<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 March 31, 1999
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 30092-2929
(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 May 13, 1999, the Registrant had 6,652,005 shares of Common Stock, $0.01
Par Value, outstanding.
- -------------------------------------------------------------------------------
Page 1 of 30
Index of Exhibits on page 30
<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
March 31, 1999 and September 30, 1998....................... 3
Condensed Consolidated Statements of Operations for
the three and six months ended March 31, 1999 and 1998...... 5
Condensed Consolidated Statements of Cash Flows for
the six months ended March 31, 1999 and 1998................ 6
Notes to Condensed Consolidated Financial
Statements.................................................. 7
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 11
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings................................................ 27
ITEM 4: Submission of Matters to a Vote of Security Holders.............. 27
ITEM 5: Other Information................................................ 28
ITEM 6: Exhibits and Reports on Form 8-K................................. 28
Signatures....................................................... 29
Index of Exhibits................................................ 30
2
<PAGE>
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
(Unaudited) (Audited)
---------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents ........................................... $ 8,714 $ 2,008
Accounts receivable, less allowance for doubtful
accounts of $19,976 and $14,008, respectively .................... 99,752 99,030
Prepaid expenses .................................................... 454 807
Income taxes receivable ............................................. 1,974 2,898
Deferred income taxes ............................................... -- 3,266
Other current assets ................................................ 5,480 5,837
--------- ---------
Total current assets ..................................................... 116,374 113,846
Property and equipment:
Home care equipment held for rental ................................. 29,538 28,435
Furniture and fixtures .............................................. 16,263 15,185
Vehicles ............................................................ 891 891
Leasehold improvements .............................................. 988 915
--------- ---------
47,680 45,426
Accumulated depreciation and amortization ........................... (23,935) (20,714)
--------- ---------
23,745 24,712
Other assets:
Goodwill, less accumulated amortization of
$6,249 and $6,672, respectively .................................. 68,798 89,172
Certificates of need, less accumulated amortization of
$251 and $508, respectively ...................................... 421 2,739
Deferred financing fees, less accumulated
amortization of $805 and $521, respectively ...................... 2,984 3,251
Noncompete agreements, less accumulated amortization of
$953 and $875, respectively ...................................... 107 185
Other ............................................................... 649 656
--------- ---------
72,959 96,003
--------- ---------
Total assets ............................................................. $ 213,078 $ 234,561
========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC
CONDENSED CONSOLIDATED BALANCE SHEETS--(Continued)
(In thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1999 1998
(Unaudited) (Audited)
----------- -------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable...................................................................... $ 12,608 $ 11,600
Accrued compensation.................................................................. 11,337 11,147
Accrued insurance..................................................................... 3,970 3,516
Other accrued liabilities............................................................. 7,127 7,362
Deferred revenue...................................................................... 967 1,101
Current maturities of long-term obligations to related parties........................ 3,636 3,323
Current maturities of long-term obligations........................................... 321 416
-------- --------
Total current liabilities............................................................. 39,966 38,465
Long-term obligations to related parties, net of current maturities................... 170 220
Long-term obligations, net of current maturities...................................... 139,046 127,567
Deferred income taxes................................................................. -- 3,879
Minority interest in subsidiary....................................................... 580 747
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; 6,652 shares at March 31,
1999 and 6,652 shares at September 30, 1998 issued and outstanding, respectively.... 67 67
Additional paid-in capital............................................................ 48,362 50,037
Retained earnings (deficit)........................................................... (15,113) 13,579
-------- --------
Total stockholders' equity............................................................ 33,316 63,683
-------- --------
Total liabilities and stockholders' equity............................................ $213,078 $234,561
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
(Unaudited) (Unaudited)
------------------------ ------------------------
1999 1998 1999 1998
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Net revenue...................................................... $ 76,999 $79,479 $156,373 $141,038
Costs and expenses:
Operating salaries, wages and employee benefits............... 29,265 31,017 58,950 57,098
Other operating costs......................................... 36,054 32,524 70,880 55,467
Corporate, general and administrative......................... 6,359 6,070 12,398 9,907
Provision for doubtful accounts............................... 7,346 2,095 10,510 3,928
Depreciation and amortization................................. 2,657 2,297 5,099 4,144
Impairment of intangible assets............................... 20,984 -- 20,984 --
-------- ------- -------- --------
Total costs and expenses.................................... 102,665 74,003 178,821 130,544
-------- ------- -------- --------
Operating income (loss).......................................... (25,666) 5,476 (22,448) 10,494
Interest expense................................................. 3,870 1,926 6,964 3,392
-------- ------- -------- --------
Income (loss) before minority interest and income
taxes......................................................... (29,536) 3,550 (29,412) 7,102
Minority interest in loss of subsidiary.......................... 124 26 167 27
-------- ------- -------- --------
Income (loss) before income taxes................................ (29,412) 3,576 (29,245) 7,129
Income tax expense (benefit)..................................... (612) 1,441 (553) 2,873
-------- ------- -------- --------
Net income (loss) ............................................... $(28,800) $ 2,135 $(28,692) $ 4,256
======== ======= ======== ========
Net income (loss) per share data:
Basic....................................................... $ (4.33) $ 0.30 $ (4.31) $ 0.63
======== ======= ======== ========
Diluted..................................................... $ (4.33) $ 0.30 $ (4.31) $ 0.61
======== ======= ======== ========
Weighted average shares outstanding:
Basic....................................................... 6,652 7,075 6,652 6,789
======== ======= ======== ========
Diluted..................................................... 6,652 7,234 6,652 6,971
======== ======= ======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
(Unaudited)
-----------------------
1999 1998
-------- --------
<S> <C> <C>
Operating activities
Net income (loss)............................................................................ $(28,692) $ 4,256
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization............................................................ 5,099 4,144
Impairment of intangible assets.......................................................... 20,984 --
Provision for doubtful accounts.......................................................... 10,510 3,928
Amortization of deferred financing fees.................................................. 284 90
Deferred income taxes.................................................................... (612) 2,418
Minority interest in loss of subsidiary.................................................. (167) (27)
Changes in operating assets and liabilities, net of effects from
acquisitions of businesses:
Accounts receivable...................................................................... (11,233) (27,663)
Prepaid expenses and other current assets................................................ 651 (809)
Accounts payable......................................................................... 1,007 920
Income taxes............................................................................. 925 (18)
Accrued liabilities...................................................................... 274 1,682
-------- --------
Net cash used in operating activities........................................................ (970) (11,079)
Investing activities
Purchases of property and equipment...................................................... (2,295) (3,804)
Acquisitions of businesses............................................................... -- (23,356)
Other, net............................................................................... 16 (26)
-------- --------
Net cash used in investing activities........................................................ (2,279) (27,186)
Financing activities
Principal payments on long-term debt..................................................... (6,530) (5,961)
Borrowings on long-term debt............................................................. 16,500 44,000
Deferred financing fees.................................................................. (16) (33)
Proceeds from exercise of stock options.................................................. 1 69
-------- --------
Net cash provided by financing activities.................................................... 9,955 38,075
-------- --------
Increase (decrease) in cash and cash equivalents............................................. 6,706 (190)
Cash and cash equivalents at beginning of period............................................. 2,008 501
-------- --------
Cash and cash equivalents at end of period................................................... $ 8,714 $ 311
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest................................................................... $ 6,754 $ 3,370
======== ========
Cash paid for income taxes............................................................... $ 95 $ 577
======== ========
</TABLE>
See accompanying notes.
6
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
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 six months ended March 31, 1999 are
not necessarily indicative of the results to be expected for the entire
fiscal year ending September 30, 1999. These condensed consolidated
financial statements should be read in conjunction with the Company's
audited financial statements for the year ended September 30, 1998 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 1998 Annual Report.
2. Accounts Receivable
Accounts receivable include approximately $24.0 million and $33.1 million
for which services have been rendered but the amounts were unbilled as of
March 31, 1999 and September 30, 1998, respectively. Such unbilled amounts
result primarily from the medical testing division which bills one month in
arrears. Other unbilled amounts are due to normal time delays in
processing.
3. Allowance for Doubtful Accounts
During the three months ended March 31, 1999, the Company's provision for
doubtful accounts increased approximately $5.3 million to $7.4 million from
$2.1 million in the three months ended March 31, 1998. During the three
months ended March 31, 1999 the Company experienced a significant
deterioration in the aging of its accounts receivable and an increase in
the days sales outstanding ("DSO"). The increase in the provision during
the three months ended March 31, 1999 is primarily attributable to: (1)
continued difficulties in the health care reimbursement environment
including extended payor claim review and delayed payment; (2) significant
organizational disruption caused by excessive personnel turnover in the
Company's reimbursement department including all levels of reimbursement
management; (3) increased personnel resources dedicated to the resolution
of the medical testing division case management and billing system issues;
(4) continued assessment of payor requirements and payment performance; and
(5) continued claim formatting and electronic transmission difficulties
with a significant number of large payors. Due to the above mentioned
issues and ongoing changes in the business environment, the Company's
management reassessed its estimate of the allowance for doubtful accounts
resulting in an increase in the allowance provision.
7
<PAGE>
4. Intangible and Other Long-lived Assets
An impairment of intangible assets was recorded during the three months
ended March 31, 1999. The impairment resulted primarily from the impact on
certain non-core business locations and activities of the Company's
strategic plan formulated in the second quarter of fiscal 1999 which will
focus the Company on its core businesses. See further discussion in Recent
Developments. Additionally, certain locations were negatively impacted by
the cancellation of certain large contracts which impacted the future
profitability of the locations. Finally, certain second quarter of fiscal
1999 conditions, including failure of the Company to meet management
projections, declining gross margins, recurring location operating losses
and slower than expected progress in improving collections were identified
by management as indications of potential intangible asset impairment.
Management conducted an evaluation of the carrying value of the Company's
recorded intangible assets. Management considered current and anticipated
industry conditions and recent changes in its business strategies and
concluded that an impairment charge of $21.0 million in the second quarter
of fiscal 1999 was appropriate. The charge includes a write-off of $7.9
million in goodwill and $2.2 million in certificates of need associated
with the specific locations to be closed in the third quarter of fiscal
1999 and $10.9 million in goodwill related to changes within certain
locations arising from the cancellation of certain contracts which impacted
location profitability and the termination of certain non-core activities.
For purposes of assessing impairment, assets were grouped at the location
level, which is the lowest level for which there are identifiable cash
flows that are largely independent. Asset impairment was deemed to exist
if the Company's estimate of undiscounted cash flows was less than the
carrying amount of the long-lived assets and goodwill at the location. In
estimating future cash flows, management used its best estimates of
anticipated operating results over the remaining useful life of the assets.
For those locations where asset impairment was identified, the amount of
impairment was measured by comparing the carrying amount of the long-lived
assets and goodwill to the estimated fair value for each location. Fair
value was estimated using a valuation technique based on the present value
of the expected future cash flows.
In conjunction with the impairment evaluation, management reduced the
amortization periods for intangible assets at March 31, 1999 from 30 and 25
years to 20 years. This change in estimate will be accounted for
prospectively.
5. Long-Term Borrowings Arrangements
On April 23, 1999, the Company provided notice to its lenders, as required
under the terms of its Credit Agreement, as amended, of non-compliance with
certain financial covenants contained in the Credit Agreement. On May 13,
1999 the Credit Agreement was further amended ("Amendment No. 5"), waiving
the defaults under the Credit Agreement, revising the financial covenants
and reducing the total commitment from $70.0 million to $65.0 million
effective May 13, 1999. Further, Amendment No. 5 revised the interest
payment date to be
8
<PAGE>
monthly and extended the time period which prohibits the Company from
borrowing for acquisitions. The new covenants become more restrictive over
the remaining life of the Credit Agreement.
Under the Credit Agreement, as amended, commitment fees were set at 0.500%
per annum on the average daily unused portion of the loan facility. On the
effective date of Amendment No. 5, all LIBOR and swingline borrowings were
converted to a base rate loan bearing interest at base rate plus 2.50%.
Base rate is defined as the greater of (a) federal funds rate plus 1/2 of
1% or (b) prime rate. At March 31, 1999, the interest rates on LIBOR and
swingline borrowings under the Credit Agreement ranged from 8.48% to 8.69%.
Outstanding borrowings under the Credit Agreement at March 31, 1999 were
approximately $64.0 million.
6. Net Income (Loss) per Common and Common Equivalent Share
Basic net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding during the period. Diluted
net income (loss) per share is computed using the weighted average number
of shares of common stock outstanding and the dilutive effect of common
equivalent shares (calculated using the treasury stock method). The
dilutive effect of the weighted average number of options included in the
diluted earnings per share is 159,708, and 182,126 for the three and six
months ended March 31, 1998, respectively. For the three and six months
ended March 31, 1999, 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.
7. Interest Rate Swap Agreement
At March 31, 1999, 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%.
The interest rate differential to LIBOR is received or paid and 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.
8. Segments of an Enterprise
Effective December 31, 1998, the Company adopted the provisions of
Statement of Financial Accounting Standard No. 131, Disclosures about
Segments of an Enterprise and Related Information ("SFAS 131"). Under the
provisions of SFAS 131, the Company has restated its prior year disclosures
to conform to the requirements of SFAS 131. The Company has two reportable
segments: medical services and medical testing.
The medical services division provides a broad range of pediatric health
care services, including nursing, respiratory therapy and other medical
equipment, pharmacy and infusion therapy.
9
<PAGE>
The medical testing division provides a broad range of paramedical testing
services, including taking health histories, collecting blood and urine
samples, administering physical examinations and performing
electrocardiogram examinations on insurance applicants.
Unaudited financial data by segment is as follows:
<TABLE>
<CAPTION>
General
Medical Medical Corporate
Services Testing Expense Consolidated
--------- ------- --------- ------------
<S> <C> <C> <C> <C>
For the three months ended March 31, 1999
Net revenue............................... $ 54,870 $ 22,129 $ -- $ 76,999
Operating income (loss) (1)............... (22,326) 3,239 (6,579) (25,666)
Depreciation/amortization................. 1,956 480 221 2,657
Impairment of intangible assets........... 20,984 -- -- 20,984
For the three months ended March 31, 1998
Net revenue............................... $ 57,302 $ 22,177 $ -- $ 79,479
Operating income (loss) (1)............... 6,983 4,665 (6,172) 5,476
Depreciation/amortization................. 1,944 252 101 2,297
</TABLE>
<TABLE>
<CAPTION>
General
Medical Medical Corporate
Services Testing Expense Consolidated
-------- --------- ---------- ------------
<S> <C> <C> <C> <C>
For the six months ended March 31, 1999
Net revenue.............................. $ 111,610 $ 44,763 $ -- $ 156,373
Operating income (loss) (1).............. (16,412) 6,791 (12,827) (22,448)
Depreciation/amortization................ 3,903 767 429 5,099
Impairment of intangible assets.......... 20,984 -- -- 20,984
For the six months ended March 31, 1998
Net revenue.............................. $ 109,217 $ 31,821 $ -- $ 141,038
Operating income (loss) (1).............. 15,342 5,234 (10,082) 10,494
Depreciation/amortization................ 3,630 339 175 4,144
</TABLE>
<TABLE>
<CAPTION>
Medical Medical General
Services Testing Corporate Consolidated
-------- ------- --------- ------------
<S> <C> <C> <C> <C>
As of March 31, 1999
Accounts receivable (less allowance for doubtful accounts).. $74,643 $25,109 $ -- $99,752
Property and equipment (less depreciation and amortization).. 15,368 4,991 3,386 23,745
Goodwill (less accumulated amortization)..................... 45,999 22,799 -- 68,798
As of September 30, 1998
Accounts receivable (less allowance for doubtful accounts)... $72,636 $26,394 $ -- $99,030
Property and equipment (less depreciation and amortization).. 16,582 4,842 3,288 24,712
Goodwill (less accumulated amortization)..................... 65,969 23,203 -- 89,172
</TABLE>
(1) Operating income (loss) represents business segment's income (loss)
before corporate general and administrative expenses, interest and taxes.
10
<PAGE>
Unaudited reconciliation to income (loss) before minority interest and income
taxes
<TABLE>
<CAPTION>
For the Three Months
Ended
March 31,
----------------------------------
1999 1998
---- ----
<S> <C> <C>
Consolidated operating income (loss) ................... $(25,666) $ 5,476
Interest expense ........................................ 3,870 1,926
-------- --------
Income (loss) before minority interest and income taxes . $(29,536) $ 3,550
======== ========
</TABLE>
<TABLE>
<CAPTION>
For the Six Months
Ended
March 31,
----------------------------------
1999 1998
---- ----
<S> <C> <C>
Consolidated operating income (loss) .................... $(22,448) $ 10,494
Interest expense ........................................ 6,964 3,392
-------- --------
Income (loss) before minority interest and income taxes . $(29,412) $ 7,102
======== ========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) relating to
future financial performance of the Company. When used in this Form 10-Q, the
words "may," "could," "should," "would," "believe," "feel", "anticipate,"
"estimate," "intend," "plan" and similar expressions or statements are intended
to identify forward-looking statements. These statements by their nature
involve substantial risks and uncertainties, certain of which are beyond the
Company's control. The Company cautions that various factors, including the
factors described hereunder and those discussed in the Company's filings with
the Securities and Exchange Commission, as well as general economic conditions
and industry trends, the Company's ability to collect for equipment sold or
rented, or for services provided, could cause actual results or outcomes to
differ materially from those expressed in any forward-looking statements of the
Company made by or on behalf of the Company. Any forward-looking statements
speak only as of the date on which such statement is made, and the Company
undertakes no obligation to update any forward-looking statement or statements
to reflect events or circumstances after the date on which such statement is
made or to reflect the occurrence of an unanticipated event. New factors emerge
from time to time, and it is not possible for management to predict all of such
factors. Further, management cannot assess the impact of each such factor on
11
<PAGE>
the business or the extent to which any factor, or combination of factors, may
cause actual results to differ materially from those contained in any forward-
looking statements.
Recent Developments
In the second quarter of fiscal 1999, the Company's senior management finalized
its strategic plan to improve the Company's performance. The primary focus of
the strategic plan relating to medical services is to refocus the Company on its
core businesses, the pediatric home healthcare and adult respiratory businesses.
As a result, the Company anticipates undergoing many changes. The key changes
are: (1) a refocus on core business including closing of non-core businesses
and termination of certain non-core activities at ongoing locations; (2) the
sale of certain non-core business assets; (3) withdrawal from certain
unprofitable contracts and locations; (4) reduction in location operating costs
and corporate general and administrative expenses; (5) expansion of field sales
organization; and (6) evaluation of recapitalization alternatives by retaining
an investment banking firm as its financial advisor. The strategic plan has
given rise to a number of charges which are discussed herein.
In addition, the increasing difficulties within the health care industry
relating to the timely collection of accounts receivable combined with certain
internal challenges within the Company's reimbursement organization made it
necessary for the Company to increase the allowance for doubtful accounts in the
current quarter. In response to these problems, management is (1) reassessing
its authorization process to improve the probability of timely payment from
providers, (2) reevaluating contracts with managed care organizations in an
effort to cancel contracts not meeting minimum profitability and cash flow
levels and (3) refocusing resources within the reimbursement organization of the
Company.
Although the strategic plan is expected to reduce operating costs, there can be
no assurance that the Company will be able to achieve the expected cost savings
from the strategic plan efforts or will be able to reduce costs without
negatively impacting operations. Further, it is not possible to predict the
ultimate outcome of the cost reductions the Company has implemented or whether
they will be sufficient to offset the reductions in net revenue.
12
<PAGE>
Results of Operations
Due to the nature of the industry and the reimbursement environment in which the
Company operates, certain estimates are required in recording net revenue.
Inherent in these estimates is the risk net revenue will have to be revised or
updated, with the changes recorded in subsequent periods as additional
information becomes available to management.
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
Percentage of Net Revenue Increase (Decrease)
------------------------------------------ -----------------------
Three Months Six Months Three Six
Months Months
Ended Ended Ended Ended
March 31, March 31, March 31, March 31,
----------------- ----------------- -----------------------
1999 1998 1999 1998 1999 1999
----- ---- ----- ---- ------ ----
<S> <C> <C> <C> <C> <C> <C>
Net revenue............................................ 100% 100% 100% 100% (3)% 11%
Operating salaries, wages and employee benefits........ 38.0 39.0 37.7 40.5 (6) 3
Other operating costs.................................. 46.8 40.9 45.3 39.3 11 28
Corporate, general and administrative.................. 8.3 7.6 7.9 7.0 5 25
Provision for doubtful accounts........................ 9.5 2.6 6.7 2.8 251 168
Depreciation and amortization.......................... 3.5 2.9 3.3 2.9 16 23
Impairment of intangible assets........................ 27.3 - 13.4 - - -
----- ---- ----- ---- ------ ----
Operating income (loss)................................ (33.4) 7.0 (14.3) 7.5 (569) (314)
Interest expense....................................... 5.0 2.4 4.5 2.4 101 105
----- ---- ----- ---- ------ ----
Income (loss) before minority interest and income
taxes.................................................. (38.4) 4.6 (18.8) 5.1 (932) (514)
Minority interest in loss of subsidiary................ 0.2 - 0.1 - 371 508
----- ---- ----- ---- ------ ----
Income (loss) before income taxes...................... (38.2) 4.6 (18.7) 5.1 (923) (510)
Income tax expense (benefit)........................... (0.8) 1.8 (0.4) 2.0 (143) (119)
----- ---- ----- ---- ------ ----
Net income (loss)...................................... (37.4)% 2.8% (18.3)% 3.1% (1,449)% (774)%
===== ==== ===== ==== ====== ====
</TABLE>
13
<PAGE>
The following table sets forth for the periods indicated the net revenue
breakdown by service:
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pediatric Home Health Care
Nursing.......................................................... $22,811 $22,418 $ 46,161 $ 44,973
Respiratory Therapy Equipment.................................... 6,288 6,891 12,847 11,643
Home Medical Equipment........................................... 825 777 1,688 1,574
Pharmacy and Other............................................... 9,245 9,878 19,000 17,980
------- ------- -------- --------
Total Pediatric Home Health Care......................... 39,169 39,964 79,696 76,170
------- ------- -------- --------
Adult Home Health Care:
Nursing.......................................................... 5,250 4,714 10,259 8,825
Respiratory Therapy Equipment.................................... 5,670 5,504 11,707 11,491
Home Medical Equipment........................................... 1,730 1,507 3,621 3,071
Pharmacy and Other............................................... 3,051 5,613 6,327 9,660
------- ------- -------- --------
Total Adult Home Health Care............................. 15,701 17,338 31,914 33,047
------- ------- -------- --------
Total Medical Testing Services........................... 22,129 22,177 44,763 31,821
------- ------- -------- --------
Total Net Revenue........................................ $76,999 $79,479 $156,373 $141,038
======= ======= ======== ========
</TABLE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
Net revenue decreased $2.5 million, or 3%, to $77.0 million in the three months
ended March 31, 1999 from $79.5 million in the three months ended March 31,
1998. The Company's acquisitions accounted for an approximately $2.8 million
increase in net revenue and a decline in net revenue from existing branch
offices accounted for a decrease of $5.3 million. The decline in net revenue
was 7% for the three months ended March 31, 1999. Of the $2.5 million decrease
in net revenue for the three months ended March 31, 1999, pediatric health care
net revenue accounted for $0.8 million. Decreased pediatric health care net
revenue for the three months ended March 31, 1999 was primarily attributable to
a significant increase in unstaffed pediatric nursing cases due to location
specific nursing shortages for the three months ended March 31, 1999 compared to
the three months ended March 31, 1998, offset by revenues related to acquired
businesses. Reductions in adult health care net revenue accounted for $1.6
million of the total decrease in net revenue for the three months ended March
31, 1999, which was primarily the result of the termination of contracts for
adult infusion services during the three months ended March 31, 1999. During
the three months ended March 31, 1999, the Company derived approximately 72% of
its net revenue from commercial insurers and other private payors, 23% from
Medicaid and 5% from Medicare.
Operating salaries, wages and employee benefits consist primarily of branch
office employee costs. Operating salaries, wages and employee benefits
decreased $1.8 million, or 6%, to $29.2 million in the three months ended March
31,1999, from $31.0 million in the three months ended March 31, 1998. As a
percentage of net revenue, operating salaries, wages and employee benefits for
the three months ended March 31, 1999, decreased to 38% from 39% in the three
months ended March 31, 1998.
Other operating costs include medical supplies, branch office rent, utilities,
vehicle expenses, independent medical testing technician payments and cost of
sales. Cost of sales consists primarily
14
<PAGE>
of the costs of pharmacy products sold. Other operating costs increased $3.5
million or 11%, to $36.0 million in the three months ended March 31, 1999, from
$32.5 million in the three months ended March 31, 1998. As a percentage of net
revenue, other operating costs for the three months ended March 31, 1999
increased to 47% from 41% in the three months ended March 31, 1998. During the
three months ended March 31, 1999, other operating costs increased due to: (1)
relocating selected offices to new facilities and support costs related to the
newly developed case management and billing system in the medical testing
division; (2) increased costs for infusion services; and (3) higher fixed costs
as a percentage of declining net revenue in the medical services division.
Corporate, general and administrative costs increased $0.3 million, or 5%, to
$6.4 million in the three months ended March 31, 1999 from $6.1 million in the
three months ended March 31, 1998. As a percentage of net revenue, corporate,
general and administrative costs increased for the three months ended March 31,
1999 to 8.3% from 7.6% in the three months ended March 31, 1998. The Company
has experienced high turnover within the reimbursement organization, including
senior level management. This turnover has resulted in increased recruiting,
overtime and temporary labor costs. In the medical testing division additional
field sales staff were hired to increase market penetration in the three months
ended March 31, 1999, when compared to the three months ended March 31, 1998.
Provision for doubtful accounts consists of the amount of accounts receivable
that management estimates to be uncollectible. During the three months ended
March 31, 1999 the Company's provision for doubtful accounts increased
approximately $5.3 million, or 251%, to $7.4 million from $2.1 million in the
three months ended March 31, 1998. During the three months ended March 31, 1999
the Company experienced a significant deterioration in the aging of its accounts
receivable and an increase in the days sales outstanding ("DSO"). The increase
in the provision during the three months ended March 31, 1999 is primarily
attributable to: (1) continued difficulties in the health care reimbursement
environment including extended payor claim review and delayed payment; (2)
significant organizational disruption caused by excessive personnel turnover in
the Company's reimbursement department including all levels of reimbursement
management; (3) increased personnel resources dedicated to the resolution of the
medical testing division case management and billing system issues; (4)
continued assessment of payor requirements and payment performance; and (5)
continued claim formatting and electronic transmission difficulties with a
significant number of large payors. Due to the above mentioned issues and
ongoing changes in the business environment, the Company's management reassessed
its estimate of the allowance for doubtful accounts resulting in an increase in
the allowance provision.
Depreciation and amortization increased $0.4 million, or 16%, to $2.7 million in
the three months ended March 31, 1999, from $2.3 million in the three months
ended March 31, 1998. As a percentage of the Company's total net revenue,
depreciation and amortization costs increased for the three months ended March
31, 1999, to 4% from 3% in the three months ended March 31, 1998. The increase
in depreciation was primarily due to the newly developed medical testing case
management and billing system.
An impairment of intangible assets was recorded during the three months ended
March 31, 1999. The impairment resulted primarily from the impact on certain
non-core business locations and
15
<PAGE>
activities of the Company's strategic plan formulated in the second quarter of
fiscal 1999 which will focus the Company on its core businesses. See further
discussion in Recent Developments. Additionally, certain locations were
negatively impacted by the cancellation of certain large contracts which
impacted the future profitability of the locations. Finally, certain second
quarter of fiscal 1999 conditions, including failure of the Company to meet
management projections, declining gross margins, recurring location operating
losses and slower than expected progress in improving collections were
identified by management as indications of potential intangible asset
impairment. Management conducted an evaluation of the carrying value of the
Company's recorded intangible assets. Management considered current and
anticipated industry conditions and recent changes in its business strategies
and concluded that an impairment charge of $21.0 million in the second quarter
of fiscal 1999 was appropriate. The charge includes a write-off of $7.9 million
in goodwill and $2.2 million in certificates of need associated with the
specific locations to be closed in the third quarter of fiscal 1999 and $10.9
million in goodwill related to changes within certain locations arising from the
cancellation of certain contracts which impacted location profitability and the
termination of certain non-core activities.
For purposes of assessing impairment, assets were grouped at the location level,
which is the lowest level for which there are identifiable cash flows that are
largely independent. Asset impairment was deemed to exist if the Company's
estimate of undiscounted cash flows was less than the carrying amount of the
long-lived assets and goodwill at the location. In estimating future cash
flows, management used its best estimates of anticipated operating results over
the remaining useful life of the assets. For those locations where asset
impairment was identified, the amount of impairment was measured by comparing
the carrying amount of the long-lived assets and goodwill to the estimated fair
value for each location. Fair value was estimated using a valuation technique
based on the present value of the expected future cash flows.
In conjunction with the impairment evaluation, management reduced the
amortization periods for intangible assets at March 31, 1999 from 30 and 25
years to 20 years. This change in estimate will be accounted for prospectively.
Interest expense increased $1.9 million, or 101%, to $3.9 million in the three
months ended March 31, 1999, from $1.9 million in the three months ended March
31, 1998. The increase was primarily the result of a $42.0 million increase in
the Company's average debt outstanding incurred to finance acquisitions and the
Company's working capital, compared to the prior fiscal year period. The
increase was also due to an increase in interest rates related to the Company's
issuance of $75.0 million aggregate principal amount of 10% Senior Subordinated
Notes due 2008 and the increase in the interest rates under Amendment No. 4 of
the Credit Agreement.
Income tax expense (benefit) decreased $2.0 million to ($0.6) million in the
three months ended March 31, 1999, from $1.4 million in the three months ended
March 31, 1998. In the three months ended March 31, 1999, an income tax benefit
was recorded to the extent of the net deferred tax liability of $0.6 million.
The Company recorded a $10.6 million valuation allowance against the remaining
$10.6 million of net deferred tax assets generated this quarter as a result of
net operating losses. In recording the valuation allowance, management
considered whether it is more likely than not that some or all of the deferred
tax assets will be realized. This analysis includes considering scheduled
reversal of deferred tax liabilities, projected future taxable income, carryback
potential,
16
<PAGE>
and tax planning strategies.
Six Months Ended March 31, 1999 Compared to Six Months Ended March 31, 1998
Net revenue increased $15.3 million, or 11%, to $156.3 million in the six months
ended March 31, 1999, from $141.0 million in the six months ended March 31,
1998. The Company's acquisitions accounted for approximately $19.4 million of
the increase in net revenue offset by a decline in net revenue from existing
branch offices of $4.1 million. The decline in net revenue was 3% for the six
months ended March 31, 1999. Of the $15.3 million increase in net revenue for
the six months ended March 31, 1999, pediatric health care net revenue accounted
for $3.5 million. Increased pediatric health care net revenue for the six
months ended March 31, 1999, was primarily attributable to the Company's
acquisitions offset by a decline in internal growth primarily driven by a
significant increase in unstaffed pediatric nursing cases due to location
specific nursing shortages for the six months ended March 31, 1999 compared to
the six months ended March 31, 1998. Adult health care net revenue accounted
for a decrease of $1.1 million for the six months ended March 31, 1999.
Increased adult health care net revenue for the six months ended March 31, 1999,
attributable to the Company's acquisitions was offset by a decline in net
revenue from existing branch offices primarily the result of the termination of
contracts for adult infusion services during the six months ended March 31,
1999. Medical testing services net revenue accounted for $12.9 million of the
increase in net revenue for the six months ended March 31, 1999, primarily due
to the December 1997 acquisition of PMI which added $11.6 million in net revenue
for the period. In the six months ended March 31, 1999 the Company derived
approximately 71% of its net revenue from commercial insurers and other private
payors, 24% from Medicaid and 5% from Medicare.
Operating salaries, wages and employee benefits consist primarily of branch
office employee costs. Operating salaries, wages and employee benefits
increased $1.9 million, or 3%, to $59.0 million in the six months ended March
31,1999, from $57.1 million in the six months ended March 31, 1998. The
increase was primarily due to the Company's acquisitions which added
approximately $6.7 million offset by a decrease of $4.8 million in internal
operations. As a percentage of net revenue, operating salaries, wages and
employee benefits for the six months ended March 31, 1999, decreased to 38% from
41% in the six months ended March 31, 1998. This decrease as a percentage of
net revenue is due to the PMI acquisition in December 1997, which has a lower
salaries, wages and employee benefits component as compared to the medical
services division.
Other operating costs include medical supplies, branch office rent, utilities,
vehicle expenses, independent medical testing technician payments and cost of
sales. Cost of sales consists primarily of the costs of pharmacy products sold.
Other operating costs increased $15.4 million, or 28%, to $70.9 million in the
six months ended March 31, 1999, from $55.5 million in the six months ended
March 31, 1998. As a percentage of net revenue, other operating costs for the
six months ended March 31, 1999, increased to 45% from 39% in the six months
ended March 31, 1998. Of the increase, $9.3 million relates to acquisitions,
primarily the acquisition of PMI in the medical testing business. The remaining
increase relates to: (1) relocating selected offices to new facilities and
support costs related to the newly developed case management and billing system
in the medical testing division; (2) increased costs for infusion services; and
(3) higher fixed costs as a percentage of declining net revenue in the medical
services division.
17
<PAGE>
Corporate, general and administrative costs increased $2.5 million, or 25%, to
$12.4 million in the six months ended March 31, 1999, from $9.9 million in the
six months ended March 31, 1998. As a percentage of net revenue, corporate,
general and administrative costs for the six months ended March 31, 1999,
increased to 7.9% from 7.0% in the six months ended March 31, 1998. Of the
increase, $1.7 million relates to the December 1997 acquisition of PMI in the
medical testing business. The Company has experienced high turnover within the
reimbursement department, including senior level management. This has resulted
in increased recruiting, overtime and temporary labor costs. In the medical
testing division, additional field sales staff were hired to increase market
penetration in the six months ended March 31, 1999, when compared to the six
months ended March 31, 1998.
Provision for doubtful accounts consists of the amount of accounts receivable
that management estimates to be uncollectible. During the six months ended
March 31, 1999 the Company's provision for doubtful accounts increased
approximately $6.6 million, or 168%, to $10.5 million from $3.9 million in the
six months ended March 31, 1998. During the six months ended March 31, 1999 the
Company experienced a significant deterioration in the aging of its accounts
receivable and an increase in the days sales outstanding ("DSO"). The increase
in the provision during the six months ended March 31, 1999 is primarily
attributable to: (1) continued difficulties in the health care reimbursement
environment including extended payor claim review and delayed payment; (2)
significant organizational disruption caused by excessive personnel turnover in
the Company's reimbursement department including all levels of reimbursement
management; (3) increased personnel resources dedicated to the resolution of the
medical testing division case management and billing system issues; (4)
continued assessment of payor requirements and payment performance; and (5)
continued claim formatting and electronic transmission difficulties with a
significant number of large payors. Due to the above mentioned issues and
ongoing changes in the business environment, the Company's management reassessed
its estimate of the allowance for doubtful accounts resulting in an increase in
the allowance provision.
Depreciation and amortization increased $1.0 million, or 23%, to $5.1 million in
the six months ended March 31, 1999 from $4.1 million in the six months ended
March 31, 1998. As a percentage of the Company's net revenue, depreciation and
amortization costs for the six months ended March 31, 1999 increased to 3.3%
from 2.9% in the six months ended March 31, 1998. The increase in depreciation
was primarily due to the newly developed medical testing case management and
billing system, as well as the amortization of goodwill from the Company's
acquisitions.
An impairment of intangible assets was recorded during the six months ended
March 31, 1999. The impairment resulted primarily from the impact on certain
non-core business locations and activities of the Company's strategic plan
formulated in the second quarter of fiscal 1999 which will focus the Company on
its core businesses. See further discussion in Recent Developments.
Additionally, certain locations were negatively impacted by the cancellation of
certain large contracts which impacted the future profitability of the
locations. Finally, certain second quarter of fiscal 1999 conditions, including
failure of the Company to meet management projections, declining gross margins,
recurring location operating losses and slower than expected progress in
improving collections were identified by management as indications of potential
intangible asset impairment. Management conducted an evaluation of the carrying
value of the Company's recorded intangible assets. Management considered current
and anticipated industry conditions and recent changes in its business
strategies
18
<PAGE>
and concluded that an impairment charge of $21.0 million in the second quarter
of fiscal 1999 was appropriate. The charge includes a write-off of $7.9 million
in goodwill and $2.2 million in certificates of need associated with the
specific locations to be closed in the third quarter of fiscal 1999 and $10.9
million in goodwill related to changes within certain locations arising from the
cancellation of certain contracts which impacted location profitability and the
termination of certain non-core activities.
For purposes of assessing impairment, assets were grouped at the location level,
which is the lowest level for which there are identifiable cash flows that are
largely independent. Asset impairment was deemed to exist if the Company's
estimate of undiscounted cash flows was less than the carrying amount of the
long-lived assets and goodwill at the location. In estimating future cash
flows, management used its best estimates of anticipated operating results over
the remaining useful life of the assets. For those locations where asset
impairment was identified, the amount of impairment was measured by comparing
the carrying amount of the long-lived assets and goodwill to the estimated fair
value for each location. Fair value was estimated using a valuation technique
based on the present value of the expected future cash flows.
In conjunction with the impairment evaluation, management reduced the
amortization periods for intangible assets at March 31, 1999 from 30 and 25
years to 20 years. This change in estimate will be accounted for prospectively.
Interest expense increased $3.6 million, or 105%, to $7.0 million in the six
months ended March 31, 1999, from $3.4 million in the six months ended March 31,
1998. The increase was primarily the result of a $50.8 million increase in the
Company's average debt outstanding incurred to finance acquisitions and the
Company's working capital, compared to the prior fiscal year period. The
increase was also due to an increase in interest rates related to the Company's
issuance of $75.0 million aggregrate principal amount of 10% Senior Subordinated
Notes due 2008 and the increase in the interest rates under Amendment No. 4 of
the Credit Agreement.
Income tax expense (benefit) decreased $3.4 million to ($0.6) million in the six
months ended March 31, 1999, from $2.9 million in the six months ended March 31,
1998. In the six months ended March 31, 1999, an income tax benefit was
recorded to the extent of the net deferred tax liability of $0.6 million. The
Company recorded a $10.6 million valuation allowance against the remaining $10.6
million of net deferred tax assets generated during the six months ended March
31, 1999, as a result of net operating losses. In recording the valuation
allowance, management considered whether it is more likely than not that some or
all of the deferred tax assets will be realized. This analysis includes
considering scheduled reversal of deferred tax liabilities, projected future
taxable income, carryback potential, and tax planning strategies.
Liquidity and Capital Resources
Operating Cash Flow
The Company's operating cash flows are significantly affected by changes in
accounts receivable, which have grown substantially over time largely as a
result of the Company's net revenue growth and slowing collections. See
"Accounts Receivable" below. Cash used in operating activities was
19
<PAGE>
$1.0 million for the six months ended March 31, 1999 compared to $11.1 million
for the same period in the prior year. The increase in accounts receivable in
the six months ended March 31, 1998 was due, in part, to the acquisition of PMI.
The DSO was 117 days as of March 31, 1999 and 107 days as of September 30, 1998,
based on the net revenue for the last quarter of the period. For the three and
six months ended March 31, 1999, the increase in DSO is largely attributable to
the slower collections in the medical services business.
The Company's investments in property and equipment are attributable largely to
purchases of medical equipment that is rented to patients and computer equipment
needed for the Company's new systems, primarily billing and collection systems
for both medical services and medical testing and financial systems. Capital
expenditures for computer equipment and software development have been
substantially completed.
The Company cannot be certain that cash flows from operations or cash on hand
will be adequate to allow the Company to continue to meet its debt service
obligations, including interest payments, working capital and other capital
expenditures. The Company is currently reviewing its future capital
requirements and financing alternatives. These alternatives may be severely
limited as a result of the current home health care industry environment. There
can be no assurance that the Company's internally generated funds and funds from
alternative financings, if any, will be sufficient to fund the Company's
operations.
Accounts Receivable
The Company experienced a significant deterioration in the aging of its accounts
receivable and an increase in the DSO. The deterioration is primarily
attributable to: (1) continued difficulties in the health care reimbursement
environment including extended payor claim review and delayed payment; (2)
significant organizational disruption caused by excessive personnel turnover in
the Company's reimbursement department including all levels of reimbursement
management; (3) increased personnel resources dedicated to the resolution of the
medical testing division case management and billing system issues; (4)
continued assessment of payor requirements and payment performance; and (5)
continued claim formatting and electronic transmission difficulties with a
significant number of large payors. Due to the above mentioned issues and
ongoing changes in the business environment, the Company's management reassessed
its estimate of the allowance for doubtful accounts resulting in an increase in
the allowance provision. A key component of the Company's strategic plan
involves an organizational reengineering of the reimbursement process. However,
there can be no assurances that these efforts will result in the Company
realizing operating improvements and improved cash flow.
Impairment of Intangible Assets
An impairment of intangible assets was recorded during the quarter ended March
31, 1999. The impairment resulted primarily from the impact on certain non-core
business locations and activities of the Company's strategic plan formulated in
the second quarter of fiscal 1999 which will focus the Company on its core
businesses. See further discussion in Recent Developments. Additionally,
certain locations were negatively impacted by the cancellation of certain large
contracts which impacted the future profitability of the locations. Finally,
certain second quarter of fiscal 1999 conditions, including
20
<PAGE>
failure of the Company to meet management projections, declining gross margins,
recurring location operating losses and slower than expected progress in
improving collections were identified by management as indications of potential
intangible asset impairment. Management conducted an evaluation of the carrying
value of the Company's recorded intangible assets. Management considered current
and anticipated industry conditions and recent changes in its business
strategies and concluded that an impairment charge of $21.0 million in the
second quarter of fiscal 1999 was appropriate. The charge includes a write-off
of $7.9 million in goodwill and $2.2 million in certificates of need associated
with the specific locations to be closed in the third quarter of fiscal 1999 and
$10.9 million in goodwill related to changes within certain locations arising
from the cancellation of certain contracts which impacted location profitability
and the termination of certain non-core activities.
In conjunction with the impairment evaluation, management reduced the
amortization periods for intangible assets at March 31, 1999 from 30 and 25
years to 20 years. This change in estimate will be accounted for prospectively.
Long-Term Debt
Senior Subordinated Notes
On April 16, 1998, the Company issued, in a private placement, $75.0 million
aggregate principal amount of 10% Senior Subordinated Notes due 2008, which were
subsequently replaced on May 12, 1998, with $75.0 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
Credit Agreement. Interest on the Notes accrues from April 16, 1998, 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 redemption
prices set forth in the Indenture. 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. A
default and acceleration of any indebtedness and failure to pay any indebtedness
of the Company at maturity results in a default under the Notes.
Credit Agreement
On July 31, 1998, the Company provided notice to its lenders, as required under
the terms of the Credit Agreement, of non-compliance with certain financial
covenants contained in the Credit Agreement. As a result, the Credit Agreement
was further amended on August 13,1998 ("Amendment No. 2"), waiving 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 reduced total
borrowings allowed under the Credit Agreement from $100.0 million to $75.0
million, and changed the commitment fees and applicable margins. Amendment No.
2 also granted the Company a waiver to permit the Company to comply with its
contractual obligations relating to the
21
<PAGE>
PMI acquisition by allowing the Company to repurchase at the previously
guaranteed price the shares issued to ChoicePoint in the PMI transaction. The
Security Agreement executed in connection with Amendment No. 2 granted to the
lenders under the Credit Agreement, subject to certain permitted liens and
exceptions, a security interest in substantially all of the assets of the
Company.
On December 4, 1998 the Company provided notice to its lenders, as required
under the terms of the Credit Agreement, as amended, of non-compliance with
certain financial covenants contained in the Credit Agreement. On December 24,
1998, the Credit Agreement was further amended ("Amendment No. 3"), waiving the
default under the Credit Agreement through January 29, 1999 and providing the
Company temporary borrowing availability while revised financial covenants and
other modifications were negotiated. On January 8, 1999, an amendment
("Amendment No. 4") was signed with a revised set of financial covenants. The
new financial covenants continue to require certain liquidity ratios and DSO
targets to be met. Amendment No. 4 also revised the Credit Agreement
termination date from August 13, 2002 to October 1, 2000 and reduced the total
commitment from $75 million to $70 million, with a further reduction to $65
million on June 30, 1999.
On April 23, 1999, the Company provided notice to its lenders, as required under
the terms of the Credit Agreement, as amended, of non-compliance with certain
financials covenants contained in the Credit Agreement. On May 13, 1999 the
Credit Agreement was further amended ("Amendment No. 5"), waiving the default
under the Credit Agreement, revising the financial covenants and reducing the
total commitment from $70.0 million to $65.0 million effective May 13, 1999.
Further, Amendment No. 5 revised the interest payment date to be monthly and
extended the time period which prohibits the Company from borrowing for
acquisitions. The new covenants become more restrictive over the remaining life
of the Credit Agreement which, in the opinion of management, is reflective of
the anticipated improvements in the business. Management believes that the
Company will remain in compliance with the new financial covenants. Though not
anticipated, if the Company fails to remain in compliance with the new financial
covenants it could have a material adverse effect on the Company.
The financial statements for the period ended March 31, 1999 are in compliance
with the new financial covenants contained in Amendment No. 5.
Under the Credit Agreement, as amended, commitment fees were set at 0.500% per
annum on the average daily unused portion of the loan facility. On the
effective date of Amendment No. 5, all LIBOR and swingline borrowings were
converted to a base rate loan bearing interest at base rate plus 2.50%. Base
rate is defined as the greater of (a) Federal Funds rate plus 1/2 of 1% or (b)
prime rate. At March 31, 1999, the interest rates on LIBOR and swingline
borrowings under the Credit Agreement ranged from 8.48% to 8.69%. Outstanding
borrowings under the Credit Agreement at March 31, 1999 were approximately $64.0
million.
At March 31, 1999, total borrowings under the Notes and the Credit Agreement
were approximately $139.0 million.
Interest Rate Swap Agreement
22
<PAGE>
At March 31, 1999, 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%. The interest
rate differential to LIBOR is received or paid and 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.
Year 2000 Compliance
General Description of the Year 2000 Issue
As the Year 2000 approaches, an issue impacting all companies has emerged
regarding how existing application software programs and computer operating
systems ("Systems"), and other operating equipment ("Equipment") which use
embedded computer chips can accommodate this date value. The Year 2000 Issue is
the result of computer programs being written using two digits rather than four
to define the applicable year. Any of the Company's Systems that have date-
sensitive software or embedded chips may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities.
The Company's plan to resolve the Year 2000 Issue (the "Year 2000 Plan")
involves the following four phases: assessment, remediation, testing, and
implementation. In addition to the Company's internal initiatives, the Company
has requested information about the Year 2000 compliance status of its material
suppliers and payors through internally developed Year 2000 surveys and written
warranty information. Based solely on such inquiry and research and the
Company's Year 2000 assessment to date (discussed below), management does not
currently believe that the Company should incur significant operating expenses
or be required to invest heavily in Systems improvements or Equipment relating
to the Year 2000 Issue, however, the Company does expect to experience payment
delays, particularly from federal and state welfare programs. It is impossible
to quantify the effects of any payment delays at this time, but the Company will
continue to monitor and update Year 2000 compliance efforts of the Company and
of its material suppliers and payors.
Status of Year 2000 Plan
As indicated on the Year 2000 chart set forth below, the Company has completed
approximately 98% of its assessment of all Systems that could be significantly
affected by the Year 2000 issue. Based on the Company's continuing assessment,
the Company is not modifying or replacing significant portions of its Systems.
Testing of Systems is being actively performed on all Systems that could be
significantly affected by the Year 2000 issue.
The remediation phase of the Year 2000 Plan for the Company's information
technology systems is approximately 80% complete. Remediation involves
upgrading or replacing Systems and equipment which the assessment phase
indicates are not Year 2000 compliant. Remediation of the critical
23
<PAGE>
software systems is essentially complete. Non Year 2000 compliant hardware is
now being replaced throughout the Company. The testing phase of the Year 2000
plan is approximately 65% complete. Testing involves operation of Systems and
Equipment using dates after December 31, 1999. The Company expects to complete
testing by July 15, 1999. The revised completion date was extended by two months
due to the extensiveness of testing required for recently included improvements
in the invoicing and pricing modules of key Systems. This change in planned
completion dates is primarily due to significant improvements and changes to the
programs in several critical applications.
The implementation phase of the Year 2000 Plan begins upon completion of
material phases of remediation and testing, and involves operating under Year
2000 conditions. It also encompasses contingency plans for any problems arising
when Year 2000 dates begin to affect the Company's Systems and Equipment and
those of third party suppliers and payors.
Importance of Third Party Exposure to the Year 2000
Certain of the Company's Systems interface directly with significant third party
vendors and payors including federal and state Medicare and Medicaid agencies.
The Company also conducts business electronically with certain external parties,
including some payors and vendors. Management does not know at this time, what
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.
The Company has requested information regarding Year 2000 readiness from its
significant payors including commercial insurance companies, and has sought to
gather information about the Year 2000 compliance status of the federal and
state Medicare and Medicaid agencies with which it conducts business through its
Year 2000 surveys and through research of external information sources,
including government sources. To date, the Company has received a limited
number of responses to its Year 2000 survey from commercial insurance carriers,
no direct response to its Year 2000 survey from any state Medicaid agency, and
only one response from a Medicare carrier.
At this juncture, the Company is not aware of any specific payor with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of ensuring
that such payors, including federal and state Medicare and Medicaid agencies
will be Year 2000 ready. The inability of these payors to complete their Year
2000 resolution process in a timely fashion could have a material adverse
impact on the Company's ability to bill and collect accounts receivable. The
effect of non-compliance by such payors is not determinable.
Estimated Costs
The Company has, will and will continue to utilize both internal and external
resources to reprogram, or replace, test, and implement the Systems and
Equipment for Year 2000 modifications. The original estimated costs for the
Year 2000 project excluded consulting fees that are estimated to be
approximately $190,000. The estimated total has been revised to be
approximately $440,000 and is being funded through operating cash flows.
Through March 31, 1999, the Company has incurred approximately $180,500, related
to all phases of the Year 2000 project. The total remaining project costs is
currently estimated at $259,500.
24
<PAGE>
Contingency Plans
The Company already has certain contingency planning and safeguards in place in
the event of system shutdowns and problems including: diagrams for
reconstruction of databases, backup computer tapes of all network information
which are stored offsite and a help desk available during working hours to solve
computer problems. However, in response to Year 2000 issues, the Company is now
formulating a more specific disaster recovery and contingency plan for certain
critical applications. This plan involves, among other things, manual
workarounds, hiring additional personnel, and adjusting staffing strategies.
Additional safeguards are also being considered. Specifically, the Company
plans to revert to manual billing and collection, if required and keep a "hard
copy" of System and billing information at the end of the 1999 and beginning of
the 2000 calendar years. The Company also intends to have a backup plan for its
telephone systems and a full inventory of critical medical supplies and
equipment on hand at the end of 1999. There can be no assurance that the Year
2000 issues will not impact the Company even if any contingency plans are
implemented, which could have a material adverse effect on the Company.
Risks
Management of the Company believes that it has an effective Year 2000 Plan in
place to resolve the Year 2000 issues in a timely manner. As noted above, the
Company has not yet completed all necessary phases of the Year 2000 Plan. In
the event that the Company does not complete critical portions of such plan, the
Company could be unable to take customer orders, invoice customers or collect
payments. Furthermore, the Company has no means of ensuring that such payors,
including federal and state Medicare and Medicaid agencies will be Year 2000
compliant. The inability of these payors to be Year 2000 compliant could have a
material adverse effect on the Company. In addition, disruptions in the economy
generally resulting from Year 2000 issues could also materially adversely affect
the Company, and the Company could be subject to litigation for Systems or
Equipment failure or malfunctions relating to Year 2000 problems. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
25
<PAGE>
Year 2000 Disclosure Chart(1)
<TABLE>
<CAPTION>
Resolution Phases(2)
--------------------------------------------------------------------------------------------------------------------
Assessment Remediation Testing Implementation
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Information 98% Complete 80% Complete 65% Complete 50% Complete
Technology
Systems Expected completion Expected completion Expected completion
date, July 15, 1999 date, July 15, 1999 date, August 30, 1999
--------------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------------
Operating 100% Complete 100% Complete 100% Complete 100% Complete
E Equipment with
x Embedded Chips
p or Software(3)
o --------------------------------------------------------------------------------------------------------------------
s --------------------------------------------------------------------------------------------------------------------
u Products(4) N/A N/A N/A N/A
r
e
--------------------------------------------------------------------------------------------------------------------
T 3rd Party(5) 100% Complete for 25% Complete 25% Complete 0% Complete
y direct system
p interface; 75% Expected completion Expected completion
e Complete for all Develop contingency date for system date for system
other material plans as appropriate, interface work, interface work,
exposures March 31, 1999 September 30, 1999 November 30, 1999
Expected Implement contingency
completion date plans or other
for surveying all alternatives as
third parties: in necessary, December
process 31, 1999
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon estimates derived from our detailed master Year 2000 plan.
Percentages are approximate and best estimates.
(2) Where systems have been designed with Year 2000 in mind, but not yet
validated, a weighted success factor has been included. The assumption is
that the system will execute with minimal, if any, remediation. For
example, a system not intended to be Year 2000 compliant, would start with
a zero weighting factor. A system designed for Year 2000 compliance is
considered to be at least 75% completed.
(3) Letters from our key suppliers and payors stating their compliance for
critical Year 2000 issues have been placed on file. The Company does not
intend to test medical equipment any further.
(4) The category Products does not apply to the Company in general and
therefore is not applicable.
(5) Percentages reflect third party systems that interface directly with the
Company's systems. The effect of non-compliance by other third party
payors is not determinable at this time and may be beyond the Company's
control.
26
<PAGE>
QUARTERLY OPERATING RESULTS AND SEASONALITY
The Company's quarterly results may vary significantly depending primarily on
factors such as rehospitalizations of patients, the time of new branch office
openings and pricing pressures due to legislative and regulatory initiatives to
contain health care costs. The Company's operating results for any particular
quarter may not be indicative of the results for the full fiscal year.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On March 11, 1999, a putative class action complaint was filed against the
Company in the United States District Court for the Northern District of
Georgia. The Company and certain of its then current officers and directors
were named as defendants. In general, the plaintiffs allege that prior to the
decline in the price of the Company's common stock on July 28, 1998, there were
violations of the Federal Securities Laws arising from misstatements of material
information in and/or omissions of material information from certain of the
Company's securities filings and other public disclosures. The complaint
purports to be filed on behalf of all persons who purchased the Company's common
stock during the period from December 23, 1997 through and including July 29,
1998.
To the Company's knowledge, no other putative class action complaints were filed
within the sixty day time period provided for in the Private Securities
Litigation Reform Act. The Company expects that the plaintiffs and their
counsel will be appointed lead plaintiffs and lead counsel and that an amended
complaint will be filed. The Company and the individuals named as defendants
deny that they have violated any of the requirements or obligations of the
Federal Securities Laws; however, there can be no assurance that the Company
will not sustain material liability as a result of or related to this
shareholder suit.
ITEM 4. Submission of Matters to a Vote of Security Holders
The 1999 Annual Meeting of Shareholders of the Company was held on February 19,
1999. Proxies with regard to the matters to be voted upon at the Annual Meeting
were solicited under Regulation 14A of the Securities Exchange Act of 1934, as
amended. Set forth below is a brief description of each matter voted upon at
the Annual Meeting and the results of the voting on each matter.
(a) Election of the two directors named below for a term of three years
expiring at the 2002 Annual Meeting of Shareholders. There was no
solicitation in opposition to any of the nominees listed in the proxy
statement, and each of the nominees was elected.
Votes Broker
------------------- ----------------------
Nominees For Withheld Abstentions Non-votes
----------------- --------- -------- ----------- ---------
Adam O. Holzhauer 5,807,750 73,655 - -
Michael J. Finn 5,807,750 73,655 - -
27
<PAGE>
(b) Ratification of the appointment of Ernst & Young LLP as independent
auditors of the Company for the fiscal year ending September 30, 1999.
The Shareholders approved the proposal.
Votes
--------------------------------------------
For Against Abstentions
--------- ------- -----------
5,799,385 29,357 52,653
ITEM 5. Other Information
On April 26, 1999, the Company issued a press release announcing the resignation
of Stephen M. Mengert as Senior Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company. James M. McNeill, the Company's Chief
Accounting Officer has been named as his replacement.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
The following exhibits are filed as part of this Report.
10.20 Amendment No. 5 to the Credit Agreement, dated May 13, 1999,
filed herewith.
27 Financial Data Schedule
(b) Report on Form 8-K
------------------
On March 25, 1999, the Registrant filed a Current Report on Form 8-K
under Item 5, announcing that the listing of the Company's Common Stock
moved to The Nasdaq SmallCap Market effective March 22, 1999.
28
<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: May 21, 1999 By: /s/ James M. McNeill
--------------------------------
James M. McNeill
Senior Vice President,
Chief Financial Officer,
Treasurer and Secretary
(Duly authorized officer and
Principal Financial Officer)
29
<PAGE>
INDEX OF EXHIBITS
Page No.
--------
10.20 Amendment No. 5 to the Credit Agreement, dated May 13, 1999..... 31
27 Financial Data Schedule......................................... 41
30
<PAGE>
EXHIBIT 10.20
AMENDMENT NO. 5
THIS AMENDMENT NO. 5 (the "Amendment") dated as of May 13, 1999, 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 no otherwise defined shall have the meanings provided in the
Credit Agreement.
W I T N E S S E T H
WHEREAS, a 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 that the Lenders make certain
amendments to the Credit Agreement;
WHEREAS, the requested amendments require the consent of the Required
Lenders;
WHEREAS, the Required Lenders, for and on behalf of the Lenders, have
agreed to the requested amendments 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 agrees as follows:
1. The Credit Agreement is amended and modified in the following respects:
1.1 The following definitions in Section 1.1 are amended and modified
to read as follows:
"Aggregate Revolving Committed Amount" means aggregate amount of
------------------------------------
Revolving Commitments in effect from time to time, being from May 13,
1999 (the date of Amendment No. 5), and
<PAGE>
thereafter, SIXTY-FIVE MILLION DOLLARS ($65,000,000).
"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, to the extent deducted in arriving
----
at net income, the sum of the following: (a) interest expense
(including amortization of debt discount and premium, the interest
component under Capital Leases and the implied interest component
under Securitization Transactions) plus (b) all provisions for
----
Federal, state or other domestic and foreign income taxes plus (c)
----
depreciation and amortization, plus (d) special non-cash charges of up
----
to (i) $21,000,000 for asset impairment and $4,000,000 of incremental
provision for doubtful accounts taken against earnings in the second
fiscal quarter of 1999, (ii) $5,000,000 for asset impairment and
$20,000,000 for incremental provision for doubtful accounts in the
third fiscal quarter of 1999, and (iii) $1,200,000 for non-recurring
costs related to the closing of locations in the fourth quarter of
1999, in each case determined in accordance with GAAP applied on a
consistent basis.
"Interest Payment Date" means the last day of each month and the
---------------------
Termination Date. If an Interest Payment Date falls on a date which
is not a Business Day, such Interest Payment Date shall be deemed to
be the next succeeding Business Day.
In addition, the definition of "Permitted Investments" is amended and
modified by deleting subsection (xiv), adding the word "and" before
"(xiii)", and a period after "(xiii)".
1.2 Amendment Fee. The Borrower agrees to pay to the Administrative
-------------
Agent for the ratable benefit of the Lenders an amendment fee ("Amendment
Fee") in the amount of $325,000, fully earned on the date of this
Amendment, one-half of which shall be due and payable on May 13, 1999, and
one-half of which shall be due and payable on the earlier of (a) the date
all Obligations are paid in full and each Lender's Revolving Commitment is
terminated, and (b) August 15, 1999.
1.3 Borrower, Swing Line Lender, and Lenders hereby agree that the
Swing Line Commitment is terminated, effective immediately.
1.4 Notwithstanding anything in the Credit Agreement or in any other
Loan Document, the Borrower may not request, and Administrative Agent and
Lenders will not make, Eurodollar Loans, and each Eurodollar
-2-
<PAGE>
Loan outstanding on the date hereof shall be converted to a Base Rate Loan,
effective immediately.
1.5 Section 7.2 is amended by adding the following subparagraphs (f)
and (g):
(f) Promptly after each such development occurs, detailed
information with respect to significant developments in any material
transaction, and in any event, information with respect to progress in
connection with that transaction in a conference call held not less
frequently than once every other week, in addition to such other
written and verbal information with respect thereto as any Lender
shall reasonably request.
(g) Weekly Cash Report. On or before Wednesday of the following
------------------
week, a weekly cash receipts and disbursements report for the
preceding week in form and substance satisfactory to Required Lenders.
1.6 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
---------------------------
quarter to occur during the periods set forth below, the Consolidated
Leverage Ratio shall be not greater than:
January 1, 1999 through March 31, 1999 10.00:1.0
April 1, 1999 through June 30, 1999 13.00:1.0
July 1, 1999 through September 30, 1999 8.00:1.0
October 1, 1999 through December 31, 1999 6.00:1.0
January 1, 2000 through March 31, 2000 4.00:1.0
April 1, 2000 and thereafter 3.50:1.0
(b) Consolidated Fixed Charge Coverage Ratio. As of the end of
----------------------------------------
each fiscal quarter to occur during the periods set forth below, the
Consolidated Fixed Charge Coverage Ratio shall be not less than:
January 1, 2000 and thereafter 1.40:1.0
(c) Consolidated Net Worth. On March 31, 2000, and at all times
----------------------
thereafter, Consolidated Net Worth shall be not less than the sum of
85% of Consolidated Net Worth as of the Closing Date
-3-
<PAGE>
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.
(d) Consolidated Senior Leverage Ratio. As of the end of each
----------------------------------
fiscal quarter to occur during the periods set forth below, the
Consolidated Senior Leverage Ratio shall be not greater than:
January 1, 1999 through March 31, 1999 5.00:1.0
April 1, 1999 through June 30, 1999 6.00:1.0
July 1, 1999 through September 30, 1999 4.00:1.0
October 1, 1999 through December 31, 1999 3.00:1.0
January 1, 2000 and thereafter 1.75:1.0
(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:
Fiscal Quarter ending on or about March 31, 1999 $900,000
Fiscal Quarter ending on or about June 30, 1999
and thereafter $1,500,000
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 quarter
----------------------
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
-------------------------
January 1, 1999 through March 31, 1999 130 days
April 1, 1999 through June 30, 1999 105 days
July 1, 1999 through September 30, 1999 110 days
October 1, 1999 through December 31, 1999 and
thereafter 115 days
paramedical testing business
----------------------------
-4-
<PAGE>
January 1, 1999 through March 31, 1999 110 days
April 1, 1999 through June 30, 1999 110 days
July 1, 1999 through September 30, 1999 105 days
October 1, 1999 through December 31, 1999 and
thereafter 100 days
provided, however, that Days Sales Outstanding for the medical
services business assume a $20,000,000 special incremental charge in
the third fiscal quarter of 1999 for doubtful accounts; to the extent
such charge shall be less than $20,000,000, minimum Days Sales
Outstanding will increase to an amount demonstrated by the Borrower to
be reasonable and a direct result of not taking such charge in a
schedule attached to the Officer's Certificate required to be
delivered for that quarter pursuant to Section 7.2(b).
(g) Consolidated EBITDA. From January 1, 1999 through the end of
-------------------
each of the following months, Consolidated EBITDA on a cumulative
basis shall not be less than the following:
March, 1999 2,100,000
April, 1999 2,400,000
May, 1999 3,100,000
June, 1999 5,400,000
July, 1999 5,900,000
August, 1999 6,900,000
September, 1999 10,500,000
October, 1999 11,300,000
November, 1999 12,900,000
December, 1999 18,700,000
January, 2000 19,500,000
February, 2000 21,100,000
March, 2000 26,900,000
1.7 Subparagraph (h) of Section 8.1 is hereby amended in its entirety
to read as follows:
(h) other unsecured Indebtedness of the Company and/or the
Borrower incurred before May 6, 1999 of up to $10,000,000 in the
aggregate at any time outstanding; and
1.8 Subparagraphs (a) and (c) of Section 8.4 are hereby amended in
their entirety to read as follows:
(a) Enter into a transaction of merger or consolidation.
-5-
<PAGE>
(c) Other than in connection with the Non-Qualified Plan, after
May 6, 1999, acquire all or any portion of the capital stock or other
ownership interest in any Person or all or any substantial portion of
the assets, property and/or operations of a Person.
1.9 Section 8.10 is hereby amended in its entirety to read as
follows:
8.10 Restricted Payments.
-------------------
Other than with respect to the Non-Qualified Plan, and share
guaranty payments to Medical Equipment and Supply, Inc., in the amount
of $289,942.38 each on June 1, 1999, and July 15, 1999, and share
guaranty payments to Pediatric Nursing Service, Inc., in the amount of
$129,088.84, on May 20, 1999, make or permit any Restricted Payments.
2. In accordance with the provisions of Section 3.4(a) of the Credit
Agreement, the Revolving Commitments are hereby permanently reduced by FIVE
MILLION DOLLARS ($5,000,000) to a revised Aggregate Revolving Committed Amount
of SIXTY-FIVE MILLION DOLLARS ($65,000,000), subject to further reduction as
provided in the definition of "Aggregate Revolving Committed Amount" and as
otherwise provided in the Credit Agreement.
3. 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 legal opinions of counsel
to the Credit Parties relating to this Amendment; and
(c) receipt by the Administrative Agent for the ratable benefit of the
Lenders the amount of $162,500, being one-half of the Amendment Fee.
4. Each of the Credit Parties hereby represents and warrants that (i) it
has the requisite corporate power and authority to execute, deliver and perform
this Agreement, (ii) it is duly authorized to, and has been authorized by all
necessary corporate action, to execute, deliver and perform under this
Agreement, (iii) it has no claims, counterclaims, offsets or defenses to the
Credit Documents, and the performance of its obligations thereunder, or if it
has any such claims, counterclaims, offsets or defenses, they are hereby waived,
relinquished and released in consideration of the execution and
-6-
<PAGE>
delivery of this Agreement by the Required Lenders, (iv) after giving effect to
this Amendment, the representations and warranties in Section 6 of the Credit
Agreement are true and correct in all material respects (except (x) those which
expressly relate to an earlier period and, (y) with respect to Section 6.6, to
the extent disclosed to the Lenders in a letter dated March 15, 1999, describing
litigation which, if adversely determined, would reasonably be expected to have
a Material Adverse Effect), and (v) after giving effect to this Amendment, no
Default or Events of Default has occurred or is continuing.
5. The Borrower agrees to pay all reasonable costs and expenses of the
Administrative Agent and the Lenders in connection with the Credit Agreement,
including without limitation the reasonable fees and expenses of counsel and
financial consultants to the Administrative Agent and Lenders.
6. 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.
7. 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.
8. 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 - Signature Pages Follow]
-7-
<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/ James McNeill
-----------------
Name: James McNeill
Title: Senior Vice President and Chief Financial Officer
GUARANTORS: PEDIATRIC SERVICES OF AMERICA, INC.,
- ---------- a Delaware corporation
By: /s/ James McNeill
-----------------
Name: James McNeill
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 for the foregoing
PEDIATRIC SERVICES OF AMERICA (CONNECTICUT), INC.,
a Connecticut corporation
PREMIER MEDICAL SERVICES, INC.,
<PAGE>
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
LENDERS: NATIONSBANK, N.A.,
- -------
individually in its capacity as a Lender and in its capacity
as Administrative Agent
By: /s/ Jay T. Wampler
------------------
Name: Jay T. Wampler
--------------
Title: Managing Director
-----------------
TORONTO DOMINION (TEXAS), INC.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Thomas J. McCool
--------------------
Name: Thomas J. McCool
----------------
<PAGE>
Title: Senior Vice President
---------------------
SUNTRUST BANK, ATLANTA
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
MELLON BANK, N.A.
By: /s/ Colleen McCullum
--------------------
Name: Colleen McCullum
----------------
Title: Asst Vice President
-------------------
BANK AUSTRIA CREDITANSTALT CORPORATE
FINANCE, INC.
By: /s/ Robert M. Biringer
----------------------
Name: Robert M. Biringer
------------------
Title: Executive Vice President
------------------------
By: /s/ Carl G. Drake
-----------------
Name: Carl G. Drake
-------------
Title: Vice President
--------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 8,714
<SECURITIES> 0
<RECEIVABLES> 119,728
<ALLOWANCES> 19,976
<INVENTORY> 0
<CURRENT-ASSETS> 116,374
<PP&E> 47,680
<DEPRECIATION> 23,935
<TOTAL-ASSETS> 213,078
<CURRENT-LIABILITIES> 39,966
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 33,249
<TOTAL-LIABILITY-AND-EQUITY> 213,078
<SALES> 156,373
<TOTAL-REVENUES> 156,373
<CGS> 0
<TOTAL-COSTS> 168,311
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 10,510
<INTEREST-EXPENSE> 6,964
<INCOME-PRETAX> (29,245)
<INCOME-TAX> (553)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (28,692)
<EPS-PRIMARY> (4.31)
<EPS-DILUTED> (4.31)
</TABLE>
