<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER 0-23946
PEDIATRIC SERVICES OF AMERICA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 58-1873345
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 TECHNOLOGY PARKWAY, NORCROSS GA 30092
(Address of principal executive offices, including zip code)
(770) 441-1580
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of August 5, 1998 the Registrant had 7,147,014 shares of Common Stock, $0.01
par value, outstanding.
- --------------------------------------------------------------------------------
Page 1 of 20
Index of Exhibits on page 20
<PAGE>
FORM 10-Q
PEDIATRIC SERVICES OF AMERICA, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE NUMBER
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1998 and September 30, 1997........................3
Condensed Consolidated Statements of Operations for
the three and nine months ended June 30, 1998 and 1997......5
Condensed Consolidated Statements of Cash Flows for
the nine months ended June 30, 1998 and 1997................6
Notes to Condensed Consolidated Financial Statements.............7
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations.........................9
PART II OTHER INFORMATION
ITEM 5: Other Information................................................17
ITEM 6: Exhibits and Reports on Form 8-K.................................18
Signatures.......................................................19
Index of Exhibits................................................20
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
JUNE 30, SEPTEMBER 30,
1998 1997
------------------ ------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 272 $ 501
Accounts receivable, less allowances for doubtful accounts
of $25,578 and $10,036, respectively................... 90,251 75,458
Prepaid expenses.......................................... 778 508
Deferred income taxes..................................... 3,793 3,880
Income taxes receivable................................... 2,959 --
Other current assets...................................... 4,308 3,481
-------- --------
Total current assets........................................ 102,361 83,828
Property and equipment:
Home care equipment held for rental....................... 27,558 24,104
Furniture and fixtures.................................... 12,993 6,979
Vehicles.................................................. 876 731
Leasehold improvements.................................... 919 581
-------- --------
42,346 32,395
Accumulated depreciation and amortization............... (19,508) (15,678)
-------- --------
22,838 16,717
Other assets:
Goodwill, less accumulated amortization of $5,826
and $3,695, respectively................................. 86,246 50,421
Certificates of need, less accumulated amortization of
$437 and $279, respectively.............................. 3,111 1,543
Deferred financing fees, less accumulated amortization of
$382 and $192, respectively.............................. 3,196 632
Non-compete agreements, less accumulated amortization
of $836 and $719, respectively........................... 224 321
Other..................................................... 476 372
-------- --------
Total assets................................................ $218,452 $153,834
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED) (AUDITED)
JUNE 30, SEPTEMBER 30,
1998 1997
------------------ ----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $ 10,915 $ 6,302
Accrued compensation.............................................. 7,489 5,147
Accrued insurance................................................. 3,049 2,393
Other accrued liabilities......................................... 6,969 3,559
Deferred revenue.................................................. 885 853
Income taxes payable.............................................. -- 1,119
Current maturities of long-term obligations from related
parties......................................................... 1,365 2,163
Current maturities of long-term obligations....................... 682 99
-------- --------
Total current liabilities........................................... 31,354 21,635
-------- --------
Long-term obligations from related parties, net of current
maturities....................................................... 3,099 3,887
Long-term obligations, net of current maturities.................... 105,088 61,125
Deferred income taxes............................................... 3,804 4,691
Minority interest in subsidiary..................................... 788 816
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;
7,146 shares at June 30, 1998 and 6,258 shares at
September 30, 1997 issued and outstanding, respectively........ 71 63
Additional paid-in capital........................................ 60,030 41,746
Retained earnings................................................. 14,218 19,871
-------- --------
Total stockholders' equity.......................................... 74,319 61,680
-------- --------
Total liabilities and stockholders' equity.......................... $218,452 $153,834
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
4
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
(unaudited) (unaudited)
---------------------------- ------------------------
1998 1997 1998 1997
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Net revenue............................................. $78,480 $53,890 $219,518 $150,191
Costs and expenses:
Operating salaries, wages and employee benefits....... 32,925 23,108 90,023 64,304
Other operating costs................................. 34,478 19,993 89,945 56,483
Corporate general and administrative.................. 6,680 3,499 16,587 9,244
Provision for doubtful accounts....................... 15,346 1,675 19,274 4,657
Depreciation and amortization......................... 2,259 1,583 6,403 4,480
----- ------ ------- -------
Total costs and expenses................................ 91,688 49,858 222,232 139,168
------ ------ ------- -------
Operating income (loss)................................. (13,208) 4,032 (2,714) 11,023
Interest expense........................................ 2,619 964 6,011 2,325
------- ------ ------ ------
Income (loss) before minority interest and income taxes. (15,827) 3,068 (8,725) 8,698
Minority interest in (gain) loss of subsidiary.......... 1 (4) 28 43
------- ------ ------ ------
Income (loss) before income taxes....................... (15,826) 3,064 (8,697) 8,741
Income taxes............................................ (5,917) 1,225 (3,044) 3,513
------- ------ ------- ------
Net income (loss)....................................... $(9,909) $1,839 $(5,653) $5,228
======= ====== ======= ======
BASIC SHARE DATA:
Net income (loss) per common and common equivalent
share................................................ $(1.39) $ .29 $(0.82) $ .84
======= ======= ======= ======
Weighted average common shares outstanding............. 7,145 6,269 6,908 6,258
======= ======= ======= ======
DILUTED SHARE DATA:
Net income (loss) per common and common
equivalent share..................................... $(1.39) $0.29 $(0.82) $0.81
======= ======= ======= ======
Weighted average common shares outstanding............. 7,145 6,434 6,908 6,434
======= ======= ======= ======
</TABLE>
See accompanying notes to condensed consolidated financial statements
5
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
(UNAUDITED)
------------
1998 1997
------- ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss)........................................................ $ (5,653) $ 5,228
Adjustments to reconcile net income (loss) to net cash used in operating
activities:
Depreciation and amortization............................................ 6,403 4,480
Provision for doubtful accounts.......................................... 19,274 4,657
Amortization of deferred financing fees.................................. 191 77
Deferred income taxes.................................................... (242) --
Minority interest in loss of subsidiary.................................. (28) (43)
Changes in operating assets and liabilities, net of effects from
acquisitions of businesses:
Accounts receivable...................................................... (32,569) (20,656)
Prepaid expenses and other current assets................................ (475) (1,083)
Accounts payable......................................................... 3,943 (1,344)
Income taxes payable/receivable.......................................... (4,079) (369)
Accrued liabilities...................................................... 5,600 2,708
-------- -------
Net cash used in operating activities...................................... (7,635) (6,345)
INVESTING ACTIVITIES
Purchases of property and equipment...................................... (7,977) (5,134)
Acquisitions of businesses............................................... (24,415) (10,683)
Other, net............................................................... (42) (1)
-------- -------
Net cash used in investing activities...................................... (32,434) (15,818)
FINANCING ACTIVITIES
Principal payments on long-term debt..................................... (87,057) (1,729)
Borrowings on long-term debt............................................. 129,500 24,314
Deferred financing fees.................................................. (2,755) (210)
Proceeds from exercise of stock options.................................. 152 158
-------- -------
Net cash provided by financing activities.................................. 39,840 22,533
-------- -------
Increase (decrease) in cash and cash equivalents........................... (229) 370
Cash and cash equivalents at beginning of year............................. 501 770
-------- -------
Cash and cash equivalents at end of period................................. $ 272 $ 1,140
======== =======
Supplemental disclosure of cash flow information
Cash paid for interest................................................... $ 4,166 $ 1,977
======== ========
Cash paid for income taxes............................................... $ 1,311 $ 3,892
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
6
<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 and nine month periods ended June 30,
1998 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 February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, Earnings Per Share ("Statement
128"). 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 (loss) 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
number of options included in the diluted earnings per share is 165,844 and
176,359 for the three and nine months ended June 30, 1997. For the three
and nine months ended June 30, 1998 the effect of the stock options were
excluded from the calculation of weighted average shares outstanding for
diluted loss per share as such amounts were antidilutive, respectively.
3. INTEREST RATE SWAP AGREEMENT
At June 30, 1998, 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 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.
7
<PAGE>
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. The parties agreed to an earnout formula based on the
earnings for the 1998 calendar year, whereby IC is paid in cash if it meets
or exceeds certain targets or IC repays the Company in Common Stock if it
fails to meet certain targets.
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 $1.2
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 of
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 495,050 shares of the Company's Common Stock. The
Company provided the seller with a one-year price protection upon
disposition for the Company's Common Stock issued at closing. See Item 2,
"Liquidity and Capital Resources - Commitments" for further information.
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.
On January 12, 1998, the Company purchased substantially all of the assets
and assumed certain liabilities of Texas Air Supply Home Medical Equipment,
Inc. ("TAS"), a home medical equipment and supply company in Ft. Worth,
Texas, for a total purchase price of $1.0 million, consisting of $750,000
8
<PAGE>
cash and $250,000 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. The Company paid at closing
$500,000 of indebtedness of TAS.
On January 30, 1998, the Company purchased the stock of Pediatric Nursing
Service, Inc. ("PNS"), a pediatric nursing company in Parsippany, New
Jersey, for a total purchase price of $2.4 million, consisting of $1.8
million in cash and $600,000 in the form of 31,927 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. The Company
granted the sellers a price protection upon disposition of the shares of
Common Stock for a period of 30 days after they are released from escrow.
On February 10, 1998, the Company purchased substantially all of the assets
and assumed certain liabilities of Strictly Pediatrics, L.L.C. ("SP"), a
home nursing and supply company in Austin, Texas, for a total purchase
price of $15,000 in cash. The Company assumed and paid approximately
$129,000 of indebtedness.
On March 1, 1998 the Company purchased the stock of Medical Equipment &
Supply, Inc. ("MES"), in Austin, Texas, for a total purchase price of $2.0
million, consisting of $670,000 cash and $1.34 million in the form of
69,247 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. The Company granted the sellers a price protection
upon disposition of the shares of Common Stock for a period of 30 days
after they are released from escrow.
On June 5, 1998, the Company signed an agreement to put on deposit $1.0
million to purchase substantially all of the assets of Transworld Home
Health Care--Nursing Division, Inc. ("THHC"), a home nursing company with
operations in New Jersey and Florida. On the closing date July 15, 1998 the
total purchase price was $5.3 million, consisting of all cash. At closing,
$1.0 million of the purchase price was placed in escrow and will be
released upon satisfaction of certain conditions.
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, KN, TAS, PNS, SP, MES and
THHC 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
In connection with the "Safe Harbor" provisions of the Private Securities
Litigation Reform Act of 1995, the Company hereby makes reference to
certain risks as set forth under the heading "Risk Factors" in the
Company's Registration Statement on Form S-4, as filed with the Securities
and Exchange Commission on May 5, 1998 (Registration No. 333-51895). Such
cautionary statements identify important facts that could cause the
Company's actual results to differ materially from those projected in
forward looking statements made by or on behalf of the Company in this or
any other section of this Form 10-Q. The Company's business is subject to
a number of risks, some of which are beyond the Company's control. These
risks include whether the Company will be able to resolve issues pertaining
to the collectibility of its accounts receivable, pricing pressures
(including changes in governmental reimbursement levels), the
9
<PAGE>
impact of health care reform proposals, the effect of federal and state
healthcare regulations, the highly competitive market, recent losses, the
concentration of large payors and dependence on relationships with third
parties.
RESULTS OF OPERATIONS
The historical condensed consolidated statements of operations of the
Company for the three and nine month periods ended June 30, 1998 contained
in this report and the following discussion thereof, include the effect of
the Company's acquisitions of PPT, IC, AIE, KAN, CHM, PMI, KN, TAS, PNS,
SP, and MES subsequent to the respective dates of acquisition.
The following table is derived from the Company's unaudited condensed
consolidated statements of operations for the periods indicated and
presents results of operations as a percentage of net revenue and the
percentage change in the dollar amounts of each item from the comparative
prior period.
<TABLE>
<CAPTION>
PERIOD-TO-PERIOD
PERCENTAGE OF
PERCENTAGE OF NET REVENUE Increase (Decrease)
------------------------------------------ ---------------------------------
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
June 30, June 30, June 30, JUNE 30,
--------------------- -------------------- ---------------- ---------------
1998 1997 1998 1997 1998 TO 1997 1998 TO 1997
---------- --------- --------- --------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue......................... 100% 100% 100% 100% 45.6% 46.2%
Operating salaries, wages and
employee benefits.................. 42.0 42.9 41.0 42.8 42.5 40.0
Other operating costs............... 43.9 37.1 41.0 37.6 72.4 59.2
Corporate, general and
administrative..................... 8.5 6.5 7.6 6.2 90.9 79.4
Provision for doubtful accounts..... 19.6 3.1 8.8 3.1 815.9 313.8
Depreciation and amortization....... 2.8 2.9 2.9 3.0 42.7 42.9
----- ---- ---- ---- ------ ------
Operating income (loss)............. (16.8) 7.5 (1.3) 7.3 (427.6) (124.6)
Interest expense.................... 3.3 1.8 2.7 1.5 171.8 158.6
----- ---- ---- ---- ------ ------
Income (loss) before income taxes
and minority interest.............. (20.1) 5.7 (4.0) 5.8 (615.9) (200.3)
Minority interest in (gain) loss of
subsidiary......................... 0.0 0.0 0.0 0.0 (119.8) (34.2)
----- ---- ---- ---- ------ ------
Income (loss) before income taxes... (20.1) 5.7 (4.0) 5.8 (616.6) (199.5)
Income taxes........................ (7.5) 2.3 (1.4) 2.3 (583.2) (186.7)
----- ---- ---- ---- ------ ------
Net income (loss)................... (12.6)% 3.4% (2.6)% 3.5% (638.8)% (208.1)%
===== ==== ==== ==== ====== ======
</TABLE>
10
<PAGE>
The following table sets forth for the periods indicated, the percentage of net
revenue represented by the following items:
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
- ----------------------------------------------------------------------------------------------------------
PEDIATRIC HOME HEALTH CARE: 1998 1997 1998 1997
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Nursing.......................................... $22,785 $19,075 $ 67,758 $ 47,255
Respiratory Therapy Equipment.................... 6,306 5,944 17,949 16,525
Home Medical Equipment........................... 853 482 2,426 1,761
Pharmacy and Other............................... 8,594 7,702 26,574 20,657
------- ------- -------- --------
Total Pediatric Home Health Care................. 38,538 33,203 114,707 86,198
------- ------- -------- --------
ADULT HOME HEALTH CARE:
Nursing............................................. 4,292 4,485 13,117 17,482
Respiratory Therapy Equipment....................... 5,159 5,548 16,650 16,695
Home Medical Equipment.............................. 1,549 1,385 4,620 4,088
Pharmacy and Other.................................. 5,265 2,469 14,926 6,605
------- ------- -------- --------
Total Adult Home Health Care............... 16,265 13,887 49,313 44,870
------- ------- -------- --------
Total Medical Testing Services............. 23,677 6,800 55,498 19,123
------- ------- -------- --------
Total Net Revenue.......................... $78,480 $53,890 $219,518 $150,191
======= ======= ======== ========
</TABLE>
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997.
- ------------------------------------------------------------------------------
Net Revenues: Net revenue increased $24.6 million, or 46%, to $78.5
million in the three months ended June 30, 1998 from $53.9 million in the same
period in the prior year. The Company's acquisitions accounted for
approximately $22.9 million of the increase in net revenue and internal growth
accounted for the remaining $1.7 million. For branch offices that have been
under the Company's management for more than one year, the internal growth in
net revenue was 3% for the three months ended June 30, 1998. Of the $24.6
million increase in net revenue in the third quarter of fiscal 1998, pediatric
health care net revenue accounted for $5.3 million. Increased pediatric health
care net revenue for the three months ended June 30, 1998 was attributable to
the Company's acquisitions which accounted for approximately $4.1 million and
the remaining to 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 (young adult and geriatric patients) net revenue accounted
for $2.4 million of the total increase in net revenue for the three months ended
June 30, 1998. Increased adult net revenue for the three months ended June 30,
1998 was attributable to the Company's acquisitions which accounted for
approximately $3.8 million, partially offset by a decline in internal revenue
for adult patients of $1.3 million. Net revenue for paramedical testing
services accounted for $16.9 million of the increase in net revenue for the
quarter, primarily due to the acquisition of PMI which added $15.0 million. In
the three months ended June 30, 1998, the Company derived approximately 71% of
its net revenues from commercial insurers and other private payors, 23% from
Medicaid and 6% from Medicare.
Operating Salaries, Wages and Employee Benefits: Operating salaries, wages
-----------------------------------------------
and employee benefits consist primarily of branch office employee costs which
increased $9.8 million, or 43%, to $32.9 million in the three months ended June
30, 1998 from $23.1 million in the same period in the prior year. The increase
was due to various factors including the Company's acquisitions which added
approximately $8.7 million. As a result of acquisitions completed by the
Company, particularly the December 1997 acquisition of PMI, the
11
<PAGE>
Company's historical results of operations are not necessarily indicative of
future results. Due to the nature of its operations, PMI has a lower operating
salaries, wages and employee benefits component as compared to the Company's
home healthcare operations. As a percentage of net revenue, operating salaries,
wages and employee benefits for the three months ended June 30, 1998 decreased
to 42% from 43% in the comparable period of the prior year.
Other Operating Costs:
---------------------
Other operating costs include medical supplies, branch office rents, utilities,
vehicle expenses, independent contractor payments and cost of sales. The cost of
sales consists primarily of the cost of pharmacy products sold. Other operating
costs increased $14.5 million, or 72%, to $34.5 million in the three months
ended June 30, 1998 from $20.0 million in the comparable period in 1997. Of the
increase $6.9 million relates to the PMI acquisition in the medical testing
business. Due to the nature of its operations, PMI has a higher other operating
cost component as compared to the Company's home healthcare operations. The
remaining $7.6 million is primarily due to growth in the business. As a
percentage of net revenue, other operating costs for the three months ended June
30, 1998 increased to 44% from 37% in the comparable period of the prior year.
Corporate, General and Administrative Costs:
-------------------------------------------
Corporate, general and administrative costs increased $3.2 million, or 91%, to
$6.7 million for the three months ended June 30, 1998 from $3.5 million in the
same period in the prior year. The increase was primarily due to the acquisition
of PMI and growth of the business. As a percentage of net revenue, corporate,
general and administrative costs for the three months ended June 30,1998
increased to 9% from 7% in the comparable period of the prior year.
Provision for Doubtful Accounts:
-------------------------------
Provision for doubtful accounts consists of the amount of billed revenue that
management estimates to be uncollectible. During the three months ended June 30,
1998, the Company's provision for doubtful accounts increased approximately
$13.7 million, or 816%, to $15.4 million from $1.7 million in the same period in
1997. The increase in the three months ended June 30, 1998 is primarily
attributable to management's ongoing assessment of the collectibility of
accounts receivable which was revised to reflect: (1) continued difficulties in
the health care reimbursement environment, (2) lagging collection on certain
receivables primarily resulting from the implementation of a new billing and
collection system which diverted the Company's resources from pursuing older
receivable balances, (3) problems identified during the quarter related
primarily to certain billings generated during the implementation phase of the
new billing and collection system, (4) collection experience on certain
receivables of acquired businesses and (5) the unfavorable outcome of certain
receivables under appeal. Due to the above mentioned environmental and process
changes the Company's Management reassessed its methodology for estimating its
allowance for doubtful accounts resulting in the increase in the provision and a
decrease in days sales outstanding to 103 days in the fiscal 1998 period from
111 days in the prior year period. See "Liquidity and Capital Resources".
Depreciation and Amortization Expenses:
--------------------------------------
Depreciation and amortization expenses increased $0.7 million, or 43%, to $2.3
million in the three months ended June 30, 1998 from $1.6 million in the same
period in 1997. The increase was primarily due to capital expenditures for the
purchase of rental and computer equipment and the amortization of goodwill from
the Company's acquisitions. As a percentage of the Company's total net revenue,
depreciation and amortization costs were comparable for the three months ended
June 30, 1998 and 1997.
Interest Expense:
----------------
Interest expense increased $1.6 million, or 172%, to $2.6 million in the three
months ended June 30, 1998 from $1.0 million in the same period in the prior
year. The increase was primarily the result of a $60.2 million increase in the
Company's average debt outstanding at June 30, 1998 compared to the same period
in the prior year. The increase was also due to an increase in interest rates
related to the issuance of
12
<PAGE>
10% Senior Subordinated Notes due 2008, and the Company's credit facility. See
"Liquidity and Capital Resources".
Income Tax Expense: Income tax expense (benefit) decreased $7.1 million,
------------------
or 583% to $(5.9) million in the three months ended June 30, 1998 from $1.2
million in the same period in the prior year. The Company has recorded an
overall net operating loss for the quarter. The Company expects to realize a
refund through carryback claims of approximately $0.9 million.
NINE MONTHS ENDED JUNE 30, 1998 COMPARED TO NINE MONTHS ENDED JUNE 30, 1997.
Net Revenues: Net revenue increased $69.3 million, or 46% to $219.5
------------
million in the nine months ended June 30, 1998 from $150.2 million in the same
period in the prior year. The Company's acquisitions accounted for
approximately $56.2 million of the increase in net revenue and internal growth
accounted for the remaining $13.1 million. For branch offices that have been
under the Company's management for more than one year, the internal growth in
net revenue was 9% for the nine months ended June 30, 1998. Of the $69.3
million increase in net revenue for the nine months ended June 30, 1998,
pediatric health care net revenue accounted for $28.5 million. Increased
pediatric health care net revenue for the nine months ended June 30, 1998 was
attributable to the Company's acquisitions which accounted for approximately
$13.4 million and the remainder to marketing efforts which resulted in an
increase in patients served rather than any significant increase in rates
charged. Adult health care net revenue accounted for $4.4 million of the
increase in net revenue for the nine months ended June 30, 1998. Increased
adult health care net revenue for the nine months ended June 30, 1998 was
attributable to the Company's acquisitions which accounted for approximately
$11.1 million. This amount was partially offset by a decline in internal revenue
for adult patients of $6.7 million. Paramedical testing services net revenue
accounted for $36.4 million of the increase in net revenue for the nine month
period, primarily due to the acquisition of PMI which added $31.7 million. The
Company derived approximately 70% of its net revenues from commercial insurers
and other private payors, 23% from Medicaid and 7% from Medicare.
Operating Salaries, Wages and Employee Benefits: Operating salaries, wages
-----------------------------------------------
and employee benefits consist primarily of branch office employee costs.
Operating salaries, wages and employee benefits increased $25.7 million, or 40%
to $90.0 million in the nine months ended June 30, 1998 from $64.3 million in
the same period in the prior year. The increase was primarily due to the
Company's acquisitions which added approximately $20.6 million. 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. Due to the nature of its operations,
PMI has a lower operating salaries, wages and employee benefits component as
compared to the Company's home healthcare operations. As a percentage of net
revenue, operating salaries, wages and employee benefits for the nine months
ended June 30, 1998 decreased to 41% from 43%.
Other Operating Costs: Other operating costs include medical supplies,
---------------------
branch office rents, utilities, vehicle expenses, independent contractor
payments and cost of sales. The cost of sales consists primarily of the costs
of pharmacy products sold. Other operating costs increased $33.4 million or 59%
to $89.9 million in the nine months ended June 30, 1998 from $56.5 million in
the comparable period in 1997. Of the increase, $16.2 million relates to the
PMI acquisition in the medical testing business. Due to the nature of its
operations, PMI has a higher other operating costs component as compared to the
Company's home healthcare operations. The remaining $17.2 million is primarily
due to growth in the business. As a percentage of net revenue, other operating
costs for the nine months ended June 30, 1998 increased to 41% from 38% in the
comparable period of the prior year.
13
<PAGE>
Corporate, General and Administrative Costs: Corporate, general and
-------------------------------------------
administrative costs increased $7.4 million, or 80%, to $16.6 million in the
nine months ended June 30, 1998 from $9.2 million in the same period in the
prior year. The increase was primarily due to the acquisition of PMI and growth
of the business. As a percentage of net revenue corporate, general and
administrative costs for the nine months ended June 30, 1998, increased to 8%
from 6% in the comparable period of the prior year.
Provision for Doubtful Accounts: Provision for doubtful accounts consists
-------------------------------
of the amount of billed revenue that management estimates to be uncollectible.
During the nine months ended June 30, 1998, the Company's provision for doubtful
accounts increased approximately $14.6 million, or 314%, to $19.3 million from
$4.7 million in the same period in 1997. The increase in the three months ended
June 30, 1998 is primarily attributable to management's ongoing assessment of
the collectibility of accounts receivable which was revised to reflect: (1)
continued difficulties in the health care reimbursement environment, (2) lagging
collection on certain receivables primarily resulting from the implementation of
a new billing and collection system which diverted the Company's resources from
pursuing older receivable balances, (3) problems identified during the quarter
related primarily to certain billings generated during the implementation phase
of the new billing and collection system, (4) collection experience on certain
receivables of acquired businesses and (5) the unfavorable outcome of certain
receivables under appeal. Due to the above mentioned environmental and process
changes the Company's Management reassessed its methodology for estimating its
allowance for doubtful accounts resulting in the increase in the provision and a
decrease in days sales outstanding to 103 days in the fiscal 1998 period from
111 days in the prior year period. See "Liquidity and Capital Resources".
Depreciation and Amortization Expenses: Depreciation and amortization
--------------------------------------
expenses increased $1.9 million, or 43%, to $6.4 million in the nine months
ended June 30, 1998 from $4.5 million in the same period in 1997. The increase
was primarily due to capital expenditures for the purchase of rental and
computer equipment and the amortization of goodwill from the Company's
acquisitions. As a percentage of the Company's total net revenue, depreciation
and amortization costs were comparable for the nine months ended June 30, 1998
and 1997.
Interest Expense: Interest expense increased $3.7 million, or 159%, to
----------------
$6.0 million in the nine months ended June 30, 1998 from $2.3 million in the
same period in the prior year. The increase was primarily the result of $50.4
million increase in the Company's average debt outstanding at June 30, 1998
compared to the same period in the prior year. The increase was also due to an
increase in interest rates related to the issuance of 10% Senior Subordinated
Notes due 2008, and the Company's credit facility. See "Liquidity and Capital
Resources".
Income Tax Expense: Income tax expense (benefit) decreased $6.5 million,
------------------
or 187%, to $(3.0) million in the nine months ended June 30, 1998 from $3.5
million in the same period in the prior year. The Company has recorded an
overall net operating loss for the year to date. The Company expects to realize
a refund through carryback claims of approximately $0.9 million.
LIQUIDITY AND CAPITAL RESOURCES
ACCOUNTS RECEIVABLE: 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 nine
months ended June 30, 1998 and 1997, the Company's cash flows from operations
were affected by increases in accounts receivable balances of $32.6 million and
$20.7 million, respectively. The Company's DSO was 103 days and 111 days as of
June 30, 1998 and June 30, 1997, respectively, based on the net revenue for the
last quarter of the period. The decrease in DSO is primarily
14
<PAGE>
attributable to the increase in the allowance for doubtful accounts. The Company
has taken measures intended to further improve DSO by hiring additional
experienced reimbursement personnel, enhancements to the billing and collection
system, improving training programs, engaging an outside consulting firm to
assess the billing and collection functions and provide recommendations for
process improvements, as well as further utilization of the new billing and
collection system to include the integration of locations not currently on the
system.
PROPERTY AND EQUIPMENT: The Company's investments in property and
equipment are attributable largely to purchases of medical equipment that is
rented to patients, and to computer equipment related to the Company's new
medical billing and collection system, and the new medical testing billing,
ordering and management systems. Capital expenditures for computer equipment
have been substantially completed.
ACQUISITIONS: 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 cash investments in the acquisition of
businesses were $24.4 million and $10.7 million respectively, for the nine
months ended June 30, 1998 and 1997.
LONG TERM DEBT: On April 16, 1998, the Company issued, in a private
placement, $75 million aggregate principal amount of 10% Senior Subordinated
Notes due 2008, which were subsequently replaced on May 12, 1998, with $75
million aggregate principal amount of 10% Senior Subordinated Notes due 2008,
Series A, registered with the Securities and Exchange Commission (the "Notes").
After paying issuance costs of approximately $2.7 million, the Company received
proceeds of $72.3 million, which were used to repay a portion of the
indebtedness outstanding under its revolving credit facility. Interest on the
Notes accrues from the date of issuance, and is payable semi-annually on April
15 and October 15 of each year, commencing October 15, 1998. The 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 certain redemption prices, 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 25% of the aggregate principal
amount of the Notes at a set redemption amount with the net proceeds from one or
more public offerings of Common Stock of the Company. The Notes place certain
restrictions on the incurrence of additional indebtedness, the creation of
liens, sales of assets, mergers and consolidations and payment of dividends,
among other things.
CREDIT AGREEMENT: In August 1997, the Company increased the amount of
financing available under the Credit Agreement from $60.0 million to $100.0
million, consisting of a $95.0 million revolving loan (Credit Facility) with a
$5.0 million swingline loan credit subfacility. The Credit Agreement was amended
April 16, 1998, effective upon the issuance of the Notes, changing the
commitment fees and the financial ratio requirements.
As of July 31, 1998, the Company provided notice to its lenders, as
required under the terms of the Credit Agreement, of a breach of certain
financial covenants contained in the Credit Agreement. As a result, the Credit
Agreement was further amended on August 13, 1998 ("Amendment No. 2"), waving the
default under the credit agreement, amending the financial covenants applicable
after August 13, 1998, placing a limitation on aggregate borrowings for working
capital purposes and prohibiting the Company from borrowing for acquisitions
until February 1999 without the approval of the lenders and stipulating that the
Company must meet certain financial criteria as defined in Amendment No. 2
before borrowing for acquisitions. In addition, Amendment No. 2 reduces total
borrowings allowed under the Credit Agreement from $100.0 million to $75.0
million, changes commitment fees and applicable margins and allows the lenders
to appoint an independent consultant to review the billing and collection
system, processes and controls. The Amendment No. 2 also granted the Company a
waiver to permit the Company to comply with its contractual obligations under
the PMI
15
<PAGE>
acquisition and to repurchase at the market price the shares issued in the PMI
transaction, and gave lender approval for the purchase by the Company of a home
health agency in Georgia. See discussion under "Commitments".
The Security Agreement executed in connection with Amendment No. 2 grants
to the lenders under the Credit Agreement, subject to certain permitted liens
and exceptions, a collateral interest in substantially all of the assets of the
Company.
Under the amended Credit Facility, commitment fees ranging from 0.300% to
0.500% per annum is charged on the average daily unused portion of the loan
facility. The Company's current leverage ratio will result in an increase in
the effective interest rate on borrowings under the Credit Agreement. 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 1.375% to a
maximum of 3.000% and is based on the calculation of a leverage ratio, or (2)
the base rate plus the applicable margin. 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 June 30, 1998, the
Company's applicable margin was 1.625%, and the interest rates under this
facility at June 30, 1998 ranged from 7.175% to 7.315%. Outstanding borrowings
under this facility at June 30,1998 were approximately $30.0 million.
The Company anticipates that the available lines of credit under the Credit
Agreement, and cash flow generated from operations should be adequate to enable
the company to continue to fund its operations, capital expenditures,
anticipated internal growth, and planned acquisitions.
At June 30, 1998, total borrowings under the Notes and the Credit Agreement
were approximately $105.0 million.
INTEREST RATE SWAP AGREEMENT: At June 30, 1998, the Company had one
interest rate swap agreement with a commercial bank (the "Counter Party"),
having a cumulative notional principal amount of $25.0 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.
COMMITMENTS: A portion of the consideration paid by the Company for PMI
consisted of 495,050 shares of the Company's Common Stock issued at $20.20 per
share (the "Shares"), for a total share value of $10.0 million. Pursuant to the
terms of the PMI acquisition, as amended, the Company agreed to provide
ChoicePoint protection for a specified time period against a decrease in the
value of any of the Shares subsequently sold by ChoicePoint in the marketplace,
or any Shares tendered to the Company in a private sale at the current market
price. Under the terms of the agreement, the Company must reimburse ChoicePoint
in cash for the difference between $20.20 and the sale price of any Shares
actually sold by ChoicePoint for less than $20.20 prior to December 15, 1998,
and must purchase any Shares tendered by ChoicePoint at the current market
price. Pursuant to the terms of Amendment No.2 to the Credit Agreement, the
lenders agreed to permit the Company to repurchase all of the shares at the
market price at the time of purchase, and to pay the contractual protection
obligation, for a total of $10.0 million, the amount of the original
consideration represented by the Shares at closing. ChoicePoint and the Company
have agreed to complete the transaction on or prior to August 21, 1998.
16
<PAGE>
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 systems, and the systems presently
in the final stages of implementation, are believed to be year 2000 compliant.
The Company anticipates that testing of its systems will begin in the first
quarter of fiscal 1999.
In addition, the Company conducts business electronically with certain
external parties, including payors and vendors. 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 are not
fully compliant. Management is contacting external parties with which it
interacts to determine year 2000 compliance issues and when its payors or
vendors expect to be year 2000 compliant.
QUARTERLY OPERATING RESULTS AND SEASONALITY
The Company's quarterly results may vary significantly depending primarily
on factors such as rehospitalizations of patients, the timing of new branch
office openings and pricing pressures due to legislative and regulatory
initiatives to contain health care costs. As a result of the above factors, the
Company's operating results for any particular quarter may not be indicative of
the results for the full fiscal year. In addition, the Company's future
operating results could differ materially from those previously achieved or
projected in forward looking statements made by or on behalf of the Company.
PART II - OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
The Securities and Exchange Commission has made recent changes to the
proxy rules in Regulation 14A under the Securities Exchange Act of
1934, as amended, including Rule 14a-4 and Rule 14a-5. Stockholders
are entitled to submit proposals on matters appropriate for
stockholder action consistent with the rules and regulations of the
Securities and Exchange Commission and with the Company's Bylaws. Any
such proposal for the 1999 Annual Meeting of stockholders must comply
with applicable regulations and be received by the Company at its
executive offices in Norcross, Georgia, as follows:
(i) to be eligible for inclusion in the Company's proxy
materials and form of proxy, it must be received no later than
November 1, 1998; or
(ii) to be eligible to be presented from the floor for vote at
the meeting (but not intended for inclusion in the Company's
proxy materials), it must be received no later than sixty (60)
days nor more than ninety (90) days prior to the meeting;
provided, however, that in the event that less than seventy (70)
days notice or prior public disclosure of the date of the meeting
is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than close of business on
the 10th day following the day on which
17
<PAGE>
such notice of the date of the annual meeting was mailed or such
public disclosure was made.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
--------
The following exhibits are filed with or incorporated by reference in
this report. Where such filing is made by incorporation by reference
to a previously filed registration statement or report, such
registration statement or report is identified in parentheses. The
Company will furnish any exhibit upon request to Pediatric Services
of America, Inc., 310 Technology Parkway, Norcross, Georgia 30092.
There is a charge of $.50 per page to cover expenses for copying and
mailing.
10.16 Amendment No. 2 to Credit Agreement
10.17 Security Agreement
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On July 29, 1998, the Registrant filed a report on Form 8-K under Item 5,
indicating the expected results of this third quarter report. See "Item 2.
Management's Discussion and Analysis and Results of Operations".
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PEDIATRIC SERVICES OF AMERICA, INC.
(REGISTRANT)
Date: August 14, 1998 By: /s/ Stephen M. Mengert
---------------------------------
Stephen M. Mengert
Senior Vice President,
Chief Financial Officer,
Treasurer and Secretary
(Duly authorized officer and
Principal Financial Officer)
19
<PAGE>
INDEX OF EXHIBITS
PAGE NO.
--------
10.16 Amendment No. 2 to Credit Agreement........................ 21
10.17 Security Agreement......................................... 32
27 Financial Data Schedule.................................... 52
20
<PAGE>
AMENDMENT NO. 2
THIS AMENDMENT NO. 2 (the "Amendment") dated as of August 13, 1998, to the
---------
Credit Agreement referenced below, is by and among PEDIATRIC SERVICES OF
AMERICA, INC., a Georgia corporation, PEDIATRIC SERVICES OF AMERICA, INC., a
Delaware corporation, the subsidiaries and affiliates identified herein, the
lenders identified herein, and NATIONSBANK, N.A., as Administrative Agent.
Terms used but not otherwise defined shall have the meanings provided in the
Credit Agreement.
W I T N E S S E T H
WHEREAS, a $100 million credit facility has been established in favor of
Pediatric Services of America, Inc., a Georgia corporation (the "Borrower")
--------
pursuant to the terms of that Credit Agreement dated as of August 13, 1997 (as
amended and modified, the "Credit Agreement") among the Borrower, the Guarantors
----------------
and Lenders identified therein, and NationsBank, N.A., as Administrative Agent;
WHEREAS, the Borrower has requested certain modifications to the Credit
Agreement, including, among other things, reduction of the Commitments and
adjustments to certain financial covenants;
WHEREAS, such modifications require the consent of the Required Lenders;
WHEREAS, the Required Lenders have consented to the requested modifications
on the terms and conditions set forth herein;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. The Credit Agreement is amended in the following respects:
1.1 The following definitions in Section 1.1 are amended and
modified, or added, to read as follows:
"Aggregate Revolving Committed Amount" means the aggregate amount of
------------------------------------
Revolving Commitments in effect from time to time, being SEVENTY-FIVE
MILLION DOLLARS ($75,000,000).
"Applicable Percentage" means for any day, the rate per annum set
---------------------
forth below opposite the applicable Consolidated Leverage Ratio then in
effect, it being understood that the Applicable Percentage for (i) Base
Rate Loans shall be the percentage set forth under the column "Base Rate
Margin", (ii) Eurodollar Loans shall be the percentage set forth under the
column "Eurodollar Margin and Letter of Credit Fee", (iii) the Letter of
Credit Fee shall be the
<PAGE>
percentage set forth under the column "Eurodollar Margin and Letter of
Credit Fee" and (iv) the Commitment Fee shall be the percentage set forth
under the column "Commitment Fee":
<TABLE>
<CAPTION>
Eurodollar
Margin
Consolidated and
Pricing Leverage Base Rate Letter of Commitment
Level Ratio Margin Credit Fee Fee
- -------------------------- -------------------------- ----------------- -------------------- -------------------
<S> <C> <C> <C> <C>
equal to or greater than
I 6.00 2.00% 3.000% .500%
equal to or greater than
II 5.50 but less than 6.00 1.75% 2.750% .500%
equal to or greater than
III 5.00 but less than 5.50 1.50% 2.500% .500%
equal to or greater than
IV 4.50 but less than 5.00 1.25% 2.250% .500%
equal to or greater than
V 4.00 but less than 4.50 0.75% 1.750% .450%
equal to or greater than
VI 3.50 but less than 4.00 0% 1.625% .375%
equal to or greater than
VII 3.00 but less than 3.50 0% 1.500% .325%
VIII less than 3.00 0% 1.375% .300%
</TABLE>
The Applicable Percentage shall be determined and adjusted quarterly on the
date (each a "Rate Determination Date") five (5) Business Days after the
-----------------------
date by which the annual and quarterly compliance certificates and related
financial statements and information are required in accordance with the
provisions of Sections 7.1(a) and (b) and Section 7.2(b), as appropriate;
provided that:
--------
(i) the Applicable Percentages from the effective date of
Amendment No. 2 shall be based on Pricing Level IV and shall remain in
effect at such Pricing Level until the first Rate Determination Date
to occur in connection with delivery of financial statements through
September 30, 1998, and
(ii) in the event an annual or quarterly compliance certificate
and related financial statements and information are not delivered
timely to the Agency Services Address by the date required by Sections
7.1(a) and (b) and Section 7.2(b), as appropriate, the Applicable
Percentages shall be based on Pricing Level I until such time as an
appropriate compliance certificate and related financial statements
and information are delivered, whereupon the applicable Pricing Level
shall be adjusted based on the information contained in such
compliance certificate and related financial statements and
information.
Each Applicable Percentage shall be effective from a Rate Determination
Date until the next such Rate Determination Date. The Administrative Agent
shall determine the appropriate Applicable Percentages in the pricing
matrix promptly upon receipt of the quarterly or annual compliance
certificate and related financial information and shall promptly notify the
Borrower and the Lenders of any change thereof. Such determinations by the
Administrative Agent shall be conclusive absent manifest error. Adjustments
in the Applicable Percentages shall be effective as to existing Extensions
of Credit as well as new Extensions of Credit made thereafter.
"ChoicePoint Obligation" means the obligation of the Company and
----------------------
Paramedical Services of America, Inc. to ChoicePoint Services, Inc. (the
"Seller") and ChoicePoint, Inc. under that certain Asset Purchase Agreement
-------
dated December 2, 1997 (the "Asset Purchase Agreement"), to reimburse the
------------------------
Seller for the difference in the average trading price below $20.20
<PAGE>
on 495,050 shares of common stock of the Company (but in any event not to
exceed $10 million in the aggregate) acquired by the Seller pursuant to the
Asset Purchase Agreement.
"Consolidated Adjusted EBITDA" means for any period for the
----------------------------
Consolidated Group on a consolidated basis,
(i) on or before September 30, 1999, the sum of EBITDA minus cash
-----
taxes paid (net of refunds),
(ii) after September 30, 1999, the sum of EBITDA minus capital
-----
expenditures made or incurred minus cash taxes paid (net of refunds),
-----
in each case determined in accordance with GAAP applied on a consistent
basis. Except as otherwise expressly provided, the applicable period shall
be for the four consecutive fiscal quarters ending as of the date of
determination.
"Consolidated Net Worth" means, as for any date for the Consolidated
----------------------
Group, shareholders' equity or net worth as determined in accordance with
GAAP, but, excluding, in any event, for purposes hereof, payments of
--- ---------
ChoicePoint Obligation of up to $10,000,000 in the aggregate.
"Credit Documents" means a collective reference to this Credit
----------------
Agreement, the Notes, the LOC Documents, the Security Agreement, the Pledge
Agreement, each Joinder Agreement, the Administrative Agent's Fee Letter,
and all other related agreements and documents issued or delivered
hereunder or thereunder or pursuant hereto or thereto.
"Days Sales Outstanding" means, for any Person or any line of
----------------------
business, the quotient of
(i) consolidated accounts receivable net of allowances taken in
accordance with GAAP as of the date of determination, divided by
(ii) the quotient of (A) net revenues or sales for the fiscal
quarter ending as of the date of determination multiplied by 4,
divided by (B) 365 or 366 days, as appropriate.
"EBITDA" means for any period, the sum of net income (exclusive of
------
extraordinary gains and losses and related tax effects on any such excluded
gains and losses) plus interest expense (including amortization of debt
----
discount and premium, the interest component under Capital Leases and the
implied interest component under Securitization Transactions) plus all
----
provisions for Federal, state or other domestic and foreign income taxes
plus depreciation and amortization, in each case determined in accordance
----
with GAAP applied on a consistent basis, but excluding, in any event, for
--- ---------
purposes hereof, special charges of up to $15.25 million actually taken
against earnings in the third fiscal quarter of 1998.
"Restricted Payment" means (i) any dividend or other distribution,
------------------
direct or indirect, on account of any shares of any class of stock now or
hereafter outstanding, except (A) a dividend payable solely in shares of
that class to the holders of that class and (B) dividends and other
distributions payable to a Credit Party, (ii) any redemption, retirement,
sinking fund or similar payment, purchase or other acquisition for value,
direct or indirect, of any shares of any class of
<PAGE>
stock now or hereafter outstanding, but excluding, in any event, for
--- ---------
purposes hereof, the repurchase of 495,050 shares of common stock of the
Company from the Seller during the fiscal quarter ending September 30, 1998
in an amount not to exceed $10 million in connection with the satisfaction
of the ChoicePoint Obligation and the subsequent retirement of such stock,
and (iii) any payment made to retire, or to obtain the surrender of, any
outstanding warrants, options or other rights to acquire shares of any
class of stock now or hereafter outstanding.
"Security Agreement" means the Security Agreement dated as of the date
------------------
of Amendment No. 2 to Credit Agreement given by the Credit Parties to
NationsBank, N.A., as Administrative Agent, to secure the obligations
hereunder and under Hedge Agreements with Lenders and their affiliates
permitted hereunder, as amended and modified.
1.2 A new Section 6.17 is added to read as follows:
Section 6.17 Year 2000 Compliance.
--------------------
The Company has (i) initiated a review and assessment of all areas
within its and each of its Subsidiaries' business and operations (including
those affected by suppliers, vendors and customers) that could be adversely
affected by the "Year 2000 Problem" (that is, the risk that computer
applications used by the Company or any of its Subsidiaries (or suppliers,
vendors and customers) may be unable to recognize and perform properly
date-sensitive functions involving certain dates prior to and any date
after December 31, 1999), (ii) developed a plan and timeline for addressing
the Year 2000 Problem on a timely basis, and (iii) to date, implemented
that plan in accordance with that timetable. Based solely on the
foregoing, and relying on representations made to the Borrower by its
suppliers, vendors and customers, to date the Company believes that all
computer applications (including those of its suppliers, vendors and
customers) that are material to its or any of its Subsidiaries' business
and operations are reasonably expected on a timely basis to be able to
perform properly date-sensitive functions for all dates before and after
January 1, 2000 (that is, be "Year 2000 compliant"), except to the extent
that a failure to do so could not reasonably be expected to have a Material
Adverse Effect.
1.3 Section 7.1(b) is amended to read as follows:
(b) Company-Prepared Financial Statements. As soon as available, but
-------------------------------------
in any event
(i) within 15 Business Days after the end of each fiscal month, a
company-prepared consolidated balance sheet of the Company and its
subsidiaries as of the end of the month and related company-prepared
consolidated balance sheets and statements of income for such monthly
period and for the fiscal year to date, and detailed cash reports on a
rolling basis and accounts receivables reports and agings (including
bad debt and days sales outstanding analysis by line of business) for
the Company and its subsidiaries in form and substance satisfactory to
the Administrative Agent and the Required Lenders;
(ii) within 45 days after the end of each of the first three
fiscal quarters, a company-prepared consolidated balance sheet of the
Company and its subsidiaries as of the end of the quarter and related
company-prepared consolidated statements of income,
<PAGE>
retained earnings, shareholders' equity and cash flows for such
quarterly period and for the fiscal year to date;
(iii) within 60 days after the end of each fiscal year, an annual
business plan and budget for the Consolidated Group as is customarily
prepared by the Company, containing, among other things, pro forma
financial statements for the next fiscal year,
in each case setting forth in comparative form the consolidated figures for
the corresponding period or periods of the preceding fiscal year or the
portion of the fiscal year ending with such period, as applicable, in each
case subject to normal recurring year-end audit adjustments.
1.4 The financial covenants in Section 7.9 are amended in their
entirety to read as follows:
7.9 Financial Covenants.
-------------------
(a) Consolidated Leverage Ratio. As of the end of each fiscal
---------------------------
reporting period to occur during the periods set forth below, the
Consolidated Leverage Ratio shall be not greater than:
<TABLE>
<CAPTION>
<S> <C>
September 30, 1998 through December 30, 1998 6.45:1.0
December 31, 1998 through March 30, 1999 5.00:1.0
March 31, 1999 through June 29, 1999 4.50:1.0
June 30, 1999 through September 29, 1999 4.25:1.0
September 30, 1999 through December 30, 1999 4.00:1.0
December 31, 1999 and thereafter 3.50:1.0
</TABLE>
(b) Consolidated Fixed Charge Coverage Ratio. As of the end of each
----------------------------------------
fiscal reporting period to occur during the periods set forth below, the
Consolidated Fixed Charge Coverage Ratio shall be not less than:
<TABLE>
<CAPTION>
<S> <C>
September 30, 1998 through December 30, 1998 1.75:1.0
December 31, 1998 through March 30, 1999 1.60:1.0
March 31, 1999 through June 29, 1999 1.60:1.0
June 30, 1999 through September 29, 1999 1.75:1.0
September 30, 1999 through December 30, 1999 1.75:1.0
December 31, 1999 and thereafter 1.60:1.0
</TABLE>
(c) Consolidated Net Worth. As of the end of each fiscal reporting
----------------------
period, Consolidated Net Worth shall be not less than the sum of 85% of
Consolidated Net Worth as of the Closing Date plus on the last day of each
----
fiscal quarter to occur after the Closing Date, 50% of Consolidated Net
Income for the fiscal quarter then ended (but not less than zero), such
increases to be cumulative, plus 75% of the net proceeds from Equity
----
Transactions (including for purposes hereof, any increases in shareholder
equity on account of acquisitions made by issuance of stock or stock swap)
occurring after the Closing Date.
<PAGE>
(d) Consolidated Senior Leverage Ratio. As of the end of each fiscal
----------------------------------
reporting period to occur during the periods set forth below, the
Consolidated Senior Leverage Ratio shall be not greater than:
September 30, 1998 through December 30, 1998 2.75:1.0
December 31, 1998 and thereafter 2.50:1.0
(e) Capital Expenditures. The aggregate amount of capital
--------------------
expenditures made or incurred by members of the Consolidated Group during
the fiscal quarters set forth below shall not exceed:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Quarter ending on or about September 30, 1998 $3,600,000
Fiscal Quarter ending on or about December 31, 1998 $2,750,000
Fiscal Quarter ending on or about March 31, 1999 $2,250,000
Fiscal Quarter ending on or about June 30, 1999 $2,250,000
Fiscal Quarter ending on or about September 30, 1999 $2,250,000
</TABLE>
The unused portion of capital expenditures permitted but not used in any
fiscal quarter may be carried over and used in the next fiscal quarter (one
quarter carry-over).
(f) Days Sales Outstanding. As of the end of each fiscal reporting
----------------------
period to occur during the periods set forth below, Days Sales Outstanding
of the Consolidated Group for the lines of business set forth below shall
not be greater than:
medical services business
-------------------------
September 30, 1998 through December 30, 1998 130 days
December 31, 1998 through March 30, 1999 128 days
March 31, 1999 through September 29, 1999 125 days
September 30, 1999 and thereafter 122 days
paramedical testing business
----------------------------
September 30, 1998 through December 30, 1998 71 days
December 31, 1998 through March 30, 1999 68 days
March 31, 1999 and thereafter 63 days
1.5 A new Section 7.13 is added to read as follows:
Section 7.13 Year 2000 Compliance.
--------------------
The Company will promptly notify the Bank in the event the Company
discovers or determines that any computer application (including those of
its suppliers, vendors and customers) that is material to its or any of its
Subsidiaries' business and operations will not be Year 2000 compliant,
except to the extent that such failure could not reasonably be expected to
have a Material Adverse Effect.
<PAGE>
1.6 In Section 8.4(b) immediately following the phrase in the first
parenthetical which reads "the sale or disposition of plant, property and
equipment" there shall be inserted the following:
"in the ordinary course of business"
1.7 Section 8.4(c)(ii) is amended to read as follows:
(ii) in the case of an acquisition of capital stock or other
ownership interest after giving effect thereto, such Person will be a
Subsidiary, or in the case of an acquisition of assets, property and/or
operations then
(A) no such acquisition shall occur prior to February 28,
1999 without the prior written consent of the Required Lenders;
(B) the Consolidated Leverage Ratio shall be less than
4.0:1.0 both as of the most recent fiscal quarter end and after giving
effect to the prospective acquisition on a Pro Forma Basis;
(C) the cost of any such acquisition (or series of related
acquisitions) shall not exceed $10,000,000 in any instance;
(D) the Board of Directors of the Person which is the
subject of the acquisition shall have approved the acquisition; and
(E) no Default or Event of Default would exist after giving
effect thereto on a Pro Forma Basis.
2. In accordance with the provisions of Section 3.4(a) of the Credit
Agreement, the Revolving Commitments are hereby reduced by TWENTY-FIVE MILLION
DOLLARS ($25,000,000) to a revised Aggregate Revolving Committed Amount of
SEVENTY-FIVE MILLION DOLLARS ($75,000,000).
3. The Credit Parties will grant a security interest in all personal
property, tangible and intangible (including accounts, inventory, equipment and
general intangibles), to the Administrative Agent to secure the loans and
obligations owing under the Credit Agreement (and obligations owing under Hedge
Agreements with Lenders or their affiliates) pursuant to the terms of the
Security Agreement entered into in connection with this Amendment. Further, the
Credit Parties will cooperate with and assist the Administrative Agent and the
Lenders in establishing and maintaining the liens and security interests granted
pursuant to the Security Agreement and the Pledge Agreement, including execution
of financing statements.
4. The Administrative Agent, on behalf of the Lenders, will, at the
Borrower's expense, engage independent consultants for a review and analysis of
the billing and accounts receivables systems, processes and controls. The
Administrative Agent will share the results of the analysis with the Lenders and
the Borrower. The Credit Parties will cooperate with the
<PAGE>
Administrative Agent and the independent consultants in the conduct of the
review and analysis, and will promptly implement recommendations of the
independent consultants and recommendations of the Administrative Agent and the
Required Lenders based on the results of the review and analysis (including
follow-up reports on implementation of the recommendations). The agreements and
obligations set forth in this paragraph shall survive payment of the loans and
obligations, and termination of the commitments, under the Credit Agreement.
5. This Amendment shall be effective upon satisfaction of the following
conditions:
(a) execution of this Amendment by the Credit Parties and the Required
Lenders;
(b) receipt by the Administrative Agent of multiple counterparts of
the Security Agreement and the financing statements relating thereto;
(c) receipt by the Administrative Agent of legal opinions of counsel
to the Credit Parties relating to this Amendment; and
(d) receipt by the Administrative Agent for the ratable benefit of the
consenting Lenders of an Amendment Fee of 18.75 basis points on the
aggregate amount of Commitments held by each of the Lenders consenting to
this Amendment.
6. Based on preliminary financial statements and information for the
fiscal quarter ended June 30, 1998 provided to the Administrative Agent (and
provided that the final financial statements for such period do not differ in
any material respect), the Required Lenders hereby waive any Default or Event of
Default which existed or may have existed prior to the effective date of this
Amendment solely on account of noncompliance with the Consolidated Leverage
Ratio under Section 7.9(a) of the Credit Agreement and the Consolidated Fixed
Charge Coverage Ratio under Section 7.9(b) of the Credit Agreement.
7. The Required Lenders hereby consent to (i) the payment by the Company
of up to $10 million in the aggregate for purchase of 495,050 shares of common
stock of the Company from the Seller and satisfaction of the ChoicePoint
Obligation and (ii) sale of the assets and operations of [DESCRIBE ST. LOUIS
OPERATION] in cancellation of $70,000 in seller financing notes owing by the
Company and its Subsidiaries and return and redemption of approximately 2,400
shares of common stock of the Company in connection therewith (in consideration
of the sale and return of the assets and operations, without additional cash
consideration). The Company and the Borrower hereby agree to structure
satisfaction of the ChoicePoint Obligation as a repurchase and redemption of the
shares of common stock of the Company from the Seller.
8. The Required Lenders hereby consent to the purchase by the Borrower of
the Savannah home health agency owned by Visiting Nurse Health System for cash
consideration not to exceed $225,000 at closing.
<PAGE>
9. Except as modified hereby, all of the terms and provisions of the
Credit Agreement (including Schedules and Exhibits) shall remain in full force
and effect.
10. The Borrower agrees to pay all reasonable costs and expenses of the
Administrative Agent in connection with the preparation, execution and delivery
of this Amendment, including without limitation the reasonable fees and expenses
of Moore & Van Allen, PLLC.
11. This Amendment may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed an original and it shall
not be necessary in making proof of this Amendment to produce or account for
more than one such counterpart.
12. This Amendment shall be deemed to be a contract made under, and for
all purposes shall be construed in accordance with the laws of the State of
North Carolina.
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
BORROWER: PEDIATRIC SERVICES OF AMERICA, INC.
- --------
a Georgia corporation
By: /s/ Stephen M. Mengert
-------------------------
Name: Stephen M. Mengert
Title: Senior Vice President and Chief Financial Officer
GUARANTORS: PEDIATRIC SERVICES OF AMERICA, INC.
- ----------
a Delaware corporation
By: /s/ Stephen M. Mengert
-------------------------
Name: Stephen M. Mengert
Title: Senior Vice President and Chief Financial Officer
PSA LICENSING CORPORATION,
a Delaware corporation
PSA PROPERTIES CORPORATION,
a Delaware corporation
By: /s/ Susan E. Dignan
-------------------------
Name: Susan E. Dignan
Title: President
for each of the foregoing
PEDIATRIC SERVICES OF AMERICA (CONNECTICUT), INC.,
a Connecticut corporation
PREMIER MEDICAL SERVICES, INC.
a Nevada corporation
PEDIATRIC HOME NURSING SERVICES, INC.,
a New York corporation
PEDIATRIC PARTNERS, INC.,
a Delaware corporation
PARAMEDICAL SERVICES OF AMERICA, INC.,
a California corporation
PREMIER NURSE STAFFING, INC.,
a Nevada corporation
PREMIER CERTIFIED HOME HEALTH SERVICES, INC.,
a Nevada corporation
ARO HEALTH SERVICES, INC.,
a Washington corporation
By: /s/ Stephen M. Mengert
-------------------------
Name: Stephen M. Mengert
Title: Vice President
for each of the foregoing
<PAGE>
LENDERS: NATIONSBANK, N.A.,
- ------- individually in its capacity as a
Lender and in its capacity as Administrative Agent
By: /s/ Ashley M. Crabtree
------------------------
Name: Ashley M. Crabtree
Title: Senior Vice President
TORONTO DOMINION (TEXAS), INC.
By: /s/ Debbie A. Greene
-------------------------
Name: Debbie A. Greene
Title: Vice President
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Jeffrey R. Dickson
-------------------------
Name: Jeffrey R. Dickson
Title: Vice President
SUNTRUST BANK, ATLANTA
By: /s/ Jeffrey L. Seavey
-------------------------
Name: Jeffrey L. Seavey
Title: Vice President
By: /s/ Jessica V. Wilkerson
-------------------------
Name: Jessica V. Wilkerson
Title: Banking Officer
MELLON BANK, N.A.
By:
-------------------------
Name:
Title:
CREDITANSTALT AG
By: /s/ Carl G. Drake
-------------------------
Name: Carl G. Drake
Title: Vice President
By: /s/ John G. Taylor
-------------------------
Name: John G. Taylor
Title: Senior Associate
<PAGE>
SECURITY AGREEMENT
SECURITY AGREEMENT dated as of August 13, 1998 (as amended and modified, the
"Security Agreement" or this "Agreement") among PEDIATRIC SERVICES OF AMERICA,
- ------------------- ---------
INC., a Georgia corporation (the "Borrower"), PEDIATRIC SERVICES OF AMERICA,
--------
INC., a Delaware corporation (the "Company"), the subsidiaries and affiliates of
-------
the Borrower identified on the signature pages hereto and such other
subsidiaries and affiliates of the Borrower as may hereafter join this Security
Agreement (together with the Company, as referenced in the Credit Agreement, the
"Guarantors" and collectively with the Borrower, the "Credit Parties") and
---------- --------------
NATIONSBANK, N.A., as Administrative Agent (in such capacity, the
"Administrative Agent") for the Lenders under the Credit Agreement described
- ---------------------
below and any Affiliates of Lenders which provide interest rate or currency
protection agreements as hereafter provided (collectively, the "Lenders").
-------
W I T N E S S E T H
WHEREAS, the Lenders have severally agreed to make loans and extensions of
credit to the Borrower upon the terms and conditions provided in the terms of
that Credit Agreement dated as of August 13, 1997 (as amended and modified, the
"Credit Agreement") among the Borrower, the Guarantors and Lenders identified
----------------
therein and NationsBank, N.A., as Administrative Agent;
WHEREAS, it is a condition precedent to the effectiveness of the Credit
Agreement and the obligation of the Lenders to make their respective loans and
extensions of credit to the Borrower thereunder that the Credit Parties shall
have executed and delivered this Security Agreement to the Administrative Agent
for the ratable benefit of the Lenders;
NOW, THEREFORE, in consideration of the premises and to induce the
Administrative Agent and the Lenders to enter into the Credit Agreement and to
induce the Lenders to make their respective loans and extensions of credit
thereunder, the Credit Parties hereby agree with the Administrative Agent, for
the ratable benefit of the Lenders, as follows:
1. Defined Terms.
-------------
1.1 Definitions. (a) Unless otherwise defined herein, terms defined in the
-----------
Credit Agreement and used herein shall have the meanings given to them in the
Credit Agreement, and the following terms which are defined in the Uniform
Commercial Code in effect in the State of North Carolina on the date hereof are
used herein as so defined: Accounts, Chattel Paper, Documents, Equipment, Farm
Products, Fixtures, General Intangibles, Instruments, Inventory and Proceeds.
For purposes of this Agreement, the term "Lender" shall include any Affiliate of
any Lender which has entered into a Hedging Agreement with a Credit Party to the
extent permitted by the Credit Agreement.
(b) The following terms shall have the following meanings:
<PAGE>
"Agreement": this Security Agreement, as the same may be amended,
---------
supplemented or otherwise modified from time to time.
"Collateral": as defined in Section 2 of this Agreement; provided that
---------- --------
Collateral shall not include any property which is subject to a Lien
permitted under Section 8.2 of the Credit Agreement securing Indebtedness
permitted under Section 8.1 of the Credit Agreement to the extent that the
grant of a security interest hereunder would be prohibited by such Lien or
by the terms of such Indebtedness.
"Collateral Account": any collateral account established by the
------------------
Administrative Agent as provided in subsection 3.3 or subsection 7.2.
"Contracts": all contracts and agreements to which a Credit Party is a
---------
party, as each may be amended, supplemented or otherwise modified from time
to time, including, without limitation, (a) all rights of a Credit Party to
receive moneys due and to become due to it thereunder or in connection
therewith, (b) all rights of a Credit Party to damages arising out of or
for breach or default in respect thereof and (c) all rights of a Credit
Party to exercise all remedies thereunder.
"Copyright Licenses": any written agreement, naming any Credit Party
------------------
as licensor, granting any right under any Copyright including, without
limitation, any thereof referred to in Schedule 3 hereto.
----------
"Copyrights": (i) all registered United States copyrights in all
----------
Works, now existing or hereafter created or acquired, all registrations and
recordings thereof, and all applications in connection therewith,
including, without limitation, registrations, recordings and applications
in the United States Copyright office including, without limitation, any
thereof referred to in Schedule 3 hereto, and (ii) all renewals thereof
----------
including, without limitation, any thereof referred to in Schedule 3
----------
hereto.
"Patent License": all agreements, whether written or oral, providing
--------------
for the grant by or to a Credit Party of any right to manufacture, use or
sell any invention covered by a Patent, including, without limitation, any
thereof referred to in Schedule 4 hereto.
----------
"Patents": (a) all letters patent of the United States or any other
-------
country and all reissues and extensions thereof, including, without
limitation, any thereof referred to in Schedule 4 hereto, and (b) all
----------
applications for letters patent of the United States or any other country
and all divisions, continuations and continuations-in-part thereof,
including, without limitation, any thereof referred to in Schedule 4
----------
hereto.
"Secured Obligations": the collective reference to the following:
-------------------
(a) All unpaid principal of and interest on (including, without
limitation, interest accruing at the then applicable rate provided in
the Credit Agreement after the maturity of the Loans and other
obligations owing under the
<PAGE>
Credit Agreement and interest accruing at the then applicable rate
provided in the Credit Agreement after the filing of any petition in
bankruptcy, or the commencement of any insolvency, reorganization or
like proceeding, relating to the Borrower, whether or not a claim for
post-filing or post-petition interest is allowed in such proceeding)
the Loans and all other obligations and liabilities of the Borrower to
the Administrative Agent and the Lenders, whether direct or indirect,
absolute or contingent, due or to become due, or now existing or
hereafter incurred, which may arise under, out of, or in connection
with, the Credit Agreement, any Notes, this Security Agreement or any
other Credit Document, in each case whether on account of principal,
interest, reimbursement obligations, fees, indemnities, costs,
expenses or otherwise (including, without limitation, all fees and
disbursements of counsel to the Administrative Agent or to the Lenders
that are required to be paid by the Borrower pursuant to the terms of
the Credit Agreement, this Security Agreement or any other Credit
Document); and
(b) The prompt payment, performance and observance by the
Guarantors under the Credit Agreement of all obligations of the
Guarantors thereunder and under this Security Agreement and the other
Credit Documents to which the Guarantors are a party (including,
without limitation, payment of their guaranty obligations under the
Credit Agreement), or under any Hedging Agreement with a Lender or an
Affiliate of a Lender to the extent permitted under the Credit
Agreement, to which such Guarantor is a party or any guaranty is given
by it in connection therewith; and
(c) All liabilities and obligations, now existing or hereafter
arising, owing by the Borrower to any Lender or any Affiliate of a
Lender arising under Hedging Agreements with a Lender or an Affiliate
of a Lender to the extent permitted under the Credit Agreement.
"Trademark License": means any agreement, written or oral, providing
-----------------
for the grant by or to a Credit Party of any right to use any Trademark,
including, without limitation, any thereof referred to in Schedule 5
----------
hereto.
"Trademarks": (a) all trademarks, trade names, corporate names,
----------
company names, business names, fictitious business names, trade styles,
service marks, logos and other source or business identifiers, and the
goodwill associated therewith, now existing or hereafter adopted or
acquired, all registrations and recordings thereof, and all applications in
connection therewith, whether in the United States Patent and Trademark
Office or in any similar office or agency of the United States, any State
thereof or any other country or any political subdivision thereof, or
otherwise, including, without limitation, any thereof referred to in
Schedule 5 hereto, and (b) all renewals thereof.
----------
"Uniform Commercial Code": the Uniform Commercial Code as from time to
-----------------------
time in effect in the State of North Carolina.
<PAGE>
"Work": any work which is subject to copyright protection pursuant to
----
Title 17 of the United States Code.
1.2 Other Definitional Provisions. (a) The words "hereof," "herein" and
-----------------------------
"hereunder" and words of similar import when used in this Agreement shall refer
to this Agreement as a whole and not to any particular provision of this
Agreement, and section and paragraph references are to this Agreement unless
otherwise specified.
(b) The meanings given to terms defined herein shall be equally applicable
to both the singular and plural forms of such terms.
2. Grant of Security Interest. As collateral security for the prompt and
--------------------------
complete payment and performance when due (whether at the stated maturity, by
acceleration or otherwise) of the Secured Obligations, each of the Credit
Parties hereby grants to the Administrative Agent, for the ratable benefit of
the Lenders, a security interest in all of the following property now owned or
at any time hereafter acquired by such Credit Party or in which such Credit
Party now has or at any time in the future may acquire any right, title or
interest (collectively, the "Collateral"):
----------
(a) all Accounts;
(b) all Chattel Paper;
(c) all Contracts;
(d) all Copyrights;
(e) all Copyright Licenses;
(f) all Documents;
(g) all Equipment;
(h) all Fixtures;
(i) all General Intangibles, including the Contracts;
(j) all Instruments;
(k) all Inventory;
(l) all Patents;
(m) all Patent Licenses;
<PAGE>
(n) all Trademarks;
(o) all Trademark Licenses;
(p) all books, records, ledger cards, files, correspondence,
computer programs, tapes, disks, and related data processing
software (owned by such Borrower or in which it has an
interest) that at any time evidence or contain information
relating to any Collateral or are otherwise necessary or
helpful in the collection thereof or realization thereupon;
and
(q) to the extent not otherwise included, all Proceeds and
products of any and all of the foregoing;
provided that this Agreement shall not constitute an assignment of, or a grant
- --------
of a security interest in or lien on, any contract or other agreement to which
any Credit Party is a party if such assignment or grant of a security interest
or lien is prohibited by the terms of such contract or agreement.
This Agreement shall create a continuing security interest in the
Collateral which shall remain in effect until all the Secured Obligations, now
existing or hereafter arising, have been paid in full and the Commitments have
been terminated.
3. Provisions Relating to Accounts.
-------------------------------
3.1 Credit Parties Remain Liable under Accounts. Anything herein to the
-------------------------------------------
contrary notwithstanding, each of the Credit Parties shall remain liable under
each of the Accounts to observe and perform all the conditions and obligations
to be observed and performed by it thereunder, all in accordance with the terms
of any agreement giving rise to each such Account. Neither the Administrative
Agent nor any Lender shall have any obligation or liability under any Account
(or any agreement giving rise thereto) by reason of or arising out of this
Agreement or the receipt by the Administrative Agent or any Lender of any
payment relating to such Account pursuant hereto, nor shall the Administrative
Agent or any Lender be obligated in any manner to perform any of the obligations
of a Credit Party under or pursuant to any Account (or any agreement giving rise
thereto), to make any payment, to make any inquiry as to the nature or the
sufficiency of any payment received by it or as to the sufficiency of any
performance by any party under any Account (or any agreement giving rise
thereto), to present or file any claim, to take any action to enforce any
performance or to collect the payment of any amounts which may have been
assigned to it or to which it may be entitled at any time or times.
3.2 Analysis of Accounts. The Administrative Agent shall have the right,
--------------------
once during each calendar year or at any time after the occurrence and during
the continuation of an Event of Default, to make test verifications of the
Accounts in any manner and through any medium that it reasonably considers
advisable, and the Credit Parties shall furnish all such assistance and
information as the Administrative Agent may require in connection with such test
verifications.
<PAGE>
At any time and from time to time, upon the Administrative Agent's reasonable
request and at the expense of the Credit Parties, the Credit Parties shall cause
independent public accountants or others satisfactory to the Administrative
Agent to furnish to the Administrative Agent reports showing reconciliations,
aging and test verifications of, and trial balances for, the Accounts. The
Administrative Agent in its own name or in the name of others may communicate
with account debtors on the Accounts (with a copy of all written communication
to the Credit Party) to verify with them to the Administrative Agent's
satisfaction the existence, amount and terms of any Accounts.
3.3 Collections on Accounts. (a) The Administrative Agent hereby authorizes
-----------------------
the Credit Parties to collect the Accounts, provided that the Administrative
--------
Agent may curtail or terminate said authority at any time after the occurrence
and during the continuation of an Event of Default. If required by the
Administrative Agent at any time after the occurrence and during the
continuation of an Event of Default, any payments of Accounts, when collected by
the Credit Parties, (i) shall be forthwith (and, in any event, within two
Business Days) deposited by the Credit Parties in a Collateral Account
maintained under the sole dominion and control of the Administrative Agent,
subject to withdrawal by the Administrative Agent for the account of the Lenders
only as provided in subsection 7.3, and (ii) until so turned over, shall be held
by the Credit Parties in trust for the Administrative Agent and the Lenders,
segregated from other funds of the Credit Parties.
(b) Each such deposit of Proceeds of Accounts shall be accompanied by a report
identifying in reasonable detail the nature and source of the payments included
in the deposit.
(c) At the Administrative Agent's request after the occurrence and during the
continuation of an Event of Default, the Borrower shall deliver to the
Administrative Agent all original and other documents in its possession or
control (or as to which they have a right or ability to get) evidencing, and
relating to, the agreements and transactions which gave rise to the Accounts.
4. Provisions Relating to Contracts.
--------------------------------
4.1 Credit Parties Remain Liable under Contracts. Anything herein to the
--------------------------------------------
contrary notwithstanding, each of the Credit Parties shall remain liable under
each of the Contracts to observe and perform all the conditions and obligations
to be observed and performed by it thereunder, all in accordance with and
pursuant to the terms and provisions of each Contract. Neither the
Administrative Agent nor any Lender shall have any obligation or liability under
any Contract by reason of or arising out of this Agreement or the receipt by the
Administrative Agent or any such Lender of any payment relating to such Contract
pursuant hereto, nor shall the Administrative Agent or any Lender be obligated
in any manner to perform any of the obligations of a Credit Party under or
pursuant to any Contract, to make any payment, to make any inquiry as to the
nature or the sufficiency of any payment received by it or as to the sufficiency
of any performance by any party under any Contract, to present or file any
claim, to take any action to enforce any performance or to collect the payment
of any amounts which may have been assigned to it or to which it may be entitled
at any time or times.
<PAGE>
4.2 Communication with Contracting Parties. The Administrative Agent in its
--------------------------------------
own name or in the name of others at any time after the occurrence and during
the continuation of an Event of Default or in connection with any audit of the
Contract by the Administrative Agent or any other Person designated by the
Administrative Agent may communicate with parties to the Contracts (with a copy
of all written communication to the Credit Party) to verify with them to the
Administrative Agent's satisfaction the existence, amount and terms of any
Contract.
5. Representations and Warranties. Each of the Credit Parties hereby
------------------------------
represents and warrants that:
5.1 Title; No Other Liens. Except for Permitted Liens, the Credit Party owns
---------------------
each item of the Collateral free and clear of any and all Liens or claims of
others. No security agreement, financing statement or other public notice with
respect to all or any part of the Collateral is on file or of record in any
public office, except such as have been filed in favor of the Administrative
Agent, for the ratable benefit of the Lenders, pursuant to this Agreement or as
are permitted pursuant to the Credit Agreement.
5.2 Perfected First Priority Liens. The security interests granted pursuant
------------------------------
to this Agreement (a) upon completion of the filings and other actions specified
on Schedule 2 attached hereto, and possession of such Collateral with respect to
----------
which perfection is acquired by possession, will constitute perfected security
interests in the Collateral in favor of the Administrative Agent, for the
ratable benefit of the Lenders, (b) are prior to all other Liens on the
Collateral in existence on the date hereof except for Liens permitted to exist
pursuant to the Credit Agreement and (c) are enforceable as such against (i) all
creditors of and purchasers from the Credit Party (except purchasers of
Inventory in the ordinary course of business) and (ii) any Person having any
interest in the real property where any of the Equipment is located. Nothing in
this Section 5.2 shall prevent the Credit Parties from making sales or
dispositions of Equipment or other assets to the extent permitted under the
Credit Agreement, or from entering into license agreements with affiliates in
the ordinary course of business, or from licensing or selling proprietary
software programs in the ordinary course of business.
5.3 Inventory and Equipment. The Inventory and the Equipment of the Credit
-----------------------
Party are kept at the locations listed on Schedule 1 hereto.
----------
5.4 Chief Executive Office. The Credit Party's chief executive office and
----------------------
chief place of business, and the place where it keeps its books and records, is
located at the address shown on Schedule 1.
----------
5.5 Farm Products. None of the Collateral constitutes, or is the Proceeds
-------------
of, Farm Products.
5.6 Representations and Warranties Relating to Contracts. (a) No consent of
----------------------------------------------------
any party (other than the Credit Party) to any material Contract is required, or
purports to be required, in connection with the execution, delivery and
performance of this Agreement.
<PAGE>
(b) Except as set forth on Schedule 6 hereto, none of the parties to any
----------
Contracts is a Governmental Authority.
5.7 Copyrights, Patents and Trademarks. Schedule 3 hereto includes all
---------------------------------- ----------
Copyrights and Copyright Licenses owned by the Credit Party in its own name as
of the date hereof. Schedule 4 hereto includes all Patents and Patent Licenses
----------
owned by the Credit Party in its own name as of the date hereof. Schedule 5
----------
hereto includes all Trademarks and Trademark Licenses owned by the Credit Party
in its own name as of the date hereof.
6. Covenants. Each of the Credit Parties covenants and agrees with the
---------
Administrative Agent and the Lenders that, from and after the date of this
Agreement until the Secured Obligations have been paid in full and the
Commitments have been terminated:
6.1 Delivery of Instruments and Chattel Paper. If any amount payable under
-----------------------------------------
or in connection with any of the Collateral shall be or become evidenced by any
Instrument or Chattel Paper, such Instrument or Chattel Paper shall be
immediately delivered to the Administrative Agent, duly indorsed in a manner
satisfactory to the Administrative Agent, to be held as Collateral pursuant to
this Agreement.
6.2 Marking of Records. The Credit Party will mark its books and records
------------------
pertaining to the Collateral to evidence this Agreement and the security
interests created hereby.
6.3 Maintenance of Perfected Security Interest; Further Documentation. (a)
-----------------------------------------------------------------
The Credit Party shall maintain the security interest created by this Agreement
as a perfected security interest subject only to the Liens permitted to exist
pursuant to the Credit Agreement and shall defend such security interest against
claims and demands of all Persons whomsoever.
(b) At any time and from time to time, upon the written request of the
Administrative Agent, and at the sole expense of the Credit Party, the Credit
Party will promptly and duly execute and deliver such further instruments and
documents and take such further action (including without limitation all actions
required under the Federal Assignment of Claims Act or any similar state
statute) as the Administrative Agent may reasonably request for the purpose of
obtaining or preserving the full benefits of this Agreement and of the rights
and powers herein granted, including, without limitation, the filing of any
financing or continuation statements under the Uniform Commercial Code in effect
in any jurisdiction with respect to the security interests created hereby.
6.4 Changes in Locations, Name, etc. The Credit Party will not:
-------------------------------
(a) permit any of the Inventory or Equipment to be kept at a location other
than those listed on Schedule 5 hereto, unless it shall have given the
----------
Administrative Agent and the Lenders at least 30 days' prior written notice of
such change and any filings required under the Uniform Commercial Code in effect
in the affected jurisdiction to maintain the perfected security interest granted
pursuant to this Agreement shall have
<PAGE>
been made, except that Equipment may be moved from such location for a
reasonable period of time for purposes of repair of such Equipment or for
testing in the ordinary cause of business;
(b) change the location of its chief executive office and chief place of
business or the location at which it maintains its books and records from that
specified in subsection 5.4, unless it shall have given the Administrative Agent
and the Lenders at least 30 days' prior written notice of such change and any
filings required under the Uniform Commercial Code in effect in the affected
jurisdiction to maintain the perfected security interest granted pursuant to
this Agreement shall have been made; or
(c) change its name, identity or corporate structure to such an extent that
any financing statement filed by the Administrative Agent in connection with
this Agreement would become seriously misleading, unless it shall have given the
Administrative Agent and the Lenders at least 30 days' prior written notice of
such change and any filings required under the Uniform Commercial Code in effect
in the affected jurisdiction to maintain the perfected security interest granted
pursuant to this Agreement shall have been made.
6.5 Further Identification of Collateral. The Credit Party will furnish to
------------------------------------
the Administrative Agent and the Lenders from time to time statements and
schedules further identifying and describing the Collateral and such other
reports in connection with the Collateral as the Administrative Agent may
reasonably request, all in reasonable detail.
6.6 Indemnification. The Credit Parties agree to pay, and to save the
---------------
Administrative Agent and the Lenders harmless from, any and all liabilities,
costs and expenses (including, without limitation, reasonable legal fees and
expenses) (i) with respect to, or resulting from any delay in paying, any and
all excise, sales or other taxes which may be payable or determined to be
payable with respect to any of the Collateral, (ii) with respect to, or
resulting from, any delay in complying with any Requirement of Law applicable to
any of the Collateral and (iii) in connection with any of the transactions
contemplated by this Agreement, except for any such liabilities which result
from the gross negligence or wilful misconduct of the Administrative Agent. In
any suit, proceeding or action brought by the Administrative Agent or any Lender
under any Account for any sum owing thereunder, the Credit Party will save,
indemnify and keep the Administrative Agent and such Lender harmless from and
against all expense, loss or damage suffered by reason of any defense, setoff,
counterclaim, recoupment or reduction or liability whatsoever of the account
debtor thereunder, arising out of a breach by the Credit Party of any obligation
thereunder or arising out of any other agreement, indebtedness or liability at
any time owing to or in favor of such account debtor or its successors from the
Credit Party.
6.7 Covenants Relating to Accounts Upon Default. At any time after the
-------------------------------------------
occurrence and during the continuation of an Event of Default:
<PAGE>
(a) the amount represented by the Credit Party to the Lenders from time to
time as owing in respect of the Accounts as a whole, net of reserves, will at
such time be the correct amount actually owing by such account debtor or debtors
thereunder;
(b) the Credit Party will not amend, modify, terminate or waive any agreement
giving rise to an Account in any manner which would reasonably be expected to
materially adversely affect the value of the Accounts as Collateral;
(c) the Credit Party will not fail to exercise promptly and diligently each
and every material right which it may have under each agreement giving rise to
an Account (other than any right of termination);
(d) the Credit Party will not fail to deliver to the Administrative Agent a
copy of each material demand, notice or document received by it relating in
any way to any agreement giving rise to an Account; and
(e) other than in the ordinary course of business as generally conducted by
the Credit Party, the Credit Party will not grant any extension of the time of
payment of any of the Accounts, compromise, compound or settle the same for less
than the full amount thereof, release, wholly or partially, any Person liable
for the payment thereof, or allow any credit or discount whatsoever thereon.
6.8 Covenants Relating to Contracts. (a) The Credit Party will perform and
-------------------------------
comply in all material respects with all its material obligations under the
Contracts and all its other material Contractual Obligations relating to the
Collateral.
(b) The Credit Party will not amend, modify, terminate or waive any provision
of any Contract in any manner which could reasonably be expected to materially
adversely affect the value of such Contract as Collateral.
(c) The Credit Party will deliver to the Administrative Agent promptly upon
the request of the Administrative Agent copies of Contracts and demands, notices
or documents relating thereto.
(d) In any suit, proceeding or action brought by the Administrative Agent or
any Lender under any Contract for any sum owing thereunder, or to enforce any
provisions of any Contract, the Credit Party will save, indemnify and keep the
Administrative Agent and such Lender harmless from and against all expense, loss
or damage suffered by reason of any defense, setoff, counterclaim, recoupment or
reduction or liability whatsoever of the obligor thereunder, arising out of a
breach by the Credit Party of any obligation thereunder or arising out of any
other agreement, indebtedness or liability at any time owing to or in favor of
such obliger or its successors from the Credit Party except for any such
expense, loss or damage which results from the gross negligence of the wilful
misconduct of the Administrative Agent or such Lender.
<PAGE>
6.9 Covenants Relating to Copyrights. The Credit Party will take all
--------------------------------
necessary steps as it shall deem appropriate under the circumstances, to
maintain and pursue each application (and to obtain the relevant registration)
and to maintain each registration of each material Copyright owned by the Credit
Party including, without limitation, filing of applications for renewal where
necessary.
6.10 Covenants Relating to Patents and Trademarks. Whenever the Credit
--------------------------------------------
Party, either by itself or through any agent, employee, licensee or designee,
shall file an application for the registration of any Patent or Trademark with
the United States Patent and Trademark Office or any similar office or agency in
any other country or any political subdivision thereof, the Credit Party shall
report such filing to the Administrative Agent and the Lenders within five
Business Days after the last day of the fiscal quarter in which such filing
occurs. Upon request of the Administrative Agent, the Credit Party shall execute
and deliver any and all agreements, instruments, documents and papers as the
Agent may request to evidence the Administrative Agent's and the Lenders'
security interest in any Patent or Trademark and the goodwill and general
intangibles of the Credit Party relating thereto or represented thereby.
6.11 Covenants Relating to Inventory and Equipment
---------------------------------------------
(a) The Credit Party will, upon ten (10) days' written notice from the
Administrative Agent, provide a physical history of Inventory and/or Equipment
on a quarterly basis or, after the occurrence and during the continuation of an
Event of Default, more frequently.
(b) Each Credit Party shall, at its own expense, maintain insurance with
respect to the Equipment and Inventory in such amounts, against such risks, in
such form and with such insurers, as shall be reasonably satisfactory to the
Administrative Agent from time to time. Each policy for liability insurance
shall provide for all losses to be paid on behalf of the Administrative Agent
and such Credit Party as their interests may appear, and each policy for
property damage insurance shall provide for all losses (except for losses of
less than $500,000 per occurrence) to be paid directly to the Administrative
Agent. Each such policy shall in addition (i) name such Credit Party and the
Administrative Agent as insured parties thereunder (without any representation
or warranty by or obligation upon the Administrative Agent) as their interests
may appear, (ii) contain the agreement by the insurer that any loss thereunder
(except for losses of less than $500,000 per occurrence) shall be payable to the
Administrative Agent notwithstanding any action, inaction or breach of
representation or warranty by such Credit Party, (iii) provide that there shall
be no recourse against the Administrative Agent for payment of premiums or other
amounts with respect thereto and (iv) provide that at least thirty (30) days'
prior written notice of cancellation or lapse shall be given to the
Administrative Agent by the insurer. Each Credit Party shall, if so requested
by the Administrative Agent, deliver to the Administrative Agent original or
duplicate policies of such insurance and, as often as the Administrative Agent
may reasonably request, a report of a reputable insurance broker with respect to
such insurance. Further, each Credit Party shall, at the request of the
Administrative Agent, duly exercise and deliver instruments of assignment of
such insurance policies to comply with the requirements of Section 6.3 hereof
and cause the insurers to acknowledge notice of such assignment.
<PAGE>
(c) In the case of any loss involving damage to Equipment or Inventory of
any Credit Party, such Credit Party shall make or cause to be made the necessary
repairs to or replacements of such Equipment or Inventory, and any proceeds of
insurance properly received by or released to such Credit Party shall be used by
such Credit Party, except as otherwise required or permitted hereunder or by the
Credit Agreement, to pay or as reimbursement for the costs of such repairs or
replacements.
(d) So long as no Event of Default shall have occurred and shall be
continuing, all insurance payments received by the Administrative Agent in
connection with any loss, damage or destruction of any Inventory or Equipment
shall be released by the Administrative Agent to the applicable Credit Party for
the repair, replacement or restoration thereof. To the extent that (i) the
amount of any such insurance payments exceeds the cost of any such repair,
replacement or restoration, or (ii) such insurance payments are not otherwise
required by the applicable Credit Party to complete any such repair, replacement
or restoration required hereunder, the Administrative Agent shall not be
required to release the amount thereof to such Credit Party and may hold or
continue to hold such amount in a Collateral Account as additional security for
the Secured Obligations of such Credit Party (except that any such amount shall
be released by the Administrative Agent to such Credit Party if no Event of
Default has occurred and is then continuing). If an Event of Default has
occurred and is continuing, the Administrative Agent may elect, in its sole and
absolute discretion, to release any such insurance payments for the purposes set
forth in the first sentence of this subparagraph (d), or to hold such insurance
payments as additional Collateral hereunder or apply the same as specified in
the Credit Agreement.
7. Remedies.
--------
7.1 Notice to Account Debtors and Contract Parties. Upon the written request
----------------------------------------------
of the Administrative Agent at any time after the occurrence of an Event of
Default, the Credit Parties shall notify account debtors on the Accounts and
parties to the Contracts that the Accounts and the Contracts have been assigned
to the Administrative Agent for the ratable benefit of the Lenders and that
payments in respect thereof shall be made directly to the Administrative Agent.
7.2 Proceeds to be Turned Over To Administrative Agent. In addition to the
--------------------------------------------------
rights of the Administrative Agent and the Lenders specified in subsection 3.3
with respect to payments of Accounts, after the occurrence of an Event of
Default all Proceeds received by the Credit Parties consisting of cash, checks
and other near-cash items shall be held by the Credit Parties in trust for the
Administrative Agent and the Lenders, segregated from other funds of the Credit
Parties, and shall, forthwith upon receipt by the Credit Parties, be turned over
to the Administrative Agent in the exact form received by the Credit Parties
(duly indorsed by the Credit Parties to the Administrative Agent, if required)
and held by the Administrative Agent in a Collateral Account maintained under
the sole dominion and control of the Administrative Agent. All Proceeds while
held by the Administrative Agent in a Collateral Account (or by the Credit
Parties in trust for the Administrative Agent and the Lenders) shall continue to
be held as collateral security for all the
<PAGE>
Secured Obligations and shall not constitute payment thereof until applied as
provided in subsection 7.3.
7.3 Application of Proceeds. At such intervals as may be agreed upon by the
-----------------------
Credit Parties and the Administrative Agent, or, at any time after an Event of
Default shall have occurred, at the Administrative Agent's election, the
Administrative Agent may apply all or any part of Proceeds held in any
Collateral Account in payment of the Secured Obligations in such order as the
Administrative Agent may elect, and any part of such funds which the
Administrative Agent elects not so to apply and deems not required as collateral
security for the Secured Obligations shall be paid over from time to time by the
Administrative Agent to the Credit Parties or to whomsoever may be lawfully
entitled to receive the same. Any balance of such Proceeds remaining after the
Secured Obligations shall have been paid in full and the Commitments shall have
been terminated shall be paid over to the Credit Parties or to whomsoever may be
lawfully entitled to receive the same.
7.4 Uniform Commercial Code Remedies. Upon the occurrence and during the
--------------------------------
continuation of any Event of Default, the Administrative Agent, on behalf of the
Lenders, may exercise, in addition to all other rights and remedies granted to
them in this Agreement and in any other instrument or agreement securing,
evidencing or relating to the Secured Obligations, all rights and remedies of a
secured party under the Uniform Commercial Code. Without limiting the
generality of the foregoing, the Administrative Agent, without demand of
performance or other demand, presentment, protest, advertisement or notice of
any kind (except any notice required by law referred to below) to or upon the
Credit Parties or any other Person (all and each of which demands, defenses,
advertisements and notices are hereby waived), may in such circumstances
forthwith collect, receive, appropriate and realize upon the Collateral, or any
part thereof, and/or, after acceleration of the Secured Obligations and
termination of commitments relating thereto, may forthwith sell, lease, assign,
give option or options to purchase, or otherwise dispose of and deliver the
Collateral or any part thereof (or contract to do any of the foregoing), in one
or more parcels at public or private sale or sales, at any exchange, broker's
board or office of the Administrative Agent or any Lender or elsewhere upon such
terms and conditions as it may deem advisable and at such prices as it may deem
best, for cash or on credit or for future delivery without assumption of any
credit risk. The Administrative Agent or any Lender shall have the right upon
any such public sale or sales, and, to the extent permitted by law, upon any
such private sale or sales, to purchase the whole or any part of the Collateral
so sold, free of any right or equity of redemption in a Credit Party, which
right or equity is hereby waived or released. The Credit Parties further agree,
at the Administrative Agent's request, to assemble the Collateral and make it
available to the Administrative Agent at places which the Administrative Agent
shall reasonably select, whether at the respective Credit Party's premises or
elsewhere. The Administrative Agent shall apply the net proceeds of any such
collection, recovery, receipt, appropriation, realization or sale, after
deducting all reasonable costs and expenses of every kind incurred therein or
incidental to the care or safekeeping of any of the Collateral or in any way
relating to the Collateral or the rights of the Administrative Agent and the
Lenders hereunder, including, without limitation, reasonable attorneys' fees and
disbursements, to the payment in whole or in part of the Secured Obligations, in
such order as the Administrative Agent may elect, and only after such
application and after the payment by the
<PAGE>
Administrative Agent of any other amount required by any provision of law,
including, without limitation, Section 9-504(1)(c) of the Uniform Commercial
Code, need the Administrative Agent account for the surplus, if any, to each of
the Credit Parties. To the extent permitted by applicable law, the Credit
Parties waive all claims, damages and demands it may acquire against the
Administrative Agent or any Lender arising out of the exercise by them of any
rights hereunder. If any notice of a proposed sale or other disposition of
Collateral shall be required by law, such notice shall be deemed reasonable and
proper if received by the Credit Parties at least 20 days before such sale or
other disposition.
7.5 Deficiency. The Credit Parties shall remain liable for any deficiency if
----------
the proceeds of any sale or other disposition of the Collateral are insufficient
to pay the Secured Obligations and the fees and disbursements of any attorneys
employed by the Administrative Agent or any Lender to collect such deficiency.
8. Administrative Agent's Appointment as Attorney-in-Fact; Administrative
----------------------------------------------------------------------
Agent's Performance of Credit Parties' Obligations.
- --------------------------------------------------
8.1 Powers. Each of the Credit Parties hereby irrevocably constitutes and
------
appoints the Administrative Agent and any officer or agent thereof, with full
power of substitution, as its true and lawful attorney-in-fact with full
irrevocable power and authority in the place and stead of such Credit Party and
in the name of such Credit Party or in its own name, from time to time in the
Administrative Agent's discretion, for the purpose of carrying out the terms of
this Agreement, to take any and all appropriate action and to execute any and
all documents and instruments which may be necessary or desirable to secure the
Secured Obligations and grant security interests in the Collateral as
contemplated by this Agreement, and, without limiting the generality of the
foregoing, each Credit Party hereby gives the Administrative Agent the power and
right, on behalf of such Credit Party, without notice to or assent by such
Credit Party, to do the following:
(a) in the case of any Account, at any time when the authority of the
Credit Party to collect the Accounts has been curtailed or terminated
pursuant to subsection 3.3(a), or in the case of any other Collateral, at
any time after the occurrence and during the continuation of an Event of
Default, in the name of the Borrower or its own name, or otherwise, to
take possession of and indorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under any
Account, Instrument, or General Intangible or with respect to any other
Collateral and to file any claim or to take any other action or
proceeding in any court of law or equity or otherwise deemed appropriate
by the Administrative Agent for the purpose of collecting any and all
such moneys due under any Account, Instrument or General Intangible or
with respect to any other Collateral whenever payable;
(b) in the case of any Copyrights, Patents or Trademarks, at any time
after an Event of Default has occurred, to execute and deliver any and
all agreements, instruments, documents, and papers as the Administrative
Agent may request to evidence the Administrative Agent's and the Lenders'
security interest in any Copyright, Patent or
<PAGE>
Trademark and the goodwill and general intangibles of the Credit Party
relating thereto or represented thereby;
(c) at any time after an Event of Default has occurred, to pay or
discharge taxes and Liens levied or placed on or threatened against the
Collateral, to effect, any repairs or any insurance called for by the
terms all or any part of the premiums therefor and the costs thereof;
(d) to execute, in connection with the sale provided for in Section 7.4
hereof, any endorsements, assignments or other instruments of conveyance
or transfer with respect to the Collateral; and
(e) upon the occurrence and during the continuation of any Event of
Default, (i) to direct any party liable for any payment under any of the
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Administrative Agent or as the Administrative
Agent shall direct; (ii) to ask or demand for, collect, receive payment
of and receipt for, any and all moneys, claims and other amounts due or
to become due at any time in respect of or arising out of any Collateral;
(iii) to sign and indorse any invoices, freight or express bills, bills
of lading, storage or warehouse receipts, drafts against debtors,
assignments, verifications, notices and other documents in connection
with any of the Collateral; (iv) to commence and prosecute any suits,
actions or proceedings at law or in equity in any court of competent
jurisdiction to collect the Collateral or any thereof and to enforce any
other right in respect of any Collateral; (v) to defend any suit, action
or proceeding brought against the Credit Party with respect to any
Collateral; (vi) to settle, compromise or adjust any such suit, action or
proceeding and, in connection therewith, to give such discharges or
releases as the Administrative Agent may deem appropriate; (vii) to
assign or grant licenses, any Copyright, Patent or Trademark (along with
the goodwill of the business to which any such Copyright, Patent or
Trademark pertains), throughout the world for such term or terms, on such
conditions, and in such manner, as the Administrative Agent shall in its
sole discretion determine; and (viii) generally, to sell, transfer,
pledge and make any agreement with respect to or otherwise deal with any
of the Collateral as fully and completely as though the Administrative
Agent were the absolute owner thereof for all purposes, and to do, at the
Administrative Agent's option and the Credit Party's expense, at any
time, or from time to time, all reasonable acts and things which the
Administrative Agent deems necessary to protect, preserve or realize upon
the Collateral and the Administrative Agent's and the Lenders' security
interests therein and to effect the intent of this Agreement, all as
fully and effectively as the Credit Party might do.
The Administrative Agent agrees that, except after the occurrence of an Event of
Default, it will forbear from exercising the power of attorney or any rights
granted to the Administrative Agent pursuant to this subsection 8.1.
8.2 Performance by Administrative Agent of Credit Partys' Obligations.
-----------------------------------------------------------------
If the Credit Parties fail to perform or comply with any of their agreements
contained herein, the
<PAGE>
Administrative Agent, at its option, but without any obligation to do so, may
perform or comply, or otherwise cause performance or compliance, with such
agreement.
8.3 Credit Parties' Reimbursement Obligation. The expenses of the
----------------------------------------
Administrative Agent incurred in connection with actions undertaken as provided
in this Section, together with interest thereon at the rate per annum set forth
in subsection 3.1 of the Credit Agreement for Base Rate Loans from the date of
payment by the Administrative Agent to the date reimbursed by the Credit
Parties, shall be payable by the Credit Parties to the Administrative Agent on
demand.
8.4 Ratification; Power Coupled With An Interest. The Credit Parties hereby
--------------------------------------------
ratify all that said attorneys shall lawfully do or cause to be done by virtue
hereof. All powers, authorizations and agencies contained in this Agreement are
coupled with an interest and are irrevocable until the Secured Obligations have
been paid in full and the Commitments have been terminated.
9. Duty of Administrative Agent. The Administrative Agent's sole duty with
----------------------------
respect to the custody, safekeeping and physical preservation of the Collateral
in its possession, under Section 9-207 of the Uniform Commercial Code or
otherwise, shall be to deal with it in the same manner as the Administrative
Agent deals with similar property for its own account. Neither the
Administrative Agent, any Lender nor any of their respective directors,
officers, employees or agents shall be liable for failure to demand, collect or
realize upon any of the Collateral or for any delay in doing so or shall be
under any obligation to sell or otherwise dispose of any Collateral upon the
request of the Credit Parties or any other Person or to take any other action
whatsoever with regard to the Collateral or any part thereof. The powers
conferred on the Administrative Agent and the Lenders hereunder are solely to
protect the Administrative Agent's and the Lenders' interests in the Collateral
and shall not impose any duty upon the Administrative Agent or any Lender to
exercise any such powers. The Administrative Agent and the Lenders shall be
accountable only for amounts that they actually receive as a result of the
exercise of such powers, and neither they nor any of their officers, directors,
employees or agents shall be responsible to the Credit Parties for any act or
failure to act hereunder, except for their own gross negligence or wilful
misconduct.
10. Execution of Financing Statements. Pursuant to Section 9-402 of the
---------------------------------
Uniform Commercial Code, each of the Credit Parties authorizes the
Administrative Agent to file financing statements with respect to the Collateral
without the signature of the Credit Party in such form and in such filing
offices as the Administrative Agent reasonably determines appropriate to perfect
the security interests of the Administrative Agent and the Lenders under this
Agreement. A carbon, photographic or other reproduction of this Agreement shall
be sufficient as a financing statement for filing in any jurisdiction.
11. Authority of Administrative Agent. The Credit Parties acknowledge that
---------------------------------
the rights and responsibilities of the Administrative Agent under this Agreement
with respect to any action taken by the Administrative Agent or the exercise or
non-exercise by the Administrative Agent of any option, voting right request,
judgment or other right or remedy provided for herein or resulting or arising
out of this Agreement shall, as between the Administrative Agent and the
<PAGE>
Lenders, be governed by the Credit Agreement and by such other agreements with
respect thereto as may exist from time to time among them, but, as between the
Administrative Agent and the Credit Parties, the Administrative Agent shall be
conclusively presumed to be acting as agent for the Lenders with full and valid
authority so to act or refrain from acting, and the Credit Parties shall be
under no obligation, or entitlement, to make any inquiry respecting such
authority.
12. Notices. All notices shall be given or made in accordance with Section
-------
11.1 of the Credit Agreement, except that notices to the Borrower or to the
Company shall be directed as follows:
Pediatric Services of America, Inc.
310 Technology Parkway
Norcross, GA 30092
Telephone: (770) 441-1580
Facsimile: (770) 248-8192
Attention: General Counsel
13. Severability. Any provision of this Agreement which is prohibited or
------------
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
14. Amendments in Writing; No Waiver; Cumulative Remedies.
-----------------------------------------------------
14.1 Amendments in Writing. None of the terms or provisions of this
---------------------
Agreement may be waived, amended, supplemented or otherwise modified except by a
written instrument executed by the Administrative Agent and the Credit Parties
directly affected thereby; provided that any provision of this Agreement may be
--------
waived by the Administrative Agent in a letter or agreement executed by the
Administrative Agent or by facsimile transmission from the Administrative Agent.
14.2 No Waiver by Course of Conduct. Neither the Administrative Agent nor
------------------------------
any Lender shall by any act (except by a written instrument pursuant to
subsection 14.1 hereof), delay, indulgence, omission or otherwise be deemed to
have waived any right or remedy hereunder or to have acquiesced in any Default
or Event of Default or in any breach of any of the terms and conditions hereof.
No failure to exercise, nor any delay in exercising, on the part of the
Administrative Agent or any Lender, any right, power or privilege hereunder
shall operate as a waiver thereof. No single or partial exercise of any right,
power or privilege hereunder shall preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. A waiver by the
Administrative Agent or any Lender of any right or remedy hereunder on any one
occasion shall not be construed as a bar to any right or remedy which the
Administrative Agent or such Lender would otherwise have on any future occasion.
<PAGE>
14.3 Remedies Cumulative. The rights and remedies herein provided are
-------------------
cumulative, may be exercised singly or concurrently and are not exclusive of any
other rights or remedies provided by law.
15. Section Headings. The section and subsection headings used in this
----------------
Agreement are for convenience of reference only and are not to affect the
construction hereof or be taken into consideration in the interpretation hereof.
16. Successors and Assigns. This Agreement shall be binding upon the
----------------------
successors and assigns of the Credit Parties and shall inure to the benefit of
the Administrative Agent and the Lenders and their successors and assigns,
provided that the Credit Parties may not assign any of their rights or Secured
- --------
Obligations under this Agreement without the prior written consent of the
Administrative Agent and any such purported assignment shall be null and void.
17. Term of Agreement. This Agreement and the Liens granted hereunder shall
-----------------
remain in full force and effect until the Secured Obligations have been paid in
full and the Commitments have been terminated, at which time the Administrative
Agent shall release and terminate the Liens granted to it hereunder. Upon such
release and termination, (i) the Borrower shall be entitled to the return, at
its expense, of any and all funds in the Collateral Account and such of the
Collateral held by the Administrative Agent as shall not have been sold or
otherwise applied pursuant to the terms hereof and (ii) the Administrative Agent
will, at the Borrower's expense, execute and deliver to the Borrower such UCC
termination statements and other documents as the Borrower shall reasonably
request to evidence such termination.
18. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND SECURED OBLIGATIONS OF
-------------
THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN
ACCORDANCE WITH, THE LAW OF THE STATE OF NORTH CAROLINA.
[Remainder of Page Intentionally Left Blank]
<PAGE>
IN WITNESS WHEREOF, the undersigned have caused this Security Agreement to be
duly executed and delivered as of the date first above written.
BORROWER: PEDIATRIC SERVICES OF AMERICA, INC.
- --------
a Georgia corporation
By: /s/ Stephen M. Mengert
-------------------------
Name: Stephen M. Mengert
Title: Senior Vice President and
Chief Financial Officer
GUARANTORS: PEDIATRIC SERVICES OF AMERICA, INC.
- ----------
a Delaware corporation
By: /s/ Stephen M. Mengert
-------------------------
Name: Stephen M. Mengert
Title: Senior Vice President and Chief Financial Officer
PSA LICENSING CORPORATION,
a Delaware corporation
PSA PROPERTIES CORPORATION,
a Delaware corporation
By: /s/ Susan E. Dignan
-------------------------
Name: Susan E. Dignan
Title: President
for each of the foregoing
PEDIATRIC SERVICES OF AMERICA (CONNECTICUT), INC.,
a Connecticut corporation
PREMIER MEDICAL SERVICES, INC.
a Nevada corporation
PEDIATRIC HOME NURSING SERVICES, INC.,
a New York corporation
PEDIATRIC PARTNERS, INC.,
a Delaware corporation
PARAMEDICAL SERVICES OF AMERICA, INC.,
a California corporation
PREMIER NURSE STAFFING, INC.,
a Nevada corporation
PREMIER CERTIFIED HOME HEALTH SERVICES, INC.,
a Nevada corporation
ARO HEALTH SERVICES, INC.,
a Washington corporation
By: /s/ Joseph D. Sansone
-------------------------
Name: Joseph D. Sansone
Title: President
for each of the foregoing
<PAGE>
ADMINISTRATIVE
AGENT: NATIONSBANK, N.A.,
as Administrative Agent
By: /s/ Ashley M. Crabtree
-----------------------------
Name: Ashley M. Crabtree
Title: Senior Vice President
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