<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 DECEMBER 31, 1998
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
COMMISSION FILE NUMBER 0-23946
PEDIATRIC SERVICES OF AMERICA, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 58-1873345
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 TECHNOLOGY PARKWAY, NORCROSS GA 30092-2929
(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 February 2, 1999, the Registrant had 6,652,005 shares of Common Stock,
$0.01 Par Value, outstanding.
Page 1 of 23
Index of Exhibits on page 22
<PAGE>
FORM 10-Q
PEDIATRIC SERVICES OF AMERICA, INC.
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE
NUMBER
<S> <C>
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1998 and September 30, 1998.................3
Condensed Consolidated Statements of Income for
the three months ended December 31, 1998 and 1997........5
Condensed Consolidated Statements of Cash Flows for
the three months ended December 31, 1998 and 1997........6
Notes to Condensed Consolidated Financial
Statements Unaudited.....................................7
ITEM 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations......................9
PART II OTHER INFORMATION
ITEM 4: Submission of Matters to a Vote of Security Holders..........20
ITEM 6: Exhibits and Reports on Form 8-K.............................20
Signatures...................................................21
Index of Exhibits............................................22
</TABLE>
Page-2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
(UNAUDITED) (AUDITED)
-----------------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents.............................................................. $ 8,829 $ 2,008
Accounts receivable, less allowance for doubtful
accounts of $14,731 and $14,008, respectively......................................... 102,386 99,030
Prepaid expenses....................................................................... 548 807
Income taxes receivable................................................................ 2,810 2,898
Deferred income taxes.................................................................. 3,266 3,266
Other current assets................................................................... 6,236 5,837
-------- --------
Total current assets...................................................................... 124,075 113,846
PROPERTY AND EQUIPMENT:
Home care equipment held for rental.................................................... 29,017 28,435
Furniture and fixtures................................................................. 15,855 15,185
Vehicles............................................................................... 891 891
Leasehold improvements................................................................. 931 915
-------- --------
46,694 45,426
Accumulated depreciation and amortization.............................................. (22,223) (20,714)
-------- --------
24,471 24,712
OTHER ASSETS:
Goodwill, less accumulated amortization of
$7,475 and $6,672, respectively....................................................... 88,368 89,172
Certificates of need, less accumulated amortization of
$558 and $508, respectively........................................................... 2,689 2,739
Deferred financing fees, less accumulated
amortization of $647 and $521, respectively........................................... 3,141 3,251
Noncompete agreements, less accumulated amortization of
$914 and $875, respectively........................................................... 146 185
Other.................................................................................. 690 656
-------- --------
95,034 96,003
-------- --------
Total assets.............................................................................. $243,580 $234,561
======== ========
</TABLE>
See accompanying notes.
Page-3
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS--(CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1998
(UNAUDITED) (AUDITED)
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable........................................................................... $ 14,288 $ 11,600
Accrued compensation....................................................................... 12,183 11,147
Accrued insurance.......................................................................... 3,620 3,516
Other accrued liabilities.................................................................. 5,272 7,362
Deferred revenue........................................................................... 1,130 1,101
Current maturities of long-term obligations to related parties............................. 3,214 3,323
Current maturities of long-term obligations................................................ 251 416
-------- --------
Total current liabilities.................................................................. 39,958 38,465
Long-term obligations to related parties, net of current maturities........................ 195 220
Long-term obligations, net of current maturities........................................... 135,052 127,567
Deferred income taxes...................................................................... 3,879 3,879
Minority interest in subsidiary............................................................ 704 747
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; 6,653 shares at December
31, 1998 and 6,652 shares at September 30, 1998 issued and outstanding respectively....... 67 67
Additional paid-in capital................................................................. 50,038 50,037
Retained earnings.......................................................................... 13,687 13,579
-------- --------
Total stockholders' equity................................................................. 63,792 63,683
-------- --------
Total liabilities and stockholders' equity................................................. $243,580 $234,561
======== ========
</TABLE>
See accompanying notes.
Page-4
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
(UNAUDITED)
------------------------------------
1998 1997
----------------- -----------------
<S> <C> <C>
NET REVENUE.............................................. $79,375 $61,559
Costs and expenses:
Operating salaries, wages and employee benefits......... 29,685 26,081
Other operating costs................................... 34,826 22,943
Corporate, general and administrative................... 6,039 3,836
Provision for doubtful accounts......................... 3,165 1,833
Depreciation and amortization........................... 2,442 1,847
------- -------
Total costs and expenses.............................. 76,157 56,540
------- -------
Operating income......................................... 3,218 5,019
Interest expense......................................... 3,094 1,466
------- -------
Income before minority interest and income tax expense... 124 3,553
Minority interest in loss of subsidiary.................. 43 1
------- -------
Income before income tax expense......................... 167 3,554
Income tax expense ...................................... 59 1,432
------- -------
Net income............................................... $ 108 $ 2,122
======= =======
NET INCOME PER SHARE DATA:
Basic............................................... $ 0.02 $ 0.33
======= =======
Diluted............................................. $ 0.02 $ 0.32
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic............................................... 6,653 6,504
======= =======
Diluted............................................. 6,673 6,708
======= =======
</TABLE>
See accompanying notes.
Page-5
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
(UNAUDITED)
--------------------------
1998 1997
-------- -------
<S> <C> <C>
OPERATING ACTIVITIES
Net income............................................................................. $ 108 $ 2,122
Adjustments to reconcile net income to net cash provided by (used in) operating
activities:
Depreciation and amortization....................................................... 2,442 1,847
Provision for doubtful accounts..................................................... 3,165 1,833
Amortization of deferred financing fees............................................. 126 45
Deferred income taxes............................................................... -- 922
Minority interest in loss of subsidiary............................................. (43) (1)
Changes in operating assets and liabilities, net of effects from acquisitions of
businesses:
Accounts receivable................................................................. (6,521) (11,734)
Prepaid expenses and other current assets........................................... (154) (1,764)
Accounts payable.................................................................... 2,688 1,029
Income taxes........................................................................ 89 590
Accrued liabilities................................................................. (922) 2,108
------- --------
Net cash provided by (used in) operating activities.................................... 978 (3,003)
INVESTING ACTIVITIES
Purchases of property and equipment................................................. (1,284) (1,774)
Acquisitions of businesses.......................................................... -- (19,736)
Other, net.......................................................................... (45) (10)
------- --------
Net cash used in investing activities.................................................. (1,329) (21,520)
FINANCING ACTIVITIES
Principal payments on long-term debt................................................ (6,313) (594)
Borrowings on long-term debt........................................................ 13,500 25,000
Deferred financing fees............................................................. (16) --
Proceeds from exercise of stock options............................................. 1 31
------- --------
Net cash provided by financing activities.............................................. 7,172 24,437
------- --------
Increase (decrease) in cash and cash equivalents....................................... 6,821 (86)
Cash and cash equivalents at beginning of period....................................... 2,008 501
------- --------
Cash and cash equivalents at end of period............................................. $ 8,829 $ 415
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest.............................................................. $ 4,840 $ 1,262
======= ========
Cash paid for income taxes.......................................................... $ 39 $ 50
======= ========
</TABLE>
See accompanying notes.
Page-6
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - UNAUDITED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Pediatric Services of America, Inc. (the "Company") and its majority-owned
subsidiaries have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included.
Results of operations for the three months ended December 31, 1998 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 includes approximately $23,876,000 and $33,085,000 for
which services have been rendered but the amounts were unbilled as of
December 31, 1998 and September 30, 1998, respectively.
3. NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
Basic net income per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted net income
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 20,750 and 204,545 for the three months ended December 31, 1998
and 1997, respectively.
4. INTEREST RATE SWAP AGREEMENT
At December 31, 1998, the Company had one interest rate swap agreement with
a commercial bank (the "Counter Party"), having a cumulative notional
principal amount of $25 million. The Company pays a fixed rate of 6.61%
plus 3.50%. The interest rate differential to be received or paid is
recognized over the life of the agreement as an adjustment to interest
expense. The interest rate swap terminates in June 2002. The Company is
exposed to credit loss in the event of non-performance by the Counter Party
to the interest rate swap agreement. However, the Company does not
anticipate such non-performance.
Page-7
<PAGE>
5. 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.
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 DECEMBER 31, 1998
Revenue $56,741 $22,634 $ 79,375
Operating income (1) 5,914 3,552 (6,248) 3,218
Depreciation/amortization 1,947 287 208 2,442
FOR THE THREE MONTHS ENDED DECEMBER 31, 1997
Revenue $51,915 $ 9,644 $ 61,559
Operating income (1) 8,359 569 (3,909) 5,019
Depreciation/amortization 1,686 87 74 1,847
<CAPTION>
MEDICAL MEDICAL GENERAL
SERVICES TESTING CORPORATE CONSOLIDATED
-------- ------- --------- ------------
<S> <C> <C> <C> <C>
AS OF DECEMBER 31, 1998
Accounts receivable (less allowance for doubtful accounts) $73,900 $28,486 $102,386
Property and equipment (less depreciation and amortization) 16,365 5,075 3,031 24,471
Goodwill (less accumulated amortization) 65,367 23,001 88,368
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 represents business segment's income before corporate
general and administrative expenses, interest and taxes.
Page-8
<PAGE>
UNAUDITED RECONCILIATION TO INCOME BEFORE INCOME TAXES
FOR THE THREE MONTHS ENDED
DECEMBER 31,
--------------------------
1998 1997
---- ----
Consolidated operating income $3,218 $5,019
Interest expense 3,094 1,466
------ ------
Income before minority interest and income
tax expense $ 124 $3,553
====== ======
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 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 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.
Page-9
<PAGE>
RESULTS OF OPERATIONS
The following table is derived from the Company's unaudited condensed
consolidated statements of income for the periods indicated and presents results
of operations as a percentage of net revenue and the percentage change in the
dollar amounts of each item from the comparative prior period.
<TABLE>
<CAPTION>
PERIOD-TO-PERIOD
PERCENTAGE OF
PERCENTAGE OF NET REVENUE INCREASE (DECREASE)
------------------------- -------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
DECEMBER 31, DECEMBER 31,
---------------
1998 1997 1998 TO 1997
---- ---- ------------
<S> <C> <C> <C>
Net revenue...................................... 100% 100% 29%
Operating salaries, wages and
employee benefits................................ 37.3 42.4 14
Other operating costs............................ 43.9 37.3 52
Corporate, general and administrative............ 7.6 6.2 57
Provision for doubtful accounts.................. 4.0 3.0 73
Depreciation and amortization.................... 3.1 3.0 32
---- ---- ----
Operating income................................. 4.1 8.1 (36)
Interest expense................................. 3.9 2.4 111
---- ---- ----
Income before income taxes and
minority interest................................ 0.2 5.7 (97)
Minority interest in loss of subsidiary.......... 0.0 0.0 0
---- ---- ----
Income before income taxes....................... 0.2 5.7 (95)
Income tax expense............................... 0.1 2.3 (96)
---- ---- ----
Net income....................................... 0.1% 3.4% (95)%
==== ==== ====
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 31,
1997
Net revenue increased $17.8 million, or 29% to $79.4 million in the three months
ended December 31, 1998 from $61.6 million in the three months ended December
31, 1997. The Company's acquisitions accounted for approximately $16.6 million
of the increase in net revenue and internal growth accounted for the remaining
$1.2 million. For branch offices that have been under the Company's management
for more than one year, the internal growth in net revenue was 2% for the three
months ended December 31, 1998. Of the $17.8 million increase in net revenue
for the three months ended December 31, 1998, pediatric health care net revenue
accounted for $4.3 million. Increased pediatric health care net revenue for the
three months ended December 31, 1998 was primarily attributable to the Company's
acquisitions which accounted for approximately $3.3 million and the remaining
$1.0 million to marketing efforts which resulted in an increase in patients
served
Page-10
<PAGE>
rather than a significant increase in rates charged. Adult health care net
revenue accounted for $0.5 million of the increase in net revenue for the three
months ended December 31, 1998. Increased adult health care net revenue for the
three months ended December 31, 1998 was attributable to the Company's
acquisitions which accounted for approximately $1.7 million, offset by a decline
in internal revenue growth for adult patients of $1.2 million. Medical testing
services net revenue accounted for $13.0 million of the increase in net revenue
for the three months ended December 31, 1998, primarily due to the acquisition
of the Physical Measurements Information division ("PMI") of ChoicePoint
Services, Inc. (" ChoicePoint") which added $11.6 million. In the three months
ended December 31, 1998 the Company derived approximately 70% of its net revenue
from commercial insurers and other private payors, 25% 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 $3.6 million, or 14% to $29.7 million in the three months ended
December 31,1998 from $26.1 million in the three months ended December 31, 1997.
The increase was primarily due to the Company's acquisitions which added
approximately $4.7 million. As a result of acquisitions completed by the
Company, particularly the December 1997 acquisition of PMI, the Company's
historical results of operations are not necessarily indicative of future
results. Due to the nature of its operations, PMI has a lower operating
salaries, wages and employee benefits component as compared to the Company's
home health care operations. As a percentage of net revenue, operating
salaries, wages and employee benefits for the three months ended December 31,
1998, decreased to 37% from 42% in the three months ended December 31, 1997.
Other operating costs include medical supplies, branch office rent, utilities,
vehicle expenses, independent medical testing technician payments and cost of
sales. The cost of sales consists primarily of the costs of pharmacy products
sold. Other operating costs increased $11.9 million or 52% to $34.8 million in
the three months ended December 31, 1998 from $22.9 million in the three months
ended December 31, 1997. Of the increase, $8.9 million relates to acquisitions,
primarily PMI in the medical testing business. Due to the nature of its
operations, PMI has a higher other operating costs component as compared to the
Company's home heath care operations. The remaining $3.0 million is primarily
due to internal growth in the business. As a percentage of net revenue, other
operating costs for the three months ended December 31, 1998 increased to 44%
from 37% in the three months ended December 31, 1997.
Corporate, general and administrative costs increased $2.2 million, or 57%, to
$6.0 million in the three months ended December 31, 1998 from $3.8 million in
the three months ended December 31, 1997. The increase was primarily due to the
acquisition of PMI. The Company has also added reimbursement personnel,
including senior level management to improve billings and collections. As a
percentage of net revenue, corporate, general and administrative costs for the
three months ended December 31, 1998, increased to 7.6% from 6.2% in the three
months ended December 31, 1997.
Provision for doubtful accounts consists of the amount of billed revenue that
management estimates to be uncollectible. During the three months ended
December 31, 1998 the Company's provision for doubtful accounts increased
approximately $1.3 million, or 73%, to $3.1 million from $1.8 million in the
three months ended December 31, 1997. The increase in the three months ended
December 31, 1998 is primarily attributable to management's ongoing assessment
of the collectibility of accounts
Page-11
<PAGE>
receivable which reflects: (1) continued difficulties in the health care
reimbursement environment, (2) lagging collection on certain receivables
primarily resulting from the implementation of a new billing and collection
system which diverted the Company's resources from pursuing older receivable
balances, (3) problems identified related primarily to certain billings
generated during the implementation phase of the new billing and collection
system and (4) collection experience on certain receivables of acquired
businesses. Due to the above mentioned process changes and 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 and a decrease in days sales outstanding to 116 days at December 31,
1998 from 125 days at December 31, 1997.
Depreciation and amortization increased $0.6 million, or 32%, to $2.4 million in
the three months ended December 31, 1998 from $1.8 million in the three months
ended December 31, 1997. The increase was primarily due to capital expenditures
for the purchase of medical and computer equipment and the amortization of
goodwill from the Company's acquisitions. As a percentage of the Company's total
net revenue, depreciation and amortization costs were comparable for the three
months ended December 31, 1998 and 1997.
Interest expense increased $1.6 million, or 111%, to $3.1 million in the three
months ended December 31, 1998 from $1.5 million in the three months ended
December 31, 1997. The increase was primarily the result of a $55.4 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 the 10% Senior Subordinated Notes due 2008 and the
increase in the margins under Amendment No. 2 of the Credit Agreement.
Income tax expense decreased $1.4 million, or 96%, to $0.1 million in the three
months ended December 31, 1998 from $1.5 million in the three months ended
December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
On April 16, 1998, the Company issued in a private placement, $75 million
aggregate principal amount of 10% Senior Subordinated Notes due 2008, which were
subsequently replaced on May 12, 1998, with $75 million aggregate principal
amount of 10% Senior Subordinated Notes due 2008, Series A, registered with the
Securities and Exchange Commission (the "Notes"). After paying issuance costs
of approximately $2.7 million, the Company received proceeds of $72.3 million,
which were used to repay a portion of the indebtedness outstanding under its
Credit Agreement. Interest on the Notes accrues from the date of issuance, and
is payable semi-annually on April 15 and October 15 of each year, commencing
October 15,1998. The Notes are redeemable for cash at any time on or after
April 15, 2003, at the option of the Company, in whole or in part at 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. The Credit
Agreement was amended April 16, 1998 ("Amendment No. 1"), effective upon the
issuance of the Notes, changing the commitment fees and the financial ratio
requirements.
Page-12
<PAGE>
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 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 days
sales outstanding targets to be met. 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 these improvements are achievable based on the full
implementation of the new financial systems, the cessation in acquisition
activity which will allow the Company to more fully focus on improving existing
operations and an improvement in the collection of accounts receivable. Based
on the above, management believes that the Company will remain in compliance
with all of 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. 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.
The Company is in compliance with the new financial covenants as of December 31,
1998.
Under the Credit Facility, as amended, commitment fees were set at 0.500% per
annum on the average daily unused portion of the loan facility. At the
Company's option, borrowings under the revolving facility bear interest at (1)
LIBOR plus 3.50%, or (2) the base rate plus 2.50%. At the Company's option,
borrowings under the swingline loan credit subfacility bear interest at either
(1) a quoted rate established by the lender or (2) the prime rate. At December
31, 1998, the interest rates under the Credit Facility ranged from 7.57% to
9.13%. Outstanding borrowings under the Credit Facility at December 31, 1998
were approximately $60.0 million.
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<PAGE>
At December 31, 1998, total borrowings under the Notes and the Credit Agreement
were approximately $135.0 million.
At December 31, 1998, the Company had one interest rate swap agreement with a
commercial bank (the "Counter Party"), having a cumulative notional principal
amount of $25 million. The Company pays a fixed rate of 6.61% plus 3.50%. 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.
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. Accounts
receivable increased to $102.4 million at December 31, 1998 from $99.0 million
at September 30, 1998, an increase of $3.4 million. The Company's Days Sales
Outstanding ("DSO") was 116 days as of December 31, 1998 and 107 days as of
September 30, 1998, based on the net revenue for the last quarter of the period.
For the three months ended December 31, 1998, the increase in DSO is largely
attributable to higher accounts receivable balances in the medical testing
business as a result of delayed billings; and slower collections in the medical
services business, primarily in the non-integrated operations.
The Company continues to experience difficulty with collecting accounts
receivable from managed care and other non-governmental payors, which is an
industry-wide issue. The Company has taken measures to improve DSO by hiring
more experienced reimbursement personnel, including senior level management,
improving and expanding training, and establishing regional data entry centers
to improve the quality of patient intake information. In addition, the Company
has taken a more aggressive approach on collecting accounts receivable from
managed care and other non-governmental payors. The Company has formed special
collection teams which deal with specific payors, escalated payment issues to
higher levels within the payor's organization, involved state insurance
commissioners, and in some cases, terminated selected contracts. While there
can be no assurances that these measures will lead to DSO improvements,
management believes that they have taken the appropriate actions to do so.
Management will continue to monitor the appropriateness of the Company's
allowance for doubtful accounts as the results of these measures are determined.
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, medical
testing and financial systems. Capital expenditures for computer equipment and
software development, have been substantially completed, as evidenced by the
reduced level of spending of $1.3 million in the three months ended December
31,1998 compared to $1.8 million in the three months ended December 31, 1997.
As of December 31, 1998, the Company has recorded a net deferred tax liability
in its consolidated financial statements. Under guidance issued by the Internal
Revenue Service, in December 1996, the Company made an election entitling it to
mark its accounts receivable to market value for tax purposes. This election
eliminated the deferred tax asset relating to the allowance for doubtful
accounts and established a new deferred tax liability to reflect the new
temporary differences. In
Page-14
<PAGE>
fiscal 1998, the mark to market election for accounts receivable was repealed
requiring the Company to recognize the related deferred tax liabilities evenly
over four years. The repeal of the mark to market election re-established the
deferred tax asset relating to the allowance for doubtful accounts. The Company
has approximately $1.2 million of net operating losses for income tax purposes
available to offset future taxable income. Such losses expire by the year 2011.
The Company has suspended acquisition plans and will be focusing resources on
strengthening infrastructure, cash collections and sales and marketing.
Management currently believes that internally generated funds and borrowings
under the Credit Agreement will be adequate to satisfy the Company's working
capital requirements.
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 System 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 on page nineteen, the Company has completed
approximately 90% of its assessment of all Systems that could be significantly
affected by the Year 2000. Based on this assessment, the Company believes that
it will not be required to modify or replace significant portions of its
Systems, primarily due to the fact that the Company recently replaced and/or
upgraded its billing, collection, and accounting computer systems. While such
improvements were not a part of the Company's Year 2000 Plan, the improvements
were intended to be Year 2000 compliant.
Page-15
<PAGE>
However, testing will be required to confirm compliance. After an assessment of
its medical equipment and inquiry of material suppliers, the Company does not
believe that significant replacement of the equipment sold or rented by the
Company will require remediation to be Year 2000 compliant.
The remediation phase of the Year 2000 Plan for the Company's information
technology systems is approximately 75% complete. Remediation involves
upgrading or replacing Systems and equipment which the assessment phase
indicates are not Year 2000 compliant. The testing phase of the Year 2000 Plan
is approximately 50% complete. Testing involves operation of Systems and
Equipment using dates after December 31, 1999. The Company expects to complete
remediation and testing by March 31, 1999 and May 31, 1999, respectively.
However, if such remediation and/or testing is not completed in a timely manner
with respect to key Systems , the Year 2000 Issue could potentially have a
material impact on the operations of the Company.
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. However, the Company is aware that
the U.S. General Accounting Office has issued a report, dated November, 1998,
to congressional requesters who requested an assessment about the "readiness of
state automated systems to support federal welfare programs." Specifically, the
report indicated that states (49 states and the District of Columbia, excluding
South Dakota) utilized 421 automated systems to manage seven federal welfare
programs including Medicaid. Overall, only about one-third of state welfare
systems are reported to be compliant. The states also reported that they had
completed the assessment phase for about 80% of the welfare systems and about
one-quarter of the systems had completed the validation and implementation
phases. The states also reported that they had not developed test plans for
about 27% of the systems. In addition, 80% of the states noted that Year 2000
compliance efforts had delayed the performance of routine system developments
and maintenance activities. The states reported that failure to complete Year
2000 conversion could result in billions of dollars in benefits payments not
being delivered, because (1)
Page-16
<PAGE>
new recipients could not be added, (2) eligibility for new applicants could not
be determined, (3) recipients could be denied benefits, (4) payments could be
underpaid or overpaid, and (5) payments could be delayed.
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 will utilize both internal and external resources to reprogram, or
replace, test, and implement the Systems and Equipment for Year 2000
modifications. The total costs of the Year 2000 project is estimated at
$250,000 and is being funded through operating cash flows. To date, 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 $69,500.
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
Page-17
<PAGE>
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.
Page-18
<PAGE>
YEAR 2000 DISCLOSURE CHART(1)
<TABLE>
<CAPTION>
RESOLUTION PHASES(2)
---------------------------------------------------------------------------------------------------------------------
ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Information 90% Complete 75% Complete 50% Complete 50% Complete
Technology
Systems Expected completion Expected completion Expected completion
date, March 31, 1999 date, May 31, 1999 date, June 30, 1999
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Operating 100% Complete 100% Complete 100% Complete 100% Complete
E Equipment with
X Embedded Chips
P or Software(3)
- -------------------------------------------------------------------------------------------------------------------------
O
- -------------------------------------------------------------------------------------------------------------------------
S Products(4) N/A N/A N/A N/A
U
R
E
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
T 3rd Party(5) 50% 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. PSA does not intend to
test medical equipment any further.
(4) The category Products does not apply to PSA 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.
Page-19
<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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The 1999 Annual Meeting of Shareholders of the Company was scheduled to be held
on January 20, 1999. Proxies with regard to the matters to be voted upon at the
Annual Meeting were solicited under Regulation 14A of the Securities and
Exchange Act of 1934, as amended. The Company did not receive a quorum on the
matters submitted for vote and the Company adjourned the meeting until February
2, 1999. On February 2, 1999, the Company did not receive a quorum on the
matters submitted for vote and adjourned the meeting until February 19, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
--------
The following exhibits are filed as part of this Report.
27 Financial Data Schedule
(b) Report on Form 8-K
------------------
On October 13, 1998, the Registrant filed a report on Form 8-K under
Item 5, announcing the adoption of a Shareholder Rights Plan on
September 22, 1998.
Page-20
<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: February 11, 1999 By: /s/ Stephen M. Mengert
----------------------------------
Stephen M. Mengert
Senior Vice President,
Chief Financial Officer,
Treasurer and Secretary
(Duly authorized officer and
Principal Financial Officer)
Page-21
<PAGE>
INDEX OF EXHIBITS
PAGE NO.
--------
27 Financial Data Schedule................................... 23
Page-22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 8,829
<SECURITIES> 0
<RECEIVABLES> 117,117
<ALLOWANCES> 14,731
<INVENTORY> 0
<CURRENT-ASSETS> 124,075
<PP&E> 46,694
<DEPRECIATION> 22,223
<TOTAL-ASSETS> 243,580
<CURRENT-LIABILITIES> 39,958
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 63,725
<TOTAL-LIABILITY-AND-EQUITY> 243,580
<SALES> 79,375
<TOTAL-REVENUES> 79,375
<CGS> 0
<TOTAL-COSTS> 72,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,165
<INTEREST-EXPENSE> 3,094
<INCOME-PRETAX> 167
<INCOME-TAX> 59
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 108
<EPS-PRIMARY> 0.02
<EPS-DILUTED> 0.02
</TABLE>
