<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 August 20 1999, the Registrant had 6,652,005 shares of Common Stock, $0.01
Par Value, outstanding.
- --------------------------------------------------------------------------------
Page 1 of 29
Index of Exhibits on page 28
<PAGE>
FORM 10-Q
PEDIATRIC SERVICES OF AMERICA, INC.
INDEX
PART I FINANCIAL INFORMATION Page
Number
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1999 and September 30, 1998.................... 3
Condensed Consolidated Statements of Operations for
the three and nine months ended June 30, 1999 and 1998.. 5
Condensed Consolidated Statements of Cash Flows for
the nine months ended June 30, 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
ITEM 3: Qualitative and Quantitative Disclosures About Market Risk... 25
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings............................................. 25
ITEM 6: Exhibits and Reports on Form 8-K.............................. 26
Signatures.................................................... 27
Index of Exhibits............................................. 28
Page - 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
(Unaudited) (Audited)
---------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................................... $ 8,860 $ 2,008
Accounts receivable, less allowance for doubtful accounts of
$19,745 and $14,008 at June 30, 1999 and September 30, 1998,
respectively...................................................... 87,279 99,030
Prepaid expenses.................................................... 289 807
Income taxes receivable............................................. 1,023 2,898
Deferred income taxes............................................... - 3,266
Other current assets................................................ 5,279 5,837
-------- --------
Total current assets.................................................. 102,730 113,846
Property and equipment:
Home care equipment held for rental................................ 30,039 28,435
Furniture and fixtures............................................. 16,385 15,185
Vehicles........................................................... 856 891
Leasehold improvements............................................. 1,019 915
-------- --------
48,299 45,426
Accumulated depreciation and amortization.......................... (25,405) (20,714)
-------- --------
22,894 24,712
Other assets:
Goodwill, less accumulated amortization of $7,241 and $6,672,
respectively..................................................... 67,806 89,172
Certificates of need, less accumulated amortization of $277 and
$508, respectively............................................... 396 2,739
Deferred financing fees, less accumulated amortization of $962 and
$521, respectively............................................... 2,827 3,251
Noncompete agreements, less accumulated amortization of $993 and
$875, respectively............................................... 68 185
Other.............................................................. 656 656
-------- --------
71,753 96,003
-------- --------
Total assets.......................................................... $197,377 $234,561
======== ========
</TABLE>
See accompanying notes.
Page - 3
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS--(Continued)
(In thousands)
<TABLE>
<CAPTION>
June 30, September 30,
1999 1998
(Unaudited) (Audited)
-----------------------------------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable....................................................... $ 10,431 $ 11,600
Accrued compensation................................................... 11,108 11,147
Accrued insurance...................................................... 4,308 3,516
Other accrued liabilities.............................................. 4,846 7,362
Deferred revenue....................................................... 1,030 1,101
Current maturities of long-term obligations to related parties......... 2,961 3,323
Current maturities of long-term obligations............................ 41 416
-------- --------
Total current liabilities.............................................. 34,725 38,465
Long-term obligations to related parties, net of current maturities.... 145 220
Long-term obligations, net of current maturities....................... 137,276 127,567
Deferred income taxes.................................................. -- 3,879
Minority interest in subsidiary........................................ 547 747
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 June 30, 1999 and September 30, 1998 issued and outstanding....... 67 67
Additional paid-in capital............................................. 48,362 50,037
Retained earnings (deficit)............................................ (23,745) 13,579
-------- --------
Total stockholders' equity............................................. 24,684 63,683
-------- --------
Total liabilities and stockholders' equity............................. $197,377 $234,561
======== ========
</TABLE>
See accompanying notes.
Page - 4
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
(Unaudited) (Unaudited)
---------------------------- -------------------------
1999 1998 1999 1998
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Net revenue............................................ $53,134 $54,803 $164,745 $164,020
Costs and expenses:
Operating salaries, wages and employee benefits...... 26,222 28,055 80,787 80,776
Other operating costs................................ 18,830 20,659 56,888 54,254
Corporate, general and administrative................ 4,590 4,267 13,040 12,430
Provision for doubtful accounts...................... 4,452 15,346 14,962 19,274
Depreciation and amortization........................ 2,237 1,854 6,570 5,660
Impairment of intangible assets...................... -- -- 20,984 --
------- ------- -------- -------
Total costs and expenses........................... 56,331 70,181 193,231 172,394
------- ------- -------- -------
Operating loss from continuing operations.............. (3,197) (15,378) (28,486) (8,374)
Interest expense....................................... 3,950 2,619 10,914 6,011
Loss on sale of businesses............................. 1,258 -- 1,258 --
------- ------- -------- -------
Loss from continuing operations, before minority
interest and income taxes............................ (8,405) (17,997) (40,658) (14,385)
Minority interest in loss of subsidiary................ 33 1 200 28
------- ------- -------- -------
Loss from continuing operations before income taxes.... (8,372) (17,996) (40,458) (14,357)
Income tax benefit..................................... -- 6,511 1,659 5,205
------- ------- -------- -------
Net loss from continuing operations.................... (8,372) (11,485) (38,799) (9,152)
Discontinued operations:
Income (loss) from discontinued operations, net of
tax.................................................. (260) 1,576 1,475 3,499
------- ------- -------- -------
Net loss............................................... $(8,632) $(9,909) $(37,324) $(5,653)
======= ======= ======== =======
Basic net income (loss) per share data:
Continuing operations.................................. $ (1.26) $ (1.61) $ (5.83) $ (1.32)
Income (loss) from discontinued operations............. (0.04) 0.22 0.22 0.50
------- ------- -------- -------
Net loss............................................... $ (1.30) $ (1.39) $ (5.61) $ (0.82)
======= ======= ======== =======
Diluted net income (loss) per share data :
Continuing operations.................................. $ (1.26) $ (1.61) $ (5.83) $ (1.32)
Income (loss) from discontinued operations............. (0.04) 0.22 0.22 0.48
------- ------- -------- -------
Net loss............................................... $ (1.30) $ (1.39) $ (5.61) $ (0.84)
======= ======= ======== =======
Weighted average shares outstanding for continuing and
discontinued operations:
Basic................................................ 6,652 7,145 6,652 6,908
======= ======= ======== =======
Diluted.............................................. 6,652 7,287 6,669 7,076
======= ======= ======== =======
</TABLE>
See accompanying notes.
Page - 5
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
(unaudited)
----------------------------
1999 1998
-------------- -------------
<S> <C> <C>
Operating activities
Net loss.............................................................................. $(37,324) $ (5,653)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization....................................................... 7,950 6,403
Impairment of intangible assets..................................................... 20,984 --
Provision for doubtful accounts..................................................... 15,462 19,274
Loss on sale of businesses.......................................................... 1,258 --
Amortization of deferred financing fees............................................. 441 191
Deferred income taxes............................................................... (612) (242)
Minority interest in loss of subsidiary............................................. (200) (28)
Changes in operating assets and liabilities, net of effects from acquisitions and
dispositions of businesses:
Accounts receivable................................................................ (6,716) (32,569)
Prepaid expenses and other current assets.......................................... 1,424 (475)
Accounts payable................................................................... (1,169) 3,943
Income taxes....................................................................... 1,875 (4,079)
Accrued liabilities................................................................ (2,284) 5,600
-------- --------
Net cash provided by (used in) operating activities................................... 1,089 (7,635)
Investing activities
Purchases of property and equipment................................................. (3,256) (7,977)
Acquisitions of businesses.......................................................... -- (24,415)
Proceeds from sale of businesses.................................................... 1,770 --
Other, net.......................................................................... 43 (42)
-------- --------
Net cash used in investing activities................................................. (1,443) (32,434)
Financing activities
Principal payments on long-term debt................................................ (9,279) (87,057)
Borrowings on long-term debt........................................................ 16,500 129,500
Deferred financing fees............................................................. (16) (2,755)
Proceeds from exercise of stock options............................................. 1 152
-------- --------
Net cash provided by financing activities............................................. 7,206 39,840
-------- --------
Increase (decrease) in cash and cash equivalents...................................... 6,852 (229)
Cash and cash equivalents at beginning of period...................................... 2,008 501
-------- --------
Cash and cash equivalents at end of period............................................ $ 8,860 $ 272
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest.............................................................. $ 13,181 $ 4,166
======== ========
Cash paid for income taxes.......................................................... $ 565 $ 1,311
======== ========
</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 and nine months ended June 30, 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 $21.7 million and $33.1 million
for which services have been rendered but the amounts were unbilled as of
June 30, 1999 and September 30, 1998, respectively. Primarily such unbilled
amounts result from the medical testing division's practice of billing one
month in arrears and normal time delays in processing claims in the medical
services division.
3. Allowance for Doubtful Accounts
During the three months ended June 30, 1999, due to continued difficulties
in the health care industry related to the reimbursement environment, the
timing of the write off of receivables previously reserved and the
Company's collection history, management concluded that it would be
appropriate to keep an allowance similar to that of the previous quarter of
fiscal 1999.
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 related to 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
Page - 7
<PAGE>
locations. Finally, certain second quarter conditions of fiscal 1999,
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 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.
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 monthly and extended the time period during which the
Company is prohibited from borrowing for acquisitions. The new covenants
become more restrictive over the remaining life of the Credit Agreement.
As of June 30, 1999, the Company is in compliance with the financial
covenants contained in Amendment No. 5.
As required under Amendment No. 5, the Company obtained Lender consent to
sell certain assets (See footnote 8). Under terms of the consent, proceeds
from the sale were used to permanently reduce availability under the Credit
Agreement to $63.2 million.
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
Page - 8
<PAGE>
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 June
30, 1999, the interest rate on borrowings under the Credit Agreement was
10.25%. Outstanding borrowings under the Credit Agreement at June 30, 1999
were approximately $62.2 million.
6. Continuing and Discontinued 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). For the
three and nine months ended June 30, 1999 and 1998 for continuing
operations, and the three months ended June 30, 1999 for discontinued
operations, 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. The dilutive effect of stock
options was included in weighted average shares for purposes of computing
diluted net income per share from discontinued operations for the three
months ended June 30, 1998 and the nine months ended June 30, 1999 and
1998.
7. Interest Rate Swap Agreement
At June 30, 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. Dispositions
On June 28, 1999, the Company sold the assets of several medical services
staffing locations in the MidAtlantic Region to Medical Staffing Network,
Inc., a medical staffing company. As part of the implementation of the
strategic plan, these businesses were defined as part of the non-core
activities of the Company. The assets were sold for a total cash price of
$1.8 million and the Company recorded a loss of $1.3 million.
Page - 9
<PAGE>
9. Discontinued Operations
During the third quarter of fiscal 1999, the Company's Board of Directors
approved management's plan of its intent to sell the Company's medical
testing operations. As a result, the medical testing operations are
reflected as a discontinued operation. The operating results of the
discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 30, June 30,
(Unaudited) (Unaudited)
--------------------------- -------------------------
1999 1998 1999 1998
------------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenue........................................ $21,296 $23,677 $66,059 $55,498
Income (loss) before income taxes.................. (260) 2,170 2,581 5,660
Income taxes....................................... - 594 1,106 2,161
Net income (loss).................................. $ (260) $ 1,576 $ 1,475 $ 3,499
Net income (loss) per share:
Basic........................................... $ (0.04) $ 0.22 $ 0.22 $ 0.50
Diluted......................................... $ (0.04) $ 0.22 $ 0.22 $ 0.48
</TABLE>
<TABLE>
<CAPTION>
As of June 30, As of September 30,
1999 1998
-------------- -------------------
<S> <C> <C>
Cash................................................. $ 525 $ 565
Accounts receivable, net............................. 21,893 26,393
Prepaid expenses..................................... 100 215
Other current assets................................. 985 1,962
------- -------
Total current assets................................. 23,503 29,135
Accrued compensation................................. 550 489
------- -------
Net assets of discontinued operations, current....... $22,953 $28,646
======= =======
Property, net........................................ $ 5,047 $ 4,842
Goodwill, net........................................ 22,486 23,203
Other................................................ 47 7
------- -------
Net assets of discontinued operations, non current... $27,580 $28,052
======= =======
</TABLE>
The consolidated results of operations of the Company have been restated to
reflect the discontinued operations. The Company has not broken out
separately the net assets and cash flows of the discontinued operations on
the balance sheet and cash flow statements.
Page - 10
<PAGE>
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
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 third quarter of fiscal 1999, the Company's senior management continued
implementation of its strategic plan (the "Plan") to improve the Company's
performance. The primary focus of the Plan relating to medical services is to
refocus the Company on its core businesses, the pediatric home healthcare and
adult respiratory businesses. After evaluating several alternatives, on August
13, 1999, the Company announced that it intends to sell the medical testing
division, Paramedical Services of America, Inc. The decision by management is
consistent with its Plan. The Company is in discussions with prospective
purchasers but has not reached agreement on the terms of a transaction to sell
the division. As a result, the Company can give no assurances as to whether or
not it will be able to reach agreement on the sale of the division on terms
acceptable to the Company. It is anticipated that if the Company sells the
medical testing division, it would use the proceeds from such a transaction to
repay a portion of existing indebtedness and for corporate working capital
purposes. The Company's condensed consolidated statements of operations for
the quarter ended June 30, 1999, have been restated to reflect discontinued
operations.
The primary objective of the Plan relating to medical services is to refocus the
Company on its core businesses of pediatric home healthcare and adult
respiratory therapy. As part of implementing the Company's Plan of focusing on
defined core businesses, the Company finalized the sale of its Washington, D.C.,
Springfield, Virginia and Bala Cynwyd, Pennsylvania medical staffing businesses
Page - 11
<PAGE>
to Medical Staffing Network, Inc. on June 28, 1999, for approximately $1.8
million. The proceeds from this transaction were used to repay existing
indebtedness. Medical staffing is considered part of the Company's non-core
businesses.
The Company also made progress on the other operating initiatives contained
within the Plan. The closure of identified locations has been substantially
completed; however, the Company experienced some delays in the discharge and
transfer of care for certain patients. These delays could impact future results
of operations. For a more detailed status of the internal organizational and
process changes, see "Result of Operations" below.
Although the 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 Plan efforts or will be able to reduce costs without negatively
impacting operations. Further, at this time it is not possible to predict the
ultimate outcome of the cost reductions the Company has implemented or whether
such reductions will be sufficient to offset the reductions in net revenue.
Page - 12
<PAGE>
Results of Continuing 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 that 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 continuing 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
Increase
Percentage of Net Revenue (Decrease)
--------------------------------------- ------------------------------
Three Nine
Three Months Nine Months Months Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
------------------ ----------------- --------------- ------------
1999 1998 1999 1998 1999 to 1998 1999 to 1998
--------- -------- --------- ------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue.......................... 100% 100% 100% 100% (3)% 0%
Operating salaries, wages and
employee benefits.................. 49.3 51.2 49.0 49.2 (7) (0)
Other operating costs................ 35.4 37.7 34.5 33.1 (9) 5
Corporate, general and
administrative..................... 8.6 7.8 7.9 7.6 8 5
Provision for doubtful accounts...... 8.4 28.0 9.1 11.8 (71) (22)
Depreciation and amortization........ 4.2 3.4 4.0 3.5 21 16
Impairment of intangible assets...... - - 12.7 - - N/A
---------------------------------------------------------------------------------------
Operating loss from continuing
operations......................... (5.9) (28.1) (17.2) (5.2) 79 (240)
Interest expense..................... 7.4 4.8 6.6 3.7 51 82
Loss on sale of businesses........... 2.4 - 0.8 - N/A N/A
---------------------------------------------------------------------------------------
Loss from continuing operations
before minority interest and
income taxes....................... (15.7) (32.9) (24.6) (8.9) 53 (183)
Minority interest in loss of
subsidiary......................... 0.1 - 0.1 - - -
---------------------------------------------------------------------------------------
Loss from continuing operations
before income taxes................ (15.6) (32.9) (24.5) (8.9) 53 (183)
Income tax benefit................... - 10.8 0.9 1.9 (100) (71)
----------------------------------------------------------------------------------------
Net loss from continuing operations.. (15.6)% (22.1)% (23.6)% (7.0)% 27% (324)%
===== ===== ===== ==== ==== ====
</TABLE>
Page - 13
<PAGE>
The following table sets forth for the periods indicated the net revenue
breakdown by service:
(in thousands)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Pediatric Home Health Care
Nursing.......................................................... $24,048 $22,785 $ 70,209 $ 67,758
Respiratory Therapy Equipment.................................... 5,694 6,306 18,541 17,949
Home Medical Equipment........................................... 683 853 2,372 2,426
Pharmacy and Other............................................... 8,419 8,594 27,419 26,574
------- ------- -------- --------
Total Pediatric Home Health Care......................... 38,844 38,538 118,541 114,707
------- ------- -------- --------
Adult Home Health Care:
Nursing.......................................................... 4,803 4,292 15,062 13,117
Respiratory Therapy Equipment.................................... 5,178 5,159 16,885 16,650
Home Medical Equipment........................................... 1,395 1,549 5,016 4,620
Pharmacy and Other............................................... 2,914 5,265 9,241 14,926
------- ------- -------- --------
Total Adult Home Health Care............................. 14,290 16,265 46,204 49,313
------- ------- -------- --------
Total Net Revenue........................................ $53,134 $54,803 $164,745 $164,020
======= ======= ======== ========
</TABLE>
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
Net revenue decreased $1.7 million, or 3%, to $53.1 million in the three months
ended June 30, 1999 from $54.8 million in the three months ended June 30, 1998.
The Company's acquisitions accounted for an approximately $1.8 million increase
in net revenue and a decline in net revenue from existing branch offices
accounted for a decrease of $3.5 million. This reduction in revenue reflects
the continued efforts to reduce non-core and/or non-profitable products and
services consistent with the strategic plan. For the three months ended June
30, 1999, this most directly impacted pediatric respiratory therapy and home
medical equipment revenues when compared to the three months ended June 30,
1998. The decline in net revenue for existing branch offices was 6% for the
three months ended June 30, 1999. Pediatric health care net revenue increased
$0.3 million for the three months ended June 30, 1999 compared to the three
months ended June 30, 1998. Reductions in adult health care net revenue
accounted for $2.0 million of the total decrease in net revenue for the three
months ended June 30, 1999, which was primarily the result of the Company's
efforts in terminating unprofitable adult infusion services contracts in fiscal
1999. During the three months ended June 30, 1999, the Company derived
approximately 56% of its net revenue from commercial insurers and other private
payors, 37% from Medicaid and 7% 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 7%, to $26.2 million in the three months ended June
30,1999, from $28.0 million in the three months ended June 30, 1998. As a
percentage of net revenue, operating salaries, wages and employee benefits for
the three months ended June 30, 1999, decreased to 49% from 51% in the three
months ended June 30, 1998. Labor costs have decreased across all services as a
result of headcount reductions.
Other operating costs include medical supplies, branch office rent, utilities,
vehicle expenses and cost of sales. Cost of sales consists primarily of the
costs of pharmacy products sold. Other operating costs decreased $1.8 million
or 9%, to $18.8 million in the three months ended June 30,
Page - 14
<PAGE>
1999, from $20.6 million in the three months ended June 30, 1998. As a
percentage of net revenue, other operating costs for the three months ended June
30, 1999 decreased to 35% from 38% in the three months ended June 30, 1998.
During the three months ended June 30, 1999, the other operating costs decrease
was primarily attributable to the Company's cost containment efforts in the
respiratory and HME services areas.
Corporate, general and administrative costs increased $0.3 million, or 8%, to
$4.6 million in the three months ended June 30, 1999 from $4.3 million in the
three months ended June 30, 1998. As a percentage of net revenue, corporate,
general and administrative costs increased for the three months ended June 30,
1999 to 9% from 8% in the three months ended June 30, 1998. The Company
continues to experience turnover within the reimbursement department and
management anticipates further turnover in the short term. This turnover has
resulted in increased recruiting, overtime and temporary labor costs. The
increase is primarily attributable to costs incurred to improve the
functionality of the medical testing division case management and billing
system.
Provisions for doubtful accounts decreased $10.9 million, or 71%, to $4.5
million in the three months ended June 30, 1999, from $15.4 million in the three
months ended June 30, 1998. The decrease in the provision is a result of the
significant provision recorded in the quarter ended June 30, 1998. The provision
recorded for the quarter ended June 30, 1998 was due to difficulties in the
health care reimbursement environment and lagging collections on certain account
receivables due to focus on the implementation of the new billing system.
Depreciation and amortization increased $0.4 million, or 21%, to $2.2 million in
the three months ended June 30, 1999, from $1.8 million in the three months
ended June 30, 1998. As a percentage of the Company's total net revenue,
depreciation and amortization costs increased for the three months ended June
30, 1999, to 4% from 3% in the three months ended June 30, 1998. The increase
in amortization costs is due to the decrease in the amortization period for
intangible assets from 30 and 25 years to 20 years.
Interest expense increased $1.3 million, or 51%, to $3.9 million in the three
months ended June 30, 1999, from $2.6 million in the three months ended June 30,
1998. The increase was primarily the result of a $33.8 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
expense increase was also due to the increase in interest rates under Amendment
No. 5 of the Credit Agreement.
During the three months ended June 30, 1999, the Company recorded a loss on the
sale of businesses for the Company's medical staffing business in the
MidAtlantic Region to Medical Staffing Network, Inc. As part of the
implementation of the strategic plan, these businesses were defined as part of
the non-core activities of the Company. The assets were sold for a total cash
price of $1.8 million and the Company recorded a loss of $1.3 million.
Income tax benefit decreased $5.9 million in the three months ended June 30,
1999. The Company recorded a $3.3 million valuation allowance against the
remaining $3.3 million of net deferred tax assets generated this quarter as a
result of net operating losses. In recording the valuation
Page - 15
<PAGE>
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.
Nine Months Ended June 30, 1999 Compared to Nine Months Ended June 30, 1998
Net revenue increased $0.7 million, or 0.4%, to $164.7 million in the nine
months ended June 30, 1999, from $164.0 million in the nine months ended June
30, 1998. The Company's acquisitions accounted for approximately $9.5 million
of the increase in net revenue offset by a decline in net revenue from existing
branch offices of $8.8 million. The decline in net revenue from existing branch
offices was 5% for the nine months ended June 30, 1999. This reduction in
revenue reflects the continued efforts to reduce non-core and/or non-profitable
products and services consistent with the strategic plan. Of the $0.7 million
increase in net revenue for the nine months ended June 30, 1999, pediatric
health care net revenue accounted for $3.8 million. Increased pediatric health
care net revenue for the nine months ended June 30, 1999, was primarily
attributable to the Company's acquisitions offset by a decline in net revenue
for existing branch offices. Adult health care net revenue accounted for a
decrease of $3.1 million for the nine months ended June 30, 1999. Increased
adult health care net revenue attributable to the Company's acquisitions was
offset by a decline in internal revenue growth. The decline in revenue from
existing branch offices was primarily the result of the Company's efforts in
terminating unprofitable adult infusion services contracts during the nine
months ended June 30, 1999. In the nine months ended June 30, 1999 the Company
derived approximately 58% of its net revenue from commercial insurers and other
private payors, 35% from Medicaid and 7% from Medicare.
Operating salaries, wages and employee benefits consist primarily of branch
office employee costs. Operating salaries, wages and employee benefits was
unchanged at $80.8 million for the nine months ended June 30,1999 as compared to
the nine months ended June 30, 1998. As a percentage of net revenue, operating
salaries, wages and employee benefits for the nine months ended June 30, 1999,
were comparable to the nine months ended June 30, 1998.
Other operating costs include medical supplies, branch office rent, utilities,
vehicle expenses and cost of sales. Cost of sales consists primarily of the
costs of pharmacy products sold. Other operating costs increased $2.6 million,
or 5%, to $56.9 million in the nine months ended June 30, 1999, from $54.3
million in the nine months ended June 30, 1998. As a percentage of net revenue,
other operating costs for the nine months ended June 30, 1999, increased to 35%
from 33% in the nine months ended June 30, 1998. The increase primarily relates
to increased costs for infusion services and higher fixed costs as a percentage
of declining net revenue.
Corporate, general and administrative costs increased $0.6 million, or 5%, to
$13.0 million in the nine months ended June 30, 1999, from $12.4 million in the
nine months ended June 30, 1998. As a percentage of net revenue, corporate,
general and administrative costs for the nine months ended June 30, 1999, were
comparable to the nine months ended June 30, 1998. The Company continues to
experience turnover within the reimbursement department and management
anticipates further turnover in the short term. This turnover has resulted in
increased recruiting, overtime and temporary labor costs. In addition, the
Company incurred costs to improve the functionality of the medical testing
division case management and billing system.
Page - 16
<PAGE>
Provisions for doubtful accounts decreased $4.3 million, or 22%, to $15.0
million in the nine months ended June 30, 1999, from $19.3 million in the nine
months ended June 30, 1998. The decrease in the provision is a result of the
significant provision recorded in the quarter ended June 30, 1998, discussed
previously. The decrease is offset by higher levels of provision recorded in
the nine months ended June 30, 1999, due to continued challenges presented by
the health care industry related to the reimbursement environment and the
Company's collections history.
Depreciation and amortization increased $0.9 million, or 16%, to $6.6 million in
the nine months ended June 30, 1999 from $5.7 million in the nine months ended
June 30, 1998. As a percentage of the Company's net revenue, depreciation and
amortization costs for the nine months ended June 30, 1999 increased to 4% from
3% in the nine months ended June 30, 1998. The increase in amortization costs
is due to the decrease in the amortization period for intangible assets from 30
and 25 years to 20 years.
An impairment of intangible assets was recorded during the nine months ended
June 30, 1999. The impairment resulted primarily from an assessment of the
impact of disposing of certain non-core business locations and activities as
defined in the Company's strategic plan formulated in the second quarter of
fiscal 1999. 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 conditions of fiscal 1999, 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 closed in the third quarter of fiscal 1999. An additional
$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 from 30 and 25 years to 20 years.
Page - 17
<PAGE>
Interest expense increased $4.9 million, or 82%, to $10.9 million in the nine
months ended June 30, 1999, from $6.0 million in the nine months ended June 30,
1998. The increase was primarily the result of a $47.2 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
expense increase was also due to an increase in interest rates related to the
Company's issuance of 10% Senior Subordinated Notes due 2008 and the increase in
the interest rates under Amendment No. 5 of the Credit Agreement.
During the nine months ended June 30, 1999, the Company recorded a loss on the
sale of businesses for the Company's medical staffing businesses in the
MidAtlantic Region to Medical Staffing Network, Inc. As part of the
implementation of the strategic plan, these businesses were defined as part of
the non-core activities of the Company. The assets were sold for a total cash
price of $1.8 million and the Company recorded a loss of $1.3 million.
Income tax benefit decreased $2.4 million to $0.6 million in the nine months
ended June 30, 1999, from $3.0 million in the nine months ended June 30, 1998.
In the nine months ended June 30, 1999, an income tax benefit was recorded to
the extent of the net deferred tax liability of $0.6 million. The Company
recorded a $13.9 million valuation allowance against the remaining $13.9 million
of net deferred tax assets generated during the nine months ended June 30, 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. See "Accounts Receivable" below. Cash provided by (used
in) operating activities was $(1.0) million for the six months ended March 31,
1999 and $1.1 million for the nine months ended June 30, 1999, compared to
$(11.1) million and $(7.6) million, respectively, for the same periods in the
prior year. The net cash provided by operating activities for the three months
ended June 30, 1999 was the result of higher cash collections which enabled the
Company to reduce its current liabilities (net of deferred revenue and current
maturities of long term obligations) by over $4 million while maintaining level
cash on hand.
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 medical services and financial systems. Capital expenditures for computer
equipment and software development have been substantially completed and the
remaining Y2K project costs are intended to be funded through operating cash
flows.
The Company cannot be certain that cash flows from operations or cash on hand
will be adequate to
Page - 18
<PAGE>
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
Overall cash collections for continuing and discontinued operations increased
approximately $6.3 million or 9% for the three months ended June 30, 1999
compared to the three months ended March 31, 1999. While the organizational re-
engineering of the Company's reimbursement process is underway, and early
indications of progress are positive, management's assessment of its estimate of
the allowance for doubtful accounts remains consistent with the quarter ended
March 31, 1999. While management anticipates continued progress in the re-
engineering efforts, there can be no assurances that these efforts will result
in the Company realizing operating improvements and improved cash flow.
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. 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
governing the Notes. 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
Page - 19
<PAGE>
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 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
financial 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. Although, no assurances can be given, 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.
As required under Amendment No. 5, the Company obtained Lender consent to sell
certain assets (See footnote 8). Under terms of the consent, proceeds from the
sale were used to permanently reduce availability under the Credit Agreement to
$63.2 million.
As of June 30, 1999, the Company is in compliance with the 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 June 30, 1999, the interest rate on borrowings under the Credit
Agreement was 10.25%. Outstanding borrowings under the Credit Agreement at June
30, 1999 were approximately $62.2 million.
At June 30, 1999, total borrowings under the Notes and the Credit Agreement were
approximately
Page - 20
<PAGE>
$137.2 million.
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
100% 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 90% complete. Remediation involves
upgrading or replacing Systems and equipment which the assessment phase
indicates are not Year 2000 compliant. Remediation of the critical 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 90% complete. Testing involves operation of Systems and Equipment
using dates after December 31, 1999. The Company expects to complete testing by
September 30, 1999. The revised completion date was extended by two months due
to the extensiveness of testing required for recently included
Page - 21
<PAGE>
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. The Company continues to receive responses to its
Year 2000 survey from some commercial insurance carriers and government
agencies.
At this time, 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 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 June 30, 1999, the Company has incurred approximately $190,000, related
to all phases of the Year 2000 project. The total remaining project costs is
currently estimated at $250,000.
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
Page - 22
<PAGE>
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.
Page - 23
<PAGE>
Year 2000 Disclosure Chart(1)
<TABLE>
<CAPTION>
Resolution Phases(2)
-------------------------------------------------------------------------------------------------------------------------
Assessment Remediation Testing Implementation
-------------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Information 100% Complete 90% Complete 90% Complete 70% Complete
Technology
Systems Expected completion Expected Expected completion
date, August 30, 1999 completion date, date, September 30, 1999
September 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) 100% Complete for 80% Complete 80% Complete 80% 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, November 30, 1999
exposures September 30, 1999 September 30, 1999
Expected Implement contingency
completion date plans or other
for surveying all alternatives as
third parties: in necessary, December 31,
process 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.
Page - 24
<PAGE>
(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.
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.
ITEM 3. Quantitative And Qualitative Disclosures About Market Risk
At June 30, 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.
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. 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 plaintiffs and their counsel
were appointed lead plaintiffs and lead counsel, and an amended complaint was
filed on or about July 22, 1999. The amended complaint also identifies the
Company's auditors, Ernst & Young LLP, as a defendant.
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 principally related to its reporting of
accounts receivable and the reserve for doubtful accounts. The amended
complaint purports to expand the class to include all persons who purchased the
Company's common stock during the period from July 29, 1997 through and
including July 29, 1998. 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.
On July 28, 1999, a civil action was filed against the Company and certain of
its current and former officers and directors in the United States District
Court for the Middle District of Tennessee. The action was filed by Phyllis T.
Craighead, Healthmark Partners, LLC, and The Kids and Nurses
Page - 25
<PAGE>
Liquidating Trust. In general, the plaintiffs allege that the defendants
violated Federal and State (i.e., Tennessee) Securities Laws and committed
common law fraud in connection with the Company's purchase of Kids and Nurses,
Inc. in November, 1997. The plaintiffs seek actual damages in an amount between
$2.5 million and $3.5 million, plus punitive damages and the costs of
litigation, including reasonable attorneys fees. The Company and the individuals
named as defendants deny that they have violated any of the requirements or
obligations of any applicable Federal or State Securities Laws, or any other
applicable law; 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 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 May 3, 1999, the Registrant filed a Current Report on Form 8-K
under Item 5, attaching a copy of a press release issued April 26, 1999,
which announced 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 was named as his
replacement.
Page - 26
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PEDIATRIC SERVICES OF AMERICA, INC.
(Registrant)
Date: August 23, 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)
Page - 27
<PAGE>
INDEX OF EXHIBITS
Page No.
--------
27 Financial Data Schedule................................ 29
Page - 28
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 8,860
<SECURITIES> 0
<RECEIVABLES> 107,024
<ALLOWANCES> 19,745
<INVENTORY> 0
<CURRENT-ASSETS> 102,730
<PP&E> 48,299
<DEPRECIATION> 25,405
<TOTAL-ASSETS> 197,377
<CURRENT-LIABILITIES> 34,725
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 24,617
<TOTAL-LIABILITY-AND-EQUITY> 197,377
<SALES> 164,745
<TOTAL-REVENUES> 164,745
<CGS> 0
<TOTAL-COSTS> 178,269
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,962
<INTEREST-EXPENSE> 10,914
<INCOME-PRETAX> (40,458)
<INCOME-TAX> (1,659)
<INCOME-CONTINUING> (38,799)
<DISCONTINUED> 1,475
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,324)
<EPS-BASIC> (5.61)
<EPS-DILUTED> (5.61)
</TABLE>
