the Exchange Offer
with the intention or for the purpose of participating in a distribution of
the New Notes cannot rely on such interpretation by the staff of the
Commission and must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. Unless an exemption from registration is otherwise available, any
such resale transaction should be covered by an effective registration
statement containing the selling security holders information required by Item
507 of Regulation S-K under the Securities Act. This Prospectus may be used
for an offer to resell, resale or other retransfer of New Notes only as
specifically set forth herein. Each broker-dealer that receives New Notes for
its own account in exchange for Old Notes, where such Old Notes were acquired
by such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept for exchange any and
all Old Notes properly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. The Company will issue $1,000 principal
amount of New Notes in exchange for each $1,000 principal amount of
outstanding Old Notes surrendered pursuant to the Exchange Offer. Old Notes
may be tendered only in integral multiples of $1,000.
22
<PAGE>
The form and terms of the New Notes will be the same as the form and terms
of the Old Notes except the New Notes will be registered under the Securities
Act and hence will not bear legends restricting the transfer thereof. The New
Notes will evidence the same debt as the Old Notes. The New Notes will be
issued under and entitled to the benefits of the Indenture, which also
authorized the issuance of the Old Notes, such that both series will be
treated as a single class of debt securities under the Indenture.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Old Notes being tendered for exchange.
As of the date of this Prospectus, $75 million aggregate principal amount of
the Old Notes are outstanding. This Prospectus, together with the Letter of
Transmittal, is being sent to all registered holders of Old Notes. There will
be no fixed record date for determining registered holders of Old Notes
entitled to participate in the Exchange Offer.
The Company intends to conduct the Exchange Offer in accordance with the
provisions of the Registration Rights Agreement and the applicable
requirements of the Exchange Act, and the rules and regulations of the
Commission thereunder. Old Notes which are not tendered for exchange in the
Exchange Offer will remain outstanding and continue to accrue interest and
will be entitled to the rights and benefits such holders have under the
Indenture and the Registration Rights Agreement.
The Company shall be deemed to have accepted for exchange properly tendered
Old Notes when, as and if the Company shall have given oral or written notice
thereof to the Exchange Agent and complied with the provisions of Section 2 of
the Registration Rights Agreement. The Exchange Agent will act as agent for
the tendering holders for the purposes of receiving the New Notes from the
Company. The Company expressly reserves the right to amend or terminate the
Exchange Offer, and not to accept for exchange any Old Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions specified
below under "--Certain Conditions to the Exchange Offer."
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date," shall mean 5:00 p.m., New York City time on June
12, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date and
time to which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the Exchange
Agent of any extension by oral or written notice and will mail to the
registered holders of Old Notes an announcement thereof, each prior to 9:00
a.m., New York City time, on the next business day after the then Expiration
Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting for exchange any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer if any of the conditions set forth below under
"--Certain Conditions to the Exchange Offer" shall not have been satisfied, by
giving oral or written notice of such delay, extension or termination to the
Exchange Agent or (ii) to amend the terms of the Exchange Offer in any manner.
Any such delay in acceptance, extension, termination or amendment will be
followed as promptly as practicable by oral or written notice thereof to the
registered holders of Old Notes. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment by means of a prospectus supplement that will
be distributed to the registered holders, and the Company will extend the
Exchange Offer, depending upon the significance of the amendment and the
manner of disclosure to the registered holders, if the Exchange Offer would
otherwise expire during such period.
23
<PAGE>
INTEREST ON THE NEW NOTES
The New Notes will bear interest at a rate of 10% per annum, payable semi-
annually, on April 15 and October 15 of each year, commencing October 15,
1998. Holders of New Notes will receive interest on October 15, 1998 from the
date of initial issuance of the New Notes, plus an amount equal to the accrued
interest on the Old Notes from the date of initial issuance thereof to the
date of exchange thereof for New Notes. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the New Notes.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any New Notes for, any Old
Notes, and may terminate the Exchange Offer as provided herein before the
acceptance of any Old Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court or
by or before any governmental agency with respect to the Exchange Offer
which, in the Company's sole judgment, might materially impair the ability
of the Company to proceed with the Exchange Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or enacted,
or any existing law, statute, rule or regulation is interpreted by the
staff of the Commission, which, in the Company's sole judgment, might
materially impair the ability of the Company to proceed with the Exchange
Offer; or
(c) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the consummation
of the Exchange Offer as contemplated hereby.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the Exchange Agent. During any such
extensions, all Old Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Old Notes
not accepted for exchange for any reason will be returned without expense to
the tendering holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted
for exchange, upon the occurrence of any of the conditions of the Exchange
Offer specified above. The Company will give oral or written notice of any
extension, amendment, non-acceptance or termination to the holders of the Old
Notes as promptly as practicable, such notice in the case of any extension to
be issued no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any
such condition or may be waived by the Company in whole or in part at any time
or from time to time in its sole discretion. The failure by the Company at any
time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right and each such right shall be deemed an ongoing right which may
be asserted at any time or from time to time.
In addition, the Company will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939, as
amended (the "TIA").
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or facsimile thereof, have the signature thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile to the Exchange Agent
prior to 5:00 p.m., New York City time, on the Expiration
24
<PAGE>
Date. In addition, either (i) Old Notes must be received by the Exchange Agent
along with the Letter of Transmittal, or (ii) a timely confirmation of book-
entry transfer (a "Book-Entry Confirmation") of such Old Notes, if such
procedure is available, into the Exchange Agent's account at the Depository
Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedure
for book-entry transfer described below must be received by the Exchange Agent
on or prior to the Expiration Date, or (iii) the holder must comply with the
guaranteed delivery procedures described below. To be tendered effectively,
the Letter of Transmittal and other required documents must be received by the
Exchange Agent at the address set forth below under "--Exchange Agent" prior
to 5:00 p.m., New York City time, on the Expiration Date.
The tender by a holder which is not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date will constitute an agreement between such
holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES, THE LETTER OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE
HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS
MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR OTHER NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to
tender should contact the registered holder promptly and instruct such
registered holder of Old Notes to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of Transmittal and
delivering such owner's Old Notes, either make appropriate arrangements to
register ownership of the Old Notes in such owner's name or obtain a properly
completed bond power from the registered holder of Old Notes. The transfer of
registered ownership may take considerable time and may not be able to be
completed prior to the Expiration Date.
Signatures on a Letter of Transmittal or a notice of withdrawal described
below, as the case be, must be guaranteed by an Eligible Institution (as
defined below) unless the Old Notes tendered pursuant thereto are tendered (i)
by a registered holder who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantor must be a member
firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange
Act which is a member of one of the recognized signature guarantee programs
identified in the Letter of Transmittal (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered
holder as such registered holder's name appears on such Old Notes with the
signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
25
<PAGE>
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old
Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute
right to reject any and all Old Notes not properly tendered or any Old Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any
defects, irregularities or conditions of tender as to particular Old Notes.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify holders of
defects or irregularities with respect to tenders of Old Notes, neither the
Company, the Exchange Agent nor any other person shall incur any liability for
failure to give such notification. Tenders of Old Notes will not be deemed to
have been made until such defects or irregularities have been cured or waived.
Any Old Notes received by the Exchange Agent that are not properly tendered
and as to which the defects or irregularities have not been cured or waived
will be returned by the Exchange Agent to the tendering holders, unless
otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of Old Notes or a timely Book-Entry Confirmation of such
Old Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility, a properly completed and duly executed Letter of Transmittal and all
other required documents. If any tendered Old Notes are not accepted for
exchange for any reason set forth in the terms and conditions of the Exchange
offer or if Old Notes are submitted for a greater principal amount than the
holder desires to exchange, such unaccepted or non-exchanged Old Notes will be
returned without expense to the tendering holder thereof (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described below, such non-exchanged Notes will be credited to an
account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's system may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of the Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, the Letter of Transmittal or facsimile thereof,
with any required signature guarantees and any other required documents, must,
in any case, be transmitted to and received by the Exchange Agent at the
address set forth below under "--Exchange Agent" on or prior to 5:00 p.m., New
York City time, on the Expiration Date or, if the guaranteed delivery
procedures described below are to be complied with, within the time period
provided under such procedures. Delivery of documents to the Book-Entry
Transfer Facility does not constitute delivery to the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent prior to
the Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the registered number(s)
of such Old Notes and
26
<PAGE>
the principal amount of Old Notes tendered, stating that the tender is
being made thereby and guaranteeing that, within three New York Stock
Exchange trading days after the Expiration Date, the Letter of Transmittal
(or facsimile thereof) together with the Old Notes or a Book-Entry
Confirmation, as the case may be, and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as all tendered Notes in proper form for
transfer or a Book-Entry Confirmation, as the case may be, and all other
documents required by the Letter of Transmittal, are received by the
Exchange Agent within three (3) New York Stock Exchange trading days after
the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes
to be withdrawn (including the principal amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which
such Old Notes were registered, if different from that of the withdrawing
holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered
for exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Notes) as soon
as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering" above at
any time on or prior to the Expiration Date.
27
<PAGE>
EXCHANGE AGENT
SunTrust Bank, Atlanta has been appointed as Exchange Agent of the Exchange
Offer. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
SUNTRUST BANK, ATLANTA
By Mail: By Facsimile: By Hand or Overnight
(Registered or Certified (Eligible Institutions Only) Delivery:
Mail recommended)
(404) 332-3966 SunTrust Bank, Atlanta
SunTrust Bank, Atlanta Attention: David M. Kaye 58 Edgewood Avenue,
58 Edgewood Avenue, To Confirm by Telephone Suite 400
Suite 400 or for Information Call: Atlanta, Georgia 30303
Atlanta, Georgia 30303
Attention: David M. Kaye
Attention: David M. Kaye (404) 588-8060 Corporate Trust
Corporate Trust Department
Department
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telephone or in person by officers and regular employees of the
Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to broker-dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay
the Exchange Agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Company. Such expenses include registration fees, fees and
expenses of the Exchange Agent and Trustee, accounting and legal fees and
printing costs, and related fees and expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Notes pursuant to the Exchange Offer. If, however, certificates
representing Old Notes for principal amounts not tendered or accepted for
exchange are to be delivered to, or are to be issued in the name of, any
person other than the registered holder of Notes tendered, or if tendered
Notes are registered in the name of any person other than the person signing
the Letter of Transmittal, or if a transfer tax is imposed for any reason
other than the exchange of Notes pursuant to the Exchange Offer, then the
amount of any such transfer taxes (whether imposed on the registered holder or
any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such taxes or exemption therefrom is not submitted with
the Letter of Transmittal, the amount of such transfer taxes will be billed
directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes, as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to the exemptions from,
or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws.
28
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company as of the dates and for the periods presented below. The selected
consolidated financial data as of September 30, 1997 and 1996 and for each of
the years in the three-year period ended September 30, 1997 have been derived
from the Company's audited Consolidated Financial Statements and notes thereto
included elsewhere and incorporated by reference herein. The financial
information as of December 31, 1997, and for the three months ended December
31, 1997 and 1996, has been derived from the Company's Consolidated Financial
Statements and notes thereto included elsewhere and incorporated by reference
herein and is unaudited, but in the opinion of management reflects all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the results for such period. The results of operations for the
three months ended December 31, 1997 are not necessarily indicative of results
that may be expected for any other interim period or for the full year. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and notes thereto appearing elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER
31, YEAR ENDED SEPTEMBER 30,
--------------- -------------------------------------------
1997 1996 1997 1996 1995 1994 1993
------- ------- -------- -------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
(1):
Net revenue............. $61,559 $46,554 $204,023 $163,804 $111,860 $70,686 $52,190
Operating salaries,
wages and employee
benefits............... 26,081 19,734 87,943 72,026 50,078 33,198 26,260
Other operating costs... 22,943 17,948 75,386 60,096 39,087 23,566 15,476
Corporate, general and
administrative......... 3,836 2,772 12,885 10,784 7,217 5,428 4,946
Provision for doubtful
accounts............... 1,833 1,375 6,239 4,708 3,164 1,411 1,335
Depreciation and
amortization........... 1,847 1,416 6,103 4,858 3,656 1,874 1,328
Combination costs....... -- -- -- 1,166 -- -- --
------- ------- -------- -------- -------- ------- -------
Operating income........ 5,019 3,309 15,467 10,166 8,658 5,209 2,845
Interest expense........ 1,466 575 3,534 1,778 1,643 1,074 872
------- ------- -------- -------- -------- ------- -------
Income before minority
interest, income taxes
and extraordinary
item................... 3,553 2,734 11,933 8,388 7,015 4,135 1,973
Minority interest in
loss of subsidiary..... 1 40 119 64 -- -- --
------- ------- -------- -------- -------- ------- -------
Income before income
taxes and extraordinary
item................... 3,554 2,774 12,052 8,452 7,015 4,135 1,973
Income taxes............ 1,432 1,118 4,797 3,406 2,803 1,556 574
------- ------- -------- -------- -------- ------- -------
Income before
extraordinary item..... 2,122 1,656 7,255 5,046 4,212 2,579 1,399
Extraordinary item, net
of tax................. -- -- -- -- 781 (408) --
------- ------- -------- -------- -------- ------- -------
Net income.............. $ 2,122 $ 1,656 $ 7,255 $ 5,046 $ 4,993 $ 2,171 $ 1,399
======= ======= ======== ======== ======== ======= =======
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER
31, YEAR ENDED SEPTEMBER 30,
----------------- -------------------------------------------
1997 1996 1997 1996 1995 1994 1993
-------- -------- -------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
NET INCOME (LOSS)
ATTRIBUTABLE TO COMMON
AND COMMON EQUIVALENT
SHARES:
Income before
extraordinary item..... $ 2,122 $ 1,656 $ 7,255 $ 5,046 $ 4,212 $ 2,579 $ 1,399
Less accretion on
redeemable warrants.... -- -- -- -- -- (51) (48)
Less accretion on
redeemable preferred
stock.................. -- -- -- (10) (36) (2,198) (1,865)
Less preferred stock
dividends.............. -- -- -- (86) (195) (86) (128)
-------- -------- -------- ------- ------- ------- -------
Income (loss) before
extraordinary item
attributable to common
and common equivalent
shares................. 2,122 1,656 7,255 4,950 3,981 244 (642)
Extraordinary item, net
of tax................. -- -- -- -- 781 (408) --
-------- -------- -------- ------- ------- ------- -------
Income (loss)
attributable to common
and common equivalent
shares................. $ 2,122 $ 1,656 $ 7,255 $ 4,950 $ 4,762 $ (164) $ (642)
======== ======== ======== ======= ======= ======= =======
DENOMINATOR SHARE
DATA(2):
Denominator for basic
income per share-
weighted average
shares................. 6,504 6,249 6,257 6,057 4,655 1,573 227
Effect of dilutive
securities:
Warrants and options.... 204 184 189 243 403 91 --
Conversion of preferred
stock upon business
combination............ -- -- -- 137 -- -- --
Redeemable convertible
preferred stock
converted.............. -- -- -- -- 108 49 --
-------- -------- -------- ------- ------- ------- -------
Denominator for diluted
income per share-
adjusted weighted
average shares......... 6,708 6,433 6,446 6,437 5,166 1,713 227
======== ======== ======== ======= ======= ======= =======
INCOME PER SHARE
DATA(2):
Income (loss) before
extraordinary item per
common share:
Basic................. $ 0.33 $ 0.27 $ 1.16 $ 0.82 $ 0.86 $ 0.16 $ (2.83)
Diluted............... 0.32 0.26 1.13 0.77 0.77 0.14 (2.83)
Extraordinary item per
common share:
Basic................. -- -- -- -- $ 0.17 $ (0.26) --
Diluted............... -- -- -- -- 0.15 (0.24) --
-------- -------- -------- ------- ------- ------- -------
Net income (loss) per
common share:
Basic................. $ 0.33 $ 0.27 $ 1.16 $ 0.82 $ 1.02 $ (0.10) $ (2.83)
Diluted............... 0.32 0.26 1.13 0.77 0.92 (0.10) (2.83)
======== ======== ======== ======= ======= ======= =======
Weighted average shares
outstanding:
Basic................. 6,504 6,249 6,257 6,057 4,655 1,573 227
Diluted............... 6,708 6,433 6,446 6,437 5,166 1,713 227
======== ======== ======== ======= ======= ======= =======
OTHER FINANCIAL DATA:
Depreciation and
amortization........... $ 1,847 $ 1,416 $ 6,103 $ 4,858 $ 3,656 $ 1,874 $ 1,328
Interest expense........ 1,466 575 3,534 1,778 1,643 1,074 872
EBITDA(3)............... 6,867 4,765 21,689 15,088 12,314 7,083 4,173
Capital expenditures.... 1,774 1,400 6,867 6,479 3,811 2,682 1,890
BALANCE SHEET DATA (AT
PERIOD END):
Cash and cash
equivalents............ $ 415 $ 579 $ 501 $ 770 $ 101 $ 6,010 $ 924
Working capital......... 70,646 41,236 62,193 35,673 17,936 13,754 3,777
Total assets............ 201,517 109,840 153,834 98,736 73,151 40,299 30,706
Long-term obligations,
including current
portion................ 92,147 34,742 67,274 25,956 8,496 8,919 15,262
Total stockholders'
equity................. 79,783 55,866 61,680 54,193 44,621 20,097 161
</TABLE>
30
<PAGE>
- --------
(1) The consolidated financial information has been restated for the effect of
the business combination on February 29, 1996, of the Company and Premier
which was accounted for using the pooling-of-interests method. See Note 5
of notes to the Company's Consolidated Financial Statements.
(2) Income per share amounts for the periods presented have been restated to
conform to the Statement of Financial Accounting Standards No. 128,
Earnings Per Share requirements. All share information gives effect to a
0.7 for 1 reverse split of the Common Stock that was effected on June 10,
1994.
(3) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, non-recurring charges, interest and other
income and extraordinary items. EBITDA is included herein because
management believes that certain investors may find it to be a useful tool
for measuring a company's ability to service its debt; however, EBITDA
does not represent cash flow from operations, as defined by generally
accepted accounting principles, and should not be considered as a
substitute for net income as an indicator of the Company's operating
performance or for cash flow as a measure of liquidity.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Prior to September 1989, the Company operated as two wholly-owned
subsidiaries of Charter Medical Corporation. On September 25, 1989,
management, along with certain investors, completed the acquisition of the
Company with financing that included senior debt, a seller note and equity.
Subsequent to the acquisition, management made the strategic decision to focus
on the growth and development of the Company's pediatric (under age 18) and
young adult (age 18 to 64) home health care businesses and to de-emphasize the
Company's geriatric (age 65 and older) home health care business. Pediatric
home health care is a distinct specialty within the health care services
market requiring nurses, therapists and pharmacists trained to meet the
special needs of pediatric patients. In order to better meet these special
needs and to offer a broad range of services to medically fragile children and
their families, the Company has expanded its services beyond home health care
to include rehabilitation services, pediatric day treatment centers, well care
services and special needs education services for pediatric patients. The
Company also provides case management services in order to assist the family
and the patient by coordinating the provision of services between the insurer
or other payor, the physician, the hospital and other health care providers.
Consistent with the Company's focus on pediatric health care, the Company's
net revenue from pediatric health care services relative to geriatric health
care services has increased significantly during the past eight fiscal years.
The Company's pediatric and young adult revenue is derived primarily from
patients covered by private insurers and Medicaid, while geriatric revenue is
derived primarily from patients covered by Medicare.
In February 1996, the Company acquired Premier, thereby extending its home
health care operations and entering the paramedical testing services business.
In December 1997, the Company acquired PMI, which the Company estimates had
approximately $60 million in net revenue in the year ended December 31, 1997.
As a result of these acquisitions, the Company provides paramedical testing
for more than 1,000 life, health and disability insurance companies which use
the Company's services to assist them in risk assessment for underwriting
insurance policies. The Company also provides drug and alcohol screening,
wellness physical examinations and occupational health services for
corporations and other organizations.
The Company has grown significantly during the past five years, increasing
its revenue from $24.9 million in the fiscal year ended September 30, 1992 to
$204.0 million in the fiscal year ended September 30, 1997. The Company has
expanded its business through strategic acquisitions, new office openings and
internal growth. During the period from October 1, 1992 to December 31, 1997,
the Company completed 30 acquisitions, acquiring an aggregate of 67 branch
health care services offices in 26 states and over 200 paramedical testing
field offices with locations in all 50 states, Puerto Rico and Guam, and has
opened 16 additional start-up branch health care services offices. The Company
intends to continue to expand its business primarily through acquisitions,
opening additional offices in both new and existing markets and expanding the
services currently provided at its existing offices.
As a result of acquisitions completed by the Company, particularly the
December 1997 acquisition of PMI, the Company's historical results of
operations are not necessarily indicative of future results.
32
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of
net revenue represented by the following items:
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
DECEMBER YEAR ENDED
31, SEPTEMBER 30,
------------ -------------------
1997 1996 1997 1996 1995
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net revenue................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Operating salaries, wages and employee
benefits.................................. 42.4 42.4 43.1 44.0 44.8
Other operating costs...................... 37.3 38.5 36.9 36.7 34.9
Corporate, general and administrative...... 6.2 6.0 6.3 6.6 6.5
Provision for doubtful accounts............ 3.0 3.0 3.1 2.9 2.8
Depreciation and amortization.............. 3.0 3.0 3.0 3.0 3.3
Combination costs.......................... -- -- -- 0.6 --
----- ----- ----- ----- -----
Operating income........................... 8.1 7.1 7.6 6.2 7.7
Interest expense........................... 2.4 1.2 1.7 1.1 1.4
----- ----- ----- ----- -----
Income before minority interest, income
taxes and extraordinary item.............. 5.7 5.9 5.9 5.1 6.3
Minority interest in loss of subsidiary.... -- 0.1 0.1 0.1 --
----- ----- ----- ----- -----
Income before income taxes and
extraordinary item........................ 5.7 6.0 6.0 5.2 6.3
Income taxes............................... 2.3 2.4 2.4 2.1 2.5
----- ----- ----- ----- -----
Income before extraordinary item........... 3.4 3.6 3.6 3.1 3.8
Extraordinary item, net of tax............. -- -- -- -- 0.7
----- ----- ----- ----- -----
Net income................................. 3.4% 3.6% 3.6% 3.1% 4.5%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED TO THREE MONTHS ENDED DECEMBER
31, 1996
Net revenue increased $15.0 million, or 32%, to $61.6 million in the three
months ended December 31, 1997 from $46.6 million in the same period in the
prior year. The Company's acquisitions and start up operations accounted for
approximately $10.0 million, or 67%, of the increase and internal growth
accounted for the remaining $5.0 million, or 33%, of the increase. Overall,
the internal growth in net revenue was 11% for the three months ended December
31, 1997. Of the $15.0 million increase in net revenue in the first quarter of
fiscal 1998, pediatric health care net revenue accounted for $10.0 million, or
67%, of the increase. Increased pediatric health care net revenue for the
three months ended December 31, 1997 was attributable to the Company's
acquisitions which contributed approximately $4.6 million, or 46%, of the
increase and to internal marketing efforts which resulted in an increase in
patients served rather than any significant increase in rates charged. The net
increase in adult health care net revenue (attributable to young adult and
geriatric patients) accounted for $1.5 million, or 10%, of the total increase
in net revenue for the three months ended December 31, 1997. Increased adult
net revenue for the three months ended December 31, 1997 was attributable to
the Company's acquisitions which contributed approximately $3.0 million, or
30% of the increase. Paramedical testing services net revenue accounted for
$3.5 million, or 23%, of the increase in net revenue for the quarter,
primarily due to the acquisition of PMI. This acquisition accounted for $2.4
million, or 24%, of the increase. In the three months ended December 31, 1997,
the Company derived approximately 67% of its net revenues from commercial
insurers and other private payors, 25% from Medicaid and 8% from Medicare.
PMI, which has no significant revenue derived from government payors, did not
contribute materially to the same period in the prior year.
Operating salaries, wages and employee benefits consist primarily of branch
office operations. Operating salaries, wages and employee benefits increased
$6.4 million, or 32%, to $26.1 million in the three months ended December 31,
1997 from $19.7 million in the same period in the prior year. The increase was
primarily due to the Company's acquisitions and start up operations which
added approximately $4.4 million, or 70%, of the
33
<PAGE>
increase and the remainder to internal growth. As a percentage of net revenue,
operating salaries, wages and employee benefits for the three months ended
December 31, 1997 remained unchanged relative to the comparable period in the
prior year.
Other operating costs include medical supplies, branch office rents,
utilities, vehicle expenses and cost of sales. The cost of sales consists
primarily of the cost of pharmacy products. Other operating costs increased
$5.0 million, or 28%, to $22.9 million in the three months ended December 31,
1997 from $17.9 million in the comparable period in 1996. Of this increase,
$4.0 million, or 81%, relates to operations from the Company's acquisitions.
As a percentage of net revenue, other operating costs for the three months
ended December 31, 1997 decreased to 37% from 39% in the comparable period of
the prior year due to a shift in business mix toward nursing operations which
is more service oriented, as well as the leverage of incremental revenue
against the fixed cost component of other operating costs.
Corporate, general and administrative costs increased $1.0 million, or 38%,
to $3.8 million in the three months ended December 31, 1997 from $2.8 million
in the same period in the prior year. The increase was primarily due to the
internal growth of the Company's operations. As a percentage of net revenue,
corporate, general and administrative costs for the three months ended
December 31, 1997 increased slightly to 6.2% from 6.0% in the comparable
period of the prior year.
Provision for doubtful accounts consists of the amount of billed revenue
that management estimates will become uncollectible. During the three months
ended December 31, 1997, the Company's provision for doubtful accounts
increased approximately $0.5 million, or 33%, to $1.8 million from $1.4
million in the same period in 1996. The increase is primarily due to the
increase in net revenue and an increase in DSO, which increased to 125 days in
the fiscal 1998 period from 107 days in the prior year period. As a percentage
of net revenue, the provision for doubtful accounts is comparable for the
three months ended December 31, 1997 and 1996.
Depreciation and amortization expenses increased $0.4 million, or 30%, to
$1.8 million in the three months ended December 31, 1997 from $1.4 million in
the same period in 1996. The increase was primarily due to capital
expenditures for the purchase of rental equipment and the amortization of
goodwill from the Company's acquisitions. As a percentage of the Company's net
revenue, depreciation and amortization costs were comparable for the three
months ended December 31, 1997 and 1996.
Interest expense increased $0.9 million, or 155%, to $1.5 million in the
three months ended December 31, 1997 from $0.6 million in the same period in
the prior year. The increase was primarily the result of a $49 million
increase in the Company's average debt outstanding at December 31, 1997
compared to the same period in the prior year. This additional debt was used
to finance acquisitions and the Company's working capital.
Income tax expense increased $0.3 million, or 28%, to $1.4 million in the
three months ended December 31, 1997 from $1.1 million in the same period in
the prior year. This increase is due to an increase in the taxable income of
the Company.
FISCAL 1997 COMPARED TO FISCAL 1996
Net revenue increased $40.2 million, or 25%, to $204.0 million in fiscal
1997 from $163.8 million in fiscal 1996. The Company's acquisitions and start-
up operations accounted for approximately $14.5 million, or 36%, of the
increase, and internal growth accounted for the remaining $25.7 million, or
64%, of the increase. Of the $40.2 million increase in net revenue in fiscal
1997, pediatric net revenue accounted for $26.9 million, or 67%, of the
increase. Increased pediatric net revenue for fiscal 1997 was attributable to
the Company's acquisitions and start-up operations, the successful opening of
new offices and marketing efforts which resulted in an increase in patients
served rather than any significant increase in rate changes. Adult net revenue
accounted for $6.3 million, or 16%, of the increase in net revenue for fiscal
1997, primarily due to internal growth of existing locations and acquisitions.
Paramedical testing services net revenue accounted for $7.0 million, or 17%,
of the increase in net revenue for fiscal 1997, primarily due to an increase
in the volume of business. In fiscal 1997, the
34
<PAGE>
Company derived approximately 64% of its net revenue from commercial insurers
and other private payors, 27% from Medicaid and 9% from Medicare.
Operating salaries, wages and employee benefits increased $15.9 million, or
22%, to $87.9 million in fiscal 1997 from $72.0 million in fiscal 1996. The
increase was primarily due to the Company's acquisitions, start-up operations
and the internal growth of the Company's operations. The acquisitions and
start-up operations added approximately $9.6 million, or 60%, of the increase
in operating salaries, wages and employee benefits. As a percentage of net
revenue, operating salaries, wage and employee benefits for fiscal 1997
decreased to 43% from 44% in fiscal 1996. The decrease in operating salaries,
wages and employee benefits as a percentage of net revenue is attributable to
a number of factors including improved nursing productivity due to scheduling
and staffing efficiencies and a change in business mix to a higher percentage
of pharmacy net revenue to total net revenue.
Other operating costs increased $15.3 million, or 25%, to $75.4 million in
fiscal 1997 from $60.1 million in fiscal 1996. Of the increase, $3.1 million,
or 20%, relates to the Company's acquisitions and start-up operations and the
remaining $12.2 million, or 80%, to the internal growth of the Company's
operations. The percentage of other operating costs to net revenue was
comparable for fiscal 1997 and 1996.
Corporate, general and administrative costs increased $2.1 million, or 20%,
to $12.9 million in fiscal 1997 from $10.8 million in fiscal 1996. The
increase was primarily due to the growth of the Company's operations and the
addition of temporary personnel needed for the implementation of the Company's
new billing and collection system. The percentage of corporate, general, and
administrative costs to net revenue was comparable for fiscal 1997 and 1996.
Provision for doubtful accounts during fiscal 1997 increased $1.5 million,
or 33%, to $6.2 million from $4.7 million in fiscal 1996. The increase is
primarily due to growth of the business, and an increase in net revenue and
DSO, which increased from 101 days as of September 1996 to 126 days as of
September 30, 1997.
Depreciation and amortization expenses increased $1.2 million, or 26%, to
$6.1 million in fiscal 1997 from $4.9 million in fiscal 1996. The increase was
primarily attributable to the Company's capital expenditures, the purchase of
rental equipment and the amortization of goodwill from the Company's
acquisitions. As a percentage of the Company's net revenue, depreciation and
amortization costs were comparable for fiscal 1997 and 1996.
In fiscal 1996, the Company incurred non-recurring business combination
costs of approximately $1.2 million related to the business combination of the
Company with Premier on February 29, 1996 which was treated as a pooling of
interests transaction for accounting purposes. These costs represent legal and
professional fees, severance costs and other costs related to consummating the
business combination.
Interest expense increased $1.7 million, or 99%, to $3.5 million in fiscal
1997 from $1.8 million in fiscal 1996. The increase was primarily the result
of a $29.4 million increase in the Company's average debt outstanding incurred
to finance acquisitions and the Company's working capital for fiscal 1997.
Income tax expense increased $1.4 million, or 41%, to $4.8 million in fiscal
1997 from $3.4 million in fiscal 1996. This increase is due to an increase in
the taxable income of the Company.
FISCAL 1996 COMPARED TO FISCAL 1995
Net revenue increased $51.9 million, or 46%, to $163.8 million in 1996 from
$111.9 million in fiscal 1995. The Company's acquisitions and start-up
operations accounted for approximately $25.0 million, or 48%, of the increase
and internal growth accounted for the remaining $26.9 million, or 52%, of the
increase. Overall, the internal growth in net revenue increased to 24% for
fiscal 1996 compared to 14% for fiscal 1995. Of the $51.9 million increase in
net revenue in fiscal 1996, pediatric net revenue accounted for $35.3 million,
or 68%, of the increase. Increased pediatric net revenue for fiscal 1996 was
attributable to the Company's acquisitions, the successful opening of new
offices and marketing efforts which resulted in an increase in patients served
rather
35
<PAGE>
than any significant increase in rates charged. Adult net revenue accounted
for $9.8 million, or 19%, of the increase in net revenue for fiscal 1996,
primarily due to the internal growth of existing locations. Paramedical
testing services net revenue accounted for $6.8 million, or 13%, of the
increase in net revenue for fiscal 1996, primarily due to an increase in the
volume of business. In fiscal 1996, the Company derived approximately 63% of
its net revenue from commercial insurers and other private payors, 27% from
Medicaid and 10% from Medicare.
Operating salaries, wages and employee benefits increased $21.9 million, or
44%, to $72.0 million in fiscal 1996 from $50.1 million in fiscal 1995. The
increase was primarily due to the Company's acquisitions, start-up operations
and the internal growth of the Company's operations. The acquisitions and
start-up operations added approximately $13.6 million, or 62%, of the increase
in operating salaries, wages and employee benefits. As a percentage of net
revenue, total operating salaries, wages and employee benefits for fiscal 1996
decreased to 44% from 45% in fiscal 1995. The decrease in operating salaries,
wages and employee benefits as a percentage of net revenue is primarily
attributable to the increase in the net revenue from pharmacy and paramedical
testing services operations which have a lower operating salaries, wages and
employee benefits component as compared to the Company's other lines of
business.
Other operating costs increased $21.0 million, or 54%, to $60.1 million in
fiscal 1996 from $39.1 million in fiscal 1995. Of this increase, $9.1 million,
or 43%, relates to the Company's acquisitions and start-up operations and the
remainder to the internal growth of the Company's operations. As a percentage
of net revenue, total other operating costs for fiscal 1996 increased to 37%
from 35% in fiscal 1995. The increase in other operating costs as a percentage
of net revenue is primarily attributable to the increase in net revenue from
the pharmacy and paramedical testing services operations. The pharmacy and
paramedical testing services operations have a higher other operating cost
component than the Company's other operations due to the purchase of drug
product for the pharmacy business and the payment of operating expenses for
the paramedical testing services business.
Corporate, general and administrative costs increased $3.6 million, or 49%,
to $10.8 million in fiscal 1996 from $7.2 million in fiscal 1995. The increase
is primarily due to the internal growth of the Company's operations and the
addition of administrative staff to support the Company's acquisitions and
start-up operations. As a percentage of net revenue, corporate, general and
administrative costs are comparable for fiscal 1996 and fiscal 1995.
During fiscal 1996, the Company's provision for doubtful accounts increased
$1.5 million, or 49%, to $4.7 million from $3.2 million in fiscal 1995. The
increase is primarily due to an increase in total net revenue and days sales
outstanding. As a percentage of net revenue, the provision for doubtful
accounts is comparable for fiscal 1996 and fiscal 1995.
Depreciation and amortization expenses increased $1.2 million, or 33%, to
$4.9 million in fiscal 1996 from $3.7 million in fiscal 1995. The increase was
primarily attributable to the Company's capital expenditures for the purchase
of rental equipment and the amortization of goodwill from the Company's
acquisitions. As a percentage of net revenue, depreciation and amortization
costs decreased in fiscal 1996. The decrease is primarily attributable to an
increase in the Company's pharmacy and paramedical testing businesses which
have a lower depreciation and amortization cost component than the Company's
other operations.
In fiscal 1996, the Company incurred non-recurring business combination
costs of approximately $1.2 million related to the business combination of the
Company with Premier on February 29, 1996. These costs represent legal and
professional fees, severance costs and other costs related to consummating the
business combination.
Interest expense increased $0.1 million, or 8%, to $1.8 million in fiscal
1996 from $1.6 million in fiscal 1995. The increase was primarily the result
of a $17.4 million increase in the Company's average debt outstanding incurred
to finance acquisitions during fiscal 1996. In June 1995, the Company used
approximately
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$19.0 million of the net proceeds of its second public offering to repay
outstanding indebtedness. See "Liquidity and Capital Resources."
Income tax expense increased $0.6 million, or 22%, to $3.4 million in fiscal
1996 from $2.8 million in fiscal 1995. This increase is due to an increase in
profitability of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating cash flows are affected significantly by changes in
accounts receivable, which have grown substantially over time, largely as a
result of the Company's net revenue growth. For the three months ended
December 31, 1997 and 1996, the Company's cash flows from operations were
affected by increases in accounts receivable balances of $11.7 million and
$7.0 million, respectively. The Company's DSO was 125 days and 107 days as of
December 31, 1997, and December 31, 1996, respectively, based on the
annualized net revenue for the last quarter of the period. The increase in DSO
is primarily attributable to the growth experienced by the Company, the impact
of the acquired accounts receivable balances from the acquisitions, reduced
collection activities due to the integration of the Company's billing and
collection management system and the increasing complexity of third-party
payor billing procedures and the corresponding lengthening of the collection
period. The Company has taken measures intended to improve DSO by hiring
additional experienced reimbursement personnel, improving training programs
and implementing and integrating its new billing and collection management
system.
As of December 31, 1997, the Company recorded a deferred tax asset in its
consolidated financial statements. Management believes that it is more likely
than not that the deferred tax asset will be realized. Under new guidance
issued by the Internal Revenue Service, in December 1996, the Company made an
election entitling it to mark its accounts receivable to market value for tax
purposes. This election eliminated the deferred tax asset relating to the
allowance for doubtful accounts and established a new deferred tax liability
to reflect the new temporary differences. During fiscal 1997, the 1996 tax
return and the 1993 through 1995 amended tax returns were filed for the
Company under this new guidance. This election gave rise to expected cash
refunds of $2 million plus interest. As of December 31, 1997, $1.8 million
plus interest had been received. In addition, the net operating loss
carryforward of certain subsidiaries had increased and at December 31, 1997,
$3.9 million was remaining to offset certain future tax payments. Of such
carryforwards, $1.0 million expire by the year 2010 and $2.9 million expire by
the year 2011.
The Company's investments in property and equipment are attributable largely
to purchases of medical equipment that is rented to patients and computer
equipment related to the Company's new billing and collection management
system. The Company intends to continue to expand its business primarily
through acquiring local and regional home health care companies, opening
offices in both new and existing markets and expanding the services currently
provided at its existing offices. Acquisitions to date have been financed with
a combination of borrowings under the Credit Agreement, shares of Common Stock
of the Company and seller notes. The Company's investments in the acquisition
of businesses were $19.7 million and $4.6 million respectively, for the three
months ended December 31, 1997 and 1996.
In August 1997, the Company increased the amount of financing available
under the Credit Agreement to $100.0 million from $60.0 million, consisting of
a $100.0 million revolving loan with a $5.0 million swingline loan credit
subfacility. The loan is due August 13, 2002. A commitment fee ranging from
.225% to .450% per annum is charged on the average daily unused portion of the
facility. The loan is collateralized by 100% of the voting stock of the
Company. The loan requires the Company to maintain certain financial ratios,
and places restrictions on the sale and purchase of assets, payment of
dividends and other distributions relating to the Company's outstanding
capital stock. At the Company's option, borrowings under the revolving
facility bear interest at (1) LIBOR plus an applicable margin that varies from
a minimum of 1.0% to a maximum of 1.75% and is based on the calculation of a
leverage ratio, or (2) the prime rate. At the Company's option, borrowings
under the swingline loan credit subfacility bear interest at either (1) a
Quoted Rate established by the lender or (2) the prime rate. At December 31,
1997, the Company's applicable margin was 1.625%, and the interest rates
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under this facility at December 31, 1997 ranged from 7.12% to 7.22%.
Outstanding borrowings under this facility at December 31, 1997 were
approximately $86 million. Pending consummation of the offering of the Old
Notes, the Company also entered into a revolving credit promissory note (the
"Revolving Note") whereby NationsBank, N.A. agreed to advance the Company up
to $10 million provided availability under the Credit Agreement has been
exhausted. The Revolving Note was closed on February 26, 1998, and terminated
upon the consummation of the offering of the Old Notes. Pricing and conditions
to funding for the Revolving Note were identical to those on the Credit
Agreement, and the Revolving Note is cross-defaulted to the Credit Agreement.
At April 30, 1998, total borrowings under the Credit Agreement, including
current portion, was approximately $27 million.
At December 31, 1997, the Company had one interest rate swap agreement with
a commercial bank (the "Counter Party"), having a cumulative notional
principal amount of $25 million. The Company pays a fixed rate of 6.61% plus
the applicable margin that varies from a minimum of 1.0% to a maximum of 1.75%
and is based on the calculation of a leverage ratio. The interest rate swap
terminates in June 2002. The Company is exposed to credit loss in the event of
non-performance by the Counter Party to the interest rate swap agreement.
However, the Company does not anticipate such non-performance.
A portion of the consideration paid by the Company for PMI consisted of
495,050 shares of the Company's Common Stock. Pursuant to the PMI acquisition,
the Company agreed to provide to ChoicePoint for a period of one year after
the acquisition protection against a decrease in the value of any of the
Company's shares issued to and subsequently sold by ChoicePoint in the
marketplace. Under the terms of the agreement, the Company shall each month
reimburse ChoicePoint in cash for any decrease in the price of the Company's
shares by paying ChoicePoint the difference between the actual sale price of
any shares sold by ChoicePoint and $20.20 (the average share price of the
Company's Common Stock on the Nasdaq National Market system for a 15-day
period prior to the closing of the transaction), multiplied by the number of
shares sold. If there is any net gain by ChoicePoint in any month during the
one-year period of the agreement, then ChoicePoint will reimburse the Company
for amounts previously paid by the Company to the extent of such net gains.
Management currently believes that internally generated funds and borrowings
under the Credit Agreement will be adequate to satisfy the Company's working
capital requirements, including currently anticipated expansion, for the
foreseeable future.
YEAR 2000 COMPLIANCE
As the year 2000 approaches, an issue impacting all companies has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. Management does not anticipate that the Company
will incur significant operating expenses or will be required to invest
heavily in computer system improvements relating to the uncertainties
associated with the year 2000 because the Company's current and planned
systems are year 2000 compliant. Management does not know at this time what,
if any, impact year 2000 compliance may have on its payor and vendor sources
and the impact, if any, on the Company if such payors or vendors are not fully
compliant. Management is attempting to determine when its payors and vendors
will be year 2000 compliant.
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BUSINESS
GENERAL
The Company is a leading provider of children's health care and related
services. The Company is the nation's largest focused pediatric home health
care provider and third largest provider of paramedical testing services. The
Company provides children's health care services through 131 branch offices
located in 29 states and the District of Columbia and paramedical testing
services through over 200 field offices located in all 50 states, Puerto Rico
and Guam. During the quarter ended December 31, 1997, health care and related
services represented approximately 84% of the Company's net revenue and
paramedical testing represented approximately 16% of the Company's net
revenue. The Company's net revenue and EBITDA have increased at a compound
annual growth rate (measured as the yearly percentage growth from the fiscal
year ended September 30, 1992 to the fiscal year ended September 30, 1997) of
53% and 60%, respectively. For the twelve months ended December 31, 1997, the
Company had net revenue and EBITDA of $219.0 million and $23.8 million,
respectively.
The Company provides a broad range of pediatric health care services,
including nursing, respiratory therapy and other medical equipment, and
pharmacy and infusion therapy. In addition, the Company provides pediatric
rehabilitation services, day treatment centers for medically fragile children,
pediatric well care services and special needs educational services for
pediatric patients. The Company also provides case management services in
order to assist the family and patient by coordinating the provision of
services between the insurer or other payor, the physician, the hospital and
other health care providers. The Company's services are designed to provide a
high quality, lower cost alternative to prolonged hospitalization for
medically fragile children.
The Company entered the paramedical testing business through the acquisition
of Premier in February 1996. In December 1997, the Company acquired PMI making
the Company the nation's third largest provider of paramedical testing
services. The Company provides a broad range of paramedical testing services,
including taking health histories, collecting blood and urine samples,
administering physical examinations and performing electrocardiogram
examinations on insurance applicants. The Company's paramedical testing
services clients include over 1,000 life, health and disability insurance
companies as well as corporations and other organizations that require drug
and alcohol screening, wellness physicals and occupational health services.
INDUSTRY OVERVIEW
Health Care Services
According to industry sources, the market for home health care and related
services in the United States in 1996 is estimated at $35 billion. The Company
estimates that the market for pediatric home health care for the same period
is over $5 billion. The pediatric home health care market is distinct in a
number of respects. Pediatric patients tend to require a higher acuity of care
due to their age and the severity of their medical condition, and consequently
generally have a relatively long length of treatment, often measured in years
rather than weeks or months. Pediatric illnesses and conditions include
bronchopulmonary dysplasia, digestive and absorptive diseases, congenital
heart defects and other cardiovascular disorders, cancer, cerebral palsy,
cystic fibrosis, chronic obstructive pulmonary disease, endocrinologic
disorders, hemophilia, orthopedic conditions and post surgical needs. In many
instances, pediatric patients have multiple disorders.
Home care for pediatric patients, like home care generally, is preferred
over institutional care by patients and their parents or other care givers as
well as by payors. Patients and parents prefer home care due to the ability to
care for the child in a nurturing environment, assist in socialization and
provide 24-hour attention. Home care also minimizes the risk of cross-
infection, eliminates privacy and safety concerns and permits a more gradual,
and consequently more event-free, transition of care-giving from the health
care professional to the family. Payors prefer home care because it is
generally more cost effective than institutional care.
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Third-party reimbursement for pediatric home care is provided predominantly
by private health insurance, with a smaller portion provided by Medicaid.
Because of the special needs of pediatric patients, the acuity of care and the
skill levels of the individual nurses or therapists providing the care, the
rates charged for health care services, particularly nursing services, for
pediatric patients are generally higher than adult rates. In addition, due to
the high medical acuity of pediatric patients and the large variations in
patient conditions and treatment protocols, pediatric home health care is
typically not reimbursed on a capitated basis.
Unlike geriatric home care patients, who generally receive maintenance care,
pediatric home care patients are usually treated interventionally, using
technologically advanced medical equipment such as ventilators, oxygen
delivery systems, nebulizers, sleep apnea monitors and other respiratory
equipment. Pediatric patients often also require home infusion therapy for the
delivery of pharmaceuticals, especially for the treatment of hemophilia,
cystic fibrosis and endocrinologic disorders, as well as physical and
occupational therapy.
Due to the specialized care required to treat pediatric illnesses and
conditions, home care is most effectively delivered to pediatric patients by
nurses with neonatal intensive care unit ("NICU") and pediatric intensive care
unit ("PICU") experience. These specialized health care professionals are
experienced in treating medically fragile children, using and maintaining the
medical equipment, and administering required medications and other therapies.
Pediatric patients typically require home nursing in shifts, in which nursing
care is delivered eight to twenty-four hours per day, in contrast to home
nursing care for geriatric patients, in which nursing care is typically
provided on a short "visiting nurse" basis.
Like pediatric patients, young adult home care patients, who range in age
from 18 to 64 years, often require long-term care from private duty nurses.
Young adult patients suffer from such disorders as muscular dystrophy, cystic
fibrosis, hemophilia, cardiovascular disorders and cancer. Many young adult
patients suffered injury and significant disabilities from near drowning
incidents and accidents or other forms of trauma. Many of these disorders and
illnesses require life long treatment. Frequently, a young adult patient
receives home care as a continuation of a pediatric home care treatment
regimen. A large percentage of young adult patients are covered by private
health insurance, with the remainder covered by Medicaid.
Geriatric patients (those patients age 65 years old and older) generally
have shorter periods of service and shorter periods of daily care. Many
geriatric patients suffer from emphysema or other pulmonary disorders
requiring oxygen therapy performed during short home visits by nurses or
therapists. Geriatric patients with more acute conditions are more likely to
receive care in an institutional setting. Most geriatric patients are covered
by Medicare for all or part of their health care needs.
The pediatric home health care services market currently is heavily
fragmented. This market is served by a large number of small entities that
operate on a local or regional basis and typically provide a limited range of
health care services. This market is also served by a small number of national
home health care companies that service the pediatric market as part of a
broader product offering. Because of the high degree of specialization
required for effective treatment of pediatric patients and the broad scope of
services required due to pediatric patients' generally high medical acuity
levels, the Company believes that there are significant growth opportunities
for a national provider offering a broad range of health care products focused
on the home pediatric patient.
Paramedical Testing Services
The U.S. paramedical testing services market is estimated by the Company to
be approximately $500 million with the majority of services being provided by
four national providers, including the Company, and several regional
providers. Paramedical testing services include taking health histories,
obtaining blood and urine samples and administering physical examinations and
electrocardiograms. Some or all of these tests are typically required by
insurance companies as a prerequisite to underwriting life, health and
disability insurance policies. The Company believes that the paramedical
testing services market is growing due to: (i) the implementation of stricter
underwriting standards requiring increased testing as a result of growing
concern over substance abuse
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and AIDS and other catastrophic illnesses; (ii) technological advances in
testing; and (iii) the aging of the U.S. population. The Company also believes
that large national providers are growing at the expense of local and regional
providers as many insurance companies seek to improve quality and reduce
administrative costs by consolidating their business with fewer providers.
Insurance companies increasingly focus on the technological capabilities of
their paramedical testing providers in an effort to more efficiently track the
status of pending applications and to decrease the time between policy
application and issuance. The ability of a paramedical testing provider to
quickly and accurately accept orders for tests, schedule tests, and provide
status information as well as test results electronically has become an
important selection criteria. The Company believes that large national
providers with significant information systems resources and expertise should
be able to capitalize on these assets to gain market share.
To improve quality control and reduce administrative costs, life, health and
disability insurance companies are limiting the number of paramedical testing
providers approved by their medical underwriting departments. As customers
consolidate their business with fewer providers, the ability of a provider to
offer a full range of testing services nationwide has become increasingly
important. In addition, since the accuracy and completeness of testing
information is critical to the timely completion of the entire underwriting
process, insurance companies are seeking out the high quality providers of
paramedical testing services.
BUSINESS STRATEGY
The Company's goal is to be the nation's leading provider of children's
health care services and paramedical testing services. The Company's strategy
to achieve this goal includes the following elements.
Focus on Children's Services. The Company believes that pediatric health
care services are recognized as a distinct specialty within the health care
industry. The Company has significant experience and expertise in children's
health care, particularly with respect to medically fragile children who are
dependent on sophisticated medical technology and nursing care. The Company
believes that its pediatric focus and expertise provide it with significant
sales and marketing advantages. The Company intends to continue to focus on
providing relatively high acuity health care services for children.
Expand into New Geographic Markets. The Company currently has 131 pediatric
health care branch offices in 29 states and the District of Columbia and
approximately 65% of the top 100 Metropolitan Statistical Areas ("MSAs") in
the United States. In the past two years, the Company has extended its
geographic presence from 21 states to 29 states. The Company believes
increased geographic presence can provide additional operating efficiencies
and enable the Company to obtain more referrals from large insurance companies
and other third party payors. The Company intends to continue to broaden its
national coverage by entering new geographic markets.
Expand Service Offering. The Company currently provides pediatric home
nursing, respiratory therapy and other medical equipment, and pharmacy and
infusion therapy services to medically fragile children across the nation.
However, the Company does not provide all of these services in all of its
markets. In addition, in certain locations the Company provides rehabilitation
services, pediatric day treatment centers, well care services and special
needs education. The Company intends to continue to add new services in
existing markets where it does not yet provide its full range of services. In
addition, the Company may extend its service offering to include additional
children's services that extend the scope of or complement its existing
services.
Provide High Quality, Cost-Effective Care. The Company emphasizes quality
throughout its organization with respect to both the provision of services and
the hiring and training of clinical personnel. Moreover, the Company believes
that its ability to coordinate and deliver a full range of services in a non-
institutional setting and its experience and expertise in caring for medically
fragile children result in superior and cost-effective medical outcomes. The
Company intends to continue to emphasize and enhance the quality and cost-
effectiveness of its services.
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Leverage Market Position and Service Offering in Paramedical Testing
Business. The Company recently expanded its paramedical testing services
business through the acquisition of PMI and is now the third largest national
provider of paramedical testing services. The paramedical testing market is
consolidating as customers seek to reduce administrative costs and increase
quality by limiting the number of companies with which they contract. The
Company intends to expand its paramedical testing business by leveraging its
national network and strong customer relationships and continuing to emphasize
the quality of its services and responsiveness to customers. In addition, the
Company intends to evaluate opportunities for expansion of services
complementary to paramedical testing, such as drug and alcohol screening,
corporate wellness physicals, occupational health services and preventive
medicine analysis for corporations and other organizations.
Acquire Selectively. During the period from October 1, 1992 to December 31,
1997, the Company completed 30 acquisitions aggregating approximately $181.6
million in annualized net revenue at the time of acquisition. In the past, the
Company has selectively acquired businesses which extend its geographic
presence, provide access to certificates of need, or expand the Company's
service offering. The Company continually evaluates acquisition opportunities
and intends to continue to acquire on a selective basis similar and
complementary businesses.
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SERVICES AND OPERATIONS
General
The Company provides comprehensive health care services, principally for
children. The Company also provides paramedical testing services for the
insurance industry. The following table summarizes the percentages of net
revenue to total net revenue of each major category of service offered by the
Company for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
PEDIATRIC HEALTH CARE*:
Nursing................................................. 32.3% 31.7% 30.1%
Respiratory therapy equipment........................... 11.2 10.7 11.8
Pharmacy and infusion therapy........................... 14.3 14.0 9.1
Home medical equipment.................................. 1.3 0.8 1.2
----- ----- -----
Total pediatric health care........................... 59.1 57.2 52.2
YOUNG ADULT HEALTH CARE*:
Nursing................................................. 7.6% 7.3% 8.0%
Respiratory therapy equipment........................... 6.6 9.2 11.7
Pharmacy and infusion therapy........................... 3.4 2.6 1.9
Home medical equipment.................................. 1.5 2.1 3.3
----- ----- -----
Total young adult health care......................... 19.1 21.2 24.9
GERIATRIC HEALTH CARE*:
Nursing................................................. 3.1% 3.5% 3.9%
Respiratory therapy equipment........................... 4.0 4.3 5.6
Pharmacy and infusion therapy........................... 0.9 1.0 1.4
Home medical equipment.................................. 1.0 1.2 1.1
----- ----- -----
Total geriatric health care........................... 9.0 10.0 12.0
PARAMEDICAL TESTING..................................... 12.8% 11.6% 10.9%
----- ----- -----
Total................................................. 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
- --------
* Pediatric health care includes services provided to patients age 17 and
younger. Young adult health care includes services provided to patients age
18 to 64. Geriatric health care is provided to patients age 65 and older.
The information with respect to geriatric health care is estimated, based on
net revenue received from Medicare, which is the primary payor for the
Company's geriatric patients.
HEALTH CARE SERVICES AND OPERATIONS
The Company provides a broad range of health care services principally for
children and, to a lesser extent, young adults and geriatric patients.
Pediatric Health Care Services
The Company offers the following services to pediatric patients.
Pediatric Nursing Services. The Company's pediatric nursing services consist
primarily of private duty home nursing care for pediatric patients with
illnesses and conditions such as bronchopulmonary dysplasia, digestive and
absorptive diseases, congenital heart defects and other cardiovascular
disorders, cancer, cerebral palsy, cystic fibrosis, chronic obstructive
pulmonary disease (e.g., emphysema, chronic bronchitis and asthma),
endocrinologic disorders, hemophilia, orthopedic conditions and post surgical
needs. Pediatric nursing care typically begins upon the patient's discharge
from the hospital. The Company's nurses assess and monitor vital
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signs and the condition of the child, administer medications and treatment
regimens, provide enteral and other forms of tube feeding, monitor and
maintain ventilators, oxygen and other home medical equipment, monitor and
administer pain management, provide daily care, including baths, hygiene and
skin care, conduct physical, occupational and other forms of prescribed
therapy, and coordinate other forms of medical care necessary for the child.
Private nursing care is often provided 24 hours per day for extended periods
of time. The Company estimates that its pediatric patients require private
duty nursing care for an average of eight months with length of daily care
averaging ten to 11 hours. The Company's nurses emphasize education of the
parents or other care givers of the child in order to maximize the
independence of the child and the family. Through this educational process,
the length of the daily private duty care can be reduced as the child's
condition improves or stabilizes and the parents or care givers assume a more
active role in the care of the child. Depending on the illness or condition of
the child, in many cases the Company continues to provide nursing visits,
respiratory therapy and other medical equipment services and pharmaceutical
services after it discontinues private duty nursing care.
The Company has more than 5,000 registered or licensed pediatric nurses and
therapists on its active nursing registries. Due to the special needs and
acuity of care of pediatric patients generally, the Company requires that its
nurses and therapists have training with pediatric patients. Most of the
Company's nurses have NICU or PICU experience.
Although nursing services traditionally have provided the Company with lower
profit margins than the Company's other services, referral sources generally
make arrangements for nursing services before making arrangements for other
health care services necessary for the discharge of a medically fragile child
from the hospital. Consequently, a high quality nursing service facilitates
marketing of the Company's higher margin pediatric services. The Company
intends to continue to increase the number of its branch offices that provide
pediatric nursing services as the Company focuses on further developing its
pediatric business.
Pediatric Respiratory Therapy Equipment and Services. The Company provides
respiratory therapy equipment and services to pediatric patients in the home.
These services include (i) the rental, sale, delivery and setup in accordance
with physician prescriptions of equipment, such as ventilators, oxygen
concentrators, liquid oxygen systems, high pressure oxygen cylinders, apnea
monitors and nebulizers, (ii) periodic evaluation and maintenance of the
equipment and (iii) delivery and setup of disposable supplies necessary for
the operation of the equipment. The Company provides these services to
patients with a variety of conditions, including chronic obstructive pulmonary
diseases, neurologically related respiratory problems, cystic fibrosis,
congenital heart defects and cancer. The Company utilizes skilled registered
respiratory therapists and certified respiratory therapy technicians to
provide these services. The Company also provides training to patients and
their families in equipment use and a 24-hour repair service through emergency
on-call technicians.
Pharmacy and Infusion Therapy. The Company provides pharmaceutical products
and related specialty infusion therapy services for its patients. Infusion
therapy involves the administration of nutrients, antibiotics and other
medications intravenously or through feeding tubes. The number of therapies
that can be administered safely in the home has increased significantly in
recent years because of technological innovations in infusion equipment and
advances in drug therapy. Consequently, an increasing number and a broader
range of infections and diseases which would otherwise have required patients
to be hospitalized are now considered treatable in the home. These in-home
therapies reduce the need for emergency room visits for infusion therapy, and
are popular with patients, referring physicians and payors.
The Company provides a full range of pharmacy and infusion therapies,
including antibiotic and other anti- infective therapies, enteral and total
parenteral nutrition therapy, pain management therapy, hemophilia therapy,
immunomodular therapy and chemotherapy. The Company also provides specialty
infusion therapies intended to meet the needs of patients with a variety of
serious infections such as osteomyelitis, bacterial endocarditis, cellulitis,
septic arthritis, wound infections and recurrent infections associated with
the kidney and urinary tract and AIDS. The Company also provides specialty
infusion therapy to terminally or chronically ill patients
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suffering from acute or chronic pain, patients with impaired or altered
digestive tracts due to gastrointestinal illness, patients suffering from
various types of cancer, patients requiring treatment for congestive heart
failure and patients with chronic conditions such as hemophilia, cystic
fibrosis and endocrinologic disorders. The Company's specialty infusion
therapy services are administered by its nursing staff. The Company currently
supports the home infusion therapy market through seven regional pharmacy
locations.
The Company also operates a mail order medication service that provides
physician-prescribed unit dose medications to respiratory therapy patients.
The Company offers its patients medication in a premixed unit dose form as
well as professional clinical support and claims processing. The Company
employs licensed pharmacists to assist with its unit dose medication services
business.
Pediatric Home Medical Equipment and Services. The Company provides rentals,
sales and service of home medical equipment. These services are provided to
patients upon their discharge from the hospital as well as after the Company's
nursing services are no longer required. Home medical equipment provided by
the Company includes wheelchairs, home care beds and ambulatory aids. The
Company currently has 71 locations that provide rentals of home medical
equipment as well as mail order programs for the provision of a broad range of
home health care equipment.
Other Pediatric Services. The Company currently has ten pediatric day
treatment centers in Florida, Georgia and Tennessee. These centers provide,
among other services, daily medical care and physical, occupational and other
forms of therapy for medically fragile children. The children receive nursing
supervision and/or physical and other therapies in a setting which allows for
socialization and education of the children. The Company currently intends to
increase the number of centers in areas where it believes there is sufficient
market demand.
The Company also provides pediatric rehabilitation services such as
physical, occupational and speech therapies. The Company utilizes skilled
registered therapists to perform these services in the home or through the
Company's pediatric day treatment centers.
Young Adult and Geriatric Health Care Services
The Company generally offers young adult and geriatric patients the same
health care services it provides to pediatric patients. Although young adult
patients tend to require a lower acuity of care, they often require long-term
care from private duty nurses. The Company's young adult patients are being
treated for disorders such as muscular dystrophy, cystic fibrosis, hemophilia,
cardiovascular disorders and cancer as well as serious disabilities from near
drowning incidents and accidents and other forms of trauma involving spinal
cord or other injuries. Frequently, the Company's young adult patients receive
home care as a continuation of a pediatric home care treatment regimen.
The Company's geriatric home care patients generally require the lowest
acuity of care and have shorter periods of service and shorter periods of
daily care than either the Company's pediatric or young adult patients. Most
of these patients receive maintenance care for end-of-life conditions such as
emphysema or other pulmonary disorders, neurological diseases and renal
diseases. Services are provided during short home visits by nurses or
therapists. Although some of the Company's geriatric home care patients
receive higher acuity, interventional care, these services are more likely to
be provided in an institutional setting.
Recruiting, Training and Retention of Professional Staff
The Company's services are provided by skilled pediatric nurses and skilled
respiratory therapists. Nurses generally have a minimum of one year prior NICU
or PICU experience, a nursing license and current CPR certification. Each
nurse must pass a written pediatric and medication exam and provide employment
references. Therapists generally have a minimum of one year prior experience
and current CPR certification, and must provide employment references as well.
Under the Company's pediatric nursing training program, nurses are
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required to attend an orientation program where they are trained in aspects of
home health care, such as equipment use, which differ from institutionally
provided health care. If qualified, nurses receive additional training in the
use of ventilators and other home respiratory equipment. The Company requires
its nurses to attend continuing education sessions on safety and techniques in
home health care. Further, the Company offers its nurses periodic continuing
education courses and professional seminars on various topics in home health
care to assist in the retention of qualified personnel. As of December 31,
1997, the Company had over 5,000 licensed or credentialed nurses and
therapists on its staff and active registries.
To provide a qualified, reliable nursing and therapy services staff, the
Company continuously recruits professional nurses and technical specialists,
and trains and offers benefits and other programs to encourage retention of
these professionals. The Company recruits primarily through advertising,
employment fairs, direct contact with community groups and employment programs
and uses bonuses and other benefit programs to encourage new employee
referrals by existing employees. The Company has in the past recruited
pediatric nurses who have cared for a patient in the hospital to continue to
provide care for such patient in the home through part-time or full-time
employment with the Company.
Quality Assurance
The Company has established a quality assurance program for the
implementation and monitoring of service standards. The Company's quality
assurance program includes periodic quality audits and other measures designed
to ensure compliance with the documentation and operating procedures required
by federal and state law and the Company's internal standards. The Company's
officers oversee the results of these quality assurance audits and implement
changes where necessary.
The Company's quality assurance program also emphasizes accreditation by the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). JCAHO
is a nationally recognized not-for-profit organization that develops standards
for various health care providers and monitors compliance with such standards.
Substantially all of the Company's branch offices, other than those recently
acquired or established, have received accreditation from JCAHO. JCAHO's
objective standards are one of the few methods by which referring health care
professionals may assess the quality of services of a home health care
provider.
Case Administration
Prior to providing services to a patient, the Company coordinates with the
patient's physicians, third-party payors, case managers and other referral
sources. In order to accomplish this coordination, the Company has developed
and implemented case management and clinical coordination functions.
Case Management. The Company maintains a case management service department
designed to assure the cost-effective delivery of high quality care to the
Company's highest acuity patients. This department acts as the central point
for coordination of services and benefits for patients referred by insurance
companies. The Company assigns a case manager to review the patient's
insurance status to determine coverage and relevant reimbursement criteria.
The case manager contacts the relevant third-party payors to negotiate the
services that will be covered and the applicable rates. The case manager then
communicates with the Company's billing and collection department to assist in
accurate billing. The case manager also assists in resolving disputes that may
arise between the Company and third party payors.
Clinical Coordination. The Company assigns a clinical coordinator to higher
acuity patients, typically before the patient is discharged from the hospital.
The clinical coordinator works with the physician, case manager or other
referral source to arrange all home health care services needed by the
patient.
Sales and Marketing
The Company obtains patient referrals primarily from neonatologists,
pediatricians, pulmonologists, internists and other physicians, hospital
discharge planners, case managers, community-based health care
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institutions and social service agencies. The Company markets its services to
these referral sources primarily through its branch office personnel and
various media formats. The branch office directors conduct the sales and
marketing activities at the branch office level. Branch office directors
generally have a clinical background as registered nurses and/or therapists,
and as such they are able to describe and promote the Company's services to
referral sources. The branch office directors attempt to cultivate
relationships with their local referral sources through quality service,
personal contacts and education about the appropriate role and benefits of the
Company's services in the treatment of patients. In addition, the Company's
case management department plays an integral role in maintaining favorable
relationships between the Company and large insurance companies.
The Company also promotes referrals by seeking to arrange preferred provider
contracts with managed care companies. The Company has established preferred
provider arrangements that are both national and regional in scope. These
contracts typically designate the Company as a preferred provider of certain
services in select areas but do not establish an exclusive relationship. The
preferred provider contracts typically set forth a range of services that the
Company may provide and the applicable rates for such services. The contracts
also specify required billing and claims procedures, record maintenance
policies and other requirements. The Company has not entered into any
contracts with health maintenance organizations or other third-party payors
that require services to be rendered on a risk-sharing or capitated basis.
The Company believes that JCAHO accreditation of its branch offices is an
important factor in its sales and marketing efforts. The Company also believes
that its focus on pediatric health care services combined with management's
experience in rendering these services provides the Company with a significant
sales and marketing advantage.
Billing and Collection
The Company derives substantially all of its health care net revenue from
commercial insurance and other private third-party payors and Medicare and
Medicaid. The current reimbursement environment is a complicated process,
involving multiple payors with differing coverage and reimbursement policies.
Management of accounts receivable, through effective billing, collection and
reimbursement procedures, is critical to the financial success of health care
service providers due to lengthy reimbursement periods. The Company's
reimbursement specialists work closely with the branch offices and third-party
payors. Each specialist is responsible for ensuring the adequacy of the
documentation, submitting the documentation and claims to third-party payors
and expediting payment.
In July 1997, the Company began implementing the NPAS, which is designed to
provide each of the Company's health care branch offices with immediate access
to patient information and perform billing and collection services. As of
February 28, 1998, the Company had implemented the NPAS at 80 branch offices.
See "Business--Management Information Systems."
Local Office Network
The Company currently provides its health care services through a network of
131 branch offices located in 29 states and the District of Columbia. The
Company seeks to address local market needs through its branch office network.
Each branch office conducts local marketing efforts, negotiates contracts with
local referral sources, recruits personnel and coordinates patient care. The
Company believes that the business of providing health care services is most
effective if each branch office is allowed to operate as a local business
targeting services to, and reacting to the needs of, the local community. The
Company provides its branch office managers with training, comprehensive
policies and procedures and standardized operating systems, while allowing
them sufficient autonomy to address local needs.
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PARAMEDICAL TESTING SERVICES AND OPERATIONS
General
The Company is the nation's third largest provider of comprehensive
paramedical testing services with over 1,000 life, health and disability
insurance company customers. The Company's examiners provide examinations at
the request of insurance agents at times and in places convenient to
applicants. The Company utilizes a national network of paramedical technicians
consisting of independent contractors and employees to administer the tests
primarily in the applicant's home or office. In selected cases, the Company
will contract with credentialed nurses or physicians to administer specialized
testing services. The Company offers its testing services through a network of
over 200 field offices in strategic geographical locations located in all 50
states, Puerto Rico and Guam.
Because the Company utilizes nurses, physicians and trained paramedical
technicians to conduct examinations, the Company is able to provide its
clients with a full range of paramedical examination services. These services
include recording an applicant's medical history, height and weight, measuring
blood pressure, and collecting blood and urine specimens. Examiners also
perform more sophisticated procedures at the request of insurance companies,
including physician examinations, electrocardiograms and lung capacity
measurements.
The Company's network of highly automated branch offices enables it to
provide services nationwide. As a result, the Company is an attractive choice
for direct marketers, master brokers, banks, savings and loan associations and
investment brokers who write insurance applications nationwide and desire a
single source for their paramedical testing needs.
The Company provides written and electronic examination results to insurance
clients, in most cases within three days of receiving the initial request for
an examination. The Company's ability to process examinations rapidly is due,
in part, to the proximity of its paramedical technicians to the homes and
workplaces of insurance applicants, ongoing improvements in data processing
and management information systems, and the use of medically trained personnel
who promptly evaluate insurance applicants and efficiently process examination
results. The Company also performs other services such as drug and alcohol
screening, wellness physical examinations and occupational health services for
corporations and other organizations. In order to provide high quality
paramedical testing services, the Company maintains a quality assurance
program that includes the ongoing training of paramedical technicians,
monitoring of service standards and establishing and maintaining controls
throughout the order management system.
In December 1997, the Company acquired PMI, making the Company the third
largest provider of paramedical testing services. PMI had approximately $60
million in revenues in calendar 1997. This acquisition significantly expanded
the scale of the Company's paramedical testing services, placed the Company on
the approved provider list for over 200 new insurance company customers and
added significant geographic coverage.
In connection with the Company's purchase of PMI, the Company acquired the
PMI System, an advanced computer software system, then under development by
ChoicePoint, designed for entering orders, scheduling examinations and
providing status reports. The PMI System is designed to permit electronic
communication of information between the Company and its insurance company
clients. Once completed and integrated with the Company's billing and
collection system, the Company intends to utilize the combined system
capabilities to provide current information on the status of any given
customer order, thereby providing enhanced services to and allowing closer
ties with the Company's customers.
Sales and Marketing
The Company markets its paramedical testing services on a national level
through seven full-time national sales representatives who call on senior
underwriting executives at the home offices of insurance companies. The
Company serves over 1,000 active life, health and disability insurance company
clients, including their networks
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of agency, district, and brokerage offices. National sales representatives
promote the Company's high quality of service and rapid response time to
examination requests and are responsible for maintaining the Company's
position on each insurance company's approved list of examination providers.
The Company regularly attends and occasionally sponsors client conferences to
provide national sales representatives with opportunities to further develop
key relationships.
At the local level, branch managers, and in certain offices, additional
marketing personnel, market the Company's services directly to the local
insurance agents and local managers, who have the authority to select
examination providers from the list approved by the home offices of the
insurance companies. These local marketing efforts emphasize the quality of
the Company's examinations and the speed and accuracy of its services,
including the ability of each branch to quickly ascertain the status of each
service request.
Billing, Collection and Information Services
The Company bills its insurance company and other paramedical testing
clients on a fee-for-service basis. DSO for these services average between 45
and 50 days.
In connection with the Company's purchase of PMI in December 1997,
ChoicePoint agreed to continue to provide certain services on behalf of the
Company, including order entry, scheduling, status reporting, billing and
other related services with respect to the acquired operations at no charge
from December 15, 1997 through April 15, 1998 and continues to provide such
services for a fee of approximately $223,000 per month from April 15, 1998
through June 30, 1998, unless extended by mutual agreement of the parties.
The assets purchased from ChoicePoint included the PMI System, a computer
system then under development by ChoicePoint designed to meet the requirements
of the paramedical testing operations. The system is designed for entering
orders, scheduling examinations and providing status reports. The Company
anticipates that the PMI System will be implemented in July, 1998. The Company
is also developing internally a new paramedical testing billing and collection
system which is designed to integrate with the PMI System. The Company is
completing the development of this billing and collection system and currently
plans to implement the system in June 1998.
Local Office Network
The Company provides its paramedical services through a network of over 200
field offices strategically located in all 50 states, Puerto Rico and Guam.
Each branch office is responsible for local marketing efforts, recruiting
qualified personnel and coordinating examination and reporting procedures. The
Company provides its branch managers with training, comprehensive policies and
procedures and standardized operating systems, while allowing them sufficient
autonomy to address local needs. The Company believes that decentralized
management of local operations enhances the Company's ability to establish and
maintain relationships with local insurance agents and other referral
services.
MANAGEMENT INFORMATION SYSTEMS
In July 1997, the Company began implementing the NPAS, designed to provide
each of the Company's health care branch offices with immediate access to
patient information and to perform billing and collection services.
Approximately 64% of the Company's health care branch offices currently use
the NPAS. The Company believes that once the NPAS is fully implemented, it
will enhance the Company's patient information and billing and collection
functions.
In connection with the Company's purchase of PMI in December 1997, the
Company acquired the PMI System under development by ChoicePoint for use by
PMI. The PMI System is designed for entering orders, scheduling examinations
and providing status reports and anticipates that the system will be
implemented in July 1998. The Company is also developing internally a new
paramedical testing billing and collection system which will integrate with
the PMI System. The Company is completing the development of the billing and
collection
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system and currently plans to implement the system in June 1998. In connection
with the PMI acquisition, ChoicePoint agreed to continue to provide certain
services on behalf of the Company, including order entry, scheduling, status
reporting, billing and other related services with respect to the acquired
operations at no charge from December 15, 1997 through April 15, 1998, and for
a monthly fee of up to approximately $223,000 per month from April 15, 1998
through June 30, 1998, unless extended by mutual agreement of the parties. The
completion of the PMI System will require a significant amount of management's
time and attention and there can be no assurance that the Company will
complete the development of the billing and collection system or the
integration of the operations in a timely manner. Failure to complete the PMI
System and integrate the operations in accordance with management's plans
could have a material adverse effect on the Company's financial condition and
results of operations.
The Company has selected a software vendor and has retained a consultant for
the implementation of a new general ledger, accounts payable, inventory,
purchasing and fixed assets accounting system. The Company intends to begin
implementation of this new system in the first quarter of fiscal 1999.
REIMBURSEMENT
The Company focuses its health care marketing efforts on patients with
private insurance; however, due to the nature of the Company's business, many
of its patients rely on Medicare and Medicaid for health coverage. The
following are the approximate percentages of the Company's net revenue
attributable to reimbursement from various payors of both the health care
services and paramedical testing businesses for the periods presented:
<TABLE>
<CAPTION>
YEAR
ENDED
SEPTEMBER
30,
----------
PAYOR 1997 1996
----- ---- ----
<S> <C> <C>
Commercial Insurance and Self Payors........................... 64% 63%
Medicaid and Other State Programs.............................. 27 27
Medicare and Other Federal Programs............................ 9 10
--- ---
Total........................................................ 100% 100%
=== ===
</TABLE>
These percentages do not reflect PMI's net revenue, estimated by the Company
at $60 million for the year ended December 31, 1997. All of PMI's estimated
net revenue was attributable to reimbursement from commercial insurance
companies.
During the past decade, federal and state governments and third-party payors
have taken extensive steps intended to contain or reduce the costs of health
care. These steps have included, among others, reduced reimbursement rates,
changes in services covered, increased utilization review of services,
negotiated prospective or discounted contract pricing and adoption of a
competitive bid approach to service contracts. Cost containment efforts are
expected to continue in the future. Home health care, which is usually less
costly than hospital-based care, generally has benefited from many of these
cost containment efforts. As expenditures on home health care services
continue to grow, however, initiatives aimed at reducing the cost of health
care delivery in non-institutional settings are increasing. Many state
Medicaid programs, in an effort to contain the cost of health care and in
light of state budgetary constraints, have reduced their payment rates and
have narrowed the scope of covered services. Likewise, the federal government
through legislation and regulation has acted repeatedly to limit expenditures
for health care, including home health services and home medical equipment.
Similar initiatives are expected to continue in the future. A significant
change in coverage or a reduction in payment rates for the types of services
provided by the Company could have a material adverse effect upon the
Company's business.
Commercial Insurance. The Company provides its services on a fee-for-service
basis to patients covered by commercial insurance as well as self-funded
employer plans. In some instances, services are rendered pursuant to fees
negotiated with insurance companies under preferred provider contracts. The
Company has not entered into any contracts with health maintenance
organizations or other insurance companies that require services to be
rendered on a risk-sharing or capitated basis. A shift to capitated payments
could have an adverse financial effect upon the Company's business.
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All of the Company's paramedical testing services are performed on a fee-
for-service basis and are paid by the insurance company or other entity that
requested the tests.
Medicaid Program. Medicaid (Title XIX of the Social Security Act) is a
cooperative state-federal program for medical assistance to the poor. In order
to be eligible, a person must be either age 65 or over, blind or disabled or
be the caretaker for minor children. States have great flexibility in
determining the services that will be paid for under their Medicaid programs.
Beyond mandatory services, states can provide a wide range of medical
services, including services not otherwise covered under Medicare, such as
long-term nursing care. BBA 1997 also allows states to amend their state plans
to expand services to uninsured children by providing $24 billion over the
next five years in matching funds to state Medicaid programs.
Medicare Program. Medicare is a federally funded health insurance program
that provides health insurance coverage for persons with incomes below
established federal poverty standards as well as certain disabled persons,
persons age 65 and older and persons with chronic renal disease. The United
States Congress enacted the Medicare program in 1965 as Title XVIII of the
Social Security Act. The program consists of two separate insurance programs:
(i) "Hospital Insurance," established in Part A of the Social Security Act,
provides certain benefits covering inpatient hospital, nursing facility, home
health and hospice services, and (ii) "Supplementary Medical Insurance,"
established in Part B of the Social Security Act, provides benefits in the
areas of outpatient hospital visits, physician services, other types of
outpatient services, respiratory therapy, infusion therapy, home medical
equipment and prosthetic devices.
Individuals age 65 and older who qualify for Social Security or Railroad
Retirement Benefits automatically qualify for Medicare Part A. Medicare Part B
is a voluntary program and all individuals who are eligible for Medicare Part
A coverage may elect to enroll in Medicare Part B. The Company is an
authorized provider eligible to receive direct reimbursement under Medicare
Parts A and B in certain geographic locations. Health care providers such as
the Company must meet "conditions of participation" to receive Medicare
payments. The conditions of participation are federal requirements intended to
ensure the quality of the medical services provided.
Part A providers are required to sign provider agreements to participate in
Medicare. The Medicare Part A home health benefit currently is a cost-based
reimbursement program that requires the Company to file an annual cost report
for those branch offices performing services under Medicare Part A and for the
Company's home office. Medicare reimburses the Company for covered home health
care services at the lower of (i) the Company's reimbursable costs (based on
Medicare regulations), (ii) cost limits established by Health Care Financing
Administration, or (iii) the Company's charges.
Under Medicare Part B, the beneficiary must pay an annual deductible amount
before Medicare will make any payments. After the Medicare Part B deductible
is satisfied, Medicare ordinarily will pay 80% of the Medicare approved
payment amount, and the beneficiary is responsible for paying the remaining
20%. Medicare has developed approved forms for submission of bills and claims.
The passage of BBA 1997 is expected to materially affect Medicare
reimbursement to the home health industry. The U.S. Congressional Budget
Office estimates that the combined effect of changes enacted in BBA 1997 will
reduce projected Medicare spending on home health care services, durable
medical equipment and oxygen and oxygen equipment by $19.1 billion over the
period of fiscal year 1998 through fiscal year 2002 and by $59.3 billion over
the period of fiscal year 1998 through fiscal year 2007.
Under BBA 1997, the current cost reimbursement system for home health
services will remain in effect for the two-year period prior to the
implementation of a prospective payment system in October 1999. Effective for
cost-reporting periods ending on or after October 1, 1997, agencies will be
reimbursed at the lower of three amounts: (i) their actual costs; (ii) the
cost per visit limits reduced to 105% of the median costs for free-standing
agencies; or (iii) an aggregate per beneficiary limit based on 75% of agency-
specific costs and 25% on census region costs for cost- reporting years ending
during fiscal year 1994, updated by the home health market basket
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index. For cost-reporting periods beginning on or after October 1, 1997, the
cost-per-visit limits will apply to claims based on the geographic area where
the service is furnished, rather than on the geographic area where the agency
is located. For services furnished on or after October 1, 1997, the Secretary
of Health and Human Services is authorized to issue regulations establishing
normative guidelines for the frequency and duration of home health services,
beyond which services will not be covered. The Secretary is also authorized to
implement not more than five competitive bidding demonstration projects which
must terminate by the end of calendar year 2002 for items or services covered
under Part B. Updates to the durable medical equipment fee schedules will be
eliminated for the years 1998 through 2002. Payment rates for parenteral and
enteral nutrients, supplies and equipment will also be frozen for the years
1998 through 2002 at the rate in effect during 1995. Beginning with services
furnished on or after January 1, 1998, coverage of home health services under
Part A will be reduced to a maximum of 100 visits during a spell of illness
after a three-day hospitalization or after receiving any covered services in a
skilled nursing facility. Coverage for all other home health services would be
under Part B. Funding responsibility for payment of the services under Part B
will be transferred gradually out of the Part A trust fund over a seven year
period. All claims will continue to be submitted to, and paid by, the fiscal
intermediaries. Periodic Interim Payments will be eliminated for cost
reporting periods on or for the benefit of the Medicare program and each state
Medicaid program in which it participates, after October 1, 1999. Beginning
six months after October 1, 1997, home skilled nursing care will not be
covered if it is solely venipuncture for the purpose of drawing blood.
BBA 1997 also mandates that the Medicare national payment limit for oxygen
and oxygen equipment be reduced by 25% of 1997 rates for 1998, with an
additional 5% reduction of 1997 rates for 1999 and subsequent years. The
General Accounting Office has been requested to submit a report to Congress
addressing access to home oxygen equipment and recommendations for further
legislation. Home health companies will be required to post a surety bond in
an amount equal to the greater of $50,000 or 15% of revenues derived from any
such program.
The effect that these changes ultimately will have on the home health
industry cannot be quantified at this time, however, there can be no assurance
that these and other changes mandated by BBA 1997 will not materially and
adversely affect the business and financial condition of the Company.
COMPETITION
Pediatric and Other Health Care. Each of the Company's health care services
markets is highly competitive and is divided among a large number of
providers, some of which are national providers but most of which are either
regional or local providers. The Company competes for referrals primarily
based on quality of care and service, reputation with referring health care
professionals, ability to develop and maintain contacts with referral sources
and price of services. In addition to competing with other home health care
companies focusing on providing services to pediatric patients, the Company
competes with several large national home health care companies that, while
not focusing on the pediatric patient, provide pediatric health care services
as part of a broader product offering. The Company believes that its
specialization in pediatric health care, as well as its coordinated care
approach to health care services, broadens its appeal to local health care
professionals and to managed care organizations.
In addition to its traditional competitors, other types of health care
providers, including hospitals, physician groups and home health agencies,
have entered, and may continue to enter, the Company's business. Relatively
few barriers to entry exist in the home health care industry in states that do
not require a certificate of need. Certain of the Company's competitors and
potential competitors have significantly greater financial, technical and
marketing and sales resources than the Company and may, in certain locations,
possess licenses or certificates that permit them to provide services that the
Company cannot currently provide. There can be no assurance that the Company
will not encounter increased competition in the future that could limit the
Company's ability to maintain or increase its business and could adversely
affect the Company's operating results.
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Paramedical Testing. The paramedical testing business is highly competitive,
and certain of the Company's competitors have greater resources than the
Company, and offer services not offered by the Company or offer similar
services at prices lower than those charged by the Company.
Management believes that the Company is the nation's third largest provider
of paramedical testing services to insurance companies, based on revenues. A
large number of regional and local firms also offer these services. In
management's opinion, the principal competitive factors in the paramedical
testing market are speed of response, geographic coverage, and delivery of
complete and accurate information. In addition, technological capabilities
recently have taken the forefront in client needs.
REGULATION
Pediatric and Other Health Care Services
General. The Company's health care services business is subject to extensive
and frequently changing state and federal regulation. The Company is subject
to state laws governing and regulating numerous aspects of its business,
including home health care and home infusion therapy services (including
certificates of need and license requirements in certain states) and
dispensing, distributing and compounding prescription products. The Company
also is subject to certain state laws prohibiting the payment of remuneration
for patient or business referrals and the provision of services where a
financial relationship exists between a referring physician and the entity
providing the service.
Federal laws governing the Company's activities include regulations of
pharmacy operations and regulations under the Medicare and Medicaid programs
relating to, among other things, certification of home health agencies and
reimbursement. In addition, federal fraud and abuse laws prohibit or restrict,
among other things, the payment of remuneration to parties in a position to
influence or cause the referral of patients or business.
New laws and regulations are enacted from time to time to regulate new and
existing services and products in the home health care industry. Changes in
the law or new interpretations of existing laws also could have an adverse
effect on the Company's methods and costs of doing business. Further, failure
of the Company to comply with such laws could adversely affect the Company's
ability to continue to provide, or receive reimbursement for, its equipment
and services, and also could subject the Company and its officers and
employees to civil and criminal penalties. There can be no assurance that the
Company will not encounter regulatory impediments that could adversely affect
its ability to open new branch offices and to expand the services currently
provided at its existing branch offices. There can be no assurance that
current or future government regulation will not have an adverse effect upon
the Company's business.
Set forth below is a more detailed discussion of certain factors related to
federal and state regulation of the Company and its business.
Medicare and Medicaid Regulations. As a provider of services under the
Medicare and Medicaid programs, the Company is subject to federal laws and
regulations governing reimbursement procedures and practices. These laws
include the Medicare and Medicaid fraud and abuse statutes and regulations,
which prohibit the payment or receipt of any form of remuneration in return
for referring business or patients to providers of services for which payments
are made by a government health care program. Violation of these laws may
result in civil and criminal penalties, including substantial fines, loss of
the right to participate in the Medicare and Medicaid programs and
imprisonment. In addition, the Government recently enacted the Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"), a portion of
which took effect this year, expanding the government's fraud and abuse
elimination efforts. HIPAA, among other provisions, expands the Government's
efforts for prosecuting fraud and abuse beyond Medicare and Medicaid to all
payors; makes exclusion from the Medicare and Medicaid programs mandatory for
a minimum of five years for any felony conviction relating to fraud; requires
that organizations contracting with another organization or individual take
steps to be informed as to whether the organization or individual is excluded
from Medicare and Medicaid participation; and enhances
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<PAGE>
civil penalties by increasing the amount of fines permitted. These laws also
include prohibitions on referrals contained in the Omnibus Budget
Reconciliation Act of 1989 ("Stark I"), which prohibits referrals by
physicians to clinical laboratories in which the physician has a financial
interest, and further prohibitions contained in the Omnibus Budget
Reconciliation Act of 1993 ("Stark II"), which prohibits such referrals to a
more extensive range of services, including home health care and the supply of
durable medical equipment. While regulations interpreting Stark I have been
issued, regulations interpreting Stark II have not been finalized to date. No
assurance can be given that all of the practices of the Company, if reviewed,
would be found to be in compliance with any such federal laws or with any
future laws or regulations. In addition, various federal and state laws impose
civil and criminal penalties against participants in the Medicare or Medicaid
programs who make false claims for payment for services or otherwise engage in
false billing practices.
Many states also have statutes prohibiting the payment or receipt (or the
offer of) anything of value in return for, or to induce, a referral for health
care goods or services. In addition, there are several other statutes that,
although they do not explicitly address payments for referrals, could be
interpreted as prohibiting the practice. While similar in many respects to the
federal laws, these state laws vary from state to state, are often vague and
have been interpreted inconsistently by courts and regulatory agencies.
Private insurers and various state enforcement agencies also have increased
their scrutiny of health care providers' practices and claims, particularly in
the home health and home medical equipment areas.
Recently, enforcement of federal fraud and abuse laws, and regulatory
scrutiny generally, have increasingly focused on the home health care
industry. For example, the government has implemented Operation Restore Trust,
a federal investigatory initiative focused on home health, home medical
equipment and skilled nursing facility providers, and recently expanded this
program to 12 new states, as well as implementing "Wedge" audits, which
involve a review of a small sample of patient records to identify
noncompliance. Any adverse findings under these types of audits can result in
adjustments in future payments. There can be no assurance that the Company
will not become the subject of a regulatory or other investigation or
proceeding or that its interpretations of applicable health care laws and
regulations will not be challenged. The defense of any such challenge could
result in substantial cost to the Company and diversion of management's time
and attention. Any such challenge, should it ultimately be sustained or not,
could have a material adverse effect on the Company.
In 1997, the Company undertook the development and implementation of a
company-wide corporate compliance program developed in accordance with federal
guidelines. The Company's compliance program encompasses measures for auditing
and monitoring of legal compliance as well as training for Company employees
and agents. The Company has hired a corporate compliance officer who is vested
with responsibility for implementing the compliance program.
Medicare Certification. Federal regulations governing the Medicare program
also are applicable to the Company. Regulations for Medicare reimbursement
include an annual review of health care facilities and personnel and provide
criteria for coverage and reimbursement. The Company is Medicare certified to
provide nursing services in 16 states and Washington, D.C.
Permits and Licensure. Many states require companies providing pharmacy
services, home health care services, home infusion therapy products and
services and other products and services of the type offered by the Company to
be licensed. The Company currently is licensed as a home health agency in 16
states, is licensed as a home care agency in eight states and currently is
licensed as a pharmacy in 34 states. The Company provides unit dose
medications by mail order to various states. The Company has obtained or, in
certain cases, is in the process of obtaining, licenses for its mail order
services from such states.
Certificates of Need. Approximately 16 states require companies providing
home health care services, infusion therapy and other services of the type
offered by the Company to have a certificate of need issued by a state health
planning agency. Certificates of need are often difficult to obtain and in
many instances a certificate of need is not obtainable at all (because an area
is determined to be adequately served by existing providers or
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for other reasons). If the Company plans to commence operations in a state, or
expands its operations in a state where it is currently operating, and those
operations require a certificate of need, the Company will be required to
obtain a certificate of need with respect to those operations. There can be no
assurance that the Company will be able to obtain any required certificate of
need, and, if so required, the Company will incur expenses in connection with
attempting to obtain a certificate of need.
Paramedical Testing
Various aspects of the Company's paramedical testing business also are
regulated by the federal government and the states in which the Company
currently operates. Although the Company has been able to comply with
applicable regulations to date, there can be no assurance that it will
continue to be able to comply with specific requirements of certain states.
States periodically change the regulations and licensing requirements that
apply to the Company. If such changes occur, or if the Company expands its
operations into new jurisdictions or services, there can be no assurance that
the Company will be able to comply with regulations and licensing
requirements, although the Company will be required to do so before providing
service.
HEALTH CARE REFORM
Political, economic and regulatory influences are subjecting the health care
industry in the United States to extensive and dynamic change, and many
competing proposals have been introduced in Congress and various state
legislatures to reform the present health care system. It is possible that
health care reform at the federal or state level, whether implemented through
legislation or through action by federal or state administrative agencies,
would require the Company to make significant changes in the way it conducts
business. Certain aspects of health care reform such as proposed reductions in
Medicare and Medicaid payments, if successfully developed and adopted, could
have a material adverse effect upon the Company's business. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternative health care delivery systems and payment methodologies, and
public debate of these issues will likely continue in the future. It is not
possible at this time to predict what, if any, further reforms will be
adopted, or when such reforms will be adopted and implemented. No assurance
can be given that any such reforms will not have a material adverse effect
upon the Company's business, results of operations, and financial condition.
EMPLOYEES
As of February 18, 1998, the Company's health care and related services
operations employed approximately 1,600 full-time employees and 3,400 part-
time employees and the Company's paramedical testing operation employed
approximately 350 full-time employees. The paramedical testing operations also
utilize the services of over 5,000 part-time independent contractors.
ENVIRONMENTAL MATTERS
Medical facilities are subject to a wide variety of federal, state and local
environmental and occupational health and safety laws and regulations, such as
air and water quality control requirements, waste management requirements and
requirements for training employees in the proper handling and management of
hazardous materials and wastes. The typical branch office facility operations
include, but are not limited to, the handling, use, storage, transportation,
disposal and/or discharge of hazardous, toxic, infectious, flammable and other
hazardous materials, waste, pollutants or contaminants. These activities may
result in injury to individuals or damage to property or the environment and
may result in legal liability, damages, injunctions, fines, penalties or other
governmental agency actions. The Company is not aware of any pending or
threatening claim, investigation or enforcement action regarding environmental
issues which, if determined adversely to the Company, would have a material
adverse effect upon the capital expenditures, earnings, or competitive
position of the Company.
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PROPERTIES
The Company's principal executive offices are located in Norcross, Georgia
and consist of approximately 60,000 square feet of office space. The lease
term on the facility expires in 2008. The Company's health care operations
include 131 branch offices in 29 states and the District of Columbia. Branch
offices typically are located in office parks or complexes and average
approximately 2,500 square feet. Generally, each health care facility is a
combination warehouse and office. Lease terms on branch offices are generally
three years or less. The Company's paramedical testing division maintains its
corporate operations in Walnut Creek, California in approximately 4,500 square
feet of leased space. The paramedical testing division also maintains regional
service centers in Dallas, Texas, Kansas City, Kansas, and Minneapolis,
Minnesota. The division has over 200 testing field offices located in all 50
states, Puerto Rico and Guam. The lease terms on these facilities generally
are three years or less. The Company believes that its current facilities are
suitable for and adequate to support the level of its present operations.
POTENTIAL LIABILITY AND INSURANCE
In recent years, physicians, hospitals and other participants in the health
care industry have become subject to an increasing number of lawsuits alleging
malpractice, product liability or related legal theories, many of which
involve large claims and significant defense costs. The Company currently
maintains liability insurance intended to cover any claims. This insurance
coverage is provided under a "claims-made" policy which provides, subject to
the terms of the policy, coverage for certain claims made against the Company
during the term of the policy and does not provide coverage for losses
occurring during the term of the policy for which a claim is made subsequent
to the termination of the policy. There can be no assurance that the coverage
limits of the Company's insurance policies will be adequate. In addition,
while the Company has been able to obtain liability insurance in the past,
such insurance varies in cost, is difficult to obtain and may not be available
in the future on acceptable terms or at all.
The Company is also subject to accident claims arising out of the normal
operation of its fleet of vans and small trucks and maintains insurance
intended to cover these claims. The Company also is named as an additional
insured in the product liability policies maintained by certain manufacturers
of health care equipment utilized by the Company in connection with its
business and operations. A successful claim against the Company in excess of
the insurance coverage could have a material adverse effect upon the Company's
business. Claims against the Company, regardless of their merits or eventual
outcome, also may have a material adverse effect upon the Company's reputation
and business.
LEGAL PROCEEDINGS
The Company is subject to certain claims and lawsuits, the outcomes of which
are not determinable at this time. In the opinion of management, it is
unlikely that any liability that might be incurred upon the resolution of
these claims and lawsuits will, individually or in the aggregate, have a
material adverse effect on the consolidated financial condition or results of
operations of the Company.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information as of February 24, 1998,
with respect to the directors and executive officers of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Joseph D. Sansone(1)................ 54 Chairman of the Board of Directors, President
and Chief Executive Officer
Stephen M. Mengert.................. 48 Senior Vice President, Chief Financial Officer,
Secretary and Treasurer
Susan E. Dignan..................... 45 Assistant Secretary and General Counsel
Charles P. Gaetano.................. 46 Senior Vice President of Development
James R. Henderson.................. 52 Senior Vice President of Operations
Michael J. Finn(1).................. 48 Director
Adam O. Holzhauer(1)................ 51 Director
Robert P. Pinkas(2)................. 44 Director
Irving S. Shapiro(2)................ 81 Director
Richard S. Smith(1)(2).............. 62 Director
</TABLE>
- --------
(1) Member of the Audit Committee of the Board of Directors.
(2) Member of the Compensation Committee of the Board of Directors.
Joseph D. Sansone has been Chairman of the Board of Directors, President and
Chief Executive Officer of the Company since its formation in 1989. From
September 1987 until the formation of the Company, Mr. Sansone was President
of Ambulatory Services of America, Inc. ("ASA"), a wholly owned subsidiary of
Charter Medical Corporation, the Company's former parent. Prior to joining
Charter Medical, Mr. Sansone was employed by American Medical International,
Inc. ("AMI"). From 1985 to 1987, he served as Vice President of AMI Home
Health Equipment Centers, a division of AMI specializing in durable medical
equipment sales and rentals.
Stephen M. Mengert has been Senior Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company since July 1996. Prior to joining the
Company, Mr. Mengert was Senior Vice President and Chief Financial Officer of
Arbor Health Care Company from November 1995 to July 1996. From July 1990
until joining Arbor Health Care Company, Mr. Mengert was employed in a similar
capacity at Rehability Corporation.
Susan E. Dignan has been Assistant Secretary and General Counsel of the
Company since 1996. Prior to joining the Company, Ms. Dignan was an attorney
with the law firm of Long Aldridge & Norman LLP from 1993 until 1996.
Charles P. Gaetano has served as the Company's Senior Vice President of
Development since March 31, 1995, when the Company acquired PPI. Mr. Gaetano
previously served as Chief Executive Officer of Pediatric Partners, Inc. from
1990 to 1995.
James R. Henderson joined ASA in 1987 as a Senior Regional Director and in
1989 became a Divisional Vice President of the Company. In 1996, Mr. Henderson
became Senior Vice President of Operations of the Company. From 1985 until
joining ASA, Mr. Henderson was Director of Operations and President of
Healthfocus Medical Equipment, Inc. in Houston, Texas, a wholly-owned
subsidiary of Healthfocus, Inc.
Michael J. Finn has been a director of the Company since 1989. He has been a
General Partner of Brantley Venture Partners, L.P., a venture capital firm
based in Cleveland, Ohio, since May 1995. Mr. Finn served from 1987 until May
1995 as Vice President, Venture Capital and Emerging Growth for Sears
Investment Management Co. and during his tenure headed the Venture Capital
Group for the firm. Previously, Mr. Finn was
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<PAGE>
Deputy Director of the Bureau of Investments, Michigan Department of Treasury.
In this capacity, Mr. Finn headed the Venture Capital Group. Mr. Finn also is
a director of Medirisk, Inc., Silvon Software and The Rhomas Group.
Adam O. Holzhauer has been a director of the Company since 1989. He is
Chairman of the Board and Chief Executive Officer of Royale Healthcare, Inc.,
a hospital management company which he founded in 1988. Mr. Holzhauer also is
President of Adam Holzhauer, Inc., a private investment company. From 1985
until 1994, Mr. Holzhauer served as President of Master Ventures, Inc., a
division of Master Collectors, which provides accounts receivable management
and collection services for health care providers, government agencies, major
retailers, banks and national credit card companies.
Robert P. Pinkas has been a director of the Company since 1989. He is a
General Partner of Brantley Venture Partners, L.P., a venture capital firm
based in Cleveland, Ohio, of which he was the founding partner in 1987. Mr.
Pinkas has been a director, officer and investor in several early stage
technology businesses since 1981, including Quad Systems Corporation,
Medirisk, Inc., Waterlink, Inc. and Brantley Capital Corporation. He currently
serves as Chairman of the Board of Gliatech, Inc.
Irving S. Shapiro has been a director of the Company since 1992. He has been
Of Counsel to the law firm Skadden, Arps, Slate, Meagher & Flom, LLP in
Wilmington, Delaware, since 1990, and from 1981 to 1990 was a partner of that
firm. Prior to joining Skadden, Arps, Slate, Meagher & Flom, LLP, Mr. Shapiro
was Chairman of the Board and Chief Executive Officer of E. I. du Pont de
Nemours & Company. Mr. Shapiro currently serves as director of AEA Investors
Inc., Gliatech, Inc. and J. P. Morgan Florida Savings Bank. He also serves as
a trustee of the Howard Hughes Medical Institute and Chairman of the Board of
Sola International, Inc. and Marvin & Palmer Associates, Inc.
Richard S. Smith has been a director of the Company since 1993. He has been
President of Ventex Management, Inc. or its predecessors since 1987. Ventex
Management, Inc. is the general partner of Ventex Partners, Ltd., an
investment partnership located in Houston, Texas. Mr. Smith currently serves
as a director of several private corporations.
DESCRIPTION OF CREDIT AGREEMENT
On August 13, 1997, the Company entered into a syndicated revolving credit
agreement through Pediatric Services of America, Inc. a Georgia corporation
and wholly-owned subsidiary of the Company (the "Borrower") to borrow up to
$100.0 million in borrowings, with a $10.0 million sublimit for letters of
credit, and a $5.0 million sublimit for short-term swing loans. The Credit
Agreement, as amended, which was arranged by NationsBank, N.A., as
administrative agent, will terminate on August 13, 2002 unless extended by the
consent of each of the lenders. Proceeds of the Credit Agreement initially
were used to refinance certain existing indebtedness of the Company and are
available on an ongoing basis for working capital and other corporate
purposes, including acquisitions. Letters of Credit issued under the Credit
Agreement may be used only for, or in connection with, appeal bonds,
reimbursement obligations arising in connection with surety and reclamation
bonds, reinsurance, domestic or international trade transactions and other
purposes in the ordinary course of business.
Under the terms of the Credit Agreement, borrowings bear interest at the
option of the Company either at NationsBank's prime rate (8.5% at February 23,
1998) or at LIBOR plus a specified percentage, which percentage is determined
and adjusted quarterly based upon the consolidated leverage ratio of the
Company and its consolidated subsidiaries (currently LIBOR plus 1.625%). The
obligations of the Borrower under the Credit Agreement are guaranteed by the
Company and its direct and indirect subsidiaries, and are secured by a pledge
of the capital stock and equity interests in certain of the Company's direct
and indirect subsidiaries.
As of December 31, 1997, the Company had $86 million of borrowings
(including letters of credit) outstanding under the Credit Agreement.
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<PAGE>
The Credit Agreement contains certain customary terms and provisions,
including limitations on the Company with respect to the incurrence of
additional debt, liens, consolidations, mergers, leases, sales, dispositions,
or purchases of assets, capital expenditures, advances, loans and investments,
transactions with affiliates, changes in fiscal year, prepayment, repayment or
refinancing of existing debt (other than with respect to the Non-Qualified
Plan and permitted intercompany debt), sale/leasebacks, and further negative
pledges.
The Company also is prohibited from (i) declaring, paying or making any
dividend or distribution, direct or indirect, on account of any shares of any
class of stock (other than (x) dividends payable solely in shares of the same
class of stock to holders of that class or (y) dividends payable to certain
subsidiaries), (ii) making or permitting any redemption, retirement, sinking
fund or similar payment, purchase or other acquisition for value, direct or
indirect, of any shares of any class of stock, or (iii) making or permitting
any payment to retire or to obtain the surrender of any outstanding warrants,
options or other rights to acquire shares of any class of stock (any of the
foregoing, a "Restricted Payment"). Notwithstanding the foregoing
restrictions, the Company is permitted to make Restricted Payments with
respect to the Non-Qualified Plan, and Restricted Payments may be made to the
extent that no Default or Event of Default under the Credit Agreement exists
immediately prior or will exist after giving effect to such Restricted Payment
on a pro forma basis.
In addition, the Credit Agreement contains certain financial covenants
related to the performance of the Company and its consolidated subsidiaries,
including consolidated fixed charge coverage and leverage ratios and a
consolidated net worth covenant.
The Company also entered into the Revolving Note whereby NationsBank, N.A.
agreed to advance the Company up to $10.0 million on a revolving credit basis
provided availability under the Credit Agreement has been exhausted. The
Revolving Note was closed on February 26, 1998 and terminated on the
consummation of the offering of the Old Notes.
The Company used the net proceeds of the offering of the Old Notes to repay
indebtedness outstanding under the Credit Agreement, including payment in full
of any amounts outstanding under the Revolving Note.
DESCRIPTION OF NEW NOTES
The New Notes will be, and the Old Notes were, issued pursuant to the
Indenture (the "Indenture") between the Company, the Guaranteeing Subsidiaries
and SunTrust Bank, Atlanta, a Georgia banking corporation, as trustee (the
"Trustee"), in a private transaction that was not subject to the registration
requirements of the Securities Act. For purposes of the following summary, the
Old Notes and the New Notes shall be collectively referred to as the "Notes."
The terms of the Notes include those stated in the Indenture and those made
part of the Indenture by reference to the TIA. The Notes are subject to all
such terms, and Holders of Notes are referred to the Indenture and the TIA for
a statement thereof. The following summary of certain provisions of the
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Indenture, including the definitions therein of certain terms
used below. Capitalized terms that are used but not otherwise defined below
under the caption "--Certain Definitions" have the meaning assigned to them in
the Indenture, and such definitions are incorporated herein by reference. A
copy of the Indenture is filed as an exhibit to the Registration Statement of
which this Prospectus is a part, and is available as set forth under
"Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
GENERAL
The Notes will be general unsecured obligations of the Company, subordinated
in right of payment to all existing and future Senior Debt of the Company. See
"Subordination." The Notes will be guaranteed, jointly and severally, on a
senior subordinated basis by the Guaranteeing Subsidiaries. The Subsidiary
Guarantees will be subordinated in right of payment to all existing and future
Senior Debt of the Guaranteeing Subsidiaries,
59
<PAGE>
including the obligations of the Guaranteeing Subsidiaries under the Credit
Agreement. See "Subsidiary Guarantees." At December 31, 1997, on a pro forma
basis (giving effect to the offering of the Old Notes and the application of
the net proceeds therefrom), the Company had approximately $20.1 million of
Senior Debt outstanding.
Restrictions in the Indenture on the ability of the Company and its
Restricted Subsidiaries to incur additional Indebtedness, to make Asset Sales,
to enter into transactions with Affiliates and to enter into mergers,
consolidations or sales of all or substantially all of its assets, may make
more difficult or discourage a takeover of the Company, whether favored or
opposed by the management of the Company. Although such restrictions cover a
wide variety of arrangements which traditionally have been used to effect
highly leveraged transactions, the Indenture may not afford holders of Notes
protection in all circumstances from the adverse aspects of a highly leveraged
transaction, reorganization, restructuring, merger or similar transaction.
As of the date of the Indenture, all of the Company's Subsidiaries were
Restricted Subsidiaries. However, under certain circumstances, the Company
will be able to designate current or future Subsidiaries as Unrestricted
Subsidiaries. Unrestricted Subsidiaries will not be subject to many of the
restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $100 million and
will mature on April 15, 2008. The Indenture provides for the issuance of up
to $25 million aggregate principal amount of additional notes having identical
terms and conditions to the Notes offered hereby subject to compliance with
the covenants contained in the Indenture. Any issuance of additional notes
would be subject to the covenant described under "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock." Any additional
notes will be part of the same issue as the Notes and will vote on all matters
with the Old Notes and New Notes. For purposes of this "Description of New
Notes," reference to the Notes includes any additional notes issued pursuant
to the Indenture. Interest on the Notes will accrue at the rate of 10% per
annum and will be payable semi-annually in arrears on April 15 and October 15,
commencing on October 15, 1998, to Holders of record on the immediately
preceding April 1 and October 1. Interest on the Notes will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid, from the date of original issuance. Holders of the New Notes will
receive interest on October 15, 1998 from the date of initial issuance of the
New Notes, plus an amount equal to the accrued interest on the Old Notes from
the date of initial issuance thereof to the date of exchange thereof pursuant
to the Exchange Offer. Interest on the Old Notes accepted for exchange will
cease to accrue upon issuance of New Notes in exchange therefor. Interest will
be computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, interest and Liquidated Damages (as defined in
"Registration Rights; Liquidated Damages"), if any, on the Notes will be
payable at the office or agency of the Company maintained for such purpose
within the City and State of New York or, at the option of the Company,
payment of interest may be made by check mailed to the Holders of the Notes at
their respective addresses set forth in the register of Holders of Notes.
Until otherwise designated by the Company, the Company's office or agency in
New York will be the office of the Trustee maintained for such purpose. The
Notes will be issued in denominations of $1,000 and integral multiples
thereof.
SUBSIDIARY GUARANTEES
The Company's payment obligations under the Notes will be jointly and
severally guaranteed (the "Subsidiary Guarantees") by the Guaranteeing
Subsidiaries. Guaranteeing Subsidiaries include each of the Subsidiaries of
the Company in existence on the date of the Indenture and any future
Restricted Subsidiaries and their respective successors and assigns. The
Subsidiary Guarantee of each Guaranteeing Subsidiary will be subordinated to
the prior payment in full of all existing and future Senior Debt of such
Guaranteeing Subsidiary on substantially the same terms as the Notes are
subordinated to the Senior Debt of the Company. The obligations of each
Guaranteeing Subsidiary under its Subsidiary Guarantee will provide that they
will be limited so as not
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<PAGE>
to constitute a fraudulent conveyance under applicable law. See "Risk
Factors--Fraudulent Conveyance; Preferential Transfer."
The Indenture provides that no Guaranteeing Subsidiary may consolidate with
or merge with or into (whether or not such Guaranteeing Subsidiary is the
surviving Person), another Person, whether or not affiliated with such
Guaranteeing Subsidiary, unless (i) subject to the provisions of the following
paragraph, the Person formed by or surviving any such consolidation or merger
(if other than such Guaranteeing Subsidiary) assumes all the obligations of
such Guaranteeing Subsidiary under the Notes and the Indenture pursuant to a
supplemental indenture in form and substance reasonably satisfactory to the
Trustee; (ii) immediately after giving effect to such transaction, no Default
or Event of Default exists; (iii) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
the Consolidated Net Worth of the Guaranteeing Subsidiary or the surviving
entity, as the case may be, is at least equal to the Consolidated Net Worth of
the Guaranteeing Subsidiary immediately before such transaction or series of
transactions; and (iv) the Company would be permitted by virtue of the
Company's pro forma Fixed Charge Coverage Ratio, immediately after giving
effect to such transaction, to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio set forth in the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock." The foregoing
will not prohibit a merger between a Guaranteeing Subsidiary and another
Guaranteeing Subsidiary or a merger between a Guaranteeing Subsidiary and the
Company.
The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of any Guaranteeing Subsidiary, by way
of merger, consolidation or otherwise, or a sale or other disposition of all
of the Capital Stock of any Guaranteeing Subsidiary, then such Guaranteeing
Subsidiary (in the event of a sale or other disposition, by way of such a
merger, consolidation or otherwise, of all of the Capital Stock of such
Guaranteeing Subsidiary) or the corporation acquiring the property (in the
event of a sale or other disposition of all of the assets of such Guaranteeing
Subsidiary) will be released and relieved of any obligations under its
Subsidiary Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the applicable provisions of the
Indenture. See "--Asset Sales."
SUBORDINATION
The payment of all Obligations on the Notes will be subordinated in right of
payment, as set forth in the Indenture, to the prior payment in full in cash
or Cash Equivalents of all Senior Debt, whether outstanding on the date of the
Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company, or in a bankruptcy, reorganization, insolvency,
receivership or any such proceeding relating to the Company or its property,
an assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full in cash or Cash Equivalents of all Obligations due in respect
of such Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt, whether or not
such interest is in an allowed claim under applicable law) before the Holders
of Notes will be entitled to receive any payment with respect to the Notes.
Until all Obligations with respect to Senior Debt are paid in full in cash or
Cash Equivalents, any distribution to which the Holders of Notes would
otherwise be entitled shall be made to the holders of Senior Debt (except that
Holders of Notes may receive (i) Permitted Junior Securities and any other
Permitted Junior Securities issued in exchange for any Permitted Junior
Securities and (ii) payments made from the trust described under "Legal
Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the Notes
(except in such Permitted Junior Securities, Permitted Junior Securities
issued in exchange for such Permitted Junior Securities or from the trust
described under "Legal Defeasance and Covenant Defeasance") if (i) a default
in the payment of the principal of, premium, if any, or interest on Designated
Senior Debt occurs and is continuing or (ii) any other
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<PAGE>
default occurs and is continuing with respect to Designated Senior Debt that
permits holders of the Designated Senior Debt as to which such default relates
to accelerate its maturity and the Trustee receives a notice of such default
(a "Payment Blockage Notice") from the holders of any Designated Senior Debt.
Payments on the Notes may and shall be resumed (a) in the case of a payment
default, upon the date on which such default is cured or waived and (b) in
case of a nonpayment default, the earlier of the date on which such nonpayment
default is cured or waived or 179 days after the date on which the applicable
Payment Blockage Notice is received unless the maturity of any Designated
Senior Debt has been accelerated. No new period of payment blockage may be
commenced unless and until (i) 360 days have elapsed since the effectiveness
of the immediately prior Payment Blockage Notice and (ii) all scheduled
payments of principal, premium, if any, Liquidated Damages, if any, and
interest on the Notes that have come due have been paid in full in cash. No
nonpayment default that existed or was continuing on the date of delivery of
any Payment Blockage Notice to the Trustee shall be, or be made, the basis for
a subsequent Payment Blockage Notice unless such default shall have been
waived for a period of not less than 90 days.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of the Notes may recover less ratably
than creditors of the Company who are holders of Senior Debt. See "Risk
Factors--Subordination."
OPTIONAL REDEMPTION
Except as provided in the next paragraph, the Notes will not be redeemable
at the Company's option prior to April 15, 2003. Thereafter, the Notes will be
subject to redemption at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, together, with
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
applicable redemption date, if redeemed during the twelve-month period
beginning on April 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2003............................................................ 105.000%
2004............................................................ 103.333%
2005............................................................ 101.667%
2006 and thereafter............................................. 100.000%
</TABLE>
Notwithstanding the foregoing, at any time prior to April 15, 2001, the
Company on one or more occasions may redeem up to $18,750,000 aggregate
principal amount of Notes with the net proceeds of one or more public
offerings of common stock of the Company at a redemption price of 110% of the
principal amount thereof plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the applicable date of redemption; provided that
at least $56,250,000 aggregate principal amount of the Notes remain
outstanding immediately after the occurrence of each such redemption.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company is not required to make any mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to repurchase all or any part (equal to
$1,000 or an integral multiple thereof) of such Holder's Notes
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<PAGE>
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest and Liquidated Damages, if any, thereon to
the date of purchase (the "Change of Control Payment"). Within 30 days
following any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of
Control and offering to repurchase Notes pursuant to the procedures required
by the Indenture and described in such notice. The Company will comply with
the requirements of Rule 14e-l under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of the Notes as a result of a Change of
Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating
the aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
the Notes surrendered, if any; provided that each such new Note will be in a
principal amount of $1,000 or an integral multiple thereof. The Indenture will
provide that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will
either repay all outstanding Senior Debt or obtain the requisite consents, if
any, under all agreements governing outstanding Senior Debt to permit the
repurchase of Notes required by this covenant. The Company will publicly
announce the results of the Change of Control Offer on or as soon as
practicable after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as
described above with respect to a Change of Control, the Indenture does not
contain provisions that permit the Holders of the Notes to require that the
Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.
The Credit Agreement prohibits the Company from purchasing any Notes, and
also provides that certain change of control events (including a Change of
Control under the Indenture) with respect to the Company would constitute a
default thereunder. Any future credit agreements or other agreements relating
to Senior Debt to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing Notes, the Company could seek
the consent of its lenders to the purchase of Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does
not obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an Event of Default under the
Indenture which would, in turn, constitute a default under the Credit
Agreement. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the Holders of Notes. See "Risk
Factors--Potential Inability to Effect a Change of Control Offer or an Asset
Sale Offer."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as whole. There is no
precisely established definition of the phrase "substantially all" under
applicable law. Accordingly, the ability of a Holder of Notes to require the
Company to repurchase such Notes as a result of a sale, lease,
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transfer, conveyance or other disposition of less than all of the assets of
the Company and its Subsidiaries taken as a whole to another Person or group
is uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (i) the
Company (or the Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair market
value of the assets or Equity Interests issued or sold or otherwise disposed
of and (ii) at least 75% of the consideration therefor received by the Company
or such Restricted Subsidiary is in the form of cash or Cash Equivalents;
provided that the amount of (x) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet) of the Company or any
Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Notes or, in the case of liabilities of a Restricted
Subsidiary, the Subsidiary Guarantee of such Subsidiary) that are assumed by
the transferee of any such assets and (y) any securities, notes or other
obligations received by the Company or any such Restricted Subsidiary from
such transferee that are converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received) within 180 days
after receipt, shall be deemed to be cash for purposes of this provision.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, (a) to repay Senior
Debt or Pari Passu Indebtedness (provided that if the Company shall so reduce
Pari Passu Indebtedness, it will equally and ratably make an Asset Sale Offer
(in accordance with the procedures set forth below for an Asset Sale Offer) to
all Holders) and/or (b) to an investment in another business, the making of a
capital expenditure or the acquisition of other tangible assets, product
distribution rights or intellectual property or rights thereto, in each case,
in a line of business permitted by the covenant described in "Line of
Business." Pending the final application of any such Net Proceeds, the Company
may temporarily reduce borrowings under the Credit Agreement or otherwise
invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested
as provided in the first sentence of this paragraph will be deemed to
constitute "Excess Proceeds." The Indenture provides that when the aggregate
amount of Excess Proceeds exceeds $10.0 million, the Company will (i) make an
offer to all Holders of Notes and (ii) prepay, purchase or redeem (or make an
offer to do so) any other Pari Passu Indebtedness of the Company in accordance
with provisions (if any) requiring the Company to prepay, purchase or redeem
such Indebtedness with the proceeds from any asset sales (or offer to do so),
pro rata in proportion to the respective principal amounts (or accreted value,
as applicable) of the Notes and such other Indebtedness required to be
prepaid, purchased or redeemed or tendered for pursuant to such offer (an
"Asset Sale Offer"), to purchase the maximum principal amount of Notes that
may be purchased out of the Excess Proceeds, at an offer price in cash in an
amount equal to 100% of the principal amount thereof plus accrued and unpaid
interest and Liquidated Damages thereon, if any, to the date of purchase, in
accordance with the procedures set forth in the Indenture.
The Credit Agreement prohibits the Company from purchasing any Notes and
also provides that certain change of control events with respect to the
Company (including a Change of Control under the Indenture) and certain asset
sales will constitute a default thereunder. Any future credit agreements or
other agreements relating to Senior Debt to which the Company becomes a party
may contain similar restrictions and provisions. In the event a Change of
Control occurs or the Company is required to make an Asset Sale Offer at a
time when the Company is prohibited from purchasing Notes, the Company could
seek the consent of its lenders to the purchase of Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Company does
not obtain such a consent or repay such borrowings, the Company will remain
prohibited from purchasing Notes. In such case, the Company's failure to
purchase tendered Notes would constitute an Event of Default under the
Indenture which would, in turn, constitute a default under the Credit
Agreement. In such circumstances, the subordination provisions in the
Indenture would likely restrict payments to the Holders of the Notes. See
"Risk Factors--Subordination."
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SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which
the Notes are listed or, if the Notes are not so listed, on a pro rata basis,
by lot or by such other method as the Trustee deems fair and appropriate;
provided that no Notes with a principal amount of $1,000 or less shall be
redeemed in part. Notice of redemption shall be mailed by first class mail at
least 30 but not more than 60 days before the redemption date to each Holder
of Notes to be redeemed at its registered address. If any Note is to be
redeemed in part only, the notice of redemption that relates to such Note
shall state the portion of the principal amount thereof to be redeemed. A new
Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the Holder thereof upon cancellation of the original
Note. On and after the redemption date, interest will cease to accrue on Notes
or portions thereof called for redemption.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any distribution (including in connection with any merger or
consolidation) on account of any Equity Interests of the Company or any of its
Restricted Subsidiaries (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or dividends
or distributions payable to the Company or any Wholly Owned Restricted
Subsidiary of the Company); (ii) purchase, redeem or otherwise acquire or
retire for value any Equity Interests of the Company, any of its Restricted
Subsidiaries or any other Affiliate of the Company (other than any such Equity
Interests owned by the Company or any Wholly Owned Restricted Subsidiary of
the Company); (iii) make any principal payment on, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated in right of payment to the Notes or a Subsidiary Guarantee,
except at the original final maturity thereof or in accordance with the
scheduled mandatory redemption or repayment provisions set forth in the
original documentation governing such Indebtedness (but not pursuant to any
mandatory offer to repurchase upon the occurrence of any event); or (iv) make
any Restricted Investment (all such payments and other actions set forth in
clauses (i) through (iv) above being collectively referred to as "Restricted
Payments"), unless, at the time of such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would be able to incur at least $1.00 of additional
Indebtedness under the Fixed Charge Coverage Ratio in the "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture (excluding Restricted Payments permitted by
clauses (ii), (iii), (v), (vi) and (ix) of the next succeeding paragraph),
is less than the sum of (1) 50% of the Consolidated Net Income of the
Company for the period (taken as one accounting period) from the beginning
of the first fiscal quarter commencing after the date of the Indenture to
the end of the Company's most recently ended fiscal quarter for which
internal financial statements are available at the time of such Restricted
Payment (or, if such Consolidated Net Income for such period is a deficit,
minus 100% of such deficit), plus (2) 100% of the aggregate net cash
proceeds received by the Company from contributions of capital or the issue
or sale since the date of the Indenture of Equity Interests of the Company
or the amount by which Indebtedness of the Company or its Restricted
Subsidiaries is reduced on the Company's balance sheet upon the conversion
of debt securities of the Company into Equity Interests (other than Equity
Interests (or convertible debt securities) sold to a Subsidiary of the
Company and other than Disqualified Stock or debt securities that have been
converted into Disqualified Stock), plus (3) to the extent that any
Restricted Investment that was made after the date of the Indenture is sold
for cash or otherwise liquidated or repaid for cash (other than to the
Company or a Restricted Subsidiary), the cash return of capital with
respect to such Restricted Investment equal to the amount of the original
Investment
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(less the cost of disposition, if any); provided, however, that no cash
proceeds received by the Company from the issue or sale of any Equity
Interests issued by the Company will be counted in determining the amount
available for Restricted Payments under this clause (c) to the extent such
proceeds were used: to redeem, repurchase, retire or acquire any Equity
Interests of the Company pursuant to clause (ii) of the next succeeding
paragraph; to defease, redeem or repurchase any subordinated Indebtedness
pursuant to clause (iii) of the next succeeding paragraph; or to purchase,
redeem or acquire any shares of Capital Stock of the Company or options on
such shares pursuant to clause (iv) of the next succeeding paragraph.
The foregoing provisions will not prohibit any or all of the following (each
and all of which: (1) constitutes an independent exception to the foregoing
provisions and (2) may occur in addition to any action permitted to occur
under any other exception): (i) the payment of any dividend within 60 days
after the date of declaration thereof, if at such date of declaration such
payment would have complied with the provisions of the Indenture; (ii) the
redemption, repurchase, retirement or other acquisition of any Equity
Interests of the Company in exchange for, or out of the net proceeds of, the
substantially concurrent sale (other than to a Subsidiary of the Company) of
other Equity Interests of the Company (other than Disqualified Stock);
provided that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(2) of the preceding paragraph; (iii) the defeasance,
redemption or repurchase of subordinated Indebtedness with the net proceeds
from an incurrence of Permitted Refinancing Indebtedness or the substantially
concurrent sale (other than to a Subsidiary of the Company) of Equity
Interests of the Company (other than Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement or other acquisition shall be excluded from
clause (c)(2) of the preceding paragraph; (iv) the funding of loans (but not
including the forgiveness of any such loan) to executive officers, directors
or shareholders for relocation loans, bonus advances and other purposes
consistent with past practices or the purchase, redemption or other
acquisition for value of shares of Capital Stock of the Company (other than
Disqualified Stock) or options on such shares held by the Company's or the
Restricted Subsidiaries' officers or employees or former officers or employees
(or their estates or trusts or beneficiaries under their estates or trusts for
the benefit of such beneficiaries) upon the death, disability, retirement or
termination of employment of such current or former officers or employees
pursuant to the terms of an employee benefit plan or any other agreement
pursuant to which such shares of Capital Stock or options were issued or
pursuant to a severance, buy-sell or right of first refusal agreement with
such current or former officers or employees provided that the aggregate
amount of any such loans funded and cash consideration paid, or distributions
made, pursuant to this clause (iv) does not in any one fiscal year exceed $1.0
million; (v) the payment of dividends by a Restricted Subsidiary on any class
of common stock of such Restricted Subsidiary if such dividend is paid pro
rata to all holders of such class of common stock; (vi) the repurchase of any
class of common stock of a Restricted Subsidiary if such repurchase is made
pro rata with respect to such class of common stock; (vii) any other
Restricted Payment (other than (A) a dividend or other distribution on account
of any Equity Interests of the Company or any of its Restricted Subsidiaries
and (B) a purchase, redemption or other acquisition of any Equity Interests of
the Company, any of its Restricted Subsidiaries or any Affiliate of the
Company) if the amounts thereof, together with all other Restricted Payments
made pursuant to this clause since the date of the Indenture, shall not exceed
$10.0 million, (viii) Permitted ChoicePoint Payments and (ix) the redemption,
repurchase or other acquisition of Notes.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary; provided, however, that (i) no Default or Event of
Default shall have occurred and be continuing or would arise therefrom, (ii)
such designation, when considered as an Investment as described in the next
sentence, is at that time permitted under the covenant described under
"Restricted Payments" and (iii) immediately after giving effect to such
designation, the Company would be able to incur at least $1.00 of additional
Indebtedness under the Fixed Charge Coverage Ratio in the "Incurrence of
Indebtedness and Issuance of Preferred Stock" covenant. All such outstanding
Investments will be deemed to constitute Restricted Investments in an amount
equal to the greater of (i) the net book value of such Investments at the time
of such designation and (ii) the fair market value of such Investments at the
time of such designation. Such designation will only be permitted if under the
terms of the
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Indenture such Restricted Investment would be permitted at such time and if
such Restricted Subsidiary otherwise meets the definition of an Unrestricted
Subsidiary.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustee an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed, which
calculations shall be based upon the Company's latest available financial
statements.
Incurrence of Indebtedness and Issuance of Preferred Stock
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, Incur, contingently or
otherwise, any Indebtedness (including Acquired Debt) and that the Company
will not issue any Disqualified Stock and will not permit any of its
Restricted Subsidiaries to issue any shares of preferred stock; provided,
however, that the Company and its Guaranteeing Subsidiaries may incur
Indebtedness (including Acquired Debt) and the Company may issue shares of
Disqualified Stock if the Fixed Charge Coverage Ratio for the Company's most
recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock issued would
have been at least (x) 2.0 to 1 if such incurrence or issuance occurs on or
before March 31, 2001, or (y) 2.25 to 1 if such incurrence or issuance occurs
at any time thereafter, in each case, determined on a pro forma basis
(including a pro forma application of the net proceeds therefrom), as if the
additional Indebtedness had been incurred, or the Disqualified Stock had been
issued, as the case may be, at the beginning of such four-quarter period.
The foregoing provisions do not apply to any of the following (each and all
of which: (1) may be issued or incurred, (2) constitute an independent
exception to the foregoing provisions and (3) may be incurred in addition to
any other Indebtedness permitted to be incurred under any other exception):
(i) the incurrence by the Company or any Guaranteeing Subsidiary of
Indebtedness and letters of credit pursuant to the Credit Facility in an
aggregate principal amount at any one time outstanding not exceeding $100.0
million (A) less the aggregate amount of all mandatory repayments (a
"Mandatory Repayment") permanently reducing the principal of any term
Indebtedness under the Credit Facility that has been made since the date of
the Indenture (or which would otherwise have been required to have been made
but for the fact that a prior optional repayment has been made permanently
reducing the principal of any term Indebtedness under the Credit Facility)
pursuant to the amortization schedule of the Credit Facility (other than any
Mandatory Repayment made concurrently with refinancing or refunding of the
Credit Facility) and (B) less the aggregate amount of all Net Proceeds of
Asset Sales applied pursuant to clause (a) of the first sentence of the second
paragraph under the covenant entitled "Asset Sales" to permanently reduce
Indebtedness (and, in the case of revolving Indebtedness, the commitments)
under the Credit Facility or to cash collateralize letters of credit and
permanently reduce commitments with respect to revolving Indebtedness under
the Credit Facility; provided that the amount of Indebtedness permitted to be
incurred pursuant to the Credit Facility in accordance with this clause (i)
shall be in addition to any Indebtedness permitted to be incurred pursuant to
the Credit Facility or otherwise in reliance on, and in accordance with,
clause (vii) below; (ii) the incurrence by the Company and any Guaranteeing
Subsidiary of Indebtedness represented by the Notes offered hereby (and
excluding any additional notes issued pursuant to the Indenture) and any
Subsidiary Guarantee; (iii) Existing Indebtedness; (iv) the incurrence by the
Company or any of its Restricted Subsidiaries of Permitted Refinancing
Indebtedness in exchange for, or the net proceeds of which are used to extend,
refinance, renew, replace, defease or refund, Indebtedness that was permitted
by the Indenture; (v) the incurrence by the Company or any of its Wholly Owned
Restricted Subsidiaries of intercompany Indebtedness between or among the
Company and any of its Wholly Owned Restricted Subsidiaries; provided,
however, that (a) any subsequent issuance or transfer (other than for security
purposes) of Equity Interests and (b) any subsequent sale or other transfer
(including for security purposes other than to secure Indebtedness permitted
to be incurred pursuant to clause (i) of this paragraph) of such Indebtedness,
in each case, that results in any such Indebtedness being held by a Person
other than the Company or any of its Wholly Owned Restricted Subsidiaries
shall be deemed to constitute an incurrence of such Indebtedness by the
Company or such Wholly Owned Restricted Subsidiary, as the case may be; (vi)
the
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incurrence by the Company or any of its Restricted Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging (a)
interest rate risk with respect to any floating rate Indebtedness of such
Person so long as such floating rate Indebtedness is permitted by the terms of
the Indenture to be outstanding or (b) exchange rate risk with respect to
agreements or indebtedness of such Person payable or denominated in a currency
other than U.S. dollars; (vii) the incurrence by the Company and any
Guaranteeing Subsidiary of Indebtedness in an aggregate principal amount at
any time outstanding not to exceed $15.0 million; and (viii) Obligations in
respect of performance and surety bonds provided by the Company or any
Guaranteeing Subsidiary in the ordinary course of business.
Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, enter into any sale and leaseback transaction;
provided that the Company and any Guaranteeing Subsidiary may enter into a
sale and leaseback transaction if (i) the Company or such Guaranteeing
Subsidiary could have incurred Indebtedness in an amount equal to the
Attributable Debt relating to such sale and leaseback transaction pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of the
covenant "Incurrence of Indebtedness and Issuance of Preferred Stock," (ii)
the Lien to secure such Indebtedness does not extend to or cover any assets of
the Company or such Guaranteeing Subsidiary other than the assets which are
the subject of the sale leaseback transaction, (iii) the gross cash proceeds
of such sale and leaseback transaction are at least equal to the fair market
value (as determined in good faith by the Board of Directors of the Company
and set forth in an Officers' Certificate delivered to the Trustee) of the
property that is the subject of such sale and leaseback transaction and (iv)
the transfer of assets in such sale and leaseback transaction is permitted by,
and the proceeds of such transaction are applied in compliance with, the
covenant "Asset Sales."
Liens
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien (other than Permitted Liens) securing any
Obligations on any property or asset now owned or hereafter acquired, or on
any income or profits therefrom or assign or convey any right to receive
income therefrom, unless the Notes, and the Subsidiary Guarantees, as
applicable, are either (i) secured by a Lien on such property, assets, income
or profits that is senior in priority to the Lien securing such other
Obligations, if such other Obligations are subordinated in right of payment to
the Notes and/or the Subsidiary Guarantees or (ii) equally and ratably secured
by a Lien on such property, assets, income or profits with the Lien securing
such other Obligations, if such other Obligations are pari passu in right of
payment to the Notes and/or the Subsidiary Guarantees.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or consensual
restriction on the ability of any Restricted Subsidiary to: (i)(a) pay
dividends or make any other distributions to the Company or any of its
Restricted Subsidiaries on its Capital Stock or (b) pay any Indebtedness owed
to the Company or any of its Restricted Subsidiaries; (ii) make loans or
advances to the Company or any of its Restricted Subsidiaries; or (iii)
transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness, as in effect on the date of
the Indenture; (b) any Credit Facility; provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacement or refinancings are no more restrictive in the aggregate than
those contained in the Credit Agreement, as in effect on the date of the
Indenture; (c) the Indenture and the Notes; (d) applicable law; (e) any
instrument governing Indebtedness or Capital Stock of a Person acquired by the
Company or any of its Restricted Subsidiaries, as in effect at the time of
acquisition (except to the extent such Indebtedness was incurred in connection
with, or in contemplation of, such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person, so
acquired;
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provided that in the case of Indebtedness, such Indebtedness was permitted by
the terms of the Indenture to be incurred; (f) customary non-assignment
provisions in leases and other agreements entered into in the ordinary course
of business and consistent with past practices; (g) purchase money obligations
for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired; (h) Permitted Refinancing Indebtedness; provided that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive in the aggregate than those contained in
the agreements governing the Indebtedness being refinanced; or (i) an
agreement that has been entered into for the sale or disposition of all or
substantially all of the Equity Interests or property or assets of a
Restricted Subsidiary; provided that such restrictions are limited to the
Restricted Subsidiary that is the subject of such agreement.
Merger, Consolidation or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving entity), or sell, assign,
transfer, lease, convey or otherwise dispose of all or substantially all of
its properties or assets in one or more related transactions to, another
Person unless (i) the Company is the surviving corporation or the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia; (ii) immediately after giving effect to such transaction or series
of transactions on a pro forma basis (including, without limitation, any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction or series of transactions), the Consolidated Net
Worth of the Company or the surviving entity, as the case may be, is at least
equal to the Consolidated Net Worth of the Company immediately before such
transaction or series of transactions; (iii) the Person formed by or surviving
any such consolidation or merger (if other than the Company) or the Person to
which such sale, assignment, transfer, lease, conveyance or other disposition
will have been made assumes all the obligations of the Company under the Notes
and the Indenture pursuant to a supplemental indenture in form reasonably
satisfactory to the Trustee; (iv) immediately after such transaction, no
Default or Event of Default exists; and (v) the Company or the Person formed
by or surviving any such consolidation or merger, or to which such sale,
assignment, transfer, lease, conveyance or other disposition will have been
made will, at the time of such transaction after giving pro forma effect
thereto as if such transaction had occurred at the beginning of the applicable
four-quarter period, be permitted to incur at least $1.00 of additional
Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the
first paragraph of the covenant entitled "Incurrence of Indebtedness and
Issuance of Preferred Stock." The foregoing does not prohibit a consolidation
or merger between the Company and a Wholly Owned Restricted Subsidiary, the
transfer of all or substantially all of the properties or assets of the
Company to a Wholly Owned Restricted Subsidiary or the transfer of all or
substantially all of the properties or assets of a Wholly Owned Restricted
Subsidiary to the Company; provided that if the Company is not the surviving
entity of such transaction or the Person to which such transfer is made, the
surviving entity or the Person to which such transfer is made shall comply
with clause (iii) of this paragraph.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of
any of its properties or assets to, or purchase any property or assets from,
or enter into any contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate (each of the foregoing,
an "Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary than
those that could have been obtained in a comparable transaction by the Company
or such Restricted Subsidiary with an unrelated Person, (ii) if such Affiliate
Transaction involves aggregate consideration in excess of $2.0 million, the
Company delivers to the Trustee a resolution of the Board of Directors of the
Company set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and such Affiliate Transaction is
approved by a majority of the disinterested members of the Board of Directors
of the Company and (iii) if such Affiliate Transaction involves aggregate
consideration in excess of $5.0 million, the Company delivers to the Trustee
an
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opinion as to the fairness of such Affiliate Transaction from a financial
point-of-view issued by an investment bank or accounting firm of national
standing, provided, however, that (a) any employment, consulting or similar
agreement entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business of the Company or such Restricted Subsidiary,
(b) transactions between or among the Company and/or its Restricted
Subsidiaries, (c) payment of employee benefits, including wages, salary,
bonuses, retirement plans and stock options, and director fees in the ordinary
course of business, and (d) Restricted Payments permitted by the provisions of
the Indenture described above under clauses (i), (iv), (v), (vi), (vii),
(viii) of the second paragraph of the covenant entitled "Restricted Payments,"
in each case, shall not be deemed Affiliate Transactions.
Anti-Layering
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee, or otherwise become liable for any Indebtedness that is
both (a) subordinate or junior in right of payment to any Senior Debt and (b)
senior in any respect in right of payment to the Notes and (ii) no
Guaranteeing Subsidiary will incur, create, issue, assume, guarantee or
otherwise become liable for any Indebtedness that is both (a) subordinate or
junior in right of payment to its Senior Debt and (b) senior in any respect in
right of payment to its Subsidiary Guarantee.
Line of Business
The Company will not, and will not permit any of its Restricted Subsidiaries
to, engage in any business other than a Health Care Related Business;
provided, however, that the Company will not be deemed to be in violation of
this covenant so long as the Company does not derive any material portion of
its consolidated revenues or Consolidated EBITDA from a business that is not a
Health Care Related Business.
Reports
The Indenture provides that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will furnish to the Holders of Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file
such forms, including a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" that describes the financial condition
and results of operations of the Company and its Restricted Subsidiaries and,
with respect to the annual information only, a report thereon by the Company's
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports. In addition, whether or not required by the
rules and regulations of the Commission, from and after the consummation of
the Exchange Offer or the effectiveness of the Shelf Registration Statement,
the Company will file a copy of all such information and reports with the
Commission for public availability (unless the Commission will not accept such
a filing) and make such information available to securities analysts and
prospective investors upon request. In addition, the Company and the
Guaranteeing Subsidiaries have agreed that, for so long as any Notes remain
outstanding, they will furnish to Holders and to securities analysts and
prospective investors, upon their request, the information required to be
delivered pursuant to Rule 144A(d)(4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default:
(i) default for 30 days in the payment when due of interest or Liquidated
Damages, if any, with respect to the Notes (whether or not prohibited by
the subordination provisions of the Indenture);
(ii) default in payment when due of principal or premium, if any, on the
Notes at maturity, upon redemption or otherwise (whether or not prohibited
by the subordination provisions of the Indenture);
(iii) failure by the Company or any Guaranteeing Subsidiary for 30 days
after receipt of notice from the Trustee or Holders of at least 25% in
principal amount of the Notes then outstanding to comply with the
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provisions described under the covenants entitled "Change of Control,"
"Asset Sales," "Sale and Leaseback Transactions," "Restricted Payments,"
"Incurrence of Indebtedness and Issuance of Preferred Stock" or "Merger,
Consolidation or Sale of Assets;"
(iv) failure by the Company or any Guaranteeing Subsidiary for 60 days
after notice from the Trustee or the Holders of at least 25% in principal
amount of the Notes then outstanding to comply with its other agreements in
the Indenture or the Notes;
(v) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any
of its Restricted Subsidiaries), whether such Indebtedness or Guarantee now
exists, or is created after the date of the Indenture, which default (A)(i)
is caused by a failure to pay when due at final stated maturity (giving
effect to any grace period related thereto) principal of such Indebtedness
(a "Payment Default") or (ii) results in the acceleration of such
Indebtedness prior to its express maturity and (B) in each case, the
principal amount of such Indebtedness, together with the principal amount
of any other such Indebtedness under which there has been a Payment Default
or the maturity of which has been accelerated as a result of any matter
contemplated in clause (v)(A)(i) or (v)(A)(ii), aggregates $7.5 million or
more;
(vi) failure by the Company or any of its Restricted Subsidiaries to pay
final judgments (to the extent not covered by insurance or as to which the
insurer has not acknowledged coverage in writing) aggregating in excess of
$7.5 million, which judgments are not paid, fully bonded, discharged or
stayed within 60 days after their entry;
(vii) certain events of bankruptcy or insolvency with respect to the
Company or any Restricted Subsidiary of the Company that is a Significant
Subsidiary or group of Restricted Subsidiaries of the Company that
together, would constitute a Significant Subsidiary; and
(viii) the termination of the Subsidiary Guarantee(s) of either a
Guaranteeing Subsidiary that is a Significant Subsidiary or group of
Guaranteeing Subsidiaries that together constitute a Significant Subsidiary
for any reason not permitted by the Indenture, or the denial of any Person
acting on behalf of any such Guaranteeing Subsidiary or group of
Guaranteeing Subsidiaries of its Obligations under any such Subsidiary
Guarantee(s).
To the extent that the last day of the period referred to in clauses (i),
(iii), (iv) or (vi) of the immediately preceding paragraph is not a Business
Day, then the first Business Day following such day shall be deemed to be the
last day of the period referred to in such clauses. Any "day" will be deemed
to end as of 11:59 p.m., New York City time.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable by notice in writing to the Company and
the Trustee specifying the respective Event of Default and that it is a
"notice of acceleration" (the "Acceleration Notice"), and the same (i) shall
become immediately due and payable or (ii) if there are any amounts
outstanding under the Credit Facility, shall become immediately due and
payable upon the first to occur of an acceleration under the Credit Facility
or five Business Days after receipt by the Company and the Representative
under the Credit Facility of such Acceleration Notice but only if such Event
of Default is then continuing. Notwithstanding the foregoing, in the case of
an Event of Default arising from certain events of bankruptcy or insolvency
with respect to the Company, all outstanding Notes will become due and payable
without further action or notice. Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee, may on behalf of the Holders of all of
the Notes waive any existing Default or Event of Default and its consequences
under the Indenture, except a continuing Default or Event of Default in the
payment of interest or premium on, or principal of, the Notes. The Trustee may
withhold from Holders of the Notes notice of any
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continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal or interest) if it determines that
withholding notice is in such Holders' interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company
or any Guaranteeing Subsidiary, as such, shall have any liability for any
obligations of the Company under the Notes, any Subsidiary Guarantee or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes and the Subsidiary. Such waiver may
not be effective to waive liabilities under the federal securities laws and it
is the view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all
obligations of the Company and the Guaranteeing Subsidiaries discharged with
respect to the outstanding Notes and the Subsidiary Guarantees ("legal
defeasance"). Such legal defeasance means that the Company will be deemed to
have paid and discharged the entire indebtedness represented by the
outstanding Notes, except for (a) the rights of Holders of outstanding Notes
to receive payments in respect of the principal of, premium, if any, and
interest and Liquidated Damages, if any, on the Notes when such payments are
due, or on the redemption date, as the case may be, (b) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payment and money for security payments
held in trust, (c) the rights, powers, trust, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (d) the
legal defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company and
the Guaranteeing Subsidiaries released with respect to certain covenants that
are described in the Indenture ("covenant defeasance") and thereafter any
omission to comply with such obligations shall not constitute a Default or
Event of Default with respect to the Notes. In the event covenant defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default and
Remedies" will no longer constitute an Event of Default with respect to the
Notes.
In order to exercise either legal defeasance or covenant defeasance, the
Company must, among other things, irrevocably deposit with the Trustee, in
trust for the benefit of the Holders of the Notes, cash in U.S. dollars, non-
callable Government Securities, or a combination thereof, in such amounts as
will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants selected by the Trustee, to pay the principal
of, premium, if any, and interest on the outstanding Notes on the stated
maturity or on the applicable optional redemption date, as the case may be.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indenture.
The Registrar and the Trustee may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indenture. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
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AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture, the
Notes or the Subsidiary Guarantees may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the Notes
then outstanding (including consents obtained in connection with a tender
offer or exchange offer for Notes), and any existing default or compliance
with any provision of the Indenture, the Notes or the Subsidiary Guarantees
may be waived with the consent of the Holders of a majority in principal
amount of the then outstanding Notes (including consents obtained in
connection with a tender offer or exchange offer for Notes).
Without the consent of each Holder affected, however, an amendment or waiver
may not (with respect to any Note held by a non-consenting Holder): (i) reduce
the principal amount of Notes; (ii) reduce the principal of or change the
fixed maturity of any Note or alter the provisions with respect to the
redemption of the Notes or any change of control offer; (iii) reduce the rate
of or change the time for payment of interest or Liquidated Damages on any
Notes; (iv) waive a Default or Event of Default in the payment of principal of
or premium, if any, or interest or Liquidated Damages, if any, on the Notes
(except a rescission of acceleration of the Notes by the Holders of at least a
majority in aggregate principal amount of the Notes and a waiver of the
payment default that resulted from such acceleration); (v) make any Note
payable in money other than that stated in the Notes; (vi) waive a redemption
or repurchase payment with respect to any Note; or (vii) make any change in
the foregoing amendment and waiver provisions. Notwithstanding the foregoing,
the provisions with respect to Asset Sales may be amended or supplemented with
the consent of the Holders of at least two-thirds in principal amount of the
Notes then outstanding (including consents obtained in connection with a
tender offer or exchange offer for the Notes). In addition, any amendment to
the provisions of Article 10 of the Indenture (which relate to subordination)
will require the consent of the Holders of at least 75% in aggregate amount of
Notes then outstanding if such amendment would adversely affect the rights of
Holders of Notes. In addition, any amendment to the subordination provisions
of the Indenture shall require the consent of the requisite lenders under the
Credit Facility and, if such amendment would adversely affect the rights of
the Holders of the Notes, of the Holders of at least 75% in aggregate amount
of the Notes then outstanding.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company, the Guaranteeing Subsidiaries and the Trustee may amend or
supplement the Indenture, the Subsidiary Guarantees or the Notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Notes in
addition to or in place of certificated Notes, to provide for the assumption
of the Company's or a Guaranteeing Subsidiary's obligations to Holders of the
Notes in the case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the Holders of the Notes or that
does not adversely affect the legal rights under the Indenture of any such
Holder, to comply with requirements of the Commission in order to effect or
maintain the qualification of the Indenture under the TIA or to allow any
Guaranteeing Subsidiary to guarantee the Notes.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should the Trustee become a creditor of the Company, to obtain payment of
claims in certain cases, or to realize on certain property received in respect
of any such claim as security or otherwise. The Trustee will be permitted to
engage in other transactions with the Company; however, if the Trustee
acquires any conflicting interest, it must eliminate such conflict within 90
days, apply to the Commission for permission to continue as Trustee or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any Holder of Notes, unless such Holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
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ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to the Company, 310
Technology Parkway, Norcross, Georgia 30092, Attention: Susan E. Dignan,
General Counsel.
BOOK-ENTRY, DELIVERY AND FORM
Except as described in the next paragraph, the New Notes initially will be
represented by a single permanent global certificate in definitive, fully
registered form (the "Global Note"). The Global Note will be deposited on the
date of issuance thereof with, or on behalf of, the Depository Trust Company,
New York, New York ("DTC") and registered in the name of a nominee of DTC. The
Global Note will be subject to certain restrictions on transfer set forth
therein and will bear the legend regarding such restrictions set forth under
the heading "Notice to Investors" herein.
Notes (i) transferred to "foreign purchasers" (as defined in "Notice to
Investors") or (ii) held by QIBs who elect to take physical delivery of their
certificates instead of holding their interests through the Global Note (and
which are thus ineligible to trade through DTC) (collectively referred to
herein as the "Non-Global Purchasers") will be issued in registered form (the
"Certificated Security"). Upon the transfer to a QIB of any Certificated
Security initially issued to a Non-Global Purchaser, such Certificated
Security will, unless the transferee requests otherwise or the Global Note has
previously been exchanged in whole for Certificated Securities, be exchanged
for an interest in the Global Note.
The Global Note. The Company expects that pursuant to procedures established
by DTC (i) upon the issuance of the Global Note, DTC or its custodian will
credit, on its internal system, the principal amount of Notes of the
individual beneficial interests represented by such Global Note to the
respective accounts of persons who have accounts with such depositary and (ii)
ownership of beneficial interests in the Global Note will be shown on, and the
transfer of such ownership will be effected only through, records maintained
by DTC or its nominee (with respect to interests of participants) and the
records of participants (with respect to interests of persons other than
participants). Such accounts initially were designated by or on behalf of the
Initial Purchasers and ownership of beneficial interests in the Global Note
will be limited to persons who have accounts with DTC ("participants") or
persons who hold interests through participants. QIBs may hold their interests
in the Global Note directly through DTC if they are participants in such
system, or indirectly through organizations which are participants in such
system.
So long as DTC, or its nominee, is the registered owner or holder of the
Notes, DTC or such nominee, as the case may be, will be considered the sole
owner or holder of the Notes represented by such Global Note for all purposes
under the Indenture. No beneficial owner of an interest in the Global Note
will be able to transfer that interest except in accordance with DTC's
procedures, in addition to those provided for under the Indenture with respect
to the Notes.
Payments of the principal of, premium (if any), and interest (including
Liquidated Damages) on, the Global Note will be made to DTC or its nominee, as
the case may be, as the registered owner thereof. None of the Company, the
Trustee or any Paying Agent will have any responsibility or liability for any
aspect of the records relating to or payments made on account of beneficial
ownership interests in the Global Note or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interest.
The Company expects that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, and interest (including Liquidated Damages) on the
Global Note, will credit participants accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Note as shown on the records of DTC or its nominee. The Company
also expects that payments by participants to owners of beneficial interests
in the Global Note held through such participants will be governed by standing
instructions and customary practice, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
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Transfers between participants in DTC will be effected in the ordinary way
through DTC's same-day funds system in accordance with DTC rules and will be
settled in same day funds. If a holder requires physical delivery of a
Certificated Security for any reason, including to sell Notes to persons in
states which require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in the Global Note, in
accordance with the normal procedures of DTC and with the procedures set forth
in the Indenture.
DTC has advised the Company that it will take any action permitted to be
taken by a holder of Notes (including the presentation of Notes for exchange
as described below) only at the direction of one or more participants to whose
account the DTC interests in the Global Note are credited and only in respect
of such portion of the aggregate principal amount of Notes as to which such
participant or participants has or have given such direction. However, if
there is an Event of Default under the Indenture, DTC will exchange the Global
Note for Certificated Securities, which it will distribute to its participants
and which will be legended as set forth under the heading "Notice to
Investors."
DTC has advised the Company as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provisions of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the DTC system is available to others such
as banks, brokers, dealers and trust companies that clear through or maintain
a custodial relationship with a participant, either directly or indirectly
("indirect participants").
Although DTC has agreed to the foregoing procedures in order to facilitate
transfers of interests in the Global Note among participants of DTC, it is
under no obligation to perform such procedures, and such procedures may be
discontinued at any time. Neither the Company nor the Trustee will have any
responsibility for the performance by DTC or its participants or indirect
participants of their respective obligations under the rules and procedures
governing their operations.
Certificated Securities. If DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is not
appointed by the Company within 90 days, Certificated Securities will be
issued in exchange for the Global Note, which certificates will bear the
legends referred to under the heading "Notice to Investors."
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
For purposes of making any determination of any amount under any single
definition set forth below, such determination shall be made without double
counting of any item; provided that, with respect to the definition of "Fixed
Charge Coverage Ratio" it shall not be deemed to be double counting if an item
is included in the calculation of each of "Consolidated EBITDA" and "Fixed
Charges."
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person merges
with or into or becomes a Subsidiary of such specified Person, including
Indebtedness incurred in connection with, or in contemplation of, such other
Person merging with or into or becoming a Subsidiary of such specified Person
and not satisfied at or prior to the closing of such transaction, and (ii)
Indebtedness secured by a Lien encumbering any asset acquired by such
specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition,
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"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise.
"Asset Sale" means (i) the sale, lease, conveyance, or other disposition by
the Company or any of its Restricted Subsidiaries of any assets (including,
without limitation, by way of a sale and leaseback) other than in the ordinary
course of business, and (ii) the issue or sale by the Company or any of its
Restricted Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of clauses (i) and (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $2.0 million or (b) for net proceeds in excess of $2.0
million. Notwithstanding the foregoing: (i) a transfer of assets by the
Company to a Restricted Subsidiary or by a Restricted Subsidiary to the
Company or to another Restricted Subsidiary, (ii) an issuance of Equity
Interests by a Restricted Subsidiary to the Company or to another Restricted
Subsidiary, (iii) a Restricted Payment that is permitted by the covenant
described above under the covenant entitled "Restricted Payments," and (iv)
the sale and leaseback of any assets within 90 days of the acquisition of such
assets will not be deemed to be Asset Sales.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be so required to be capitalized on the balance sheet in
accordance with GAAP.
"Capital Stock" means, (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock and (iii) in the case of a partnership, partnership interests
(whether general or limited).
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of one year or less from the date of
acquisition, bankers' acceptances with maturities not exceeding one year and
overnight bank deposits, in each case with any commercial bank or trust
company having capital and surplus in excess of $500 million, (iv) repurchase
obligations with a term of not more than seven days for underlying securities
of the types described in clauses (ii) and (iii) above entered into with any
financial institution meeting the qualifications specified in clause (iii)
above, (v) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. ("Moody's") or Standard & Poor's Ratings Services, a
division of the McGraw-Hill Companies, Inc. ("S&P") and in each case maturing
within one year after the date of acquisition, (vi) investment funds investing
95% of their assets in securities of the types described in clauses (i)-(v)
above, (vii) readily marketable direct obligations issued by any state of the
United States of America or any political subdivision thereof having one of
the two highest rating categories obtainable from either Moody's or S&P and
(vii) Indebtedness with a rating of "A" or higher from S&P or "A2" or higher
from Moody's.
"Change of Control" means the occurrence of any of the following: (i) any
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation) in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole to any "person" (as defined in Section 13(d) of the Exchange Act) or
"group" (as defined in Sections 13(d)(3) and 14(d)(2) of the Exchange Act);
(ii) the adoption of a plan for the liquidation or dissolution of the Company;
(iii) the Company consolidates with, or merges with or into, another "person"
(as defined above) or "group" (as defined above), in a transaction or series
of related transactions in which the Voting Stock of the Company is converted
into or
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exchanged for cash, securities or other property, other than any transaction
where (A) the outstanding Voting Stock of the Company is converted into or
exchanged for Voting Stock (other than Disqualified Stock) of the surviving or
transferee corporation and (B) either (1) the "beneficial owners" (as defined
in Rule 13d-3 and 13d-5 under the Exchange Act) of the outstanding Voting
Stock of the Company immediately prior to such transaction own beneficially,
directly or indirectly through one or more Subsidiaries, not less than a
majority of the total outstanding Voting Stock of the surviving or transferee
corporation immediately after such transaction or (2) if, immediately prior to
such transaction the Company is a direct or indirect Subsidiary of any other
Person (each such other Person, the "Holding Company"), the "beneficial
owners" (as defined above) of the outstanding Voting Stock of such Holding
Company immediately prior to such transaction own beneficially, directly or
indirectly through one or more Subsidiaries, not less than a majority of the
outstanding Voting Stock of the surviving or transferee corporation
immediately after such transaction; (iv) the consummation of any transaction
or series of any related transactions (including, without limitation, by way
of merger or consolidation) the result of which is that any "person" (as
defined above) or "group" (as defined above), becomes the "beneficial owner"
(as defined above) of more than 50% of the voting power of the Voting Stock of
the Company; or (v) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
(together with any new directors whose election by such Board of Directors, or
whose nomination for election by the stockholders of the Company, was approved
by a vote of a majority of the directors of the Company who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors then in office.
"Consolidated EBITDA" means, with respect to any Person for any period, the
Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period, plus, to the extent deducted in computing Consolidated Net
Income, (i) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period, (ii) Consolidated Interest
Expense of such Person for such period, (iii) depreciation and amortization
(including amortization of goodwill and other intangibles) and all other non-
cash charges (excluding any such non-cash charge to the extent that it
represents an accrual of or reserve for cash charges in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of
such Person and its Restricted Subsidiaries for such period and (iv) any
extraordinary or non-recurring loss and any net loss realized in connection
with either any Asset Sale or the extinguishment of Indebtedness, in each
case, on a consolidated basis determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization and other non-cash charges
of, a Restricted Subsidiary of a Person shall be added to Consolidated Net
Income to compute Consolidated EBITDA only to the extent (and in the same
proportion) that the Net Income of such Restricted Subsidiary was included in
calculating the Consolidated Net Income of such Person.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the interest expense of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP
(including amortization of original issue discount and deferred financing
costs (except as set forth in the proviso to this definition), non-cash
interest payments, the interest component of all payments associated with
Capital Lease Obligations, net payments, if any, pursuant to Hedging
Obligations and imputed interest with respect to Attributable Debt; provided,
however, that in no event shall any amortization of deferred financing cost
incurred on or prior to the date of the Indenture in connection with the
Credit Agreement or any amortization of deferred financing costs incurred in
connection with the issuance of the Notes be included in Consolidated Interest
Expense).
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided, however, that (i) the Net Income (but not loss) of any Person that
is not a Restricted Subsidiary or that is accounted for by the equity method
of accounting shall be included only to the extent of the amount of dividends
or distributions paid to the referent Person or a Restricted Subsidiary
thereof in cash, (ii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to
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the date of such acquisition shall be included, (iii) the cumulative effect of
a change in accounting principles shall be excluded, (iv) the portion of net
income of the Company and its Consolidated Subsidiaries allocable to
investments in unconsolidated Persons to the extent that cash dividends or
distributions have not actually been received by the Company or one of its
Consolidated Subsidiaries shall be excluded and (v) the Net Income of any
Restricted Subsidiary shall be excluded to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary of
Net Income is not, at the date of determination, permitted without any prior
governmental approval (which has not been obtained) or, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Restricted Subsidiary.
"Consolidated Net Worth" means, with respect to any Person at any date, the
consolidated stockholders' equity of such Person less the amount of such
stockholders' equity attributable to Redeemable Capital Stock of such Person
and its Subsidiaries, as determined in accordance with GAAP.
"Credit Agreement" means that certain revolving credit and security
agreement, providing for up to $100.0 million aggregate principal amount of
borrowings, dated as of August 15, 1997 and as amended through and including
the date of the Indenture, by and among the Company, certain Subsidiaries, the
several lenders party thereto and NationsBank, N.A., as Administrative Agent,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, in each case as amended,
modified, supplemented, restructured, renewed, restated, refunded, replaced,
extended or refinanced from time to time, together with any such amendment,
modification, supplement, restructuring, renewal, restatement, refunding,
replacement, extension or refinancing (collectively, a "Refinancing") to or of
any of the foregoing (collectively, a "Modification") or to any Modification,
ad infinitum, including, without limitation, any agreement modifying the
maturity or amortization schedule of or refinancing or refunding all or any
portion of the Indebtedness thereunder or increasing the amount that may be
borrowed under such agreement or any successor agreement. For purposes of this
definition, "Credit Agreement" includes that certain Revolving Credit
Promissory Note between Pediatric Services of America, Inc., a Georgia
corporation and wholly owned subsidiary of the Company and NationsBank, N.A.
dated February 26, 1998. The Company shall promptly notify the Trustee of any
Refinancing of the Credit Agreement.
"Credit Facility" means the Credit Agreement and any one or more other
borrowing arrangements entered into by and between the Company and/or one or
more of its Subsidiaries and a commercial bank or other institutional lender,
including any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, in each case as amended,
modified, supplemented, restructured, renewed, restated, refunded, replaced,
extended or refinanced from time to time on one or more occasions. The Company
shall promptly notify the Trustee of any Refinancing of a Credit Facility.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) so long as any Indebtedness is
outstanding under the Credit Agreement, such Indebtedness, and (ii) after
repayment in full of any outstanding Indebtedness under the Credit Agreement,
any other Senior Debt permitted under the Indenture the principal amount of
which at the time of such designation is $10.0 million or more and that has
been designated by the Company as "Designated Senior Debt."
"Disqualified Stock" means that portion of any Capital Stock which, by its
terms (or by the terms of any security into which it is convertible or for
which it is exchangeable), or upon the happening of any event (other than an
event which would constitute a Change of Control), matures (excluding any
maturity as the result of an optional redemption by the issuer thereof) or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
is redeemable at the sole option of the holder thereof (except, in each case,
upon the occurrence of a Change of Control) on or prior to the final maturity
date of the Notes.
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"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its Restricted
Subsidiaries (other than Indebtedness under the Credit Agreement) in existence
on the date of the Indenture until such amounts are repaid.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person and its Restricted
Subsidiaries for such period to the Fixed Charges of such Person and its
Restricted Subsidiaries for such period. In the event that the Company or any
of its Restricted Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues or redeems
preferred stock subsequent to the commencement of the period for which the
Fixed Charge Coverage Ratio is being calculated but on or prior to the date on
which the event for which the calculation of the Fixed Charge Coverage Ratio
is made (the "Calculation Date"), then the Fixed Charge Coverage Ratio shall
be calculated giving pro forma effect to such incurrence, assumption,
Guarantee or redemption of Indebtedness, or such issuance or redemption of
preferred stock, as if the same had occurred at the beginning of the
applicable four-quarter reference period. For purposes of making the
computation referred to above, (i) acquisitions that have been made by the
Company or any of its Restricted Subsidiaries, including through mergers or
consolidations and including any related financing transactions, during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have occurred on the first
day of the four-quarter reference period, and "Fixed Charge Coverage Ratio"
shall give pro forma effect to the Indebtedness and the Consolidated EBITDA of
the Person which is the subject of any such acquisition, including any pro
forma adjustments to the Consolidated EBITDA of such Person which would be
required or permitted as a result of such acquisition by Article 11 of
Regulation S-X promulgated by the Commission under the Securities Act if such
financials were included in a registration statement filed under the
Securities Act and (ii) the Consolidated EBITDA attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded.
"Fixed Charges" means, with respect to any Person for any period, the sum of
(i) the Consolidated Interest Expense of such Person for such period and (ii)
any interest expense on Indebtedness of another Person that is (a) Guaranteed
by the referent Person or one of its Restricted Subsidiaries (whether or not
such Guarantee is called upon) or (b) secured by a Lien on assets of such
Person or one of its Restricted Subsidiaries (whether or not such Lien is
called upon); provided that with respect to clause (ii)(b), the amount of
Indebtedness (and attributable interest expense) shall be equal to the lesser
of (I) the principal amount of the Indebtedness secured by the assets of such
Person or one of its Restricted Subsidiaries and (II) the fair market value
(as determined by the Board of Directors of such Person and set forth in an
Officers' Certificate delivered to the Trustee) of the assets securing such
Indebtedness and (iii) the product of (A) all cash dividend payments (and non-
cash dividend payments in the case of a Person that is a Subsidiary) on any
series of preferred stock of such Person, times (B) a fraction, the numerator
of which is one and the denominator of which is one minus the then current
combined federal, state and local statutory tax rate of such Person, expressed
as a decimal, in each case, on a consolidated basis and in accordance with
GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board, the Securities and Exchange
Commission or in such other statements by such other entity as may be approved
by a significant segment of the accounting profession of the United States,
which are in effect from time to time; provided, however, that all reports and
other financial information provided by the Company to the Holders, the
Trustee and/or the Commission shall be prepared in accordance with GAAP, as in
effect on the date of such report or other financial information.
"Government Securities" means direct obligations of, or obligations
guaranteed by the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
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"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect hereof, of all or any part of any
Indebtedness.
"Guaranteeing Subsidiary" means each of (i) the Subsidiaries of the Company
in existence on the date of the Indenture and (ii) any future Restricted
Subsidiary and their respective successors and assigns.
"Health Care Related Business" means a business whose revenues result from
the provision of health care related services, which term for purposes hereof
shall include health care information services and children's services.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates or foreign exchange rates and (iii) indemnity agreements and
arrangements entered into in connection with the agreements and arrangements
described in clauses (i) and (ii).
"Incur" or "incur" means, with respect to any Indebtedness (including
Acquired Debt), to create, incur, issue, assume, guarantee or otherwise become
directly or indirectly liable for or with respect to, or become responsible
for, the payment of such Indebtedness (including Acquired Debt); provided that
(i) neither the accrual of interest nor the accretion of original issue
discount shall be considered an incurrence of Indebtedness and (ii) the
assumption of Indebtedness by the surviving entity of a transaction permitted
by the last sentence of the second paragraph under "Subsidiary Guarantees" or
the last sentence of the covenant entitled "Merger, Consolidation, or Sale of
Assets" in existence at the time of such transaction shall not be deemed to be
an incurrence of Indebtedness. The term "incurrence" has corresponding
meaning.
"Indebtedness" means, with respect to any Person without duplication, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or
letters of credit (or reimbursement agreements in respect thereof) or
representing Capital Lease Obligations or the deferred and unpaid balance of
the purchase price of any property, except any such balance that constitutes
an accrued expense or trade payable, or representing any Hedging Obligations
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether
or not such indebtedness is assumed by such Person), the maximum fixed
repurchase price of Disqualified Stock issued by such Person and the
liquidation preference of preferred stock issued by such Person, in each case
if held by any Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company, and, to the extent not otherwise included, the
Guarantee by such Person of any such indebtedness of any other Person.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of loans
(including Guarantees), advances or capital contributions (excluding
commission, travel and similar advances to officers and employees made in the
ordinary course of business), purchases or other acquisitions for
consideration of Indebtedness, Equity Interests or other securities, and all
other items that are or would be classified as investments on a balance sheet
prepared in accordance with GAAP; provided that an acquisition of assets,
Equity Interests or other securities by the Company for consideration
consisting of common equity securities of the Company shall not be deemed to
be an Investment. If the Company or any Restricted Subsidiary of the Company
sells or otherwise disposes of any Equity Interests of any direct or indirect
Restricted Subsidiary of the Company, or any Restricted Subsidiary of the
Company issues Equity Interests, such that, after giving effect to any such
sale or disposition, such Person is no longer a Restricted Subsidiary of the
Company, the Company shall be deemed to have made an investment on the date of
any such sale, disposition or issuance equal to the fair market value of the
Equity Interests of such Person held by the Company or such Restricted
Subsidiary immediately following any such sale, disposition or issuance.
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"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP, excluding, however, (i) any
gain (but not loss), together with any related provision for taxes on such
gain (but not loss), realized in connection with (a) any Asset Sale
(including, without limitation, dispositions pursuant to sale and leaseback
transactions or (b) the extinguishment of any Indebtedness of such Person or
any of its Restricted Subsidiaries, and (ii) any extraordinary or nonrecurring
gain (but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof, amounts required to be applied to the repayment of
Indebtedness (other than long-term Indebtedness of a Restricted Subsidiary of
such Person and Indebtedness under the Credit Facility) secured by a Lien on
the asset or assets that are the subject of such Asset Sale and any reserve
for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"Non-Recourse Debt" means Indebtedness (i) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any of
its Restricted Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity; and (ii) as to which the lenders have been notified in writing that
they will not have any recourse to the stock or assets of the Company or any
of its Restricted Subsidiaries.
"Obligations" means any principal, interest (including any interest accruing
subsequent to the filing of a petition of bankruptcy at the rate provided in
the documentation with respect thereto, whether or not such interest is an
allowed claim under applicable law), penalties, fees, indemnifications,
reimbursements, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Pari Passu Indebtedness" means Indebtedness of the Company which ranks pari
passu in right of payment with the Notes.
"Permitted ChoicePoint Payment" means a cash payment required to be made to
ChoicePoint pursuant to Section 2.01(c) of the Asset Purchase Agreement,
effective as of December 2, 1997, by and among ChoicePoint, ChoicePoint, Inc.,
Insurance Medical Reporter, Inc. and the Company (without giving effect to any
amendment thereto that may be entered into by the parties thereto); provided
that at the time any such payment is made (i) no Default or Event of Default
shall have occurred and be continuing or would occur as a consequence thereof
and (ii) the Company would be able to incur at least $1.00 of additional
Indebtedness under the Fixed Charge Coverage Ratio in the "Incurrence of
Indebtedness and Issuance of Preferred Stock" Covenant.
"Permitted Investments" means (i) Investments in the Company or in a
Restricted Subsidiary of the Company (including, without limitation,
Guarantees of the Indebtedness and/or other Obligations of the Company and/or
any Wholly Owned Restricted Subsidiary of the Company, so long as such
Indebtedness and/or other Obligations are permitted under the Indenture), (ii)
Investments in Cash Equivalents, (iii) Investments by the Company or any
Wholly Owned Restricted Subsidiary of the Company in, or the purchase of the
securities of, a Person if, as a result of such Investment, (a) such person
becomes a Restricted Subsidiary of the Company or (b) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary of the Company, (iv) Investments
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in accounts and notes receivable acquired in the ordinary course of business,
(v) any non-cash consideration received in connection with an Asset Sale that
complies with the covenant entitled "Asset Sales," (vi) Investments in
connection with Hedging Obligations permitted to be incurred under the
covenant entitled "Incurrence of Indebtedness and Issuance of Preferred
Stock"; and (vii) Investments, not to exceed $10.0 million at any given time
outstanding, in corporations, limited liability companies, partnerships
(including limited liability partnerships), joint ventures or similar
investment entities, provided any such entity is engaged in a Health Care
Related Business.
"Permitted Junior Securities" means debt securities of the Company that are
unsecured and subordinated at least to the same extent as the Notes to Senior
Debt of the Company and guarantees of any such debt by any Guaranteeing
Subsidiary that are unsecured and subordinated at least to the same extent as
the Subsidiary Guarantee of such Guaranteeing Subsidiary to the Senior Debt of
such Guaranteeing Subsidiary, as the case may be, and has a final maturity
date at least as late as the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Notes.
"Permitted Liens" means (i) Liens on property of the Company and any
Guaranteeing Subsidiary securing (a) Senior Debt and/or (b) Hedging
Obligations (with respect to Senior Debt or otherwise) permitted to be
incurred under the Indenture; (ii) Liens in favor of the Company or any of its
Restricted Subsidiaries; (iii) Liens on property of a Person existing at the
time such Person is merged with or into or consolidated with the Company or
any Restricted Subsidiary of the Company; provided, that such Liens were not
incurred in connection with, or in contemplation of, such merger or
consolidation and do not extend to any assets of the Company or any Restricted
Subsidiary of the Company other than the assets acquired in such merger or
consolidation; (iv) Liens on property of a Person existing at the time such
Person becomes a Restricted Subsidiary of the Company; provided that such
Liens were not incurred in connection with, or in contemplation of, such
Person becoming a Restricted Subsidiary and do not extend to any assets of the
Company or any other Restricted Subsidiary of the Company; (v) Liens on
property existing at the time of acquisition thereof by the Company or any
Restricted Subsidiary of the Company; provided that such Liens were not
incurred in connection with, or in contemplation of, such acquisition and do
not extend to any assets of the Company or any of its Restricted Subsidiaries
other than the property so acquired; (vi) Liens to secure the performance of
statutory obligations, surety or appeal bonds or performance bonds, or
landlords', carriers', warehousemen's, mechanics', suppliers', materialmen's,
or other like Liens, in any case incurred in the ordinary course of business
and with respect to amounts not yet delinquent or being contested in good
faith by appropriate process of law, if a reserve or other appropriate
provision, if any, as is required by GAAP shall have been made therefor; (vii)
Liens existing on the date of the Indenture; (viii) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded; provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (ix) Liens to secure Indebtedness of any Restricted
Subsidiary permitted to be incurred by such Restricted Subsidiary pursuant to
the covenant entitled "Incurrence of Indebtedness and Issuance of Preferred
Stock; (x) Liens securing Indebtedness incurred to refinance Indebtedness that
has been secured by a Lien permitted under the Indenture; provided that (a)
any such Lien shall not extend to or cover any assets or property not securing
the Indebtedness so refinanced and (b) the refinancing Indebtedness secured by
such Lien shall have been permitted to be incurred under the covenant entitled
"Incurrence of Indebtedness and Issuance of Preferred Stock;" (xi) Liens in
favor of the lessee on instruments which are the subject of leases entered
into in the ordinary course of business; provided that any such Lien shall not
extend to or cover any assets or property of the Company and its Restricted
Subsidiaries that is not the subject of any such lease; (xii) Liens to secure
Attributable Debt and or that is permitted to be incurred pursuant to the
covenant entitled "Sale and Leaseback Transactions;" provided that any such
Lien shall not extend to or cover any assets of the Company or any
Guaranteeing Subsidiary other than the assets which are the subject of the
sale leaseback transaction in which the Attributable Debt is incurred; and
(xiii) Liens in connection with attachments or judgments (including judgment
or appeal bonds), provided that the judgment secured shall, within 45 days
after the entry thereof, have been discharged or execution thereof stayed
pending appeal (and the stay thereof not at any time lifted).
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"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted
Subsidiaries; provided that: (i) the principal amount of such Permitted
Refinancing Indebtedness does not exceed the principal amount of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith);
(ii) such Permitted Refinancing Indebtedness has a final maturity date at
least as late as the final maturity date of, and has a Weighted Average Life
to Maturity equal to or greater than the Weighted Average Life to Maturity of,
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased, or refunded is subordinated in right of payment to the
Notes, such Permitted Refinancing Indebtedness has a final maturity date later
than the final maturity date of, and is subordinated in right of payment to,
the Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iv) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased, or refunded ranks
pari passu in right of payment with the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and ranks pari passu with, or is subordinated in right of payment to, the
Notes on terms at least as favorable to the Holders of Notes as those
contained in the documentation governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; and (v) such Indebtedness
is incurred by the Company or by the Restricted Subsidiary who is the obligor
on the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
charitable foundation, unincorporated organization, government or any agency
or political subdivision thereof or any other entity.
"Redeemable Capital Stock" means any shares of any class or series of
Capital Stock, that, either by the terms thereof, by the terms of any security
into which it is convertible or exchangeable or by contract or otherwise, is
or upon the happening of an event or passage of time would be required to be
redeemed prior to the Stated Maturity with respect to the principal of any
Note or is redeemable at the option of the holder thereof at any time prior to
any such Stated Maturity, or is convertible into or exchangeable for debt
securities at any time prior to any such Stated Maturity.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the referent Person that is
not an Unrestricted Subsidiary.
"Senior Debt" means (a) with respect to the Company, (i) all Obligations
permitted to be incurred pursuant to the Indenture under or in respect of the
Credit Facility and (ii) any other Indebtedness permitted to be incurred by
the Company under the terms of the Indenture and any Hedging Obligation
permitted to be incurred under the terms of the Indenture, unless the
instrument under which the foregoing is incurred expressly provides that it is
on a parity with or subordinated in right of payment to the Notes and (b) with
respect to any Guaranteeing Subsidiary, (i) all Obligations permitted to be
incurred pursuant to the Indenture under or in respect of the Credit Facility
and (ii) any other Indebtedness permitted to be incurred by such Guaranteeing
Subsidiary under the terms of the Indenture and any Hedging Obligation
permitted to be incurred under the terms of the Indenture, unless the
instrument under which the foregoing is incurred expressly provided that such
Indebtedness is on parity with or subordinated in right of payment to the
Subsidiary Guarantee of such Guaranteeing Subsidiary. Notwithstanding anything
to the contrary in the foregoing, Senior Debt will not include (w) any
liability for federal, state, local or other taxes; (x) any Indebtedness of
the Company or any Guaranteeing Subsidiary to the Company or any Subsidiary of
the Company or any of their respective Affiliates, (y) any trade payables or
(z) any Indebtedness that is incurred in violation of the Indenture.
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"Significant Subsidiary" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is
due and payable, and when used with respect to any other Indebtedness, means
the date specified in the instrument governing such Indebtedness as the fixed
date on which the principal of such Indebtedness, or any installment of
interest thereon, is due and payable.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of Voting Stock is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or one or more Subsidiaries of such Person (or any combination
thereof).
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors of the Company as an Unrestricted Subsidiary pursuant to a
Board Resolution, but only to the extent that such Subsidiary: (i) has no
Indebtedness other than Non-Recourse Debt; (ii) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (iii) is a Person with respect
to which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (a) to subscribe for additional Equity Interests
or (b) to maintain or preserve such Person's financial condition or to cause
such Person to achieve any specified levels of operating results; and (iv) has
not guaranteed or otherwise directly or indirectly provided credit support for
any Indebtedness of the Company or any of its Restricted Subsidiaries. Any
such designation by the Board of Directors shall be evidenced to the Trustee
by filing with the Trustee a certified copy of the Board Resolution giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
covenant described above under the covenant entitled "Restricted Payments."
If, at any time, any Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant entitled "Incurrence of
Indebtedness and Issuance of Preferred Stock," the Company shall be in default
of such covenant from the date of such incurrence). The Board of Directors of
the Company may at any time designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that such designation shall be deemed to be an
incurrence of Indebtedness by a Restricted Subsidiary of the Company of any
outstanding Indebtedness of such Unrestricted Subsidiary and such designation
shall only be permitted if (i) such Indebtedness is permitted under the
covenant entitled "Incurrence of Indebtedness and Issuance of Preferred Stock"
and (ii) no Default or Event of Default would be in existence following such
designation.
"Voting Stock" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees
of any Person (irrespective of whether or not, at the time, stock of any other
class or classes shall have, or might have, voting power by reason of the
happening of any contingency).
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the then outstanding
principal amount of such Indebtedness into (ii) the total of the product
obtained by multiplying (a) the amount of each then remaining installment,
sinking fund, serial maturity or other required payments of principal,
including payment at final maturity, in respect thereof, by
84
<PAGE>
(b) the number of years (calculated to the nearest one-twelfth) that will
elapse between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall
at the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person or by such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
OLD NOTES; REGISTRATION RIGHTS
Pursuant to the Registration Rights Agreement, the Company and the
Guaranteeing Subsidiaries agreed to file with the Commission an Exchange Offer
Registration Statement with respect to the issue of the New Notes. If (i) the
Company is not required to file the Exchange Offer Registration Statement or
permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or Commission policy or (ii) any Holder of
Transfer Restricted Securities notifies the Company within the specified time
period that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer, (B) that it may not resell the New Notes
acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Notes acquired directly from the Company or an
affiliate of the Company, the Company will file with the Commission a
registration statement to cover resales of the Notes by the Holders thereof
who satisfy certain conditions relating to the provision of information in
connection with such registration statement (the "Shelf Registration
Statement"). The Company has agreed to use its best efforts to cause the
applicable registration statement to be declared effective as promptly as
possible by the Commission. For purposes of the foregoing, "Transfer
Restricted Securities" means each Old Note until the earlier of (i) the date
on which such Old Note has been exchanged by a person other than a broker-
dealer for a New Note in the Exchange Offer, (ii) following the exchange by a
broker-dealer in the Exchange Offer of an Old Note for a New Note, the date on
which such New Note is sold to a purchaser who receives from such broker-
dealer on or prior to the date of such sale a copy of the prospectus contained
in the Exchange Offer Registration Statement, (iii) the date on which such Old
Note has been effectively registered under the Securities Act and disposed of
in accordance with the Shelf Registration Statement or (iv) the date on which
such Old Note is distributed to the public pursuant to Rule 144 under the
Securities Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to June
15, 1998, (ii) the Company will use its best efforts to have the Exchange
Offer Registration Statement declared effective by the Commission on or prior
to August 29, 1998, (iii) unless the Exchange Offer would not be permitted by
applicable law or Commission policy, the Company will commence the Exchange
Offer and use its best efforts to issue on or prior to 45 days after the date
on which the Exchange Offer Registration Statement is declared effective by
the Commission, New Notes in exchange for all Old Notes tendered prior thereto
in the Exchange Offer, (iv) if obligated to file the Shelf Registration
Statement, the Company will file the Shelf Registration Statement with the
Commission on or prior to 60 days after such filing obligation arises and use
its best efforts to cause the Shelf Registration to be declared effective by
the Commission on or prior to 135 days after such obligation arises and (v)(A)
in certain circumstances, cause the Exchange Offer Registration Statement to
remain effective and usable for a period of 180 days following the initial
effectiveness thereof and (B) cause the Shelf Registration Statement to remain
effective and usable for a period of two years following the initial
effectiveness thereof or such shorter period ending when all the New Notes
available for sale thereunder have been sold. If (a) the Company fails to file
any of the Registration Statements required by the Registration Rights
Agreement on or before the date specified for such filing, (b) any of such
Registration Statements is not declared effective by the Commission on or
prior to the date specified for such effectiveness, (c) the Company fails to
consummate the Exchange Offer within 45 days after the date on which the
Exchange Offer Registration Statement is declared effective or (d) the Shelf
Registration Statement or the Exchange Offer Registration Statement is
declared effective but thereafter ceases to be effective or usable in
connection with resales of Transfer Restricted Securities during the periods
specified in the Registration Rights
85
<PAGE>
Agreement (each such event referred to in clauses (a) through (d) above as a
"Registration Default"), then the Company will pay to each Holder of Old
Notes, with respect to the first 90-day period immediately following the
occurrence of such Registration Default in an amount equal to $.05 per week
per $1,000 principal amount of Old Notes held by such Holder ("Liquidated
Damages"). The amount of the Liquidated Damages will increase by an additional
$.05 per week per $1,000 principal amount of Old Notes with respect to each
subsequent 90-day period until all Registration Defaults have been cured, up
to a maximum amount of Liquidated Damages of $.50 per week per $1,000
principal amount of Old Notes. All accrued Liquidated Damages will be paid by
the Company on each Damages Payment Date to the Global Note Holder by wire
transfer of immediately available funds or by federal funds check and to
Holders of Certificated Securities by wire transfer to the accounts specified
by them or by mailing checks to their registered addresses if no such accounts
have been specified. Following the cure of all Registration Defaults, the
accrual of Liquidated Damages will cease.
Holders of Old Notes will be required to make certain representations to the
Company (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and will be required to deliver information
to be used in connection with the Shelf Registration Statement and to provide
comments on the Shelf Registration Statement within the same periods set forth
in the Registration Rights Agreement in order to have their Notes included in
the Shelf Registration Statement and benefit from the provisions regarding
Liquidated Damages set forth above. Any Holder of Transfer Restricted
Securities who elects not to participate in the Exchange Offer could be deemed
to be less liquid than if such Holder participated in the Exchange Offer.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
RELATING TO THE EXCHANGE OFFER
The following is a summary of the principal U.S. federal income tax
consequences resulting from the exchange of the Old Notes for New Notes in the
Exchange Offer. This summary does not purport to consider all the possible
U.S. federal tax consequences of the purchase, ownership or disposition of the
Notes and is not intended to reflect the particular tax position of any
beneficial owner. It deals only with Old Notes and New Notes held as capital
assets. Moreover, except as expressly indicated, it does not address
beneficial owners that may be subject to special tax rules, such as banks,
insurance companies, dealers in securities or currencies, purchasers that hold
Old Notes or New Notes as a hedge against currency risks or as part of a
straddle with other investments or as part of a "synthetic security" or other
integrated investment (including a "conversion transaction") comprised of a
Note and one or more other investments, or purchasers that have a "functional
currency" other than the U.S. dollar. Except to the extent discussed below
under "Non-U.S. Holders", this summary is not applicable to persons other than
"U.S. Holders" (defined below). This summary is based upon the U.S. federal
tax laws and regulations as now in effect and as currently interpreted and
does not take into account possible changes in such tax laws or such
interpretations, any of which may be applied retroactively. It does not
include any description of the tax laws of any state, local or foreign
government that may be applicable to the Notes or holders thereof. Persons
considering the exchange of their Old Notes for New Notes should consult their
own tax advisors concerning the application of the U.S. federal tax laws to
their particular situations as well as any consequences to them under the laws
of any other taxing jurisdiction.
U.S. HOLDERS
Payments of Interest. In general, interest on a New Note will be taxable to
a beneficial owner who or which is (i) an individual who is a citizen or
resident of the United States, (ii) a corporation, partnership or other entity
created or organized under the laws of the United States or any state thereof
(including the District of Columbia), (iii) an estate or trust subject to
United States federal income taxation on its income without regard to its
source or (iv) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more
persons who otherwise would be a U.S. Holder has the authority to control all
substantial decisions of the trust (a "U.S. Holder") as ordinary income at the
time it is received or accrued, depending on the holder's method of accounting
for tax purposes.
86
<PAGE>
Exchange Offer. The exchange of Old Notes for New Notes pursuant to the
Exchange Offer will not be treated as an "exchange" for federal income tax
purposes because the New Notes will not be considered to differ materially in
kind or extent from the Old Notes. As a result, there will be no federal
income tax consequences to holders exchanging the Old Notes pursuant to the
Exchange Offer.
NON-U.S. HOLDERS
Under present United States federal income and estate tax law and subject to
the discussion of backup withholding below:
(a) payments of principal and interest on the New Notes by the Company or
any agent of the Company to any Holder that is not a U.S. Holder (a "Non-
U.S. Holder") will not be subject to United States federal withholding tax,
provided that (i) the Non-U.S. Holder does not actually or constructively
own 10% or more of the total combined voting power of all classes of stock
of the Company entitled to vote, (ii) the Non-U.S. Holder is not a
controlled foreign corporation that is related to the Company (directly or
indirectly) through stock ownership and (iii) either (A) the beneficial
owner of the Old Notes or the New Notes certifies to the Company or its
agent, under penalties of perjury, that he is not a "United States person"
(as defined in the Code) and provides his name and address, or (B) a
securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business
(a "financial institution") and holds the Notes on behalf of the beneficial
owner certifies to the Company or its agent under penalties of perjury that
such statement has been received from the beneficial owner by it or by a
financial institution between it and the beneficial owner and furnishes the
payor with a copy thereof;
(b) a Non-U.S. Holder will not be subject to United States federal
withholding tax on gain realized on the sale, exchange or redemption of New
Note; and
(c) a New Note held by an individual who at the time of death is not a
citizen or resident of the United States will not be subject to United
States federal estate tax as a result of such individual's death if, at the
time of such death, the individual did not actually or constructively own
10% or more of the total combined voting power of all classes of stock of
the Company entitled to vote and the income on the New Notes would not have
been effectively connected with the conduct of a trade or business by the
individual in the United States.
Regulations proposed by the Internal Revenue Service, if finalized in their
current form, would modify the certification requirements described in
clause(a)(iii) above with respect to certain payments made after such
regulations become effective.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest on the New Note is effectively connected with the conduct of such
trade or business, the Non-U.S. Holder, although exempt from the withholding
tax discussed in the preceding paragraph (provided that such holder properly
claims such exemption by furnishing a properly executed IRS Form 4224 on or
before any payment due), may be subject to U.S. federal income tax on such
interest and gain on the sale, exchange or redemption of the New Note in the
same manner as if it were a U.S. Holder.
INFORMATION REPORTING AND BACKUP WITHHOLDING
For each calendar year in which the New Notes are outstanding, the Company
is required to provide the IRS with certain information, including the
Holder's name, address and taxpayer identification number, the aggregate
amount of principal and interest paid to that Holder during the calendar year
and the amount of tax withheld, if any. This obligation, however, does not
apply with respect to certain U.S. Holders, including corporations, tax-exempt
organizations, qualified pension and profit sharing trust and individual
retirement accounts.
In the event that a U.S. Holder subject to the reporting requirements
described above fails to supply its correct taxpayer identification number in
the manner required by applicable law or underreports its tax liability,
87
<PAGE>
the Company, its agent or paying agents or a broker may be required to
"backup" withhold a tax equal to 31% of each payment of interest and principal
(and premium, if any) on the New Notes. This backup withholding is not an
additional tax and may be credited against the U.S. Holder's U.S. federal
income tax liability, provided that the required information is furnished to
the IRS.
Under current Treasury Regulations, backup withholding and information
reporting will not apply to payments made by the Company or any agent thereof
(in its capacity as such) to a Non-U.S. Holder of a New Note if such holder
has provided the required certification that it is not a United States person
as set forth in clause (iii) in the first paragraph under "--Non-U.S.
Holders", or has otherwise established an exemption (provided that neither the
Company not its agent has actual knowledge that the holder is a United States
person or that the conditions of any exemption are not in fact satisfied).
Payment of the proceeds from the sale of a New Note to or through a foreign
office of a broker generally will not be subject to information reporting or
backup withholding, except that information reporting may apply to such
payments if the broker is a United States person, a controlled foreign
corporation for United States tax purposes or a foreign person 50% or more of
whose gross income from all sources for the three-year period ending with the
close of its taxable year preceding the payment was effectively connected with
a U.S. trade or business. Payment of the proceeds from a sale of an Old Note
or New Note to or through the U.S. office of a broker is subject to
information reporting and backup withholding unless the holder or beneficial
owner certifies as to its taxpayer identification number of otherwise
establishes an exemption from information reporting and backup withholding.
The proposed Treasury Regulations, noted above, if adopted in their current
form, would also provide alternative certification requirements and means for
obtaining the exemption from withholding tax.
PLAN OF DISTRIBUTION
Each broker-dealer (a "Participating Broker-Dealer") that receives New Notes
for its own account pursuant to the Exchange Offer must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes.
This Prospectus, as it may be amended or supplemented from time to time, may
be used by a Participating Broker-Dealer in connection with resales of such
New Notes received in exchange for Old Notes where such Old Notes are acquired
as a result of market-making activities or other trading activities. The
Company and the Guaranteeing Subsidiaries have agreed that for a period of 180
days after the Expiration Date, they will make this Prospectus, as it may be
amended or supplemented from time to time, available to any Participating
Broker-Dealer for use in connection with any such resale. In addition, all
dealers effecting transactions in the New Notes may be required to deliver a
prospectus.
The Company will not receive any proceeds from any sale of New Notes by
Participating Broker-Dealers. New Notes received by Participating Broker-
Dealers for their own account pursuant to the Exchange Offer may be sold from
time to time in one or more transactions in the over-the-counter market, in
negotiated transactions, through the writing of options on the New Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or at negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such Participating Broker-Dealer and/or the purchasers of
any such New Notes. Any Participating Broker-Dealer that resells New Notes
that were received by it for its own account pursuant to the Exchange Offer
and any broker or dealer that participates in a distribution of such New Notes
may be deemed to be an "underwriter" within the meaning of the Securities Act
and any profit on any such resale of New Notes and any commissions or
concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that
by acknowledging that it will deliver a prospectus, and by delivering a
prospectus, a Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date, the Company and the
Guaranteeing Subsidiaries promptly will send additional copies of this
Prospectus, as it may be amended or supplemented from time to
88
<PAGE>
time, to any Participating Broker-Dealer upon request. The Company and the
Guaranteeing Subsidiaries have agreed to pay all expenses incidental to the
Exchange Offer other than commissions and concessions of any brokers or
dealers and will indemnify holders of the Old Notes (including any broker-
dealers) against certain liabilities, including liabilities under the
Securities Act, as set forth in the Registration Rights Agreement.
LEGAL MATTERS
The legality of the New Notes offered hereby and the federal income tax
consequences of the Exchange Offer will be passed upon for the Company by Long
Aldridge & Norman LLP, Atlanta, Georgia.
EXPERTS
The consolidated financial statements of Pediatric Services of America, Inc.
and its consolidated subsidiaries as of September 30, 1997 and 1996 and for
each of the three years in the period ended September 30, 1997 (except for
Premier Medical Services, Inc. for the year ended September 30, 1995) included
in this Prospectus and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as stated in their report also included in
this Prospectus and Registration Statement. The consolidated financial
statements of Premier Medical Services, Inc. for the year ended September 30,
1995 (combined with those of the Company) have been audited by Deloitte &
Touche LLP as stated in their report included herein. Such financial
statements of the Company and its consolidated subsidiaries are included
herein in reliance upon the respective reports of such firms given upon their
authority as experts in accounting and auditing.
89
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
AUDITED FINANCIAL STATEMENTS
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of September 30, 1997 and 1996........... F-3
Consolidated Statements of Income for the years ended September 30,
1997, 1996 and 1995.................................................... F-4
Consolidated Statements of Redeemable Preferred Stock, Common Stock and
Other Stockholders' Equity at October 1, 1994 and September 30, 1995,
1996 and 1997.......................................................... F-5
Consolidated Statements of Cash Flows for the years ended September 30,
1997, 1996 and 1995.................................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
UNAUDITED INTERIM FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets (unaudited) as of December 31,
1997 and September 30, 1997............................................ F-19
Condensed Consolidated Statements of Income (unaudited) for the three
months ended December 31, 1997 and 1996................................ F-20
Condensed Consolidated Statements of Cash Flows (unaudited) for the
three months ended December 31, 1997 and 1996.......................... F-21
Notes to Condensed Consolidated Financial Statements.................... F-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Pediatric Services of America, Inc.
We have audited the accompanying consolidated balance sheets of Pediatric
Services of America, Inc. ("PSA") as of September 30, 1997 and 1996, and the
related consolidated statements of income, redeemable preferred stock, common
stock and other stockholders' equity and cash flows for each of the three
years in the period ended September 30, 1997. These financial statements are
the responsibility of PSA's management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit
the consolidated statements of income, redeemable preferred stock, common
stock and other stockholders' equity and cash flows of Premier Medical
Services, Inc., a wholly-owned subsidiary, for the year ended September 30,
1995, which statements reflect total net revenue of 26% for 1995 of the
related consolidated financial statement total. Those statements were audited
by other auditors, whose report thereon has been furnished to us, and our
opinion, insofar as it relates to data included for Premier Medical Services,
Inc., is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
financial statements referred to above present fairly, in all material
respects, the consolidated financial position of PSA at September 30, 1997 and
1996, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended September 30, 1997, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
November 18, 1997, except for Note 15
as to which the date is April 10, 1998
Atlanta, Georgia
F-2
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 500,629 $ 770,206
Accounts receivable, less allowances for doubtful
accounts of $10,036,000 and $8,523,000,
respectively..................................... 75,458,527 47,744,840
Prepaid expenses.................................. 507,905 460,850
Deferred income taxes............................. 3,879,862 3,524,265
Other current assets.............................. 3,481,517 2,065,314
------------ ------------
Total current assets............................ 83,828,440 54,565,475
Property and equipment:
Home care equipment held for rental............... 24,103,723 19,013,569
Furniture and fixtures............................ 6,979,170 4,910,212
Vehicles.......................................... 731,565 580,445
Leasehold improvements............................ 580,675 562,285
------------ ------------
32,395,133 25,066,511
Accumulated depreciation and amortization......... (15,678,405) (11,644,023)
------------ ------------
16,716,728 13,422,488
Other assets:
Goodwill, less accumulated amortization of
$3,695,000 and $2,333,000, respectively.......... 50,421,121 28,733,976
Certificates of need, less accumulated
amortization of $279,000 and $176,000,
respectively..................................... 1,542,996 1,171,772
Deferred financing fees, less accumulated
amortization of $192,000 and $76,000,
respectively..................................... 632,449 216,342
Noncompete agreements, less accumulated
amortization of $719,000 and $582,000,
respectively..................................... 320,555 368,333
Other............................................. 371,706 257,144
------------ ------------
53,288,827 30,747,567
------------ ------------
Total assets.................................... $153,833,995 $ 98,735,530
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 6,302,182 $ 5,779,594
Accrued compensation.............................. 5,146,786 3,581,013
Accrued insurance................................. 2,392,780 1,845,993
Other accrued liabilities......................... 3,559,100 2,724,454
Deferred revenue.................................. 852,899 792,139
Income taxes payable.............................. 1,119,526 1,852,128
Current maturities of long-term obligations from
related parties.................................. 2,163,101 --
Current maturities of long-term obligations....... 98,590 2,317,569
------------ ------------
Total current liabilities....................... 21,634,964 18,892,890
Long-term obligations from related parties, net of
current maturities................................ 3,887,339 --
Long-term obligations, net of current maturities... 61,124,757 23,637,954
Deferred income taxes.............................. 4,690,651 1,077,058
Minority interest in subsidiary.................... 815,794 935,035
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized, no shares issued and outstanding..... -- --
Common stock, $.01 par value, 80,000,000 shares
authorized, 6,257,979 and 6,247,567 shares
issued and outstanding in 1997 and 1996,
respectively..................................... 62,580 62,476
Additional paid-in capital........................ 41,746,450 41,513,355
Retained earnings................................. 19,871,460 12,616,762
------------ ------------
Total stockholders' equity......................... 61,680,490 54,192,593
------------ ------------
Total liabilities and stockholders' equity......... $153,833,995 $ 98,735,530
============ ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
NET REVENUE........................... $204,022,726 $163,804,464 $111,859,820
Costs and expenses:
Operating salaries, wages and
employee benefits................... 87,943,066 72,026,197 50,077,865
Other operating costs................ 75,385,617 60,096,166 39,086,858
Corporate, general and
administrative...................... 12,885,475 10,783,957 7,216,887
Provision for doubtful accounts...... 6,238,965 4,707,989 3,163,799
Depreciation and amortization........ 6,102,522 4,858,319 3,656,300
Combination costs.................... -- 1,165,600 --
------------ ------------ ------------
Total costs and expenses............. 188,555,645 153,638,228 103,201,709
------------ ------------ ------------
Operating income...................... 15,467,081 10,166,236 8,658,111
Interest expense...................... 3,534,262 1,778,384 1,643,459
------------ ------------ ------------
Income before minority interest,
income taxes and extraordinary item.. 11,932,819 8,387,852 7,014,652
Minority interest in loss of
subsidiary........................... 119,341 64,965 --
------------ ------------ ------------
Income before income taxes and
extraordinary item................... 12,052,160 8,452,817 7,014,652
Income taxes.......................... 4,797,462 3,406,484 2,803,156
------------ ------------ ------------
Income before extraordinary item...... 7,254,698 5,046,333 4,211,496
Extraordinary item, net of tax expense
of $521,000.......................... -- -- 781,220
------------ ------------ ------------
Net income............................ $ 7,254,698 $ 5,046,333 $ 4,992,716
============ ============ ============
Net income attributable to common and
common equivalent shares:
Income before extraordinary item...... $ 7,254,698 $ 5,046,333 $ 4,211,496
Less accretion on redeemable preferred
stock................................ -- (10,174) (35,952)
Less preferred stock dividends........ -- (85,750) (194,943)
------------ ------------ ------------
Income before extraordinary item
attributable to common and common
equivalent shares.................... 7,254,698 4,950,409 3,980,601
Extraordinary item, net of tax expense
of $521,000.......................... -- -- 781,220
------------ ------------ ------------
Net income attributable to common and
common equivalent shares............. $ 7,254,698 $ 4,950,409 $ 4,761,821
============ ============ ============
INCOME PER SHARE DATA:
Income before extraordinary item per
common share:
Basic................................ $ 1.16 $ 0.82 $ 0.86
Diluted.............................. 1.13 0.77 0.77
Extraordinary item per common share:
Basic................................ -- -- $ 0.17
Diluted.............................. -- -- 0.15
------------ ------------ ------------
Net income per common share:
Basic................................ $ 1.16 $ 0.82 $ 1.02
Diluted.............................. 1.13 0.77 0.92
============ ============ ============
Weighted average shares outstanding
(in thousands):
Basic................................ 6,257 6,057 4,655
Diluted.............................. 6,446 6,437 5,166
============ ============ ============
</TABLE>
See accompanying notes
F-4
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK,
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE ADDITIONAL TOTAL
PREFERRED COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL EARNINGS EQUITY
----------- ------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Balances at October 1,
1994................... $ 1,867,283 $41,876 $17,150,539 $ 2,904,532 $20,096,947
Issuance of 14,300
shares of redeemable
convertible preferred
stock, net of issuance
costs of $38,000....... 1,392,000 -- -- -- --
54,748 shares of common
stock issued through
exercise of stock
options................ -- 548 85,991 -- 86,539
41,548 shares of common
stock issued in
connection with the
acquisition of
businesses............. -- 416 567,084 -- 567,500
Issuance of 1,319,915
shares of common stock
upon consummation of a
second public offering,
net of issuance costs
of $1,680,105.......... -- 13,199 19,095,357 -- 19,108,556
Accretion on redeemable
preferred stock........ 35,952 -- -- (35,952) (35,952)
Preferred stock
dividends.............. 194,943 -- -- (194,943) (194,943)
Net income.............. -- -- -- 4,992,716 4,992,716
----------- ------- ----------- ----------- -----------
Balances at September
30, 1995............... 3,490,178 56,039 36,898,971 7,666,353 44,621,363
63,563 shares of common
stock issued through
exercise of stock
options................ -- 636 355,356 -- 355,992
51,124 shares of common
stock issued in
connection with the
acquisition of a
business............... -- 511 999,489 -- 1,000,000
Accretion on redeemable
preferred stock........ 10,174 -- -- (10,174) (10,174)
Preferred stock
dividends.............. 85,750 -- -- (85,750) (85,750)
Conversion of preferred
stock upon business
combination............ (3,586,102) 3,324 3,261,505 -- 3,264,829
97,409 shares of common
stock issued from the
conversion of warrants
and stock options upon
the business
combination............ -- 974 (974) -- --
99,233 shares of common
stock issued upon the
exercise of warrants... -- 992 (992) -- --
Net income.............. -- -- -- 5,046,333 5,046,333
----------- ------- ----------- ----------- -----------
Balances at September
30, 1996............... -- 62,476 41,513,355 12,616,762 54,192,593
43,753 shares of common
stock issued through
exercise of stock
options................ -- 437 232,762 -- 233,199
33,341 shares of common
stock cancelled from
escrow................. -- (333) 333 -- --
Net income.............. -- -- -- 7,254,698 7,254,698
----------- ------- ----------- ----------- -----------
Balances at September
30, 1997............... $ -- $62,580 $41,746,450 $19,871,460 $61,680,490
=========== ======= =========== =========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.......................... $ 7,254,698 $ 5,046,333 $ 4,992,716
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization...... 6,102,522 4,858,319 3,656,300
Provision for doubtful accounts.... 6,238,965 4,707,989 3,163,799
Amortization of deferred financing
fees.............................. 115,621 48,713 27,456
Accrued interest on subordinated
note.............................. -- -- 181,210
Deferred income taxes.............. 3,257,996 (526,145) (562,844)
Minority interest in loss of
subsidiary........................ (119,341) (64,965) --
Extraordinary item, net of tax..... -- -- (781,220)
Changes in operating assets and
liabilities, net of effects from
acquisitions of businesses:
Accounts receivable............... (30,202,092) (20,258,758) (12,342,946)
Prepaid expenses.................. (44,955) 81,708 67,774
Other current assets.............. (1,377,765) (1,295,488) (93,850)
Accounts payable.................. 288,183 2,671,756 544,664
Income taxes payable.............. (752,602) 1,034,234 199,159
Accrued liabilities............... 2,206,288 1,281,231 1,480,443
------------ ------------ ------------
Net cash provided by (used in)
operating activities............... (7,032,482) (2,415,073) 532,661
INVESTING ACTIVITIES
Purchases of property and
equipment.......................... (6,866,888) (6,478,823) (3,811,372)
Acquisitions of businesses.......... (20,943,121) (4,780,619) (18,233,062)
Proceeds from minority partner in
joint venture...................... 100 1,000,000 --
Other, net.......................... 38,846 (56,204) 29,895
------------ ------------ ------------
Net cash used in investing
activities......................... (27,771,063) (10,315,646) (22,014,539)
FINANCING ACTIVITIES
Borrowings (payments) on revolving
line of credit, net................ -- (3,892,054) 866,554
Principal payments on long-term
debt............................... (9,231,503) (2,290,404) (22,900,780)
Borrowings on long-term debt........ 44,064,000 19,735,276 17,100,000
Deferred financing fees............. (531,728) (94,770) (80,000)
Issuance of common stock............ -- -- 19,108,556
Issuance of preferred stock......... -- -- 1,392,000
Payment of preferred stock
dividend........................... -- (280,693) --
Proceeds from exercise of stock
options............................ 233,199 223,008 86,539
------------ ------------ ------------
Net cash provided by financing
activities......................... 34,533,968 13,400,363 15,572,869
------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents........................ (269,577) 669,644 (5,909,009)
Cash and cash equivalents at
beginning of year.................. 770,206 100,562 6,009,571
------------ ------------ ------------
Cash and cash equivalents at end of
year............................... $ 500,629 $ 770,206 $ 100,562
============ ============ ============
Supplemental disclosure of cash flow
information
Cash paid for interest.............. $ 2,957,313 $ 1,843,000 $ 1,635,000
============ ============ ============
Cash paid for income taxes.......... $ 4,344,976 $ 2,689,000 $ 3,163,000
============ ============ ============
</TABLE>
See accompanying notes.
F-6
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation
The consolidated financial statements include the accounts of Pediatric
Services of America, Inc. ("PSA" or "the Company") and its majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amount of net revenue and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Deposits with banks are
federally insured in limited amounts.
Property and Equipment
Property and equipment are stated at cost and are depreciated on the
straight-line method over the related asset's estimated useful life, generally
five to ten years for assets other than home care equipment.
Other Assets
Goodwill represents the excess of the purchase price of acquired businesses
over the fair value of net assets acquired and is being amortized using the
straight-line method over thirty years. The carrying value of goodwill will be
reviewed if the facts and circumstances suggest that it may be impaired. If
this review indicates that goodwill will not be recoverable, as determined
based on the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of the goodwill and related
assets will be reduced to their fair value.
Certificates of need are certificates which allow the Company to provide
home care services in sixteen counties in Maryland, the District of Columbia,
North Carolina, New Jersey and Washington. The certificates of need were
acquired in connection with business acquisitions by Premier Medical Services,
Inc. ("Premier") and business acquisitions by the Company. The certificates of
need are being amortized over their useful lives (see Note 5).
Financing fees incurred in connection with the new credit agreement (see
Note 4) are being amortized using the straight-line method over the term of
the agreement.
The cost of non-compete agreements with former owners of acquired businesses
are being amortized over the respective lives of each agreement (see Note 5).
Net Revenue
Net revenue represents the estimated net realizable amounts from patients,
third-party payors and others for patient services rendered. Such revenue is
recognized as the related services are performed. Approximately 36%, 37%, and
38% of the Company's net revenue for the years ended September 30, 1997, 1996
and 1995
F-7
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
respectively, were reimbursed under arrangements with Medicare and Medicaid.
Certain services are billed in advance of the Company rendering the related
services. Such amounts are deferred in the balance sheet until the related
services are performed.
Advertising Costs
Advertising costs are charged to expense in the period the costs are
incurred. Advertising expense was approximately $587,000, $354,000 and
$282,000 for the years ended September 30, 1997, 1996 and 1995, respectively.
Concentration of Credit Risk
The Company's principal financial instrument subject to potential
concentration of credit risk is trade accounts receivable. The concentration
of credit risk with respect to trade accounts receivable is limited due to the
large number of payors including Medicare and Medicaid, insurance companies,
and individuals and the diversity of geographic locations in which the Company
operates.
At September 30, 1997, the Company had one interest rate swap agreement with
a commercial bank (the "Counter Party"), having a cumulative notional
principal amount of $25 million. The Company pays a fixed rate of 6.61% plus
the applicable margin that varies from a minimum of .875% to a maximum of
1.625% and is based on the calculation of a leverage ratio. The interest rate
differential to be received or paid is recognized over the life of the
agreement as an adjustment to interest expense. The interest rate swap
terminates in June 2002. The Company is exposed to credit loss in the event of
non-performance by the Counter Party to the interest rate swap agreement.
However, the Company does not anticipate such non-performance.
Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Impact of Recently Issued Accounting Standards
In the first quarter of fiscal year 1997, the Company adopted the Statement
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." The adoption
of this Statement did not have a material effect on the Company's financial
position or on results of operations.
In the first quarter of fiscal year 1998, the Company will adopt Statement
of Financial Accounting Standards No. 131, "Reporting Aggregated Information
about a Business Enterprise." The adoption of this Statement will not have a
material effect on the Company's financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
Statement, which is effective for the Company's fiscal year ending September
30, 1999, establishes standards for the reporting and display of comprehensive
F-8
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
income and its components in a full set of general purpose financial
statements. The adoption of this Statement is not anticipated to have a
material effect on the Company's financial position or results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). The new accounting standards prescribed by SFAS
No. 123 are optional, and the Company is permitted to account for its stock
incentive and stock purchase plans under previously issued accounting
standards (See Note 7).
2. PREFERRED STOCK AND COMMON STOCK
On June 13, 1995, the Company issued 1,102,415 shares of its Common Stock
upon the closing of its second public offering for $15,890,077 in cash, net of
issuance costs of $1,473,435. Also, on July 11, 1995, the Company's
underwriters exercised their option to purchase 217,500 of additional shares
of Common Stock for $3,218,479 in cash, net of issuance costs of $206,670.
As of September 30, 1997 a total of 565,289 shares of Common Stock have been
reserved for future issuance.
Shares of Preferred Stock and Common Stock outstanding and related changes
for the three years ended September 30, 1997 are as follows:
<TABLE>
<CAPTION>
REDEEMABLE
CONVERTIBLE
PREFERRED COMMON
STOCK STOCK
----------- ---------
<S> <C> <C>
Balances at October 1, 1994......................... 20,000 4,187,641
Exercise of stock options......................... -- 54,748
Shares issued in connection with the acquisition
of a business.................................... -- 41,548
Issuance of preferred stock....................... 14,300 --
Issuance of common stock in second public
offering......................................... -- 1,319,915
------- ---------
Balances at September 30, 1995...................... 34,300 5,603,852
Exercise of stock options......................... -- 63,563
Exercise of warrants.............................. -- 99,233
Shares issued in connection with the acquisition
of a business.................................... -- 51,124
Conversion of warrants and stock options upon
business combination............................. -- 97,409
Conversion of preferred stock upon business
combination...................................... (34,300) 332,386
------- ---------
Balances at September 30, 1996...................... -- 6,247,567
Exercise of stock options......................... -- 43,753
Shares cancelled from escrow...................... -- (33,341)
------- ---------
Balances at September 30, 1997...................... -- 6,257,979
======= =========
</TABLE>
3. SHORT-TERM BORROWING ARRANGEMENTS
Premier had a $5,000,000 revolving line of credit agreement bearing interest
at the bank's prime interest rate plus 1.0%. Premier had outstanding
borrowings of $3,892,000 under this line of credit at September 30, 1995. On
May 20, 1996, the Company retired the debt and cancelled the credit agreement.
F-9
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM OBLIGATIONS
The Company's long-term obligations as of September 30, 1997 and 1996,
consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Note payable to bank............................... $61,000,000 $25,705,000
Related party notes payable........................ 6,050,440 --
Other notes payable................................ 223,347 250,523
----------- -----------
67,273,787 25,955,523
Less current maturities............................ 98,590 2,317,569
Less current maturities on related party notes
payable........................................... 2,163,101 --
----------- -----------
$65,012,096 $23,637,954
=========== ===========
</TABLE>
In May 1996, the Company amended its credit agreement (the "Amended Credit
Agreement") to increase the amount of financing available from $28 million to
$35 million, consisting of a $25 million revolving loan and a $10 million term
loan. Amounts available to borrow under the Amended Credit Agreement were
subject to limits as defined in the agreement. Borrowings under this facility
bore interest at LIBOR plus 1.5% (7.00% at September 30, 1996), the bank's
prime rate (8.25% at September 30, 1996) or at a rate equal to the bank's cost
of funds plus 1.5%, at the Company's option. The principal balance outstanding
at September 30, 1996 on the term loan was $10 million. The principal balance
outstanding on September 30, 1996 on the revolving loan was $15.7 million.
In December 1996, the Company again amended and restated the credit
agreement ("1996 Amended and Restated Credit Agreement") to further increase
the amount of available financing to $60 million, consisting of a $50 million
revolving loan and a $10 million term loan. An additional bank was added to
the credit agreement to expand the credit facility. The terms of the 1996
Amended and Restated Credit Agreement were consistent with the original terms
of the credit agreement.
In August 1997, the Company extended its existing credit facility. The
amount of financing increased to $100 million from $60 million consisting of a
$95 million revolving loan and a $5 million swingline facility. The loan is
due August 2002. A commitment fee ranging from .225% to .375% per annum is
charged on the average daily unused portion of the facility. Amounts available
to borrow under this agreement are subject to rate limits as defined in the
agreement. The revolving loan is collateralized by 100% of the voting stock of
the Company, requires the Company to maintain certain financial ratios and
places restrictions on the sale and purchase of assets, payment of dividends
and other distributions relating to the Company's outstanding capital stock.
Borrowings under this facility bear interest at LIBOR, the bank's prime rate
or at a rate equal to the bank's cost of funds, plus an applicable margin that
varies from a minimum of .875% to a maximum of 1.625% and is based on the
calculation of a leverage ratio. At September 30, 1997 the Company's
applicable margin was 1.25% and the interest rates under this facility at
September 30, 1997 ranged from 6.91% to 7.12%. The principle balance
outstanding at September 30, 1997 on the revolving loan was $61 million.
In connection with these extended agreements, the Company incurred loan
costs of approximately $532,000. These costs include loan closing fees, legal
and professional fees.
The subordinated note payable to Health Professionals, Inc. ("HPI") at
September 30, 1995 charged interest at the prime rate. In fiscal year 1995,
the Company restructured the note payable to HPI such that a prepayment on the
note of $830,000 resulted in a reduction of the debt of $2,132,034. The
difference is considered a gain on the extinguishment of the debt and is
recorded as an extraordinary item of $781,220, which is net of income taxes of
$520,814. In July 1996, the remaining outstanding balance of the note payable
was repaid and cancelled.
F-10
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company entered into twelve related party notes payable and thirteen
non-compete agreements with individuals in connection with the acquisition of
businesses. The notes are payable in monthly, quarterly or annual installments
and bear interest at rates ranging from 6.0% to 9.0%. The maturity dates range
from January 1998 to August 2000.
The aggregate amount of required principal payments during each of the next
five fiscal years and thereafter on all long-term obligations as of September
30, 1997 is as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
-------------------------
<S> <C>
1998.......................................................... $ 2,261,691
1999.......................................................... 3,887,214
2000.......................................................... 114,517
2001 and thereafter........................................... 61,010,365
-----------
$67,273,787
===========
</TABLE>
Warrants were issued to a bank for the purchase of 124,094 shares of Common
Stock or Series B Preferred Stock at an exercise price of $0.01 per share.
Upon closing of the Company's initial public offering, warrants for 24,819
shares of Common Stock were exercised (see Note 2). As a result of the
termination of a put right and exercise of certain of the warrants, the
Company transferred $629,443 from redeemable warrants to Common Stock and
Additional Paid-in Capital. In May, 1996, the remaining warrants were
exercised for 99,233 shares of Common Stock and 42 shares of Common Stock,
were transferred to the Company as consideration for the exercise of the
warrants valued at $23.63 per share at the date of exercise.
Premier also issued common stock warrants in conjunction with financing
transactions. At September 30, 1995, Premier had outstanding warrants to
purchase 57,027 shares of Common Stock with exercise prices ranging from $5.70
to $11.40. Upon the business combination with the Company, the warrants were
exercised and converted into 35,069 shares of Common Stock.
5. ACQUISITIONS
The Company acquired thirteen companies and a home health agency with a
certificate of need during fiscal 1997, which were not deemed significant for
the disclosure of pro forma financial information. The aggregate fiscal year
net revenue for these acquisitions was approximately $28.9 million and total
net assets were $6.1 million. The aggregate purchase price of these companies
was approximately $25.5 million.
PSA entered into a Stock Exchange Agreement with Premier on February 29,
1996. Based on the exchange ratio set forth in the Stock Exchange Agreement,
PSA issued approximately 845,000 shares of its Common Stock for approximately
1,926,000 shares of Premier common stock outstanding, after giving effect to
the conversion of Premier redeemable convertible preferred stock, warrants and
certain options immediately prior to the transaction. The transaction has been
accounted for using the pooling-of-interests method and, as a result, the
financial position, results of operations and cash flows are presented as if
the combining companies had been consolidated for all periods presented.
Premier was incorporated in March 1993 and its results have been included
since that date. The consolidated financial statements for 1996 include the
costs related to the combination of approximately $1.2 million ($687,700 after
tax, or $0.11 per share). These costs consist primarily of payments required
under certain employment agreements due to a change in control of Premier and
professional fees.
F-11
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation of net revenue, net income and related per share amounts of
the combined entities from October 1, 1995 through the end of the quarter
immediately preceding the date of the acquisition and fiscal 1995 are
presented in the following table.
<TABLE>
<CAPTION>
THREE MONTHS YEAR END
ENDED DECEMBER 31, SEPTEMBER 30,
1995 1995
------------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE)
<S> <C> <C>
Net revenue:
PSA, as previously reported................. $27,389 $ 83,224
Premier..................................... 9,521 28,636
------- --------
Combined net revenue........................ $36,910 $111,860
======= ========
Net Income:
PSA, as previously reported................. $ 1,335 $ 4,203
Premier..................................... 154 9
------- --------
Combined net income before extraordinary
item....................................... 1,489 4,212
Extraordinary item, net of tax.............. -- 781
------- --------
Combined net income......................... $ 1,489 $ 4,993
======= ========
Net income per share:
PSA, as previously reported................. $ 0.24 $ 0.93
Combined.................................... $ 0.24 $ 0.94
</TABLE>
On August 1, 1994, Premier acquired substantially all of the assets and
assumed certain liabilities of Peters Pediatrics Nursing Team, Inc. ("Peters")
which provides health care personnel to care for pediatric patients in their
homes. The purchase price consisted of a cash payment of $925,195, of which
$300,000 was allocated to a covenant not to compete, the issuance of 17,547
shares of Common Stock and the issuance of a contingent note payable. The
agreement requires the Company to pay the former owners $333,333 plus an
interest factor in each of November 1995, 1996 and 1997, should the Peters
business achieve specified revenue targets. In addition, the Company must pay
the former owners a designated percentage of fiscal 1995, 1996 and 1997
earnings over specified target amounts.
During fiscal 1997, the Peters business achieved certain specified revenue
and earnings targets, resulting in additional payments or obligations of
$368,602 which have been allocated to goodwill. Due to the uncertainty of
meeting the remaining performance targets, such amounts have not been recorded
as liabilities in these financial statements.
On October 3, 1994, the Company acquired all of the outstanding stock of
Oxygen Specialties, Inc. ("OSI"), a home medical equipment company
headquartered in New Orleans, Louisiana. The purchase price of $4.9 million
consisted of $4.7 million in cash and 16,393 shares of Common Stock valued at
$200,000. An additional $200,000 was paid at closing for a non-compete
agreement with the principal stockholders of OSI.
On March 31, 1995, the Company acquired all of the outstanding stock of
Pediatric Partners, Inc. ("PPI"), a health care company headquartered in
Atlanta, Georgia, specializing in pediatric home health care services for
medically fragile children, including intravenous therapies, nursing and home
care equipment. The purchase price of $9.2 million consisted of $8.9 million
in cash and 18,575 shares of Common Stock valued at $300,000. In addition, the
Company assumed a note payable due by PPI to a former stockholder of the
Company, T2 Medical, Inc., in the amount of $4.1 million (repaid during fiscal
1995) and paid $100,000 at closing for non-compete agreements with two PPI
stockholders.
F-12
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following represents unaudited pro forma consolidated results of
operations for the year ended September 30, 1995, assuming the above
acquisitions had occurred at the beginning of the year of acquisition:
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1995
-------------
<S> <C>
Net revenue.................................................... $122,328,932
Income before extraordinary item............................... 4,172,100
Net income..................................................... 4,953,320
Income before extraordinary item per share..................... 0.78
Net income per share........................................... 0.93
</TABLE>
These unaudited pro forma consolidated results do not purport to be
indicative of the results or trends that actually would have been obtained if
the operations were combined during the periods presented, and is not intended
to be a projection of future results or trends.
The Company also acquired eight companies during fiscal 1996 and 1995, which
were not deemed significant for the disclosure of pro forma financial
information, with aggregate net revenue of approximately $16.6 million and
total assets of $3.1 million. The aggregate purchase price of these companies
was approximately $6.3 million.
The purchase method of accounting was used to record each of the above
acquisitions except Premier. Accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed based on estimated fair values at
the purchase dates. Operating results for the acquired companies have been
included in the Company's consolidated results of operations from the
respective purchase dates.
6. LEASES
The Company leases office space as well as certain automobiles and medical
equipment under operating leases that expire at various dates through 2008.
Rent expense approximated $4,209,000, $3,978,000 and $3,089,000 under these
leases for the years ended September 30, 1997, 1996 and 1995, respectively.
At September 30, 1997 the future minimum lease payments under non-cancelable
operating leases with initial or remaining terms equal to or exceeding one
year were as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30,
-------------------------
<S> <C>
1998.......................................................... $ 3,197,654
1999.......................................................... 2,417,440
2000.......................................................... 1,687,339
2001.......................................................... 971,115
2002 and thereafter........................................... 4,226,279
-----------
$12,499,827
===========
</TABLE>
7. STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
F-13
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's Stock Option Plan (the "Option Plan") provides for the
granting of stock options covering up to 700,000 shares of Common Stock, of
which 700,000 options have been granted to eligible participants as of
September 30, 1997. A proposal to increase the number of shares of Common
Stock issuable under the Option Plan from 700,000 shares to 1,750,000 shares
will be submitted to the shareholders at the 1998 Annual Meeting of
Shareholders. As of September 30, 1997, 101,575 options have been granted to
eligible participants, subject to approval of the increase in shares. If
shareholder approval of the increase in shares is not obtained, these options
will be void. Options may be issued as either incentive stock options or as
nonqualified stock options. Options may be granted only to those persons who
are officers or employees of the Company or to certain outside consultants.
The terms and conditions of options granted under the Option Plan, including
the number of shares, the exercise price and the time at which such options
become exercisable are determined by the Board of Directors. Upon the
occurrence of certain events, the vesting period of the options accelerate.
The term of options granted under the Option Plan are typically 3 to 5 years
but may not exceed 10 years. The Company has the right to repurchase the
Common Stock issued upon the exercise of these options at the then fair market
value of such shares, if the Company or the holders of such shares terminate
their employment with the Company.
Under the Company's Directors' Stock Option Plan, directors of the Company
who are not officers or employees of the Company will receive stock options
each year to purchase up to 6,000 shares of Common Stock, at an exercise price
equal to the fair market value on the date of grant and expiring 10 years
after issuance. The options vest on the first anniversary of their issuance,
provided that the grantee is then a director of the Company. A total of 95,000
shares of Common Stock have been reserved for issuance pursuant to options
granted under the Directors' Stock Option Plan of which 75,000 options have
been granted to eligible participants as of September 30, 1996. A proposal to
increase the number of shares of Common Stock issuable under the Directors'
Option Plan from 95,000 shares to 300,000 shares will be submitted to
shareholders at the 1998 Annual Meeting of Shareholders, together with a
proposal to permit discretionary grants under the plan. During fiscal year
1997, an additional 45,000 options were granted in excess of the 20,000
remaining options available to grant under the plan to eligible participants.
The options are subject to shareholder approval of the proposed amendments and
if shareholder approval of the increase of the proposed amendments is not
obtained, these options will be void.
Pro forma information regarding net income and earnings per share is
required by Statement 123, which also requires that the information be
determined as if the Company had accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method. The fair
value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions
for 1997 and 1996, respectively: risk-free interest rates of 5.99% and 6.40%;
a dividend yield of 0.0%; volatility factors of the expected market price of
the Company's common stock of 2.12 and a weighted-average expected life of the
option of 4 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
F-14
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. The Company's pro forma
information follows (in thousands, except for earnings per share information):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Pro forma net income.......................................... $6,506 $4,708
Pro forma earnings per share
Basic....................................................... $ 1.04 $ 0.78
Diluted..................................................... $ 1.01 $ 0.73
</TABLE>
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE PRICE
SHARES PER SHARE
-------- --------------
<S> <C> <C>
Outstanding at October 1, 1994...................... 471,892 $ 4.21
Granted........................................... 189,509 16.97
Exercised......................................... (54,748) 1.59
Cancelled......................................... (20,517) 8.31
-------- ------
Outstanding at September 30, 1995................... 586,136 9.30
Granted........................................... 185,600 19.55
Exercised......................................... (124,707) 3.51
Cancelled......................................... (65,376) 11.92
-------- ------
Outstanding at September 30, 1996................... 581,653 13.20
Granted........................................... 194,500 18.46
Exercised......................................... (43,753) 5.33
Cancelled......................................... (20,537) 16.54
-------- ------
Outstanding at September 30, 1997................... 711,863 $15.02
======== ======
</TABLE>
At September 30, 1997, 1996 and 1995, options to acquire 322,821, 247,084,
and 223,122 shares, respectively, were exercisable. The weighted average fair
value of options granted in 1997 and 1996 was $7.97 and $8.64, respectively.
The following table summarizes the ranges of exercise prices and weighted
average contractual lives for options outstanding and the weighted average
exercise price for options exercisable as of September 30, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------------------
WEIGHTED AVERAGE NUMBER WEIGHTED
REMAINING OPTIONS AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISABLE EXERCISE PRICE
-------------- ----------- ---------------- ----------- --------------
<S> <C> <C> <C> <C>
$0.014-$0.714 16,474 3.0 16,474 $ 0.47
1.43 12,017 4.3 12,017 1.43
4.29-5.70 114,016 5.4 95,746 4.46
8.00-10.26 45,731 6.7 38,084 8.85
13.38-19.87 478,625 8.6 144,000 17.89
20.00-24.75 45,000 9.2 16,500 24.58
------- --- ------- ------
711,863 7.8 322,821 $11.68
======= =======
</TABLE>
F-15
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. INCOME TAXES
The provision for income taxes for the years ended September 30, 1997, 1996
and 1995 are summarized below:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Current:
Federal................................. $2,683,000 $3,421,000 $2,830,000
State................................... 503,000 642,000 536,000
---------- ---------- ----------
3,186,000 4,063,000 3,366,000
Deferred:
Federal................................. 1,357,021 (552,856) (480,540)
State................................... 254,441 (103,660) (82,304)
---------- ---------- ----------
1,611,462 (656,516) (562,844)
---------- ---------- ----------
$4,797,462 $3,406,484 $2,803,156
========== ========== ==========
</TABLE>
A reconciliation of the provision for income taxes to the statutory federal
income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Statutory rate of 34% applied to pre-tax
income................................. $4,097,734 $2,873,958 $2,385,000
State income taxes, net of federal tax
benefit................................ 448,340 338,113 302,300
Amortization of goodwill................ 202,992 192,630 136,000
Other, net.............................. 48,396 1,783 (20,144)
---------- ---------- ----------
$4,797,462 $3,406,484 $2,803,156
========== ========== ==========
</TABLE>
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Allowance for doubtful accounts.................. $ -- $ 3,238,765
Mark to market accounting for accounts
receivable...................................... (2,448,500) --
Net operating loss carryforward.................. 1,830,844 96,000
Payroll related accruals......................... 495,566 394,568
Insurance related accruals....................... 1,068,684 701,436
Property and equipment and intangibles........... (2,242,151) (2,023,422)
Other, net....................................... 484,768 39,860
----------- -----------
Net deferred tax asset/(liability)............... $ (810,789) $ 2,447,207
=========== ===========
</TABLE>
Under new guidance issued by the Internal Revenue Service in December 1996,
the Company made an election entitling it to mark its accounts receivable to
market value for tax purposes. This election eliminated the deferred tax asset
relating to the allowance for doubtful accounts and established a new deferred
tax liability to reflect the new temporary difference.
The Company has approximately $4.8 million of net operating losses for
income tax purposes available to offset future taxable income. Such losses
expire $1.3 million by the year 2010 and $3.5 million by the year 2011.
F-16
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents The carrying amount reported in the balance sheet
for cash and cash equivalents approximates its fair value.
Long and short-term debt The carrying amounts of the Company's borrowings
under its short-term revolving credit agreements approximate their fair value.
The fair values of the Company's long-term debt are estimated using discounted
cash flow analysis, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements. The Company's amount of long-term
debt approximates its fair value.
10. EMPLOYEE SAVINGS PLAN
The Company has a contributory savings plan (the "Plan"), which qualifies
under Section 401(k) of the Internal Revenue Code, covering substantially all
of its employees. The Company, at its discretion, may match 33% of employee
contributions to a maximum of 6% of employee earnings each Plan year. Company
contributions to the Plan were approximately $277,000, $201,000 and $117,000
for the years ended September 30, 1997, 1996 and 1995, respectively.
11. COMMITMENTS AND CONTINGENCIES
As of September 30, 1997, the Company's professional liability insurance
policy is on a claims-made basis. Should this claims-made policy not be
renewed or replaced with equivalent insurance, claims based on occurrences
during its term but asserted subsequently would be uninsured.
The Company is subject to claims and suits arising in the ordinary course of
business. In the opinion of management, the ultimate resolution of such
pending legal proceedings will not have a material adverse effect on the
Company's consolidated financial position.
12. BASIC AND DILUTED NET INCOME PER SHARE
Basic net income per share is computed using the weighted average number of
shares of common shares outstanding during the period. Diluted net income per
share is computed using the weighted average number of common shares
outstanding and the dilutive effect of common equivalent shares (calculated
using the treasury stock method).
The following table sets forth the reconciliation of the denominators of the
basic and diluted earnings per share:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1997 1996 1995
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Denominator for basic income per share-weighted
average shares.................................... 6,257 6,057 4,655
Effect of dilutive securities:
Warrants and options............................... 189 243 403
Conversion of preferred stock upon business
combination....................................... -- 137 --
Redeemable convertible preferred stock converted... -- -- 108
-------- -------- --------
Denominator for diluted income per share-adjusted
weighted average shares........................... 6,446 6,437 5,166
======== ======== ========
</TABLE>
F-17
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. UNAUDITED SUBSEQUENT EVENTS
As of December 1, 1997, the Company has acquired five companies subsequent
to September 30, 1997. These companies were not deemed significant for the
disclosure of pro forma financial information. The total purchase price of
these companies was approximately $18.8 million and were accounted for under
the purchase method of accounting.
On December 15, 1997, one of the Company's consolidated subsidiaries,
Insurance Medical Reporter, Inc. ("IMR"), purchased certain assets of
ChoicePoint Services, Inc., for $21.7 million and was accounted for under the
purchase method of accounting. This acquisition expanded IMR's product line
revenue from approximately $26 million to $85 million. IMR provides
paramedical examinations for the life and health insurance industries. This
acquisition was not deemed significant for the disclosure of pro forma
financial information.
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1997 and 1996 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER
-------------------------------
FISCAL 1996: FIRST SECOND THIRD FOURTH
- ------------ ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue.................................... $36,910 $40,166 $43,033 $43,695
Operating income............................... 2,766 1,348 3,002 3,050
Income before income taxes..................... 2,496 948 2,413 2,595
Net income..................................... 1,489 576 1,401 1,580
Net income per share:
Basic......................................... 0.25 0.09 0.22 0.25
Diluted....................................... 0.23 0.08 0.22 0.25
</TABLE>
<TABLE>
<CAPTION>
QUARTER
-------------------------------
FISCAL 1997 FIRST SECOND THIRD FOURTH
- ----------- ------- ------- ------- -------
<S> <C> <C> <C> <C>
Net revenue.................................... $46,554 $49,746 $53,890 $53,833
Operating income............................... 3,309 3,683 4,032 4,444
Income before income taxes..................... 2,774 2,903 3,064 3,311
Net income..................................... 1,656 1,733 1,839 2,026
Net income per share:
Basic......................................... 0.27 0.28 0.29 0.32
Diluted....................................... 0.26 0.27 0.29 0.31
</TABLE>
15. SUBSEQUENT EVENT
During the quarter ended December 31, 1997, the Company adopted SFAS
No. 128. Financial statements issued subsequent to the adoption of SFAS
No. 128 are required to disclose restated earnings per share for all periods
presented. Earnings per share amounts and related notes for all periods have
been restated to conform to the SFAS No. 128 requirements.
F-18
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1997
------------ -------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 415 $ 501
Accounts receivable, less allowances for doubtful
accounts of $11,461 and $10,036, respectively..... 86,252 75,458
Prepaid expenses................................... 962 508
Deferred income taxes.............................. 3,400 3,880
Other current assets............................... 5,448 3,481
-------- --------
Total current assets................................ 96,477 83,828
Property and equipment:
Home care equipment held for rental................ 25,660 24,104
Furniture and fixtures............................. 8,860 6,979
Vehicles........................................... 789 731
Leasehold improvements............................. 631 581
-------- --------
35,940 32,395
Accumulated depreciation and amortization.......... (16,850) (15,678)
-------- --------
19,090 16,717
Other assets:
Goodwill, less accumulated amortization of $4,231
and $3,695, respectively.......................... 81,701 50,421
Certificates of need, less accumulated amortization
of $319 and $279, respectively.................... 2,929 1,543
Deferred financing fees, less accumulated
amortization of $237 and $192, respectively....... 588 632
Non-compete agreements, less accumulated
amortization of $757 and $719, respectively....... 306 321
Other.............................................. 426 372
-------- --------
Total assets........................................ $201,517 $153,834
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 7,408 $ 6,302
Accrued compensation............................... 4,753 5,147
Accrued insurance.................................. 2,643 2,393
Other accrued liabilities.......................... 6,144 3,559
Deferred revenue................................... 983 853
Income taxes payable............................... 1,709 1,119
Current maturities of long-term obligations from
related parties................................... 2,086 2,163
Current maturities of long-term obligations........ 105 99
-------- --------
Total current liabilities........................... 25,831 21,635
Long-term obligations from related parties net of
current maturities................................. 3,854 3,887
Long-term obligations, net of current maturities.... 86,102 61,125
Deferred income taxes............................... 5,132 4,691
Minority interest in subsidiary..................... 815 816
Stockholders' equity:
Preferred stock, $.01 par value, 2,000 shares
authorized; no shares issued and outstanding...... -- --
Common stock, $.01 par value, 80,000 shares
authorized; 7,109 shares at December 31, 1997 and
6,258 shares at September 30, 1997 issued and
outstanding, respectively......................... 70 63
Additional paid-in capital......................... 57,720 41,746
Retained earnings.................................. 21,993 19,871
-------- --------
Total stockholders' equity.......................... 79,783 61,680
-------- --------
Total liabilities & stockholders' equity............ $201,517 $153,834
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-19
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
Net revenue................................................ $ 61,559 $ 46,554
Costs and expenses:
Operating salaries, wages and employee benefits.......... 26,081 19,734
Other operating costs.................................... 22,943 17,948
Corporate, general and administrative.................... 3,836 2,772
Provision for doubtful accounts.......................... 1,833 1,375
Depreciation and amortization............................ 1,847 1,416
--------- ---------
Total costs and expenses............................... 56,540 43,245
--------- ---------
Operating income........................................... 5,019 3,309
Interest expense........................................... 1,466 575
--------- ---------
Income before minority interest and income taxes........... 3,553 2,734
Minority interest in loss of subsidiary.................... 1 40
--------- ---------
Income before income taxes................................. 3,554 2,774
Income taxes............................................... 1,432 1,118
--------- ---------
Net income................................................. $ 2,122 $ 1,656
========= =========
BASIC SHARE DATA:
Net income per common and common equivalent share........ $ 0.33 $ 0.27
========= =========
Weighted average common shares outstanding............... 6,504 6,249
========= =========
DILUTED SHARE DATA:
Net income per common and common equivalent share........ $ 0.32 $ 0.26
========= =========
Weighted average common shares outstanding............... 6,708 6,433
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-20
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
--------------------
1997 1996
--------- ---------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................. $ 2,122 $ 1,656
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization.......................... 1,847 1,416
Provision for doubtful accounts........................ 1,833 1,375
Amortization of deferred financing fees................ 45 19
Deferred income taxes.................................. 922 --
Minority interest loss in subsidiary................... (1) (40)
Changes in operating assets and liabilities, net of
effects from acquisitions of businesses:
Accounts receivable.................................... (11,734) (7,031)
Prepaid expenses and other current assets.............. (1,764) (551)
Accounts payable....................................... 1,029 (360)
Income taxes........................................... 590 (281)
Accrued liabilities.................................... 2,108 1,036
--------- --------
Net cash used in operating activities.................... (3,003) (2,761)
INVESTING ACTIVITIES
Purchases of property and equipment.................... (1,774) (1,400)
Acquisitions of businesses............................. (19,736) (4,250)
Other, net............................................. (10) (378)
--------- --------
Net cash used in investing activities.................... (21,520) (6,028)
FINANCING ACTIVITIES
Principal payments on long-term debt................... (594) (91)
Borrowings on long-term debt........................... 25,000 8,850
Deferred financing fees................................ -- (179)
Proceeds from exercise of stock options................ 31 18
--------- --------
Net cash provided by financing activities................ 24,437 8,598
--------- --------
Decrease in cash and cash equivalents.................... (86) (191)
Cash and cash equivalents at beginning of year........... 501 770
--------- --------
Cash and cash equivalents at end of period............... $ 415 $ 579
========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest................................. $ 1,262 $ 439
========= ========
Cash paid for income taxes............................. $ 50 $ 1,405
========= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-21
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Pediatric Services of America, Inc. (the "Company") and its majority-owned
subsidiaries have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they
do not include all information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Results of
operations for the three month period ended December 31, 1997 are not
necessarily indicative of the results to be expected for the entire fiscal
year ending September 30, 1998. These condensed consolidated financial
statements should be read in conjunction with the Company's audited financial
statements for the year ended September 30, 1997 included in the Company's
Annual Report on Form 10-K for such year filed with the Securities and
Exchange Commission. Principal accounting policies are set forth in the
Company's 1997 Annual Report.
2. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share. Statement 128
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants,
and convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement 128 requirements. The dilutive effect of the weighted
average options included in the diluted earnings per share is 204,545 and
183,889 for the three months ended December 31, 1997 and 1996, respectively.
3. INTEREST RATE SWAP AGREEMENT
At December 31, 1997, the Company had one interest rate swap agreement with
a commercial bank (the "Counter Party"), having a cumulative notional
principal amount of $25 million. The Company pays a fixed rate of 6.61% plus
the applicable margin that varies from a minimum of .875% to a maximum of
1.625% and is based on the calculation of a leverage ratio. The interest rate
differential to be received or paid is recognized over the life of the
agreement as an adjustment to interest expense. The interest rate swap
terminates in June 2002. The Company is exposed to credit loss in the event of
non-performance by the Counter Party to the interest rate swap agreement.
However, the Company does not anticipate such non-performance.
4. ACQUISITIONS
On October 31, 1997, the Company purchased the assets and assumed certain
liabilities of Pediatric Physical Therapy, Inc. ("PPT"), a physical therapy
company in St. Louis, Missouri, for a total purchase price of $50,000,
consisting of $30,000 cash and $20,000 in the form of a note payable by the
Company. The Company assumed approximately $200,000 in indebtedness.
On November 7, 1997, the Company purchased substantially all of the assets
of Intra-Care, Inc. ("IC"), a home infusion and pharmaceutical company in
Little Falls, New Jersey, for a total purchase price of $7.5 million. The
purchase price consisted of $4.5 million in cash and $3.0 million in the form
of shares of the Company's Common Stock. The shares of Common Stock have been
placed in escrow and will be released upon the satisfaction of certain
conditions.
F-22
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--UNAUDITED--(CONTINUED)
On November 11, 1997, one of the Company's consolidated subsidiaries,
Insurance Medical Reporter, Inc. ("IMR"), purchased certain assets of American
Insurance Examiners, Inc. ("AIE"), a paramedical testing company in Los
Angeles, California, for a total cash purchase price of $1.225 million.
On November 21, 1997, the Company purchased substantially all of the assets
of Kids and Nurses, Inc. ("KAN"), a company specializing in prescribed
pediatrics extended care facilities. The total purchase price was $2.5 million
consisting of shares of the Company's Common Stock. A portion of the shares
have been placed in escrow for a period of one year from the closing date and
will be released upon the satisfaction of certain conditions. At closing, the
Company assumed and paid $750,000 indebtedness.
On December 1, 1997, the Company purchased substantially all of the assets
of Cyber Home Medical Equipment Corp., Inc. ("CHM"), a home medical equipment
company, in Rockville Center, New York, for a total purchase price of $1.25
million. The purchase price consisted of $550,000 in cash, $300,000 in the
form of a note payable by the Company and $400,000 in the form of shares of
the Company's Common Stock. The shares of Common Stock have been placed in an
escrow account for the term of one year from December 1, 1997 and will be
released upon the satisfaction of certain conditions. The note will be paid
quarterly over a three year period.
On December 15, 1997, one of the Company's consolidated subsidiaries, IMR,
purchased certain paramedical testing assets of ChoicePoint Services, Inc.
("PMI") for $21.7 million consisting of $11.7 million in cash and $10.0
million in the form of shares of the Company's Common Stock. For a one year
period, the Company has agreed to protect the average price received by PMI
upon disposition of the Company's shares.
On December 29, 1997, the Company purchased all of the assets and assumed
certain liabilities of Kid's Nurses, Inc. ("KN"), a pediatric nursing company
in St. Louis, Missouri, for a total purchase price of $350,000. The purchase
price consisted of $250,000 in cash, $50,000 in the form of a note payable by
the Company and $50,000 in the form of shares of the Company's Common Stock.
The shares have been placed in an escrow account until December 29, 1998 and
will be released upon the satisfaction of certain conditions. The note will be
paid annually over a two year period.
The purchase method of accounting was used to record each of the above
acquisitions. Accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on estimated fair values at the
purchase dates. Operating results for the acquired companies have been
included in the Company's consolidated results of operations from the
respective purchase dates.
The acquisitions of PPT, IC, AIE, KAN, CHM, PMI and KN are not considered
significant as defined by Regulation S-X Rule 1-02(w) and, therefore, the
consolidated financial statements do not reflect pro forma financial
information for these acquisitions.
F-23
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR IN-
CORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PEDIATRIC SERVICES OF
AMERICA, INC., THE INITIAL PURCHASERS OR ANY OF THEIR RESPECTIVE AGENTS. NEI-
THER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER
ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF PEDIATRIC SERVICES OF AMERICA, INC. SINCE THE DATE HEREOF. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SO-
LICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SO-
LICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information.................................................... 4
Incorporation by Reference............................................... 4
Prospectus Summary....................................................... 5
Risk Factors............................................................. 13
The Company.............................................................. 20
Use of Proceeds of New Notes............................................. 20
Use of Proceeds of Old Notes............................................. 20
Capitalization........................................................... 21
The Exchange Offer....................................................... 22
Selected Historical Consolidated Financial Data.......................... 29
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 32
Business................................................................. 39
Management............................................................... 57
Description of Credit Agreement.......................................... 58
Description of Notes..................................................... 59
Old Notes; Registration Rights........................................... 85
Certain Federal Income Tax Considerations Relating to the Exchange
Offer................................................................... 86
Plan of Distribution..................................................... 88
Legal Matters............................................................ 89
Experts.................................................................. 89
Index to Financial Statements............................................ F-1
</TABLE>
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$75,000,000
LOGO
OFFER TO EXCHANGE
10% SENIOR SUBORDINATED NOTES DUE 2008, SERIES A
($75,000,000 PRINCIPAL AMOUNT)
FOR ALL OUTSTANDING
10% SENIOR SUBORDINATED NOTES DUE 2008
($75,000,000 PRINCIPAL AMOUNT OUTSTANDING)
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PROSPECTUS
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MAY 12, 1998
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