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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the Transition period from to
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COMMISSION FILE NUMBER 0-23946
PEDIATRIC SERVICES OF AMERICA, INC.
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(Exact name of registrant as specified in its charter)
Delaware 58-1873345
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(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
310 Technology Parkway
Norcross, Georgia 30092-2929
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(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code - (770) 441-1580
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock $.01
par value
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 reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
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The aggregate market value of voting stock held by non-affiliates of the
registrant on December 1, 1998, based on a closing price of $3.75 per share, was
$23,475,184. As of December 1, 1998, the number of shares of the registrant's
common stock outstanding was 6,651,964 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the registrant's 1998 Annual Report and Proxy
Statement for the Annual Meeting of Stockholders of the registrant to be held on
January 20, 1999 is incorporated herein by reference in Parts II and III of this
Annual Report on Form 10-K.
Page 1 of 90, including exhibits. Index of Exhibits is on page 38 hereof.
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PEDIATRIC SERVICES OF AMERICA, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
Table of Contents
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Item Page
Number Number
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PART I
1. Business......................................................... 3
2. Properties....................................................... 26
3. Legal Proceedings................................................ 26
4. Submission of Matters to a Vote of Security Holders.............. 26
4(A). Executive Officers of the Registrant............................. 27
PART II
5. Market for the Registrant's Common Stock and
Related Stockholder Matters...................................... 27
6. Selected Financial Data.......................................... 27
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 27
7(A). Quantitative and Qualitative Disclosures about Market Risk....... 28
8. Financial Statements and Supplementary Data...................... 28
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................. 28
PART III
10. Directors and Executive Officers of the Registrant............... 29
11. Executive Compensation........................................... 29
12. Security Ownership of Certain Beneficial Owners and Management... 29
13. Certain Relationships and Related Transactions................... 29
PART IV
14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.............................................. 29
SIGNATURES............................................................. 35
INDEX TO FINANCIAL STATEMENT SCHEDULES................................. S-1
INDEX TO EXHIBITS...................................................... 38
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
This Form 10-K 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 Pediatric Services of America, Inc. (the
"Company"). When used in this Form 10-K, 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 under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's 1998 Annual Report to Stockholders, which is incorporated herein by
reference, and those discussed in the Company's filings with the Securities and
Exchange Commission, as well as general economic conditions, 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 statement speaks 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.
GENERAL
The Company is a leading provider of children's health care and related
services, and also a provider of comprehensive and paramedical testing to the
life, health and disability insurance industries. Management believes the
Company is the nation's largest focused pediatric home health care provider and
third largest provider of paramedical testing services. The Company provides
children's health care services through 113 branch offices located in 28 states
and the District of Columbia, and paramedical testing services through over 200
field offices located in all 50 states, Puerto Rico and Guam.
The Company provides a broad range of pediatric health care services, including
nursing, respiratory therapy and other medical equipment, and pharmacy and
infusion therapy. In addition, the Company provides pediatric rehabilitation
services, day treatment centers for medically fragile children, pediatric well
care services and special needs educational services for pediatric patients.
The Company also provides case management services in order to assist the family
and patient by coordinating the provision of services between the insurer or
other payor, the physician, the hospital and other health care providers. The
company's services are designed to provide a high quality, lower cost
alternative to prolonged hospitalization for medically fragile children.
The Company entered the paramedical testing business through the acquisition of
Premier Medical Services, Inc., ("Premier") in February 1996. In December 1997,
the Company acquired Physical Measurements Information ("PMI") making the
Company the nation's third largest provider of paramedical testing services.
The Company provides a broad range of paramedical testing services, including
taking health histories, collecting blood and urine samples, administering
physical examinations and performing electrocardiogram examinations on insurance
applicants. The Company's paramedical testing services clients include over
1,000 life, health and disability insurance companies as well as corporations
and other organizations that require drug and alcohol screening, wellness
physicals and occupational health services.
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INDUSTRY OVERVIEW
Health Care Services
According to industry sources, the market for home health care services in the
United States in 1996 was estimated at $35 billion. The Company estimates that
the market for pediatric home health care for the same period was over $5
billion. The pediatric home health care market is distinct in a number of
respects. Pediatric patients tend to require a higher acuity of care due to
their age and the severity of their medical conditions, and consequently
generally have a relatively long length of treatment, often measured in years
rather than weeks or months. Pediatric illness and conditions include
bronchopulmonary dysplasia, digestive and absorptive diseases, congenital heart
defects and other cardiovascular disorders, cancer, cerebral palsy, cystic
fibrosis, chronic obstructive pulmonary disease, endocrinology disorders,
hemophilia, orthopedic conditions and post surgical needs. In many instances,
pediatric patients have multiple disorders.
Home care for pediatric patients, like home care generally, is preferred over
institutional care by patients and their parents or other care givers as well as
by payors. Patients and parents prefer home care due to the ability to care for
the child in a nurturing environment, assist in socialization and provide 24-
hour attention. Home care also minimizes the risk of cross-infection,
eliminates privacy and safety concerns and permits a more gradual, and
consequently more event-free transition of care-giving from the health care
professional to the family. Payors prefer home care because it is generally
more cost effective than institutional care.
Third-party reimbursement for pediatric home care is provided predominantly by
private health insurance, with a smaller portion provided by Medicaid. Because
of the special needs of pediatric patients, the acuity of care and the skill
levels of the individual nurses or therapists providing the care, the rates
charged for health care services, particularly nursing services for pediatric
patients are generally higher than adult rates. In addition, due to the high
medical acuity of pediatric patients and the large variations in patient
conditions and treatment protocols, pediatric home health care is typically not
reimbursed on a capitated basis.
Unlike geriatric home care patients, who generally receive maintenance care,
pediatric home care patients are usually treated interventionally, using
technologically advanced medical equipment such as ventilators, oxygen delivery
systems, nebulizers, sleep apnea monitors and other respiratory equipment.
Pediatric patients often also require home infusion therapy for the delivery of
pharmaceuticals, especially for the treatment of hemophilia, cystic fibrosis and
endocrinology disorders, as well as physical and occupational therapy.
Due to the specialized care required to treat pediatric illnesses and
conditions, home care is most effectively delivered to pediatric patients by
nurses with neonatal intensive care unit ("NICU") and pediatric intensive care
unit ("PICU") experience. These specialized health care professionals are
experienced in treating medically fragile children, using and maintaining the
medical equipment, and administering required medications and other therapies.
Pediatric patients typically require home nursing in shifts, in which nursing
care is delivered eight to twenty-four hours per day, in contrast to home
nursing care for geriatric patients, in which nursing care is typically provided
on a short "visiting nurse" basis.
Like pediatric patients, young adult home care patients, who range in age from
18 to 64 years, often require long-term care from private duty nurses. Young
adult patients suffer from such disorders as muscular dystrophy, cystic
fibrosis, hemophilia, cardiovascular disorders and cancer. Many young adult
patients suffer injury and significant disabilities from near drowning incidents
and accidents or other forms of trauma. Many of these disorders and illnesses
require lifelong treatment. Frequently, a young adult patient receives home
care as a continuation of a pediatric home care treatment regimen. A large
percentage of young adult patients are covered by private health insurance, with
the remainder covered by Medicaid.
Geriatric patients (those patients age 65 years old and older) generally have
shorter periods of
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service and shorter periods of daily care. Many geriatric patients suffer from
emphysema or other pulmonary disorders requiring oxygen therapy performed during
short home visits by nurses or therapists. Geriatric patients with more acute
conditions are more likely to receive care in an institutional setting. Most
geriatric patients are covered by Medicare for all or part of their health care
needs.
The pediatric home health care services market currently is heavily fragmented.
This market is served by a large number of small entities that operate on a
local or regional basis and typically provide a limited range of health care
services. This market is also served by a small number of national home health
care companies that service the pediatric market as part of a broader product
offering. Because of the high degree of specialization required for effective
treatment of pediatric patients and the broad scope of services required due to
pediatric patients' generally high medical acuity levels, the Company believes
that there are significant growth opportunities for a national provider offering
a broad range of health care products focused on the home pediatric patient.
The U.S. paramedical testing services market is estimated by the Company to be
approximately $600 million with the majority of services being provided by four
national providers, including the Company, and several regional providers.
Paramedical testing services include taking health histories, obtaining blood
and urine samples and administering physical examinations and
electrocardiograms. Some or all of these tests are typically required by
insurance companies as a prerequisite to underwriting life, health and
disability insurance policies. The Company believes that the paramedical
testing services market is growing due to: (i) the implementation of stricter
underwriting standards requiring increased testing as a result of growing
concern over substance abuse and AIDS and other catastrophic illnesses; (ii)
technological advances in testing; and (iii) the aging of the U.S. population.
The Company also believes that large national providers are growing at the
expense of local and regional providers as many insurance companies seek to
improve quality and reduce administrative costs by consolidating their business
with fewer providers.
Insurance companies increasingly focus on the technological capabilities of
their paramedical testing providers in an effort to more efficiently track the
status of pending applications and to decrease the time between policy
application and issuance. The ability of a paramedical testing provider to
quickly and accurately accept orders for tests, schedule tests, and provide
status information as well as test results electronically has become an
important selection criteria. The Company believes that large national
providers with significant information systems resources and expertise should be
able to capitalize on these assets to gain market share.
To improve quality control and reduce administrative costs, life, health and
disability insurance companies are limiting the number of paramedical testing
providers approved by their medical underwriting departments. As customers
consolidate their business with fewer providers, the ability of a provider to
offer a full range of testing services nationwide has become increasingly
important. In addition, since the accuracy and completeness of testing
information is critical to the timely completion of the entire underwriting
process, insurance companies are seeking out the high quality providers of
paramedical testing services.
RECENT DEVELOPMENTS
Acquisitions
The Company acquired twelve companies during fiscal 1998. Pro forma net loss and
net loss per share would not be materially different than actual net loss and
net loss per share reported in the Statement of Operations. The aggregate fiscal
year net revenue for these acquisitions was approximately $66.2 million and
total net assets were $7.2 million. The aggregate purchase price of these
companies was approximately $46.6 million. For three of the fiscal 1998
acquisitions, the Company granted price protection to the sellers for the
Company's common stock,
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as follows:
On December 15, 1997, one of the Company's consolidated subsidiaries,
Paramedical Services of America, Inc., purchased certain paramedical testing
assets ("PMI") of ChoicePoint Services, Inc. ("ChoicePoint") for $21.7 million
consisting of $11.7 million in cash and $10.0 million in the form of 495,050
shares of the Company's Common Stock. The Company provided ChoicePoint with a
one-year price protection against a decrease in the value of the shares issued
at closing. On August 19, 1998, ChoicePoint tendered to the Company all of its
shares for which the Company paid a total of $10.0 million cash, the contractual
protection price under the terms of the agreement.
On January 30, 1998, the Company purchased the stock of Pediatric Nursing
Service, Inc. ("PNS"), a pediatric nursing company in Parsippany, New Jersey,
for a total purchase price of $2.4 million, consisting of $1.8 million in cash
and $600,000 in the form of 31,927 shares of the Company's Common Stock. The
shares of Common Stock have been placed in escrow and will be released on or
after January 30, 1999, upon the satisfaction of certain conditions. The
Company granted the sellers a price protection at $18.79 per share upon
disposition of the shares of Common Stock for a period of 30 days after they are
released from escrow.
On March 1, 1998 the Company purchased the stock of Medical Equipment & Supply,
Inc. ("MES"), in Austin, Texas, for a total purchase price of $2.0 million,
consisting of $670,000 cash and $1.34 million in the form of 69,247 shares of
the Company's Common Stock. The shares of Common Stock have been placed in
escrow and will be released on or after March 1, 1999, upon the satisfaction of
certain conditions. The Company granted the sellers a price protection at
$19.35 per share upon disposition of the shares of Common Stock for a period of
30 days after they are released from escrow.
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Shareholder Rights Plan
On September 22, 1998, the Board of Directors adopted a Shareholder Rights Plan
and declared a dividend of one Common Stock Purchase Right ("Right") for each
outstanding share of the Company's Common Stock to stockholders of record at the
close of business on October 13, 1998. The Rights will be attached and traded
with the Company's Common Stock, but will detach and become exercisable 10 days
after a person or group (Acquiring Person) has acquired beneficial ownership of
15% or more of the Common Stock, or 10 days after a person or group commences a
tender offer or an exchange offer that would result in their owning 15% or more
of the Common Stock. Each Right may be exercised to acquire a number of shares
of Common Stock equal to ten shares of Common Stock multiplied by a fraction,
the numerator of which is the number of shares of Common Stock outstanding on
the date that an Acquiring Person was first determined to be such (the Stock
Acquisition Date) and the denominator of which is the number of Rights
outstanding on the Stock Acquisition Date that are not owned by the Acquiring
Person. The Company may redeem the Rights at a price of $0.01 per share at any
time before a person becomes an Acquiring Person. Until a Right is exercised,
the Rights holder will have no rights as a stockholder of the Company, including
the right to vote or to receive dividends. The Rights will expire on September
30, 2008, unless earlier redeemed or exchanged by the Company.
Effects of Continued Listing on NASDAQ
On September 11, 1998, the Company was notified by the administrative staff of
The Nasdaq Stock Market, Inc. that the Company's Common Stock has failed to
maintain for the prior 24 consecutive trading days, a closing bid price of
greater than or equal to $5.00 per share, in accordance with Nasdaq Marketplace
Rule 4450(b)(4). The Company was afforded ninety (90) calendar days (up to and
including December 10, 1998) in which to regain compliance with Marketplace Rule
4450(b)(4). However, since the Company was unable to demonstrate compliance with
the requirement, under procedural remedies pursuant to Marketplace Rule 4480,
the Company has requested a review of the staff's determination by a committee
of the NASD's Board of Governors. The Company has been notified that the review
committee will conduct a hearing on the Company's request on February 12, 1999.
The Company has also been advised that Nasdaq will not take any action to de-
list the Common Stock pending the conclusion of that hearing. There can be no
assurance, however, that the Company will be successful with the review
committee, and the Common Stock may be de-listed from the Nasdaq National Market
if the review committee accepts the administrative staff's determination and/or
the Company decides, for business reasons, not to effectuate alternative
remedies, such as a reverse stock split. In such event, the Company would apply
to list the Common Stock on the Nasdaq SmallCap Market or other quotation system
or exchange on which the Common Stock would qualify, until such time that the
Company is able to again qualify for listing on the Nasdaq National Market. It
is possible, however, that investors might react negatively to a de-listing from
the Nasdaq National Market, which could adversely affect trading in the Common
Stock.
Revenue and Collection Initiatives
As a result of the changing reimbursement environment due to the implementation
of the Interim Payment System ("IPS") for home care reimbursement under
Medicare, slower payment by commercial insurance companies and certain State
Medicaid programs, the Company has experienced smaller profit margins and slower
reimbursement by payors. This prompted the Company to adopt and implement a
number of revenue and collection initiatives during the fourth quarter of fiscal
1998. For further information relating to the Company's current initiatives,
see "Business Strategy" below.
During the fourth quarter of fiscal 1998, the Company's medical testing division
experienced difficulties with the transition to the Company's internally
developed paramedical testing billing and collection system. The conversion
resulted in significant unbilled revenue at the end of the fourth quarter, which
has subsequently been billed as of this date. To resolve these difficulties, the
Company incurred an estimated $500,000 in incremental operating costs. See
additional
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information relating to this matter as set forth under the caption "Management's
Discussion and Analysis and Results of Operations" in the Company's 1998 Annual
Report, which is incorporated herein by reference.
Credit Agreement
On December 4, 1998, the Company provided notice to its lenders, as required
under the terms of the Credit Agreement, as amended, of noncompliance 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 significant reduction 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. Specific information relating
to this matter is set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 6-13 of the
Company's Annual Report and is incorporated herein by reference.
BUSINESS STRATEGY
Focus on Children's Services. Pediatric health care services are generally
recognized as a distinct specialty within the health care industry. Recent
federal legislation allocated $24 billion of additional funding to qualifying
States for health coverage of uninsured children (see "Reimbursement"). The
Company has significant experience and expertise in children's health care,
particularly with respect to medically fragile children who are dependent on
sophisticated medical technology and nursing care. The Company believes that
its pediatric focus and expertise provide it with significant sales and
marketing advantages. The Company intends to continue to focus on providing
relatively high acuity health care services for children.
Provide High Quality, Cost-Effective Care. The Company emphasizes quality
throughout its organization with respect to both the provision of services and
the hiring and training of clinical personnel. Moreover, the Company believes
that its ability to coordinate and deliver a full range of services in a non-
institutional setting and its experience and expertise in caring for medically
fragile children result in superior and cost-effective medical outcomes. The
Company intends to continue to emphasize and enhance the quality and cost-
effectiveness of its services. The Company's goal is to be the nation's leading
provider of children's health care services and paramedical testing services.
Realization of Operating Efficiencies and Internal Growth. The Company currently
has 113 pediatric health care branch offices in 28 states and the District of
Columbia and approximately 65% of the top 100 Metropolitan Statistical Areas
("MSAs") in the United States. In the past, the Company has extended its
geographic presence by acquisition to enable the Company to obtain more
referrals from large insurance companies and other third party payors and to
provide operating efficiencies. While the Company believes that it has realized
more referrals because of its national presence, the Company has suspended
acquisition plans and intends to aggressively pursue referrals on its more
profitable product lines by increased emphasis on strengthening its infra
structure new managed care contracts and sales and marketing. The Company will
continue to focus on the realization of operating efficiencies, and internal
profitability and growth.
Lower Operating Costs and Corporate Overhead. The Company began cost-cutting
initiatives in the fourth quarter of fiscal 1998, such as closing or merging
locations not meeting profitability standards and reducing corporate and field
staff. The Company will continue to identify and implement further cost
containment initiatives. The Company believes that completion of the
implementation of management information systems will further streamline
operations and contribute to cost savings. The Company also intends to continue
to explore cost cutting initiatives, aggressively improve the efficiency of its
billing and collection efforts, and focus on internal growth and profitability.
See "Management Information Systems" below.
Focus on Cash Collections. The Company also intends to continue aggressive
collection efforts.
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Specifically, the Company has, and will continue to, hire additional experienced
reimbursement personnel and reorganize the billing and collection department to
improve collections. In addition, the legal and managed care departments are
working closely with the reimbursement department to more quickly identify and
resolve collection problems. A Company task force has been formed to resolve
large dollar collection problems and implement new procedures for corporate and
field personnel to correct identified problem areas. The Company has also begun
to establish regional data entry operations to improve the quality of data input
into the billing and collection system.
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Leverage Market Position and Service Offering in Paramedical Testing Business.
The Company expanded its paramedical testing services business through the
acquisition of PMI and is now the third largest national provider of paramedical
testing services. The paramedical testing market is consolidating as customers
seek to reduce administrative costs and increase quality by limiting the number
of companies with which they contract. The Company intends to expand its
paramedical testing business by leveraging its national network and strong
customer relationships, exploring strategic alliances with complementary
businesses, and continuing to emphasize the quality of its services and
responsiveness to customers. In addition, the Company intends to evaluate
opportunities for expansion of services complementary to paramedical testing,
such as drug and alcohol screening, laboratory services, corporate wellness
physicals, occupational health services and preventive medicine analysis for
corporations and other organizations.
Aggressively Complete Systems Projects. The Company recently implemented a new
paramedical billing and collection system. Problems encountered during the
conversion to this new system resulted in significant unbilled revenue. While
substantially all of the conversion problems have been corrected as of the date
of this filing, the Company intends to aggressively pursue the resolution of any
remaining difficulties and the completion of the project. The Company believes
that this will significantly improve cash collections, and allow paramedical
personnel to more effectively focus on sales and growth. See "Management
Information Systems" below.
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SERVICES AND OPERATIONS
General
The Company provides comprehensive home health care services, principally for
children. The Company also provides paramedical testing services for the
insurance industry. The following table summarizes the percentages of net
revenue to total net revenue of each major category of service offered by the
Company for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
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1998 1997 1996
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(In thousands) REVENUE % TOTAL REVENUE % TOTAL REVENUE % TOTAL
- -------------- --------- --------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
PEDIATRIC HOME HEALTH CARE
Nursing......................... $ 93,248 30.9 $ 65,927 32.3 $52,025 31.7
Respiratory Therapy Equipment... 24,299 8.0 22,918 11.2 17,458 10.7
Home Medical Equipment.......... 3,293 1.1 2,566 1.3 1,394 0.8
Pharmacy and Other.............. 34,563 11.4 29,151 14.3 22,819 14.0
-------- ---- -------- ---- ------- ----
Total Pediatric Home Health
Care........................ 155,403 51.4 120,562 59.1 93,696 57.2
ADULT HOME HEALTH CARE
Nursing......................... 18,254 6.0 21,900 10.7 17,683 10.8
Respiratory Therapy Equipment... 22,614 7.5 21,719 10.6 22,085 13.5
Home Medical Equipment.......... 6,309 2.1 5,041 2.5 5,385 3.3
Pharmacy and Other.............. 19,603 6.5 8,757 4.3 5,975 3.6
-------- ----- -------- ----- -------- -----
Total Adult Home Health Care. 66,780 22.1 57,417 28.1 51,128 31.2
-------- ----- -------- ----- -------- -----
TOTAL MEDICAL TESTING SERVICES.. 80,309 26.5 26,044 12.8 18,980 11.6
-------- ----- -------- ----- -------- -----
Total........................... $302,492 100.0% $204,023 100.0% $163,804 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
The Company provides a broad range of health care services principally for
children and, to a lesser extent, young adults and geriatric patients.
Pediatric Health Care Services
Pediatric Nursing Services. The Company's pediatric nursing services consist
primarily of private duty home nursing care for pediatric patients with
illnesses and conditions such as bronchopulmonary dysplasia, digestive and
absorptive diseases, congenital heart defects and other cardiovascular
disorders, cancer, cerebral palsy, cystic fibrosis, chronic obstructive
pulmonary disease (e.g., emphysema, chronic bronchitis and asthma),
endocrinology disorders, hemophilia, orthopedic conditions and post surgical
needs. Pediatric nursing care typically begins upon the patient's discharge
from the hospital. The Company's nurses assess and monitor vital signs and the
condition of the child, administer medications and treatment regimens, provide
enteral and other forms of tube feeding, monitor and maintain ventilators,
oxygen and other home medical equipment, monitor and administer pain management,
provide daily care, including baths, hygiene and skin care, conduct physical,
occupational and other forms of prescribed therapy, and coordinate other forms
of medical care necessary for the child.
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Private nursing care is often provided 24 hours per day for extended periods of
time. The Company estimates that its pediatric patients require private duty
nursing care for an average of eight months with length of daily care averaging
ten to 11 hours. The Company's nurses emphasize education of the parents or
other care givers of the child in order to maximize the independence of the
child and the family. Through this educational process, the length of the daily
private duty care can be reduced as the child's condition improves or stabilizes
and the parents or care givers assume a more active role in the care of the
child. Depending on the illness or condition of the child, in many cases the
Company continues to provide nursing visits, respiratory therapy and other
medical equipment services and pharmaceutical services after it discontinues
private duty nursing care.
The Company has more than 5,000 registered or licensed pediatric nurses and
therapists on its active nursing registries. Due to the special needs and
acuity of care of pediatric patients generally, the Company requires that its
nurses and therapists have training with pediatric patients. Most of the
Company's nurses have NICU and PICU experience.
Although nursing services traditionally have provided the Company with lower
profit margins than the Company's other services, referral sources generally
make arrangements for nursing services before making arrangements for other
health care services such as equipment or infusion, necessary for the discharge
of a medically fragile child from the hospital. Consequently, a high quality
nursing service facilitates marketing of the Company's higher margin pediatric
product lines. The Company intends to continue to increase the number of its
branch offices that provide pediatric nursing services as the Company focuses on
further developing its pediatric business.
Pediatric Respiratory Therapy Equipment and Services. The Company provides
respiratory therapy equipment services to pediatric patients in the home. The
services include (i) the rental, sale, delivery and setup in accordance with
physician prescriptions of equipment, such as ventilators, oxygen concentrators,
liquid oxygen systems, high pressure oxygen cylinders, apnea monitors and
nebulizers, (ii) periodic evaluation and maintenance of the equipment and (iii)
delivery and setup of disposable supplies necessary for the operation of the
equipment. The Company provides these services to patients with a variety of
conditions, including chronic obstructive pulmonary diseases, neurologically
related respiratory problems, cystic fibrosis, congenital heart defects and
cancer. The Company utilizes skilled registered respiratory therapists and
certified respiratory therapy technicians to provide these services. The
Company also provides training to patients and the families in equipment use and
a 24-hour repair service through emergency on-call technicians.
Pharmacy and Infusion Therapy. The Company provides pharmaceutical products and
related specialty infusion therapy services for its patients. Infusion therapy
involves the administration of nutrients, antibiotics and other medications
intravenously or through feeding tubes. The number of therapies that can be
administered safely in the home has increased significantly in recent years
because of technological innovations in infusion equipment and advances in drug
therapy. Consequently, an increasing number and a broader range of infections
and diseases which would otherwise have required patients to be hospitalized are
now considered treatable in the home. These in-home therapies reduce the need
for emergency room visits for infusion therapy, and are popular with patients,
referring physicians and payors.
The Company provides a full range of pharmacy and infusion therapies, including
antibiotic and other anti-infective therapies, enteral and total parenteral
nutrition therapy, pain management therapy, hemophilia therapy, immunomodular
therapy and chemotherapy. The Company also provides specialty infusion
therapies intended to meet the needs of patients with a variety of serious
infections such as osteomyelitis, bacterial endocarditis, cellulitis, septic
arthritis, wound infections and recurrent infections associated with the kidney
and urinary tract and AIDS. The Company also provides specialty infusion
therapy to terminally or chronically ill patients suffering from acute or
chronic pain, patients with impaired or altered digestive tracts due to
gastrointestinal illness, patients suffering from various types of cancer,
patients requiring treatment for congestive heart failure and patients with
chronic conditions such as hemophilia, cystic fibrosis and endocrinology
disorders. The Company's specialty infusion therapy services are administered
by its nursing staff. The Company currently supports the home infusion therapy
market through seven regional pharmacy locations.
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<PAGE>
The Company also operates a mail order medication service that provides
physician-prescribed unit dose medications to respiratory therapy patients. The
Company offers its patients medication in a premixed unit dose form as well as
professional clinical support and claims processing. The Company employs
licensed pharmacists to assist with its unit dose medication services business.
Pediatric Home Medical Equipment and Services. The Company provides rentals,
sales and service of home medical equipment. These services are provided to
patients upon their discharge from the hospital as well as after the Company's
nursing services are no longer required. Home medical equipment provided by the
Company includes wheelchairs, home care beds and ambulatory aids. The Company
currently has 71 locations that provide rentals of home medical equipment as
well as mail order programs for the provision of a broad range of home health
care equipment.
Other Pediatric Services. The Company currently has six pediatric day treatment
centers in Florida and Georgia. These centers provide, among other services,
daily medical care and physical, occupational and other forms of therapy for
medically fragile children. The children receive nursing supervision and/or
physical and other therapies in a setting which allows for socialization and
education of the children. The Company also provides pediatric rehabilitation
services such as physical, occupational and speech therapies. The Company
utilizes skilled registered therapists to perform these services in the home or
through the Company's pediatric day treatment centers.
Young Adult and Geriatric Health Care Services
The Company generally offers young adult and geriatric patients the same health
care services it provides to pediatric patients. Although young adult patients
tend to require a lower acuity of care, they often require long-term care from
private duty nurses. The Company's young adult patients are being treated for
disorders such as muscular dystrophy, cystic fibrosis, hemophilia,
cardiovascular disorders and cancer, as well as serious disabilities from near
drowning incidents and accidents and other forms of trauma involving spinal cord
or other injuries. Frequently, the Company's young adult patients receive home
care as a continuation of a pediatric home care treatment regimen.
The Company's geriatric home care patients generally require the lowest acuity
of care and have shorter periods of service and shorter periods of daily care
than either the Company's pediatric or young adult patients. Most of these
patients receive maintenance care for end-of-life conditions such as emphysema
or other pulmonary disorders, neurological diseases and renal diseases.
Services are provided during short home visits by nurses or therapists.
Although some of the Company's geriatric home care patients receive higher
acuity, intervention care, these services are more likely to be provided in an
institutional setting.
Paramedical Testing Services
The Company is the nation's third largest provider of comprehensive paramedical
testing services with over 1,000 life, health and disability insurance company
customers. The Company's examiners provide examinations at the request of
insurance agents at times and in places convenient to applicants. The Company
utilizes a national network of paramedical technicians consisting of independent
contractors and employees to administer the tests primarily in the applicant's
home or office. In selected cases, the Company will contract with credentialed
nurses or physicians to administer specialized testing services. The Company
offers its testing services through a network of over 200 field offices in
strategic geographical locations located in all 50 states, Puerto Rico and Guam.
Because the Company utilizes nurses, physicians and trained paramedical
technicians to conduct examinations, the Company is able to provide its clients
with a full range of paramedical examination services. These services include
recording an applicant's medical history, height and weight, measuring blood
pressure, and collecting blood and urine specimens. Examiners also perform more
sophisticated procedures at the request of insurance companies, including
physical examinations, electrocardiograms and lung capacity measurements.
The Company's network of highly automated branch offices enables it to provide
services nationwide. As a result, the Company is an attractive choice for
direct marketers, master brokers, banks, savings and loan associations and
investment brokers who write insurance applications nationwide and desire a
single source for their paramedical testing needs.
The Company provides written and electronic examination results to insurance
clients, in most cases within three days of receiving the initial request for an
examination. The Company's ability to process examinations rapidly is due, in
part, to the proximity of its paramedical technicians to the homes and
workplaces of insurance applicants, ongoing improvements in data processing and
management information systems, and the use of medically trained personnel who
promptly evaluate insurance applicants and efficiently process examination
results. The Company also performs other services such as drug and alcohol
screening, wellness physical examinations and occupational health services for
corporations and other organizations. In order to provide high quality
paramedical testing services, the Company maintains a quality assurance program
that includes the ongoing training of paramedical technicians, monitoring of
service standards and establishing and maintaining controls throughout the order
management system.
Recruiting, Training and Retention of Professional Staff
The Company's pediatric services are provided by skilled pediatric nurses and
skilled respiratory therapists. Nurses generally have a minimum of one year
prior NICU or PICU experience, a nursing license and current CPR certification.
Each nurse must pass a written pediatric and medication exam and provide
employment references. Therapists generally have a minimum of one year prior
experience and current CPR certification, and must provide employment references
as well. Under the Company's pediatric nursing training program, nurses are
required to attend an orientation program where they are trained in aspects of
home health care, such as equipment use, which differ from institutionally
provided health care. If qualified, nurses receive additional training in the
use of ventilators and other home respiratory equipment. The Company requires
its nurses to attend continuing education sessions on safety and techniques in
home health care. Further, the Company offers its nurses periodic continuing
education courses and professional seminars on various topics in home health
care to assist in the retention of qualified personnel. As of September 30,
1998, the Company had over 5,000 licensed or credentialed nurses and therapists
on its staff and active registries.
To provide a qualified, reliable nursing and therapy services staff, the Company
continuously
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<PAGE>
recruits professional nurses and technical specialists, and trains and offers
benefits and other programs to encourage retention of these professionals. The
Company recruits primarily through advertising, employment fairs, direct contact
with community groups and employment programs and uses bonuses and other benefit
programs to encourage new employee referrals by existing employees. The Company
has in the past recruited pediatric nurses who have cared for a patient in the
hospital to continue to provide care for such patient in the home through part-
time or full-time employment with the Company.
Quality Assurance
The Company has an established quality assurance program for the implementation
and monitoring of service standards. The Company's quality assurance program
includes periodic quality audits and other measures designed to ensure
compliance with the documentation and operating procedures required by federal
and state law and the Company's internal standards. The Company's officers
oversee the results of these quality assurance audits and implement changes
where necessary.
The Company's quality assurance program also emphasizes accreditation by the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). JCAHO
is a nationally recognized not-for-profit organization that develops standards
for various health care providers and monitors compliance with such standards.
Substantially all of the Company's branch offices, other than those recently
acquired or established, have received accreditation from JCAHO. JCAHO's
objective standards are one of the few methods by which referring health care
professionals may assess the quality of services of a home health care provider.
Case Administration
Prior to providing services to a patient, the Company coordinates with the
patient's physicians, third-party payors, case managers and other referral
sources. In order to accomplish this coordination, the Company has developed
and implemented case management and clinical coordination functions.
Case Management. The Company maintains a case management service department
designed to assure the cost-effective delivery of high quality care to the
Company's highest acuity patients. This department acts as the central point
for coordination of services and benefits for patients referred by insurance
companies. The Company assigns a case manager to review the patient's insurance
status to determine coverage and relevant reimbursement criteria. The case
manager contacts the relevant third-party payors to negotiate the services that
will be covered and the applicable rates. The case manager then communicates
with the Company's billing and collection department to assist in accurate
billing. The case manager also assists in resolving disputes that may arise
between the Company and third-party payors.
Clinical Coordination. The Company assigns a clinical coordinator to higher
acuity patients, typically before the patient is discharged from the hospital.
The clinical coordinator works with the physician, case manager or other
referral source to arrange all home health care services needed by the patient.
Sales and Marketing
The Company obtains patient referrals primarily from neonatologists,
pediatricians, pulmonologists, internists and other physicians, hospital
discharge planners, case managers, community-based health care institutions and
social service agencies. The Company markets its services to these referral
sources primarily through its branch office personnel and various media formats.
The branch office directors conduct the sales and marketing activities at the
branch office level. Branch office directors generally have a clinical
background as registered nurses and/or therapists, and as such they are able to
describe and promote the Company's services to referral sources. The branch
office directors attempt to cultivate relationships with their local referral
sources through quality service, personal contacts and education about the
appropriate role and benefits of the Company's
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<PAGE>
services in the treatment of patients. In addition, the Company's case
management department plays an integral role in maintaining favorable
relationships between the Company and large insurance companies.
The Company also promotes referrals by seeking to arrange preferred provider
contracts with managed care companies. The Company has established preferred
provider arrangements that are both national and regional in scope. The
contracts typically designate the Company as a preferred provider of certain
services in select areas but do not establish an exclusive relationship. The
preferred provider contracts typically set forth a range of services that the
Company may provide and the applicable rates for such services. The contracts
also specify required billing and claims procedures, record maintenance policies
and other requirements. The Company has not entered into any contracts with
health maintenance organizations or other third-party payors that require
services to be rendered on a risk-sharing or capitated basis.
The Company believes that JCAHO accreditation of its branch offices is an
important factor in its sales and marketing efforts. The Company also believes
that its focus on pediatric health care services combined with management's
experience in rendering these services provides the Company with a significant
sales and marketing advantage.
The Company markets its paramedical testing services on a national level through
six full-time national sales representatives who call on senior underwriting
executives at the home offices of insurance companies. The Company serves over
1,000 active life, health and disability insurance company clients, including
their networks of agency, districts, and brokerage offices. National sales
representatives promote the Company's high quality of service and rapid response
time to examination requests and are responsible for maintaining the Company's
position on each insurance company's approved list of examination providers.
The Company regularly attends and occasionally sponsors client conferences to
provide national sales representatives with opportunities to further develop key
relationships.
At a local level, branch managers, and in certain offices, additional marketing
personnel, market the Company's services directly to the local insurance agents
and local managers, who have the authority to select examination providers from
the list approved by the home offices of the insurance companies. These local
marketing efforts emphasize the quality of the Company's examinations and the
speed and accuracy of its services, including the ability of each branch to
quickly ascertain the status of each service request.
Billing and Collection
The Company derives substantially all of its health care net revenue from
commercial insurance and other private third-party payors and Medicare and
Medicaid. The current reimbursement environment is a complicated process,
involving multiple payors with differing coverage and reimbursement policies.
Management of accounts receivable, through effective billing, collection and
reimbursement procedures, is critical to the financial success of health care
service providers due to lengthy reimbursement periods. The Company's
reimbursement specialists work closely with the branch offices and third-party
payors. Each specialist is responsible for ensuring the adequacy of the
documentation, submitting the documentation and claims to third-party payors and
expediting payment.
In July 1997, the Company began implementing an automated patient accounting
system ("Encore"), which is designed to provide each of the Company's health
care branch offices with immediate access to patient information and perform
billing and collection services. As of September 30, 1998, the Company had
implemented the Encore System at approximately 85% of its branch offices.
The Company bills its insurance company and other paramedical testing clients on
a fee-for-service basis. In December 1997, the Company acquired PMI, making the
Company the third largest provider of paramedical testing services. The
Company's paramedical testing division had approximately $80.3 million in
revenues in fiscal year 1998. This acquisition significantly expanded the scale
of the Company's paramedical testing services, placed the Company on the
approved provider list for over 200 new insurance company customers and added
significant geographic coverage. In connection with the Company's purchase of
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<PAGE>
PMI, the Company acquired the PMI System (renamed the "SOLAR System"), an
advanced computer software system, then under development by ChoicePoint,
designed for entering orders, scheduling examinations and providing status
reports. The SOLAR System is designed to permit electronic communication of
information between the Company and its insurance company clients. Once
completed and integrated with the Company's billing and collection system, the
Company intends to utilize the combined system capabilities to provide current
information on the status of any given customer order, thereby providing
enhanced services to and allowing closer ties with the Company's customers. The
Company also developed internally a new paramedical testing billing and
collection system ("Genesis"), which is designed to integrate with the SOLAR
System. See "Management Information Systems".
Local Office Network
The Company currently provides its health care services through a network of 113
branch offices located in 28 states and the District of Columbia. The Company
seeks to address local market needs through its branch office network. Each
branch office conducts local marketing efforts, negotiates contracts with local
referral sources, recruits personnel and coordinates patient care. The Company
believes that the business of providing health care services is most effective
if each branch office is allowed to operate as a local business targeting
services to, and reacting to the needs of, the local community. The Company
provides its branch office managers with training, comprehensive policies and
procedures and standardized operating systems, while allowing them sufficient
autonomy to address local needs.
The Company provides its paramedical services through a network of over 200
field offices strategically located in all 50 states, Puerto Rico and Guam.
Each branch office is responsible for local marketing efforts, recruiting
qualified personnel and coordinating examination and reporting procedures. The
Company provides its branch managers with training, comprehensive policies and
procedures and standardized operating systems, while allowing them sufficient
autonomy to address local needs. The Company believes that decentralized
management of local operations enhances the Company's ability to establish and
maintain relationships with local insurance agents and other referral services.
CORPORATE COMPLIANCE PROGRAM
As a result of an increasingly complex regulatory environment for the health
care industry, in 1997 the Company undertook the implementation of a company-
wide compliance program, developed in accordance with federal guidelines. The
Company's compliance program encompasses measures for auditing and monitoring of
legal compliance as well as training for Company employees and agents. The
program stresses three core principles: honesty, respect and responsibility, and
is designed to provide support and guidance for the Company's employees as they
strive to be consistent with Company values. In addition, the compliance program
focuses on prevention and detection of fraud and abuse violations, as well as
reducing the prospect of unlawful conduct. The Company has hired a corporate
compliance officer who is vested with responsibility for implementing and
maintaining the compliance program.
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<PAGE>
MANAGEMENT INFORMATION SYSTEMS
The business of the Company is dependent in part upon its ability to store,
retrieve, process and manage billing and collection information for each
patient. In July 1997, the Company implemented an automated patient accounting
system, Encore, which is designed to facilitate these functions with respect to
its home health care business. Encore provides the Company's health care
locations with immediate access to patient information and performs all
necessary billing and collection services. Approximately 85% of the Company's
health care branch locations currently use Encore. The majority of the
remaining locations, with the exception of the Oxygen Specialties, Inc. branch
locations, are scheduled to be on-line in early 1999. Over the initial 15
months, utilizing Encore has enhanced the Company's patient information and
billing and collection functions.
In connection with the acquisition of PMI, the Company acquired the SOLAR System
to manage certain order entry and billing functions essential to its paramedical
testing operations. The SOLAR System which was fully implemented in July 1998,
is designed for entering orders, scheduling examinations and providing status
reports. The Company also developed internally, Genesis, a new paramedical
testing billing and collection system which is integrated with the SOLAR System.
Prior to the implementation of the SOLAR System, the Company contracted with
ChoicePoint to provide on an interim basis, certain order entry, scheduling,
status reporting, billing and other related services. The service agreement
with ChoicePoint ended on June 30, 1998 as the combination of both the Genesis
and SOLAR Systems allowed the Company to perform the
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<PAGE>
services internally.
During the fourth quarter of fiscal 1998, the Company's medical testing division
experienced continued difficulties with the conversion and transition to the
internally developed billing systems. The Company faced operational problems
with the interface of the SOLAR and Genesis systems, resulting in significant
unbilled revenue, which has subsequently been billed. Further, the Company
believes that substantially all of the systems' technical problems have been
corrected. In addition, the delay in issuing invoices caused the Company to
incur an estimated $500,000 in incremental operating costs.
As the Company's older financial accounting system (MAS-90) continued to
struggle to meet the needs of the Company, and was non-compliant for Year 2000,
the decision was made to replace it. In November, 1998, the Company implemented
the Oracle Financials application ("Oracle") which included General Ledger,
Purchasing and Accounts Payable modules. Oracle was selected for both its
functionality and scalability. This new accounting system provides additional
features and flexibility, as well as scale with the anticipated growth of the
Company and is warranted to be Year 2000 compliant.
There can be no assurance that the Company will not experience further
unanticipated delays, complications and expenses in the implementation of these
new systems. Further, there can be no assurance that the systems will perform
as expected, or that further development will not be required. Failure of such
systems to perform as expected, could have a material adverse effect on the
Company's business, financial condition and results of operations. Specific
information relating to the Company's Year 2000 efforts is set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on page 6 of the Company's 1998 Annual Report and is incorporated
herein by reference.
YEAR 2000 COMPLIANCE
As the Year 2000 approaches, an issue impacting all companies has emerged
regarding how existing application software programs and computer operating
systems ("Computer 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. The Company has also 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 from any state
Medicaid agency, and only one response from a Medicare carrier. 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.
Specific information relating to the Company's Year 2000 efforts is set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" on page 11 of the Company's 1998 Annual Report and is
incorporated herein by reference.
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REIMBURSEMENT
The Company focuses its health care marketing efforts on patients with private
insurance; however, due to the nature of the Company's business, many of its
patients rely on Medicare and Medicaid for health coverage.
The following are the approximate percentages of the Company's net revenue
attributable to reimbursement from various payors of both the health care
services and paramedical testing businesses for the periods presented:
<TABLE>
<CAPTION>
Year Ended Year Ended
Payor September 30, 1998 September 30, 1997
----- ------------------- ------------------
<S> <C> <C>
Commercial Insurance and Self Payors...................... 70% 64%
Medicaid and Other State Programs......................... 23% 27%
Medicare and Other Federal Programs....................... 7% 9%
---- ----
Total........................................... 100% 100%
==== ====
</TABLE>
During the past decade, federal and state governments and third-party payors
have taken extensive steps intended to contain or reduce the costs of health
care. These steps have included, among others, reduced reimbursement rates,
changes in services covered, increased utilization review of services,
negotiated prospective or discounted contract pricing and adoption of a
competitive bid approach to service contracts. Cost containment efforts are
expected to continue in the future. Home health care, which is usually less
costly than hospital-based care, generally has benefited from many of these cost
containment efforts. As expenditures on home health care services continue to
grow, however, initiatives aimed at reducing the cost of health care delivery in
non-institutional settings are increasing. Many state Medicaid programs, in an
effort to contain the cost of health care and in light of state budgetary
constraints, have reduced their payment rates and have narrowed the scope of
covered services. Likewise, the federal government through legislation and
regulation has acted repeatedly to limit expenditures for health care, including
home health services and home medical equipment. Similar initiatives are
expected to continue in the future. A significant change in coverage or a
reduction in payment rates for the types of services provided by the Company
could have a material adverse effect upon the Company's business.
The 1997 Balanced Budget Act ("BBA 1997") contains provisions intended to
significantly reduce Medicare reimbursement to the home health industry. In
addition, BBA 1997 requires that home health and home medical equipment
companies post surety bonds in specified amounts. The new requirements are
administered and regulated by the Health Care Financing Administration ("HCFA")
which has delayed the submission compliance date. A new submission compliance
date for surety bonds is proposed to follow a final ruling by HCFA expected no
earlier than February, 1999. Furthermore, reimbursement reductions for oxygen
and oxygen equipment are being phased in beginning January 1, 1998, and home
medical equipment fee schedules will be frozen. The Company believes that health
care reform initiatives are likely to continue in the future. These developments
are likely to have an adverse, and may have a material adverse, effect on the
Company.
Commercial Insurance. The Company provides its services on a fee-for-service
basis to patients covered by commercial insurance as well as self-funded
employer plans. In some instances, services are rendered pursuant to fees
negotiated with insurance companies under preferred provider contracts. The
Company has not entered into any contracts with health maintenance organizations
or other insurance companies that require services to be rendered on a risk-
sharing or capitated basis. All of the Company's paramedical testing services
are performed on a fee-for-service basis and are paid by the insurance company
or other entity that requested the tests.
Medicaid Program. Medicaid (Title XIX of the Social Security Act), enacted in
1965, authorizes Federal grants to States for medical assistance to low-income
persons who are age 65 or over, blind, disabled, or members of families with
dependent children or qualified pregnant women or children.
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The program is jointly financed by the Federal and State governments and
administered by States. Within broad Federal rules, each State decides eligible
groups, types and range of services, payment levels for services, and
administrative and operating procedures. Payments for services are made directly
by the State to the individuals or entities that furnish the services.
Medicare Program. Medicare is a federally funded health insurance program that
provides health insurance coverage for persons age 65 and older, certain
disabled persons under age 65, and persons of any age with chronic end-stage
renal disease. The United States Congress enacted the Medicare program in 1965
as Title XVIII of the Social Security Act. The program consists of two separate
insurance programs: (i) "Hospital Insurance," established in Part A of the
Social Security Act, provides certain benefits covering inpatient hospital,
skilled nursing facility, home health and hospice services, and (ii)
"Supplementary Medical Insurance," established in Part B of the Social Security
Act, provides benefits in the areas of outpatient hospital visits, physician
services, outpatient services, surgical supplies, braces, ambulance services,
pneumococcal and hepatitis B vaccine, and blood clotting factors for hemophiliac
patients, home medical equipment and prosthetic devices.
Individuals age 65 and older who qualify for Social Security or Railroad
Retirement Benefits automatically qualify for Medicare Part A. Medicare Part B
is a voluntary program and all individuals who are eligible for Part A coverage
may elect to enroll in Part B. The Company is an authorized provider eligible to
receive direct reimbursement under Medicare Part A and B in certain geographic
locations. Health care providers such as the Company must meet "conditions of
participation" to receive Medicare payments. The conditions of participation are
federal requirements intended to ensure the quality of the medically necessary
services provided.
Part A providers are required to sign provider agreements to participate in
Medicare. The Medicare Part A home health benefit currently is a cost-based
reimbursement program that requires the Company to file an annual cost report
for those branch offices performing services under Part A and for the Company's
home office. Medicare reimburses the Company for covered home health care
services at the lower of (i) the Company's reimbursable costs (based on Medicare
regulations), (ii) cost limits established by Health Care Financing
Administration, or (iii) the Company's charges.
Under Medicare Part B, the beneficiary must pay an annual deductible amount
before Medicare will make any payments. After the Medicare Part B deductible is
satisfied, Medicare ordinarily will pay 80% of the Medicare approved payment
amount, and the beneficiary is responsible for paying the remaining 20%.
Medicare has developed approved forms for submission of bills and claims.
The passage of the BBA 1997 is expected to materially affect Medicare
reimbursement to the home health industry. The US Congressional Budget Office
estimates that the combined effect of changes enacted in BBA 1997 will reduce
projected Medicare spending on home health care services, durable medical
equipment and oxygen and oxygen equipment by $19.1 billion over the period of
fiscal year 1998 through fiscal year 2002 and by $59.3 billion over the period
of fiscal year 1998 through fiscal year 2007.
Under BBA 1997, the current cost reimbursement system for home health services
will remain in effect for the two-year period prior of the implementation of a
prospective payment system proposed for October 1999. Effective for cost-
reporting periods beginning on or after October 1, 1997, agencies will be
reimbursed at the lower of three amounts: (i) their actual reasonable allowable
costs; (ii) the aggregate cost per visit limits reduced to 106% of the median
costs for free-standing agencies; or (iii) an aggregate per beneficiary limit
based on 75% of agency-specific costs and 25% on census region costs for cost-
reporting years ending during fiscal year 1994, updated by the home health
market basket index. For cost-reporting periods beginning on or after October 1,
1997, the cost-per-visit limit will apply to claims based on the geographic area
where the service is furnished, rather than on the geographic area where the
agency is located. For services furnished on or after October 1, 1997, the
Secretary of Health and Human Services is authorized to issue regulations
establishing normative guidelines for the frequency and duration of home health
services, beyond which services will not be covered. The Secretary is also
authorized to implement not more than five competitive bidding demonstration
projects which must terminate by the end of calendar year
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2002 for items or services covered under Part B. Updates to the durable medical
equipment fee schedules will be eliminated for the years 1998 through 2002.
Payment rates for parenteral and enteral nutrients, supplies and equipment will
also be frozen for the years 1998 through 2002 at the rate in effect during
1995. Beginning with services furnished on or after January 1, 1998, coverage of
home health services under Part A will be reduced to a maximum of 100 visits
during a spell of illness after a three-day hospitalization or after receiving
any covered services in a skilled nursing facility. Coverage for all other home
health services will be under Part B. No deductible or co-insurance will apply
to these home health services. Funding responsibility for payment of the
services under Part B will be transferred gradually out of the Part A trust fund
over a seven year period. All claims will continue to be submitted to, and paid
by, the fiscal intermediaries. Periodic Interim Payments will be eliminated for
cost reporting periods on or for the benefit of the Medicare program and each
state Medicaid program in which it participates, after October 1, 1999.
Beginning six months after October 1, 1997, home skilled nursing care will not
be covered if it is solely venipuncture for the purpose of drawing blood.
BBA 1997 also mandates that the Medicare national payment limit for oxygen and
oxygen equipment be reduced by 25% of 1997 rates for 1998, with an additional 5%
reduction of 1997 rates for 1999 and subsequent years. The General Accounting
Office has been requested to submit a report to Congress addressing access to
home oxygen equipment and recommendations for further legislation. Home health
agencies are required to post a surety bond in an amount equal to the greater of
$50,000 or 15% of revenues derived from any such program. A new submission
compliance date for surety bonds is proposed to follow a final ruling by HCFA
expected no earlier than February, 1999.
The effect that these changes ultimately will have on the home health industry
cannot be quantified at this time; however, there can be no assurance that these
and other changes mandated by BBA 1997 will not materially and adversely affect
the business and financial condition of the Company.
COMPETITION
Pediatric and Other Health Care. The markets for the Company's health care
services are highly competitive and are divided among a large number of
providers, some of which are national providers, but most of which are either
regional or local providers. In addition to competing with other home health
care companies focusing on providing services to pediatric patients, the Company
competes with several large national home health care companies that, while not
focusing primarily on the pediatric patient, provide pediatric home health care
services as part of a broader service offering. Certain of the Company's
competitors and potential competitors have significantly greater financial,
technical and marketing and sales resources than the Company and may, in certain
locations, possess licenses or certificates that permit them to provide services
that the Company cannot currently provide. There can be no assurance that the
Company will not encounter increased competition in the future that could limit
the Company's ability to maintain or increase its business and could adversely
affect the Company's operating results.
In addition to its traditional competitors, other types of health care
providers, including hospitals, physician groups and home health agencies, have
entered, and may continue to enter, the Company's business. Relatively few
barriers to entry exist in the home health care industry in states that do not
require a certificate of need.
The Company competes for referrals primarily based on quality of care and
service, reputation with referring health care professionals, ability to develop
and maintain contacts with referral sources and price of services. The Company
believes that its specialization in pediatric home health care, as well as its
coordinated care approach to home health care services, broadens its appeal to
local health care professionals and to managed care organizations. There can be
no assurance that the Company will not encounter increased competition in the
future that could limit the Company's ability to maintain or increase its
business and could adversely affect the Company's operating results.
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Paramedical Testing. The paramedical testing business is highly competitive, and
certain of the Company's competitors have greater resources than the Company,
and offer services not offered by the Company or offer similar services at
prices lower than those charged by the Company. Management believes that the
Company is the nation's third largest provider of paramedical testing services
to insurance companies, based on revenues. A large number of regional and local
firms also offer these services. In management's opinion, the principal
competitive factors in the paramedical testing market are speed of response,
geographic coverage, and delivery of complete and accurate information. In
addition, technological capabilities recently have taken the forefront in client
needs.
REGULATION
General. The Company's health care services business is subject to extensive and
frequently changing state and federal regulation. The Company is subject to
state laws governing and regulating several aspects of its business, including
home health care and home infusion therapy services (including certificates of
need and license requirements in certain states) and dispensing, distributing
and compounding of prescription products. The Company also is subject to certain
state laws prohibiting the payment of remuneration for patient or business
referrals and the provision of services where a financial relationship exists
between a referring physician and the entity providing the service. Federal laws
governing the Company's activities include regulations of pharmacy operations
and regulations under the Medicare and Medicaid programs relating to, among
other things, certification of home health agencies and reimbursement. In
addition, federal fraud and abuse laws prohibit or restrict, among other things,
the payment of remuneration to parties in a position to influence or cause the
referral of patients or business.
New laws and regulations are enacted from time to time to regulate new and
existing services and products in the home health care industry. Changes in the
law or new interpretations of existing laws also could have an adverse effect on
the Company's methods and costs of doing business. Further, failure of the
Company to comply with such laws could adversely affect the Company's ability to
continue to provide, or receive reimbursement for, its equipment and services,
and also could subject the Company and its officers and employees to civil and
criminal penalties. There can be no assurance that the Company will not
encounter regulatory impediments that could adversely affect its ability to open
new branch offices and to expand the services currently provided at its existing
branch offices.
Various aspects of the Company's paramedical testing business also are regulated
by the federal government and the states in which the Company currently
operates. Although the Company has been able to comply with applicable
regulations to date, there can be no assurance that it will continue to be able
to comply with specific requirements of certain states. States periodically
change the regulations and licensing requirements that apply to the Company. If
such changes occur, or if the Company expands its operations or services, there
can be no assurance that the Company will be able to comply with regulations and
licensing requirements, although the Company will be required to do so before
providing service.
Set forth below is a more detailed discussion of certain factors related to
federal and state regulation of the Company and its business.
Medicare and Medicaid Regulations. As a provider of services under the Medicare
and Medicaid programs, the Company is subject to federal laws and regulations
governing reimbursement procedures and practices. These laws include the
Medicare and Medicaid fraud and abuse statutes and regulations, which prohibit
the payment or receipt of any form of remuneration in return for referring
business or patients to providers of services for which payments are made by a
government health care program. Violation of these laws may result in civil and
criminal penalties, including substantial fines, loss of the right to
participate in the Medicare and Medicaid programs and imprisonment. In addition,
the Government recently enacted the Health Insurance Portability and
Accountability Act of 1996 ("HIPAA"), a portion of which took effect this year,
expanding the government's fraud and abuse elimination efforts. HIPPA, among
other provisions, expands the Government's efforts for prosecuting fraud and
abuse beyond Medicare and Medicaid to all payors; makes exclusion from the
Medicare and Medicaid programs mandatory for a minimum of five years for any
felony conviction relating to fraud; requires that organizations contracting
with another organization or individual take steps to be informed as to whether
the organization or individual is excluded from Medicare and Medicaid
participation; and enhances civil penalties by increasing the amount of fines
permitted. These laws also include prohibitions on referrals contained in the
Omnibus Budget Reconciliation Act of 1989 ("Stark I"), which prohibits referrals
by physicians to
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clinical laboratories where the physician has a financial interest and further
prohibitions contained in the Omnibus Budget Reconciliation Act of 1993 ("Stark
II)", which prohibits such referrals to a more extensive range of services,
including home health and the supply of durable medical equipment. While
regulations interpreting Stark I have been issued, regulations interpreting
Stark II have not been finalized to date. In addition, various federal and state
laws impose civil and criminal penalties against participants in the Medicare or
Medicaid programs who make false claims for payment for services or otherwise
engage in false billing practices.
Many states also have statutes prohibiting the payment or receipt (or the offer
of) anything of value in return for, or to induce, a referral for health care
goods or services. In addition, there are several other statutes that, although
they do not explicitly address payments for referrals, could be interpreted as
prohibiting the practice. While similar in many respects to the federal laws,
these state laws vary from state to state, are often vague and have been
interpreted inconsistently by courts and regulatory agencies. Private insurers
and various state enforcement agencies also have increased their scrutiny of
health care providers' practices and claims, particularly in the home health and
home medical equipment areas.
Recently, enforcement of federal fraud and abuse laws, and regulatory scrutiny
generally, have increasingly focused on the home health care industry. For
example, the government has implemented Operation Restore Trust, a federal
investigatory initiative focused on home health, home medical equipment and
skilled nursing facility providers, and have expanded this program to 12 new
states, as well as implementing "Wedge" audits, which involve a review of a
small sample of patient records to identify non-compliance. Any adverse findings
under these types of audits can result in adjustments in future payments. There
can be no assurance that the Company will not become the subject of a regulatory
or other investigation or proceeding or that its interpretations of applicable
health care laws and regulations will not be challenged. The defense of any such
challenge could result in substantial cost to the Company and diversion of
management's time and attention. Any such challenge, should it ultimately be
sustained or not, could have a material adverse effect on the Company.
Medicare Certification. Federal regulations governing the Medicare program are
also applicable to the Company. Regulations for Medicare reimbursement include
an annual review of health care facilities and personnel and provide criteria
for coverage and reimbursement. The Company is Medicare certified to provide
nursing services in 16 states and Washington, D.C.
Permits and Licensure. Many states require companies providing pharmacy
services, home health care services, home infusion therapy products and services
and other products and services of the type offered by the Company to be
licensed. The Company currently is licensed as a home health agency in 16
states, is licensed as a home care agency in 8 states, and currently is licensed
as a pharmacy in 34 states. The Company provides unit dose medications by mail
order to various states. The Company has obtained or, in certain cases, is in
the process of obtaining, licenses for its mail order services from such states.
Certificates of Need. Approximately 16 states require companies providing home
health care services, home infusion therapy and other services of the type
offered by the Company to have a certificate of need issued by a state health
planning agency. Certificates of need are often difficult to obtain and in many
instances a certificate of need is not obtainable at all (because an area is
determined to be adequately served by existing providers or for other reasons).
If the Company commences operations in a state, or expands its operations in a
state where it is currently operating, and those operations require a
certificate of need, the Company will be required to obtain a certificate of
need with respect to those operations. There can be no assurance that the
Company will be able to obtain other required certificates of need, and, if so
required, the Company will incur expenses in connection with attempting to
obtain a certificate of need.
CORPORATE COMPLIANCE PROGRAM
As a result of an increasing complex regulatory environment for the health care
industry, in 1997 the Company undertook the implementation of a company-wide
compliance program, developed in
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accordance with federal guidelines. The Company's compliance program encompasses
measures for auditing and monitoring of legal compliance as well as training for
Company employees and agents. The program stresses three core principles:
honesty, respect and responsibility, and is designed to provide support and
guidance for the Company's employees as they strive to be consistent with
company values. In addition, the compliance program focuses on prevention and
detection of fraud and abuse violations, as well as reducing the prospect of
unlawful conduct. The Company has hired a corporate compliance officer who is
vested with responsibility for implementing and maintaining the compliance
program.
HEALTH CARE REFORM
In recent years, the health care industry has undergone significant changes
driven by various efforts to reduce costs, including efforts at national health
care reform, trends toward managed care, limits in Medicare coverage and
reimbursement levels, consolidation of health care distribution companies and
collective purchasing arrangements by office-based health care practitioners.
The impact of third-party pricing pressures and low barriers to entry have
dramatically reduced profit margins for health care providers. Continued growth
in managed care and capitated plans have pressured health care providers to find
ways of becoming more cost competitive. This has also led to consolidation of
health care providers in the Company's market areas. The Company's inability to
react effectively to these and other changes in the health care industry could
adversely affect its operating results. The Company cannot predict whether any
health care reform efforts will be enacted and what effect any such reforms may
have on the Company or its customers and suppliers.
In addition, political, economic and regulatory influences are subjecting the
health care industry in the United States to extensive and dynamic change, and
many competing proposals have been introduced in Congress and various state
legislatures to reform the present health care system. It is possible that
health care reform at the federal or state level, whether implemented through
legislation or through action by federal or state administrative agencies, would
require the Company to make significant changes in the way it conducts business.
Certain aspects of health care reform such as proposed reductions in Medicare
and Medicaid payments, if successfully developed and adopted, could have a
material effect upon the Company's business. The Company anticipates that
Congress and state legislatures will continue to review and assess alternative
health care delivery systems and payment methodologies, and public debate of
these issues will likely continue in the future. It is not possible at this time
to predict what, if any, further reforms will be adopted, or when such reforms
will be adopted and implemented. No assurance can be given that any such reforms
will not have a material adverse effect upon the Company's business, results of
operations, and financial condition.
Further, provisions in the Balanced Budget Act of 1997 are expected to
significantly impact Medicare home health programs. The current cost
reimbursement system for home health services will remain in effect for the two-
year period prior to the implementation of a prospective payment system proposed
for October 1999. Effective for cost-reporting periods beginning on or after
October 1, 1997, agencies will be reimbursed at the lower of three amounts: a)
their actual reasonable allowable costs; b) the aggregate cost per visit limits
reduced to 106% of the median costs for free-standing agencies; or c) an
aggregate per beneficiary limit based on 75% of agency-
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specific costs and 25% on census region costs for cost-reporting years ending
during fiscal year 1994, updated by the home health market basket index. For
cost-reporting periods beginning on or after October 1, 1997, the cost-per-visit
limits will apply to claims based on the geographic area where the service is
furnished, rather than on the geographic area where the agency is located. For
services furnished on or after October 1, 1997, the Secretary is authorized to
issue regulations establishing normative guidelines for the frequency and
duration of home health services, beyond which services will not be covered. The
Secretary is also authorized to implement not more than five competitive bidding
demonstration projects which must terminate by the end of calendar year 2002 for
items or services covered under Part B. Updates to the durable medical equipment
fee schedules will be eliminated for the years 1998 through 2002. Payment rates
for parenteral and enteral nutrients, supplies and equipment will also be frozen
for the years 1998 through 2002 at the rate in effect during 1995.
Beginning with services furnished on or after January 1, 1998, coverage of home
health services under Part A will be reduced to a maximum of 100 visits during a
spell of illness after a three-day hospitalization or after receiving any
covered services in a skilled nursing facility. Coverage for all other home
health services will be under Part B. Funding responsibility for payment of the
services under Part B will be transferred gradually out of the Part A trust fund
over a seven year period. All claims will continue to be submitted to, and paid
by, the fiscal intermediaries. Periodic Interim Payments will be eliminated for
cost reporting periods on or for the benefit of the Medicare program and each
State Medicaid program in which it participates, after October 1, 1999.
Beginning six months after October 1, 1997, home skilled nursing care will not
be covered if it is solely venipuncture for the purpose of drawing blood.
BBA 1997 also mandates that the national payment limit for oxygen and oxygen
equipment be reduced by 25% of 1997 rates for 1998, with an additional 5%
reduction of 1997 rates for 1999 and subsequent years. The General Accounting
Office has been requested to submit a report to Congress addressing access to
home oxygen and equipment and recommendations for further legislation. The
Company had approximately $9.2 million in net revenue derived from Medicare
oxygen therapies for the fiscal year ended September 30, 1998. These and any
further changes in laws impacting oxygen services and supplies could have an
impact on the Company's business. In addition, the effect that these changes
ultimately will have on the home health industry cannot be quantified at this
time. There can be no assurance that these and other changes mandated by the
Balanced Budget Act of 1997 will not adversely affect the business and financial
condition of the Company.
EMPLOYEES
As of September 30, 1998, the Company's health care and related services
operations employed, or had on registry over 5,000 licensed or credentialed
nurses, therapists and pharmacists, and approximately 1,600 full-time employees
and 3,400 part-time employees. The Company's paramedical testing operation
employed approximately 350 full-time employees and utilized the services of over
5,000 part-time employees and independent contractors.
ENVIRONMENTAL MATTERS
Medical facilities are subject to a wide variety of federal, state and local
environmental and occupational health and safety laws and regulations, such as
air and water quality control requirements, waste management requirements and
requirements for training employees in the proper handling and management of
hazardous materials and wastes. The typical branch office facility operations
include, but are not limited to, the handling, use, storage, transportation,
disposal and/or discharge of hazardous, toxic, infectious, flammable and other
hazardous materials, waste, pollutants or contaminants. These activities may
result in injury to individuals or damage to property or the environment and may
result in legal liability damages, injunctions, fines, penalties or other
governmental agency actions. The Company is not aware of any pending or
threatening claim, investigation or enforcement action regarding environmental
issues which, if
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determined adversely to the Company, would have a material adverse effect upon
the capital expenditures, earnings, or competitive position of the Company.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Norcross, Georgia and
consist of approximately 60,000 square feet of office space. The lease term on
the facility expires in 2008. The Company's health care operations include 113
branch offices in 28 states and the District of Columbia. Branch offices
typically are located in office parks or complexes and average approximately
2,500 square feet. Generally, each health care facility is a combination
warehouse and office. Lease terms on branch offices are generally three years or
less. The Company's paramedical testing division maintains its corporate
operations in Norcross, Georgia, and its facility consists of approximately
36,000 square feet of office space. The lease term on the facility expires in
2003. The paramedical testing division also maintains regional service centers
in Dallas, Texas, Kansas City, Kansas, and Minneapolis, Minnesota. The division
has over 200 testing field offices located in all 50 states, Puerto Rico and
Guam. The lease terms on the Company-operated paramedical facilities generally
are three years or less. The Company believes that its current facilities are
suitable for and adequate to support the level of its present operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to certain claims and lawsuits, the outcomes of which are
not determinable at this time. In the opinion of management, it is unlikely that
any liability that might be incurred upon the resolution of these claims and
lawsuits will, individually or in the aggregate, have a material adverse effect
on the consolidated financial position or results of operations of the Company.
In recent years, physicians, hospitals and other participants in the health care
industry have become subject to an increasing number of lawsuits alleging
malpractice, product liability or related legal theories, many of which involve
large claims and significant defense costs. The Company currently maintains
liability insurance intended to cover any claims. This insurance coverage is
provided under a "claims-made" policy which provides, subject to the terms of
the policy, coverage for certain claims made against the Company during the term
of the policy and does not provide coverage for losses occurring during the term
of the policy for which a claim is made subsequent to the termination of the
policy. There can be no assurance that the coverage limits of the Company's
insurance policies will be adequate. In addition, while the Company has been
able to obtain liability insurance in the past, such insurance varies in cost,
is difficult to obtain and may not be available in the future on acceptable
terms or at all.
The Company is also subject to accident claims arising out of the normal
operation of its fleet of vans and small trucks and maintains insurance intended
to cover these claims. The Company also is named as an additional insured in the
product liability policies maintained by certain manufacturers of health care
equipment utilized by the Company in connection with its business and
operations. A successful claim against the Company in excess of the insurance
coverage could have a material adverse effect upon the Company's business.
Claims against the Company, regardless of their merits or eventual outcome, also
may have a material adverse effect upon the Company's reputation and business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of PSA's fiscal year ended September 30, 1998, no
matter was submitted to a vote of PSA's stockholders through the solicitation of
proxies or otherwise.
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ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below, in accordance with General Instruction G(3) of Form 10-K and
Instruction 3 to Item 401(b) of Regulation S-K, is certain information regarding
the executive officers of the Company including their ages as of November 5,
1998, their principal occupations for at least the past five years, the year in
which each was elected and any directorships held by them in other public
companies.
Joseph D. Sansone (55) has been Chairman of the Board of Directors, President
and Chief Executive Officer of the Company since its formation in 1989. From
1987 until the formation of the Company, Mr. Sansone was President of Ambulatory
Services of America, Inc. ("ASA"), a wholly-owned subsidiary of Charter Medical,
the Company's former parent. Prior to joining Charter Medical, Mr. Sansone was
employed by American Medical International, Inc. ("AMI"). From 1985 to 1987, Mr.
Sansone also served as Vice President of AMI Home Health Equipment Centers, a
division of AMI specializing in durable medical equipment sales and rentals.
Stephen M. Mengert (49) has been Senior Vice President, Chief Financial Officer,
Secretary and Treasurer of the Company since July 1996. Prior to joining the
Company, Mr. Mengert was Senior Vice President and Chief Financial Officer of
Arbor Health Care Company from November 1995 to July 1996. From July 1990 until
joining Arbor Health Care Company, Mr. Mengert was employed in a similar
capacity at Rehability Corporation.
James R. Henderson (53) joined ASA in 1987 as a Senior Regional Director and in
1989 became a Divisional Vice President of the Company. In 1996, Mr. Henderson
became Senior Vice President of Operations of the Company. From 1985 until
joining ASA, Mr. Henderson was Director of Operations and President of
Healthfocus Medical Equipment, Inc. in Houston, Texas, a wholly-owned subsidiary
of Healthfocus, Inc.
Charles P. Gaetano (47) served as the Company's Senior Vice President of
Development beginning March 1996 and as Vice President of Development beginning
March 31, 1995 when the Company acquired Pediatric Partners, Inc. ("PPI"). As of
October 21, 1998, Mr. Gaetano resigned from the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information concerning the market for, holders of and dividends paid on the
Company's Common Stock is set forth on the inside back cover page of the
Company's 1998 Annual Report, which information is incorporated herein by
reference. The Company intends to retain any future earnings to finance the
growth and development of its business and, therefore, does not anticipate
paying any cash dividends in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The information set forth under the caption "Selected Consolidated Financial
Data" on page 5 of the Company's 1998 Annual Report is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information set forth under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on pages 6-13 of the
Company's 1998 Annual Report is incorporated herein by reference.
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ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 1998, the Company had one interest rate swap agreement with a
commercial bank (the "Counter Party"), having a cumulative notional principal
amount of $25 million. The Company pays a fixed rate of 6.61% plus the
applicable margin that varies from a minimum of 1.375% to a maximum of 3.000%
and is based on the calculation of a leverage ratio. The interest rate swap
terminates in June 2002. The Company is exposed to credit loss in the event of
non-performance by the Counter Party to the interest rate swap agreement;
however, the Company does not anticipate such non-performance.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company and the notes thereto as of
September 30, 1998 and 1997, and for each of the three years in the period ended
September 30, 1998, together with the report thereon of Ernst & Young LLP, set
forth on pages 14-27 of the Company's 1998 Annual Report is incorporated herein
by reference. Supplemental schedules, together with the independent auditors'
reports thereon, are included beginning on page S-1 hereof. Such additional
financial data should be read in conjunction with the consolidated financial
statements.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the past two fiscal years and the period from October 1, 1998 to the date
hereof, the Company has not changed its independent auditors, and there have
been no reportable disagreements with the Company's auditors regarding
accounting principles or practices or financial disclosure matters.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of the Company set forth under the
captions "Proposal 1 - Election of Directors - Nominees for Re-election as
Directors at the 1999 Annual Meeting" and "Proposal 1 - Election of Directors -
Continuing Directors of the Company" in the Company's Proxy Statement for its
1999 Annual Meeting of Stockholders ("1999 Proxy Statement") is incorporated
herein by reference. Information relating to the executive officers of the
Company is, pursuant to Instruction 3 of Item 401(b) of Regulation S-K and
General Instruction G(3) of Form 10-K, set forth at Part I, Item 4(A) of this
report under the caption "Executive Officers of the Registrant." Information
regarding compliance by the directors and executive officers of the Company and
owners of more than ten percent of the Company's Common Stock with the reporting
requirements of Section 16(a) of the Securities Exchange Act of 1934, as
amended, set forth under the caption "Section 16(a) of the Securities Exchange
Act Beneficial Ownership Reporting Compliance" in the 1999 Proxy Statement is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to management compensation set forth under the captions
"Proposal 1 - Election of Directors - Directors' Compensation and Attendance",
"Executive Compensation" and "Stock Performance Graph" in the Company's 1999
Proxy Statement is incorporated herein by reference, except for the information
set forth in the section entitled "Executive Compensation - Report of the
Compensation Committee of the Board of Directors on Executive Compensation"
which specifically is not so incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of the Company's $0.01 par value Common Stock by
certain persons is set forth under the caption "Stock Ownership" in the
Company's 1999 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and transactions between the Company
and certain of its affiliates set forth under the caption "Certain Relationships
and Related Transactions" in the Company's 1999 Proxy Statement is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT.
(1) FINANCIAL STATEMENTS
The consolidated financial statements of the Company and the related
reports of independent auditors thereon which are required to be
filed as part of this report are included in the Company's 1998
Annual Report and are incorporated by reference in Item 8 hereof or
are included herein. These consolidated financial statements are as
follows:
. Consolidated Balance Sheets as of September 30, 1998 and 1997.
. Consolidated Statements of Operations for the years ended
September 30, 1998, 1997, and 1996.
. Consolidated Statements of Redeemable Preferred Stock, Common
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Stock and Other Stockholders' Equity for the years ended
September 30, 1998, 1997 and 1996.
. Consolidated Statements of Cash Flows for the years ended
September 30, 1998, 1997 and 1996.
. Notes to Consolidated Financial Statements.
(2) FINANCIAL STATEMENT SCHEDULES
The financial statement schedules referred to in Item 8 are described
in the "Index to Financial Statement Schedules" included in this
report on page S-1. All other schedules for which provision is made
in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions
or are inapplicable and therefore have been omitted.
(3) EXHIBITS
The following exhibits are filed with this report. The Company will
furnish any exhibit upon request to Pediatric Services of America,
Inc., 310 Technology Parkway, Norcross, Georgia 30092-2929. There is
a charge of $.50 per page to cover expenses for copying and mailing.
10.18 Amendment No. 3 to the Credit Agreement, dated December 24,
1998, filed herewith.
10.19 Amendment No. 4 to the Credit Agreement, dated January 8, 1999,
filed herewith.
13 1998 Annual Report, filed herewith.
21 Subsidiaries of Company, filed herewith.
23.1 Consent and Report as to Schedules of Independent Auditors,
Ernst & Young LLP, filed herewith.
25 Powers of Attorney, filed herewith.
27 Financial Data Schedule, filed herewith.
(B) REPORTS ON FORM 8-K
On July 29, 1998, the Company filed a report on Form 8-K under Item 5,
indicating the expected results of operations for the third quarter report
for the period ended June 30, 1998.
(C) EXHIBITS
The following exhibits are filed with or incorporated by reference in
this report. Where such filing is made by incorporation by reference
to a previously filed registration statement or report, such
registration statement or report is identified in parentheses. The
Company will furnish any exhibit upon request to Pediatric Services
of America, Inc., 310 Technology Parkway, Norcross, Georgia 30092-
2929. There is a charge of $.50 per page to cover expenses for
copying and mailing.
2.0 Shareholder Rights Plan dated September 22, 1998 (incorporated by
reference to the Company's Registration Statement on Form 8-A filed
October 13, 1998).
2.1 Rights Agreement dated September 22, 1998, by and between Chase
Mellon Shareholder Services and the Company (incorporated by
reference to Exhibit 2.1 to the Company's Current Report on Form 8-K
dated September 22, 1998).
3.1 Amended and Restated Certificate of Incorporation of the Company
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(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-
77880) filed on May 31, 1994).
3.2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference to Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1996).
3.3 Bylaws of the Company, as amended and restated (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on
Form S-1 filed on May 31, 1994).
3.4 Certificate of Correction to Certificate of Amendment of the Amended
and Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997).
3.5 Amended and Restated Bylaws of the Company, adopted September 22,
1998 (incorporated by reference to Exhibit 3.2 to the Company's
Current Report on Form 8-K dated September 22, 1998).
10.1 Asset Purchase Agreement, dated August 20, 1993, by and among the
Registrant, County Respiratory Products, Inc., Hyman Juter and Arlene
Juter (incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement of Form S-1 filed on May 31, 1994).
10.2 Loan and Security Agreement, dated January 14, 1993, by and among
Pediatric Services of America, Inc., a Georgia corporation ("PSA-
Georgia"), and Creditanstalt-Bankverein (incorporated by reference to
Exhibit 10.3 to the Company's Registration Statement on Form S-1
filed on May 31, 1994).
10.3 First Amendment to Loan and Security Agreement, dated July 29, 1994,
by and among PSA-Georgia, PSA and Creditanstalt-Bankverein
(incorporated by reference to Exhibit 10.3 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1994).
10.4 Second Amendment to Loan and Security Agreement, dated as of March
31, 1995 by and among PSA-Georgia, PSA and Creditanstalt-Bankverein
(incorporated by reference to Exhibit 10 to the Company's Current
Report on Form 8-K (Date of Report: March 31, 1995)).
10.5 First Amended and Restated Loan and Security Agreement, dated as of
December 4, 1996, by and among PSA-Georgia, PSA and Creditanstalt-
Bankverein and Nationsbank, N.A., as Lenders, (incorporated by
reference to Exhibit 10.5 to the Company's Annual Report on Form 10-
K, for the fiscal year ended September 30, 1996).
10.6 Amended and Restated Warrant Agreement, dated July 29, 1994, by and
among the Company and Creditanstalt-Bankverein (incorporated by
reference to Exhibit 10.4 to the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 1994).
10.7 Preferred Stock Rights Agreement, dated October 2, 1992, among the
Company and the preferred stockholders of the Company named therein
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 filed on May 31, 1994).
10.8 Stock Purchase and Stockholders Agreement, dated September 25, 1989,
by
31
<PAGE>
and among the Company and the stockholders of the Company named
therein, as amended on October 16, 1991 and January 14, 1993
(incorporated by reference to Exhibit 10.6 of the Company's
Registration Statement on Form S-1 filed on May 31, 1994).
10.9 Executive Compensation Plans and Arrangements:
(a) Pediatric Services of America, Inc. Amended and Restated Stock
Option Plan, as amended (incorporated by reference to Exhibit
10.7 of the Company's Registration Statement on Form S-1 filed
on May 31, 1994).
(b) Amendment to the Pediatric Services of America, Inc. Amended and
Restated Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.7 of the Company's Registration
Statement on Form S-1 filed on May 31, 1994).
(c) Pediatric Services of America, Inc. Director's Stock Option
Plan, (incorporated by reference to Exhibit 10.12 of the
Company's Registration Statement on Form S-1 filed on May 31,
1994).
32
<PAGE>
(d) Amendment to the Pediatric Services of America, Inc. Directors'
Stock Option Plan, (incorporated by reference to Exhibit 10.8(d)
of the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1995).
(e) Pediatric Services of America, Inc. 401(k) Savings Plan
(incorporated by reference to Exhibit 10.8 of the Company's
Registration Statement of Form S-1 filed on May 31, 1994).
(f) Pediatric Services of America, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.8(f) of the Company's
Annual Report Form 10-K for the fiscal year ended September 30,
1995).
(g) Form of Employment Agreement between Company and certain other
executive officers (incorporated by reference to Exhibit 10.10
of the Company's Registration Statement on Form S-1 filed on May
31, 1994).
(h) Employment Agreement, dated October 1, 1996, between the Company
and Joseph D. Sansone (incorporated by reference to Exhibit
10.9(h) to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996).
(i) Employment Agreement, dated July 22, 1996, between the Company
and Stephen M. Mengert (incorporated by reference to Exhibit
10.9(h) to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996).
(j) Non-Qualified Deferred Compensation Plan, dated October 1, 1997
(incorporated by reference to Exhibit 10.9(j) to the Company's
Annual Report on Form 10-K for the fiscal year ended September
30, 1997).
10.10 Stock Purchase Agreement, dated October 1, 1994, among the Company,
Dean Elazab and Oxygen Specialties, Inc. (incorporated by reference
to Exhibit 2 to the Company's Current Report on Form 8-K (Date of
Report: October 1, 1995)).
10.11 Stock Purchase Agreement, among the Company and Joseph Balskus, Lisa
Balskus, Celia Winkelman, Herman Winkelman and Balwink Enterprises,
Inc. effective as of January 13, 1995 (incorporated by reference to
Exhibit 1 to the Company's Current Report on Form 8-K (Date of
Report: January 13, 1995)).
10.12 Stock Purchase Agreement, dated as of March 31, 1995, among the
Company, T2 Medical, Inc., Charles Gaetano, Thomas D'Anna, Coram
Healthcare Corporation and Consulting Agreement & Employment
Agreement, Chuck Gaetano and Thomas D'Anna, Pediatric Partners, Inc.
(incorporated by reference to Exhibit 2 to the Company's Current
Report on Form 8-K (Date of Report: March 31, 1996)).
10.13 Stock Exchange Agreement, dated February 29, 1996, among the Company
and Premier Medical Services, Inc. (incorporated by reference to
Exhibit 1 to the Company's Current Report on Form 8-K (Date of
Report: February 29, 1996)).
10.14 Credit Agreement, by and among Pediatric Services of America, Inc., a
Georgia corporation, as Borrower, Pediatric Services of America,
Inc., a Delaware corporation, and Nationsbank, N.A., dated as of
August 13, 1997 (incorporated by reference to Exhibit 10.14 to the
Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 1997).
10.15 Amendment No. 1 to the Credit Agreement, dated April 16, 1998
(incorporated by reference to Exhibit 10.15 to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 31, 1998).
33
<PAGE>
10.16 Amendment No. 2 to the Credit Agreement, dated August 13, 1998
(incorporated by reference to Exhibit 10.16 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
10.17 Security Agreement, dated August 13, 1998 (incorporated by reference
to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998).
10.18 Amendment No. 3 to the Credit Agreement, dated December 24, 1998,
filed herewith.
10.19 Amendment No. 4 to the Credit Agreement, dated January 8, 1999, filed
herewith.
13 1998 Annual Report, filed herewith.
Except for the portions of the 1998 Annual Report that are
specifically incorporated into this Form 10-K by reference, the 1998
Annual Report is not deemed to be "filed" with the Securities and
Exchange Commission or subject to the liabilities of Section 18 of
the Securities Exchange Act of 1934, as amended.
21 Subsidiaries of Company, filed herewith.
23.1 Consent and Report as to Schedules of Independent Auditors, Ernst &
Young LLP, filed herewith.
25 Powers of Attorney, filed herewith.
27 Financial Data Schedule, filed herewith.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Pediatric Services of America, Inc.
(Registrant)
By: /s/ Joseph D. Sansone
------------------------
Joseph D. Sansone
Chairman of the Board of Directors,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
______________________________ Chairman of the Board of December 29, 1998
Joseph D. Sansone Directors, President and
Chief Executive Officer
*
- ------------------------------ Chief Financial Officer, December 29, 1998
Stephen M. Mengert Senior Vice President,
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
*
- ------------------------------- Director December 29, 1998
Michael J. Finn
*
- ------------------------------- Director December 29, 1998
Adam O. Holzhauer
*
- ------------------------------- Director December 29, 1998
Robert P. Pinkas
*
- ------------------------------- Director December 29, 1998
Irving S. Shapiro
*
- -------------------------------- Director December 29, 1998
Richard S. Smith
*By: /s/ Stephen M. Mengert
----------------------------
Stephen M. Mengert
(Attorney in Fact)
35
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC. AND SUBSIDIARY
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedules
- ---------
Schedules numbered in accordance with Rule 5.04 of Regulation S-X
II Valuation and Qualifying Accounts................................... S-2
All schedules except Schedule II have been omitted because the required
information is shown in the consolidated financial statements, or notes thereto,
or the amounts involved are not significant, or the schedules are not
applicable.
S-1
<PAGE>
SCHEDULE II---VALUATION AND QUALIFYING ACCOUNTS
PEDIATRIC SERVICES OF AMERICA, INC. AND SUBSIDIARY
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
Additions
---------
CHARGED TO
BALANCE AT CHARGED TO OTHER
Descriptions BEGINNING COSTS AND ACCOUNTS DEDUCTIONS BALANCE AT END
------------ OF PERIOD EXPENSES --DESCRIBE --DESCRIBE OF PERIOD
----------- ------------- --------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1996:
Deducted from asset
accounts:
Allowance for
doubtful accounts.... $6,870,000 $4,707,989 $ 264,000(2) $ 3,318,989(1) $ 8,523,000
========== ========== ========== =========== ===========
Year ended September 30, 1997:
Deducted from asset
accounts:
Allowance for
doubtful accounts.... $8,532,000 $6,239,000 $1,406,000(3) $ 6,132,000(1) $10,036,000
========== ========== ========== =========== ===========
Year ended September 30, 1998:
Deducted from asset
accounts:
Allowance for
doubtful accounts.... $10,036,000 $22,963,000 $2,114,000(4) $21,105,000(1) $14,008,000
=========== =========== ========== =========== ===========
</TABLE>
(1) Uncollectible accounts written off, net of recoveries.
(2) Allowance for doubtful accounts acquired in connection with the purchases of
Maternal Infant Homecare, Inc., Case Management Systems, Inc. and Primary
Health Services, Inc.
(3) Allowance for doubtful accounts acquired in connection with the purchases of
IntensiCare, Pediatric Specialists, Inc., Ivonyx Pharmacy, Home Vitality,
Inc., Concerned Nursing Care, Inc., Home Health Nursing Services, Inc.,
Supplemental Staffing Services, Inc., Special Medical Services, Inc. and
Lifetec Medical & Home Care, Inc.
(4) Allowance for doubtful accounts acquired in connection with the purchases of
Pediatric Physical Therapy, Inc., Intra-Care, Inc., Cyber Home Medical
Equipment Corp., Inc., Texas Air Supply Home Medical Equipment, Inc.,
Pediatric Nursing Services, Inc., Strictly Pediatrics, L.L.C., Transworld
Home Health Care - Nursing Division, Inc., Kid's Nurses, Inc., and Medical
Equipment and Supply, Inc.
S-2
<PAGE>
INDEX TO EXHIBITS
EXHIBITS
PAGE NO.
--------
The following exhibits are filed with this report.
The Company will furnish any exhibit upon request to
Pediatric Services of America, Inc., 310 Technology
Parkway, Norcross, Georgia 30092-2929. There is a charge
of $.50 per page to cover expenses for copying and mailing.
10.18 Amendment No. 3 to the Credit Agreement, dated December 24,
1998............................................................ 39
10.19 Amendment No. 4 to the Credit Agreement, dated January 8,
1999............................................................ 46
13 1998 Annual Report.............................................. 52
21 Subsidiaries of Company......................................... 83
23.1 Consent and Report as to Schedules of Independent Auditors,
Ernst & Young LLP.............................................. 84
25 Powers of Attorney.............................................. 85
27 Financial Data Schedule......................................... 90
38
<PAGE>
EXHIBIT 10.18
AMENDMENT NO.3
THIS AMENDMENT NO. 3 (the "Amendment") dated as of December __, 1998, to
---------
the Credit Agreement referenced below, is by and among PEDIATRIC SERVICES OF
AMERICA, INC., a Georgia corporation, PEDIATRIC SERVICES OF AMERICA, INC., a
Delaware corporation, the subsidiaries and affiliates identified herein, the
lenders identified herein, and NATIONSBANK, N.A., as Administrative Agent.
Terms used but not otherwise defined shall have the meanings provided in the
Credit Agreement.
WITNESSETH
WHEREAS, a $75 million credit facility has been established in favor of
Pediatric Services of America, Inc., a Georgia corporation (the "Borrower")
--------
pursuant to the terms of that Credit Agreement dated as of August 13, 1997 (as
amended and modified, the "Credit Agreement") among the Borrower, the Guarantors
----------------
and Lenders identified therein, and NationsBank, N.A., as Administrative Agent;
WHEREAS, the Borrower has given notice that it was in non-compliance with
the financial covenants contained in Sections 7.9(a) regarding the Consolidated
Leverage Ratio, 7.9(d) regarding the Consolidated Senior Leverage Ratio and
7.9(f) regarding the Days Sales Outstanding for the third fiscal quarter ending
September 30, 1998, and the Borrower has not been able to provide monthly
financial statements for October and November of 1998 (the "Acknowledged Events
-------------------
of Default"):
- ----------
WHEREAS, the Borrower has requested that the Lenders forbear from
exercising their remedies, and that the Lenders further continue to make
Extensions of Credit under the Credit Agreement;
WHEREAS, the requested forbearance and continuation of Extensions of Credit
require the consent of the Required Lenders;
WHEREAS, the Required Lenders, for and on behalf of the Lenders, have
agreed to the requested forbearance and continuation of Extensions of Credit on
the terms and the conditions set forth herein:
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged the parties agree as follows:
1. Forbearance. The Administrative Agent and the Lenders agree, subject
-----------
to the terms and conditions set forth herein, to forbear exercising their rights
and remedies arising exclusively as a result of the Acknowledged Events of
Default until the earlier of January 29, 1999 or the breach by the Borrower or
the other Credit Parties of this Agreement (the "Forbearance Termination Date");
----------------------------
provided that (i) this forbearance is expressly limited to the Acknowledged
Events of Default, and shall not extend to any other Event of Default which may
exist or arise after the date hereof, and (ii) the Administrative Agent and the
Lenders shall be free to exercise any and all rights and remedies available
under the Credit Agreement in respect of the Acknowledged Events of Default at
any time on and after the Forbearance Termination Date and at any time in
respect of any Events of Default other than the Acknowledged Events of Default.
Nothing contained herein shall be deemed to constitute a waive of any rights or
remedies which may exist under the Credit Documents or under applicable law.
<PAGE>
2. Modifications to the Credit Agreement. Notwithstanding provisions to
-------------------------------------
the contrary in the Credit Agreement and the other Credit Documents.
(a) Extensions of Credit. The Lenders will make Extensions of Credit
--------------------
under the Credit Agreement from the date hereof to the Forbearance
Termination Date (the "Forbearance Period") notwithstanding the existence
------------------
of the Acknowledged Events of Default; provided that the aggregate
--------
outstanding principal amount of Obligations shall not exceed SIXTY-FIVE
MILLION DOLLARS ($65,000,000) and during the Forbearance Period, references
to the Aggregate Revolving Committed Amount shall be deemed to be SIXTY-
FIVE MILLION DOLLARS ($65,000,000).
(b) Applicable Percentages. During the Forbearance Period, the
----------------------
Eurodollar Margin and Letter of Credit Fee (as referenced in the definition
of "Applicable Percentage") shall be 350 basis points (3.50%), the Base
Rate Margin (as referenced in the definition of "Applicable Percentage")
shall be 250 basis points (2.50%) and the Commitment Fee (as referenced in
the definition of "Applicable Percentage") shall be 50 basis points
(0.50%).
(c) Monthly Financial Statements. The Borrower will provide promptly
----------------------------
to the Administrative Agent and the Lenders copies of the monthly financial
statements for October and November.
3. Forbearance and Amendment Fee. In consideration of the forbearance and
-----------------------------
the other agreements provided herein and the agreement of the Lenders to work
toward a more permanent waiver and amendment by the end of the Forbearance
Period, the Borrower agrees to pay to the Lenders which consent to this
Amendment and to a subsequent waiver and amendment by the end of the Forbearance
Period (the "Consenting Lenders") a fee (the "Forbearance and Amendment Fee") of
------------------ -----------------------------
twenty-five basis points (0.25%) on the Revolving Commitments of such Lenders.
The Forbearance and Amendment Fee shall be payable as follows: (i) eight and
one-third basis points (0.08333%) payable on the date of this Forbearance
Agreement and (ii) the remaining sixteen and two-thirds basis points (0.16667%)
payable on the effective date of a subsequent waiver and amendment. Amounts paid
shall be deemed earned on receipt and shall be non-refundable.
4. This Amendment shall be effective upon satisfaction of the following
conditions:
(a) execution of this Amendment by the Credit Parties and the
Required Lenders:
(b) receipt by the Administrative Agent of legal opinions of counsel
to the Credit Parties relating to this Amendment; and
(c) receipt by the Administrative Agent for the ratable benefit of
the Consenting Lenders of the portion of the Forbearance and Amendment Fee
(8.33 basis points) payable with this Forbearance Agreement.
5. Representations and Warranties. Each of the Credit Parties hereby
------------------------------
represents and warrants that (i) it has the requisite corporate power and
authority to execute, deliver and perform this Agreement, (ii) it is duly
authorized to, and has been authorized by all necessary corporate action, to
execute, deliver and perform under this Agreement, (iii) it has no claims,
counterclaims, offsets or defenses to the Credit Documents, and the performance
of its obligations thereunder, or if it has any such claims, counterclaims,
offsets or defenses, they are hereby waived, relinquished and released in
2
<PAGE>
consideration of the execution and delivery of this Agreement by the Required
Lenders, (iv) except as to the Acknowledged Events of Default which are the
subject hereof, the representations and warranties in Section 6 of the Credit
Agreement are true and correct in all material respects (except those which
expressly relate to an earlier period), and (v) except as to the Acknowledged
Events of Default which are the subject hereof, no Default or Events of Default
has occurred and is continuing.
6. Except as modified hereby, all of the terms and provisions of the
Credit Agreement (including Schedules and Exhibits) shall remain in full force
and effect.
7. The Borrower agrees to pay all reasonable costs and expenses of the
Administrative Agent in connection with the preparation, execution and delivery
of this Amendment, including without limitation the reasonable fees and expenses
of Moore & Van Allen, PLLC.
8. This Amendment may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed an original and it shall
not be necessary in making proof of this Amendment to produce or account for
more than one such counterpart.
9. This Amendment shall be deemed to be a contract made under, and for
all purposes shall be construed in accordance with the laws of the State of
North Carolina.
[Remainder of Page Intentionally Left Blank]
3
<PAGE>
LENDERS: NATIONSBANK, N.A.,
- -------
individually in its capacity as a
Lender and in its capacity as Administrative Agent
By: /s/ Ashley M. Crabtree
--------------------------------------------
Name: Ashley M. Crabtree
Title: Senior Vice President
TORONTO DOMINION (TEXAS), INC.
By: /s/ Mark A. Baird
--------------------------------------------
Name: Mark A. Baird
Title: Vice President
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Jeffrey R. Dickson
--------------------------------------------
Name: Jeffrey R. Dickson
Title: Vice President
SUNTRUST BANK, ATLANTA
By: /s/ Jeffrey L. Seavey
--------------------------------------------
Name: Jeffrey L. Seavey
Title: Vice President
By: /s/ Don Kimitor
Name: Don Kimitor
Title: Vice President
MELLON BANK, N.A.
By: /s/ Richard Arrington
--------------------------------------------
Name: Richard Arrington
Title: First Vice President
CREDITANSTALT AG
By: /s/ Carl G. Drake
--------------------------------------------
Name: Carl G. Drake
Title: Vice President
By: /s/ John G. Taylor
--------------------------------------------
Name: John G. Taylor
Title: Senior Associate
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
BORROWER: PEDIATRIC SERVICES OF AMERICA, INC.
- --------
a Georgia corporation
By: /s/ Stephen M. Mengert
----------------------------------
Name: Stephen M. Mengert
Title: Senior Vice President and
Chief Financial Officer
GUARANTORS: PEDIATRIC SERVICES OF AMERICA, INC.
- ----------
a Delaware corporation
By: /s/ Stephen M. Mengert
----------------------------------
Name: Stephen M. Mengert
Title: Senior Vice President and Chief Financial Officer
PSA LICENSING CORPORATION,
a Delaware corporation
PSA PROPERTIES CORPORATION,
a Delaware corporation
By: /s/ Susan E. Dignan
----------------------------------
Name: Susan E. Dignan
Title: President
for each of the foregoing
PEDIATRIC SERVICES OF AMERICA (CONNECTICUT), INC.,
a Connecticut corporation
PREMIER MEDICAL SERVICES, INC.
a Nevada corporation
PEDIATRIC HOME NURSING SERVICES, INC.,
a New York corporation
PEDIATRIC PARTNERS, INC.,
a Delaware corporation
PARAMEDICAL SERVICES OF AMERICA, INC.,
a California corporation
PREMIER NURSE STAFFING, INC.,
a Nevada corporation
PREMIER CERTIFIED HOME HEALTH SERVICES, INC.,
a Nevada corporation
ARO HEALTH SERVICES, INC.,
a Washington corporation
By: /s/ Joseph D. Sansone
----------------------------------
Name: Joseph D. Sansone
Title: President
for each of the foregoing
<PAGE>
EXHIBIT 10.19
AMENDMENT NO. 4
THIS AMENDMENT NO. 4 (the "Amendment") dated as of January 8, 1999, to the
---------
Credit Agreement referenced below, is by and among PEDIATRIC SERVICES OF
AMERICA, INC., a Georgia corporation, PEDIATRIC SERVICES OF AMERICA, INC., a
Delaware corporation, the subsidiaries and affiliates identified herein, the
lenders identified herein, and NATIONSBANK, N.A., as Administrative Agent.
Terms used but not otherwise defined shall have the meanings provided in the
Credit Agreement.
W I T N E S S E T H
WHEREAS, a $75 million credit facility has been established in favor of
Pediatric Services of America, Inc., a Georgia corporation (the "Borrower")
--------
pursuant to the terms of that Credit Agreement dated as of August 13, 1997 (as
amended and modified, the "Credit Agreement") among the Borrower, the Guarantors
----------------
and Lenders identified therein, and NationsBank, N.A., as Administrative Agent;
WHEREAS, the Borrower has given notice that it was in non-compliance with
the financial covenants contained in Sections 7.9(a) regarding the Consolidated
Leverage Ratio, 7.9(d) regarding the Consolidated Senior Leverage Ratio and
7.9(f) regarding the Days Sales Outstanding for the paramedical testing business
for the fourth fiscal quarter ending September 30, 1998, and the Borrower has
not been able to provide monthly financial statements for October and November
of 1998 (the "Acknowledged Events of Default");
------------------------------
WHEREAS, the Lenders agreed to forbear as to the Acknowledged Events of
Default pursuant to Amendment No. 3 dated December 24, 1998 ("Amendment No. 3");
---------------
WHEREAS, the Borrower has requested that the Lenders make certain
amendments to the financial covenants under the Credit Agreement and provide a
waiver of the Acknowledged Events of Default;
WHEREAS, the requested amendments and waiver require the consent of the
Required Lenders;
WHEREAS, the Required Lenders, for and on behalf of the Lenders, have
agreed to the requested amendments and waiver on the terms and conditions set
forth herein;
NOW, THEREFORE, IN CONSIDERATION of the premises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. Modifications to the Credit Agreement. The Credit Agreement is amended
-------------------------------------
and modified in the following respects:
1.1 The following definitions in Section 1.1 are amended and modified
to read as follows:
"Aggregate Revolving Committed Amount" means the aggregate amount of
------------------------------------
Revolving Commitments in effect from time to time, being (i) from January
8, 1999 (being the date of Amendment No. 4) through June 29, 1999, SEVENTY
MILLION DOLLARS ($70,000,000), and (ii) on June 30, 1999 and thereafter,
SIXTY-FIVE MILLION DOLLARS ($65,000,000).
<PAGE>
"Applicable Percentage" means (i) 350 basis points (3.50%) in the case
---------------------
of Eurodollar Loans and the Letter of Credit Fee, (ii) 250 basis points
(2.50%) in the case of Base Rate Loans, and (iii) 50 basis points (0.50%)
in the case of the Commitment Fee.
"Termination Date" means October 1, 2000.
----------------
1.2 The financial covenants in Section 7.9 are amended in their
entirety to read as follows:
7.9 Financial Covenants.
-------------------
(a) Consolidated Leverage Ratio. As of the end of each fiscal quarter
---------------------------
to occur during the periods set forth below, the Consolidated Leverage
Ratio shall be not greater than:
For the fiscal quarter and period ending December 31, 1998 7.50:1.0
January 1, 1999 through March 31, 1999 5.85:1.0
April 1, 1999 through June 30, 1999 5.00:1.0
July 1, 1999 through September 30, 1999 4.50:1.0
October 1, 1999 through June 29, 2000 4.00:1.0
June 30, 2000 and thereafter 3.50:1.0
(b) Consolidated Fixed Charge Coverage Ratio. As of the end of each
----------------------------------------
fiscal quarter to occur during the periods set forth below, the
Consolidated Fixed Charge Coverage Ratio shall be not less than:
For the fiscal quarter and period ending December 31, 1998 1.40:1.0
January 1, 1999 through March 31, 1999 1.25:1.0
April 1, 1999 through September 30, 1999 1.40:1.0
October 1, 1999 and thereafter 1.45:1.0
(c) Consolidated Net Worth. At all times, Consolidated Net Worth
----------------------
shall be not less than the sum of 85% of Consolidated Net Worth as of the
Closing Date plus on the last day of each fiscal quarter to occur after the
----
Closing Date, 50% of Consolidated Net Income for the fiscal quarter then
ended (but not less than zero), such increases to be cumulative, plus 75%
----
of the net proceeds from Equity Transactions (including for purposes
hereof, any increases in shareholder equity on account of acquisitions made
by issuance of stock or stock swap) occurring after the Closing Date.
(d) Consolidated Senior Leverage Ratio. As of the end of each fiscal
----------------------------------
quarter to occur during the periods set forth below, the Consolidated
Senior Leverage Ratio shall be not greater than:
For the fiscal quarter and period ending December 31, 1998 3.40:1.0
January 1, 1999 through March 31, 1999 2.55:1.0
April 1, 1999 through June 30, 1999 2.00:1.0
July 1, 1999 and thereafter 1.75:1.0
(e) Capital Expenditures. The aggregate amount of capital
--------------------
expenditures made or incurred by members of the Consolidated Group during
the fiscal quarters set forth below shall not exceed:
Fiscal Quarter ending on or about September 30, 1998 $3,600,000
2
<PAGE>
Fiscal Quarter ending on or about December 31, 1998 $2,750,000
Fiscal Quarter ending on or about March 31, 1999 $2,250,000
Fiscal Quarter ending on or about June 30, 1999 $2,250,000
Fiscal Quarter ending on or about September 30, 1999 $2,250,000
The unused portion of capital expenditures permitted but not used in any
fiscal quarter may be carried over and used in the next fiscal quarter (one
quarter carry-over).
(f) Days Sales Outstanding. As of the end of each fiscal quarter to
----------------------
occur during the periods set forth below, Days Sales Outstanding of the
Consolidated Group for the lines of business set forth below shall not be
greater than:
medical services business
-------------------------
September 30, 1998 through December 30, 1998 130 days
December 31, 1998 through March 30, 1999 128 days
March 31, 1999 through September 29, 1999 125 days
September 30, 1999 and thereafter 122 days
paramedical testing business
----------------------------
for the period ending December 31, 1998 120 days
January 1, 1999 through March 31, 1999 95 days
April 1, 1999 through June 30, 1999 80 days
July 1, 1999 and thereafter 65 days
2. In accordance with the provisions of Section 3.4(a) of the Credit
Agreement, the Revolving Commitments are hereby permanently reduced by FIVE
MILLION DOLLARS ($5,000,000) to a revised Aggregate Revolving Committed Amount
of SEVENTY MILLION DOLLARS ($70,000,000), subject to further reduction as
provided in the definition of "Aggregate Revolving Committed Amount" and as
otherwise provided in the Credit Agreement.
3. The Lenders hereby agree and provide:
(a) The Forbearance Period as referenced in Amendment No. 3 is hereby
terminated upon the effectiveness of this Amendment.
(b) Subject only to the condition that the financial condition and
performance of the Consolidated Group as reflected in the final annual
audited financial statements shall not differ in any meaningful respect
from that reflected in the preliminary annual financial statements
previously delivered to the Administrative Agent and the Lenders, the
Acknowledged Events of Default are hereby waived.
4. This Amendment shall be effective upon satisfaction of the following
conditions:
(a) execution of this Amendment by the Credit Parties and the
Required Lenders;
(b) receipt by the Administrative Agent of legal opinions of counsel
to the Credit Parties relating to this Amendment; and
3
<PAGE>
(c) receipt by the Administrative Agent for the ratable benefit of
the Consenting Lenders of the remaining portion of the Forbearance and
Amendment Fee (16.6667 basis points) as referenced in Amendment No. 3.
5. Representations and Warranties. Each of the Credit Parties hereby
------------------------------
represents and warrants that (i) it has the requisite corporate power and
authority to execute, deliver and perform this Agreement, (ii) it is duly
authorized to, and has been authorized by all necessary corporate action, to
execute, deliver and perform under this Agreement, (iii) it has no claims,
counterclaims, offsets or defenses to the Credit Documents, and the performance
of its obligations thereunder, or if it has any such claims, counterclaims,
offsets or defenses, they are hereby waived, relinquished and released in
consideration of the execution and delivery of this Agreement by the Required
Lenders, (iv) after giving effect to this Amendment, the representations and
warranties in Section 6 of the Credit Agreement are true and correct in all
material respects (except those which expressly relate to an earlier period),
and (v) after giving effect to this Amendment, no Default or Events of Default
has occurred and is continuing.
6. Except as modified hereby, all of the terms and provisions of the
Credit Agreement (including Schedules and Exhibits) shall remain in full force
and effect.
7. The Borrower agrees to pay all reasonable costs and expenses of the
Administrative Agent in connection with the preparation, execution and delivery
of this Amendment, including without limitation the reasonable fees and expenses
of Moore & Van Allen, PLLC.
8. This Amendment may be executed in any number of counterparts, each of
which when so executed and delivered shall be deemed an original and it shall
not be necessary in making proof of this Amendment to produce or account for
more than one such counterpart.
9. This Amendment shall be deemed to be a contract made under, and for all
purposes shall be construed in accordance with the laws of the State of North
Carolina.
[Remainder of Page Intentionally Left Blank]
4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of
this Amendment to be duly executed and delivered as of the date first above
written.
BORROWER: PEDIATRIC SERVICES OF AMERICA, INC.
- --------
a Georgia corporation
By: /s/ Stephen M. Mengert
----------------------------------
Name: Stephen M. Mengert
Title: Senior Vice President and
Chief Financial Officer
GUARANTORS: PEDIATRIC SERVICES OF AMERICA, INC.
- ----------
a Delaware corporation
By: /s/ Stephen M. Mengert
----------------------------------
Name: Stephen M. Mengert
Title: Senior Vice President and Chief Financial Officer
PSA LICENSING CORPORATION,
a Delaware corporation
PSA PROPERTIES CORPORATION,
a Delaware corporation
By: /s/ Susan E. Dignan
----------------------------------
Name: Susan E. Dignan
Title: President
for each of the foregoing
PEDIATRIC SERVICES OF AMERICA (CONNECTICUT), INC.,
a Connecticut corporation
PREMIER MEDICAL SERVICES, INC.
a Nevada corporation
PEDIATRIC HOME NURSING SERVICES, INC.,
a New York corporation
PEDIATRIC PARTNERS, INC.,
a Delaware corporation
PARAMEDICAL SERVICES OF AMERICA, INC.,
a California corporation
PREMIER NURSE STAFFING, INC.,
a Nevada corporation
PREMIER CERTIFIED HOME HEALTH SERVICES, INC.,
a Nevada corporation
ARO HEALTH SERVICES, INC.,
a Washington corporation
By: /s/ Joseph D. Sansone
----------------------------------
Name: Joseph D. Sansone
Title: President
for each of the foregoing
<PAGE>
LENDERS: NATIONSBANK, N.A.,
- -------
individually in its capacity as a
Lender and in its capacity as Administrative Agent
By: /s/ Ashley M. Crabtree
-----------------------------
Name: Ashley M. Crabtree
Title: Senior Vice President
TORONTO DOMINION (TEXAS), INC.
By:
-----------------------------
Name:
Title:
PNC BANK, NATIONAL ASSOCIATION
By: /s/ Jeffrey R. Dickson
-----------------------------
Name: Jeffrey R. Dickson
Title: Vice President
SUNTRUST BANK, ATLANTA
By:
-----------------------------
Name:
Title:
By:
-----------------------------
Name:
Title:
MELLON BANK, N.A.
By:
-----------------------------
Name:
Title:
CREDITANSTALT AG
By: /s/ Robert M. Biringet
-----------------------------
Name: Robert M. Biringet
Title: Executive Vice President
By: /s/ John G. Taylor
-----------------------------
Name: John G. Taylor
Title: Senior Associate
<PAGE>
EXHIBIT 13
1998
ANNUAL REPORT
<PAGE>
Service is our
Middle Name
PSA has become
the nation's largest
focused pediatric home
health care provider
specializing in home
nursing, respiratory
therapy and infusion
therapy services for
infants and children.
PEDIATRIC SERVICES
OF AMERICA, INC.
ANNUAL REPORT
1998
<PAGE>
COMPANY PROFILE
Pediatric Services of America is designed to [photograph]
comprehensively address the full range of home
health care needs of pediatric patients,
particularly the needs of medically fragile
children dependent upon sophisticated nursing
care and medical technology. Many pediatric
patients suffer from complex medical problems,
most of which result from premature births or
genetic abnormalities. These medical problems
include bronchopulmonary dysplasia, digestive
and absorptive diseases, cystic fibrosis and
neurologically related respiratory problems.
PEDIATRIC SERVICES OF AMERICA
has become the nation's largest focused
[photograph] pediatric home health care provider specializing
in home nursing, respiratory therapy and
infusion therapy services for infants and
children.
PARAMEDICAL SERVICES OF AMERICA
is a leader in providing high quality medical [photograph]
testing services to the insurance industry.
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(Dollars in thousands, except per share data)
Year ended September 30, 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)
Net revenue $302,492 $204,023 $163,804 $111,860 $70,686
Operating income (loss) (715) 15,467 10,166 8,658 5,209
Income (loss) before extraordinary
item (6,292) 7,255 5,046 4,212 2,579
Net income (loss) (6,292) 7,255 5,046 4,993 2,171
- ----------------------------------------------------------------------------------------------------
SHARE DATA(2)
Net income (loss) per common share
Basic $ (0.91) $ 1.16 $ 0.82 $ 1.02 $ (0.10)
Diluted $ (0.91) $ 1.13 $ 0.77 $ 0.92 $ (0.10)
Weighted average shares outstanding
Basic 6,911 6,257 6,057 4,655 1,573
Diluted 6,911 6,446 6,437 5,166 1,713
- ----------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Working capital $ 75,381 $ 62,193 $ 35,673 $ 17,936 $13,754
Total assets 234,561 153,834 98,736 73,151 40,299
Long-term obligation, net of
current portion 127,787 65,012 23,638 6,243 8,227
Total stockholders' equity 63,683 61,680 54,193 44,621 20,097
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) The consolidated financial information has been restated for the effect of
the business combination on February 29, 1996 of the Company and Premier
Medical Services, Inc. accounted for using the pooling-of-interests method.
See Note 4 to the Company's consolidated financial statements.
(2) Calculated as set forth in Note 11 to the Company's consolidated financial
statements. All share information gives effect to a 0.7 for 1 reverse split
of the Common Stock that was effected on June 10, 1994. All earnings per
share information has been restated to conform with FASB Statement No. 128.
FISCAL 1998 REVENUE MIX
Major Category Mix Payor Mix
[pie chart] [pie chart]
Respiratory Commercial
Therapy Equip.......16% Insurors and
Nursing.............36% other private
payors.............70%
Pharmacy and
Other...............18% Medicare........... 7%
Home Medical Medicaid...........23%
Equipment........... 3%
Medical Testing
Services............27%
2
<PAGE>
SHAREHOLDER'S LETTER
Dear Shareholders
PSA has become the nation's largest focused pediatric home health
care provider specializing in home nursing, respiratory therapy
and infusion therapy services for infants and children.
Fiscal 1998 proved to be a difficult year for PSA and health care services
companies in general. Faced with significant cuts in government reimbursement, a
slowdown in payments from third party payors and internal system conversion cost
issues, PSA recorded its first loss since going public in 1994. Many of these
issues impacted companies throughout the health care industry, making 1998 one
of the weakest in terms of market valuations in recent years.
As the fiscal year ended, PSA aggressively addressed the problems confronting
the organization. We challenged payors on collection issues, closed or merged
thirteen branch offices based on profitability criteria, poured resources into
information technologies to complete state of the art projects, added to our
field sales force, and strengthened management in our corporate reimbursement
division. We have made excellent strides in meeting these issues and recognize
that our future growth depends on our successes in addressing each and every
area of concern.
[photograph of Joseph D. Sansone appears here]
Joseph D. Sansone
President and Chief Executive Officer
Even as we deal with many problem areas, we are able to report that our growth
as a company was remarkable during 1998. We reported record net revenue for the
sixth consecutive year with an increase of 48% from $204.0 million in fiscal
1997 to $302.5
3
<PAGE>
million in fiscal 1998. We added $90.1 million in annualized revenues through
twelve acquisitions and had an annual internal growth rate of 8%. Since 1992,
our compounded annual revenue growth has been 52%.
During fiscal 1998, we also added significant growth to our medical testing
product line, opened two start-up locations and completed three major
information system projects to enhance our billing and financial reporting
functions. While expansion has put some stress on our infrastructure, we feel
PSA is well positioned as a dominant force in both pediatric home health care
and paramedical testing services.
- ---------------------------------
We are continuing our strategy of
creating a national organization
that provides comprehensive
pediatric home health care.
- ---------------------------------
During the year, PSA entered the bond market for the first time with a
successful placement of $75 million principal amount of 10 year, ten percent
Senior Subordinated Notes. Financing from these bonds allowed us to complete
acquisitions and provide capital for future projects. We anticipate that our
capital needs in the next year will be met by internally generated cash as we
move our emphasis from acquisitions to increasing market share in our existing
locations.
The health care industry in general and home health care in particular
experienced difficulties during 1998. The effects of the Balanced Budget Act of
1997, managed care pressures and other factors contributed to weak performance
and a substantial decline in values for many health care companies. However, the
overall market remains strong. With over
- --------------------------------------------------------------------------------
Fiscal 1998 Annualized
Month Net Revenue Net Revenue
Acquired Acquisition (Millions)* (Millions)
================================================================================
Nov. 97 Kids and Nurses, Inc. $ 3.0 $ 3.5
Nov. 97 Intra-Care, Inc. $ 6.8 $ 7.5
Nov. 97 Pediatric Physical Therapy, Inc. $ 0.9 $ 1.0
Nov. 97 American Insurance Examiners, Inc. $ 0.0 $ 0.0
Dec. 97 Kid's Nurses, Inc. $ 0.5 $ 0.6
Dec. 97 Cyber Home Medical Equipment, Inc. $ 0.9 $ 1.0
Dec. 97 ChoicePoint Services, Inc. (PMI) $48.3 $61.1
Jan. 98 Texas Air Supply Home Medical
Equipment, Inc. $ 0.7 $ 1.0
Jan. 98 Pediatric Nursing Service, Inc. $ 2.2 $ 3.3
Feb. 98 Strictly Pediatrics, LLC $ 0.2 $ 0.3
Mar. 98 Medical Equipment & Supply, Inc. $ 0.7 $ 1.2
Jul. 98 Trans World Home Health Care (Nursing), Inc. $ 2.0 $ 9.6
* Since date of acquisition
- --------------------------------------------------------------------------------
Pediatric Services of America
[photograph of James R. Henderson]
James R. Henderson
Senior Vice President of Operations
Pediatric Services of America
- --------------------------------------------------------------------------------
The leadership position PSA enjoys in providing health care services gives us
the opportunity to promote, on a national basis, our concept of care for the
medically fragile children and adults entrusted to our organization.
- --------------------------------------------------------------------------------
4
<PAGE>
[photograph of Stephen M. Mengert]
Stephen M. Mengert, Chief Financial Officer
$1.1 trillion spent on health care annually, it is apparent that the
organizations that can best control costs and negotiate effective pricing will
be long term winners in this arena. PSA is committed to shaping its future as a
dynamic force on the new health care landscape.
With the addition of the PMI division from ChoicePoint Services, Inc. in
December, 1997, our medical testing division has become one of the leading
providers of paramedical testing services to the insurance industry. Annualized
revenue from this division exceeds $95 million. The medical testing environment
also has experienced change. Industry consolidation has put PSA in a strong
position in the insurance testing market. Additional opportunities exist for PSA
in the multi-billion dollar diagnostic market, clinical trials, and information
services markets. We believe the development of these businesses can
significantly enhance growth and earnings.
The home health care market for pediatrics continues to grow. Our role has
widened with the expansion of our day treatment centers for medically fragile
children. These centers provide educational, social, and therapeutic services to
children as they grow and evolve. We anticipate the focus of the Company's
pediatric division will be on an expanded children's services platform as our
capabilities grow in these alternative care product lines.
Our plans for PSA in fiscal 1999 revolve around stabilization of our core
businesses, a focus on internal growth, an aggressive reimbursement policy, cost
containment and enhancement of shareholder value. We feel we have added the
elements needed to vigorously pursue these goals and produce the results
expected by those who have invested in our vision. We look forward to reporting
improved results to our shareholders as the new year brings us new
opportunities.
/s/ Joseph D. Sansone
Joseph D. Sansone
Chairman of the Board, President and
Chief Executive Officer
Paramedical Services of America
[photograph of David Nabors]
David Nabors
Vice President of Diagnostic Services
Paramedical Services of America
- --------------------------------------------------------------------------------
Our growth in medical testing services has been extraordinary. Our potential in
providing additional diagnostics has been enhanced by our prominent position in
the industry and the overall success of our field personnel.
- --------------------------------------------------------------------------------
5
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
(in thousands, except per share data)
Year Ended September 30, 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Net revenue $302,492 $204,023 $163,804 $111,860 $70,686
Operating salaries, wages and employee benefits 123,984 87,943 72,026 50,078 33,198
Other operating costs 124,438 75,386 60,096 39,087 23,566
Corporate, general and administrative 23,030 12,885 10,784 7,217 5,428
Provision for doubtful accounts 22,963 6,239 4,708 3,164 1,411
Depreciation and amortization 8,792 6,103 4,858 3,656 1,874
Business combination costs -- -- 1,166 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (715) 15,467 10,166 8,658 5,209
Interest expense 8,956 3,534 1,778 1,643 1,074
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest, income tax expense
(benefit) and extraordinary item (9,671) 11,933 8,388 7,015 4,135
Minority interest in loss of subsidiary 68 119 64 -- --
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit)
and extraordinary item (9,603) 12,052 8,452 7,015 4,135
Income tax expense (benefit) (3,311) 4,797 3,406 2,803 1,556
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item (6,292) 7,255 5,046 4,212 2,579
Extraordinary item, net of tax -- -- -- 781 (408)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (6,292) $ 7,255 $ 5,046 $ 4,993 $ 2,171
=============================================================================================================================
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
AND COMMON EQUIVALENT SHARES:
Income (loss) before extraordinary item $ (6,292) $ 7,255 $ 5,046 $ 4,212 $ 2,579
Less accretion on redeemable warrants -- -- -- -- (51)
Less accretion on redeemable preferred stock -- -- (10) (36) (2,198)
Less preferred stock dividends -- -- (86) (195) (86)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item attributable to
common and common equivalent shares (6,292) 7,255 4,950 3,981 244
Extraordinary item, net of tax -- -- -- 781 (408)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) attributable to common and common
equivalent shares $ (6,292) $ 7,255 $ 4,950 $ 4,762 $ (164)
=============================================================================================================================
DENOMINATOR SHARE DATA(2):
Denominator for basic income (loss) per share-weighted
average shares 6,911 6,257 6,057 4,655 1,573
Effect of dilutive securities:
Warrants and options -- 189 243 403 91
Redeemable convertible preferred stock -- -- 137 108 49
- -----------------------------------------------------------------------------------------------------------------------------
Denominator for diluted income (loss) per share-adjusted
weighted average shares 6,911 6,446 6,437 5,166 1,713
=============================================================================================================================
INCOME (LOSS) PER SHARE DATA(2):
Income (loss) before extraordinary item per common share:
Basic $(0.91) $1.16 $0.82 $ 0.85 $ 0.16
Diluted (0.91) 1.13 0.77 0.77 0.14
Extraordinary item per common share:
Basic -- -- -- 0.17 (0.26)
Diluted -- -- -- 0.15 (0.24)
- -----------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share:
Basic $(0.91) $1.16 $0.82 $ 1.02 $ (0.10)
=============================================================================================================================
Diluted $(0.91) $1.13 $0.77 $ 0.92 $ (0.10)
=============================================================================================================================
BALANCE SHEET DATA:
Working capital $ 75,381 $ 62,193 $ 35,673 $ 17,936 $13,754
Total assets 234,561 153,834 98,736 73,151 40,299
Long-term obligations, net of current portion 127,787 65,012 23,638 6,243 8,227
Redeemable convertible preferred stock -- -- -- 3,490 1,867
Total stockholders' equity 63,683 61,680 54,193 44,621 20,097
=============================================================================================================================
</TABLE>
(1) The consolidated financial information has been restated for the effect of
the business combination on February 29, 1996 of the Company and Premier
Medical Services, Inc. accounted for using the pooling-of-interests method.
See Note 4 to the Company's consolidated financial statements.
(2) Calculated as set forth in Note 11 to the Company's consolidated financial
statements. All share information gives effect to a 0.7 for 1 reverse split
of the Common Stock that was effected on June 10, 1994. All earnings per
share information has been restated to conform with the Financial
Accounting Standards Board ("FASB") Statement No. 128.
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Annual Report 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 Annual Report,
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.
The following discussion should be read in conjunction with the Selected
Consolidated Financial Data and the audited Consolidated Financial Statements of
the Company included in this report. All financial information has been restated
to reflect the combination of the Company and Premier Medical Services, Inc.
("Premier"), on February 29, 1996 using the pooling-of-interests method of
accounting.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the percentage of net
revenue represented by the following items:
- -----------------------------------------------------------------------
Year Ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------
Net revenue 100.0% 100.0% 100.0%
Operating salaries, wages and
employee benefits 41.0 43.1 44.0
Other operating costs 41.1 36.9 36.7
Corporate, general and administrative 7.6 6.3 6.6
Provision for doubtful accounts 7.6 3.1 2.9
Depreciation and amortization 2.9 3.0 3.0
Business combination costs -- -- 0.6
- -----------------------------------------------------------------------
Operating income (loss) (0.2) 7.6 6.2
Interest expense 3.0 1.7 1.1
- -----------------------------------------------------------------------
Income (loss) before minority
interest, income tax expense (benefit) (3.2) 5.9 5.1
Minority interest in loss of subsidiary 0.0 0.1 0.1
- -----------------------------------------------------------------------
Income (loss) before income tax
expense (benefit) (3.2) 6.0 5.2
Income tax expense (benefit) (1.1) 2.4 2.1
- -----------------------------------------------------------------------
Net income (loss) (2.1)% 3.6% 3.1%
=======================================================================
FISCAL 1998 COMPARED TO FISCAL 1997
Net revenue increased $98.5 million, or 48%, to $302.5 million in fiscal 1998
from $204.0 million in fiscal 1997. The Company's acquisitions accounted for
approximately $81.7 million of the increase in net revenue and internal growth
accounted for the remaining $16.8 million. For branch offices that have been
under the Company's management for more than one year, the internal growth in
net revenue was 8% for fiscal 1998. Of the $98.5 million increase in net revenue
for fiscal 1998, pediatric health care net revenue accounted for $34.8 million.
Increased pediatric health care net revenue for fiscal 1998 was primarily
attributable to the Company's acquisitions which accounted for approximately
$18.5 million and the remainder to marketing efforts which resulted in an
increase in patients served rather than significant increase in rates charged.
Adult health care net revenue accounted for $9.4 million of the increase in net
revenue for fiscal 1998. Increased adult health care net revenue for fiscal 1998
was attributable to the Company's acquisitions which accounted for approximately
$14.9 million, offset by a decline in internal revenue growth for adult patients
of $5.5 million. Medical testing services net revenue accounted for $54.3
million of the increase in net revenue for fiscal 1998, primarily due to the
acquisition of the Physical Measurements Information division ("PMI") of
ChoicePoint Services, Inc. ("ChoicePoint") which added
7
<PAGE>
$48.3 million. In fiscal 1998, the Company derived approximately 70% of its net
revenues from commercial insurers and other private payors, 23% from Medicaid
and 7% from Medicare.
Operating salaries, wages and employee benefits consist primarily of branch
office employee costs. Operating salaries, wages and employee benefits increased
$36.0 million, or 41%, to $124.0 million in fiscal 1998 from $87.9 million in
fiscal 1997. The increase was primarily due to the Company's acquisitions which
added approximately $28.5 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 fiscal 1998 decreased to 41% from 43%.
Other operating costs include medical supplies, branch office rents, 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 $49.1 million, or 65%, to $124.4 million
in fiscal 1998 from $75.4 million in fiscal 1997. Of the increase, $26.9 million
relates to the PMI acquisition in the medical testing business. Due to the
nature of its operations, PMI has a higher other operating costs component as
compared to the Company's home heath care operations. The remaining $22.2
million is primarily due to internal growth in the business. As a percentage of
net revenue, other operating costs for fiscal 1998 increased to 41% from 37% in
fiscal 1997.
Corporate, general and administrative costs increased $10.1 million, or 79%, to
$23.0 million in fiscal 1998 from $12.9 million in fiscal 1997. The increase was
primarily due to the acquisition of PMI and internal growth of the business. As
a percentage of net revenue, corporate, general and administrative costs for
fiscal year 1998, increased to 8% from 6% in fiscal 1997.
Provision for doubtful accounts consists of the amount of billed revenue that
management estimates to be uncollectible. During fiscal 1998, the Company's
provision for doubtful accounts increased approximately $16.7 million, or 268%,
to $23.0 million from $6.2 million in fiscal 1997. The increase in fiscal 1998
is primarily attributable to management's ongoing assessment of the
collectibility of accounts receivable which was revised to reflect: (1)
continued difficulties in the health care reimbursement environment, (2) lagging
collection on certain receivables primarily resulting from the implementation of
a new billing and collection system which diverted the Company's resources from
pursuing older receivable balances, (3) problems identified related primarily to
certain billings generated during the implementation phase of the new billing
and collection system, (4) collection experience on certain receivables of
acquired businesses and (5) the unfavorable outcome of certain receivables under
appeal. Due to the above mentioned 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 107 days at fiscal year end 1998 from 126
days at fiscal year end 1997.
Depreciation and amortization increased $2.7 million, or 44%, to $8.8 million in
fiscal 1998 from $6.1 million in fiscal 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 fiscal years 1998 and 1997.
Interest expense increased $5.4 million, or 153%, to $9.0 million in fiscal 1998
from $3.5 million in fiscal 1997. The increase was primarily the result of a
$52.8 million increase in the Company's average debt outstanding incurred to
finance acquisitions and the Company's working capital, compared to fiscal year
1997. 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.
Income tax expense (benefit) decreased $8.1 million, or 169%, to $(3.3) million
in fiscal 1998 from $4.8 million in fiscal 1997. The Company has recorded an
overall net operating loss for fiscal 1998.
FISCAL 1997 COMPARED TO FISCAL 1996
Net revenue increased $40.2 million, or 25%, to $204.0 million in fiscal 1997
from $163.8 million in fiscal 1996. The Company's acquisitions and start-up
operations accounted for approximately $14.5 million and internal growth
accounted for the remaining $25.7
8
<PAGE>
million. Of the $40.2 million increase in net revenue in fiscal 1997, pediatric
net revenue accounted for $26.9 million. Increased pediatric net revenue for
fiscal 1997 was attributable to the Company's acquisitions and start-up
operations, the successful opening of new branch offices and marketing efforts
which resulted in an increase in patients served rather than any significant
increase in rates charged. Adult net revenue accounted for $6.3 million of the
increase in net revenue for fiscal 1997, primarily due to internal growth of
existing locations and the Company's acquisitions. Medical testing services net
revenue accounted for $7.0 million of the increase in net revenue for fiscal
1997, primarily due to an increase in the volume of business. In fiscal 1997,
the Company derived approximately 64% of its net revenue from commercial and
private payors, 27% from Medicaid and 9% from Medicare.
Operating salaries, wages and employee benefits consist primarily of branch
office operations. Operating salaries, wages and employee benefits increased
$15.9 million, or 22%, to $87.9 million in fiscal 1997 from $72.0 million in
fiscal 1996. The increase was primarily due to the Company's acquisitions,
start-up operations and the internal growth of the Company's operations. The
acquisitions and start-up operations added approximately $9.6 million of the
increase in operating salaries, wages and employees benefits. As a percentage of
net revenue, operating salaries, wages and employee benefits for fiscal 1997
decreased to 43% from 44% in fiscal 1996. The decrease in operating salaries,
wages and employee benefits as a percentage of net revenue is attributable to a
number of factors including improved nursing productivity due to scheduling and
staffing efficiencies and a change in business mix to a higher percentage of
pharmacy net revenue to total net revenue.
Other operating costs include medical supplies, branch office rents, utilities,
vehicle expenses and cost of sales. The cost of sales consists primarily of the
cost of pharmacy products. Other operating costs increased $15.3 million, or
25%, to $75.4 million in fiscal 1997 from $60.1 million in fiscal 1996. Of the
increase, $3.1 million relates to the Company's acquisitions and start-up
operations and the remaining $12.2 million to the internal growth of the
Company's operations. The percentage of other operating costs to net revenue was
essentially comparable for fiscal 1997 and 1996.
Corporate, general and administrative costs increased $2.1 million, or 20%, to
$12.9 million in fiscal 1997 from $10.8 million in fiscal 1996. The increase was
primarily due to the growth of the Company's operations and the addition of
temporary personnel needed for the implementation of the Company's new billing
and collection system. The percentage of corporate, general and administrative
costs to net revenue was essentially comparable for fiscal 1997 and 1996.
Provision for doubtful accounts consists of the amount of billed revenue that
management estimates will become uncollectible. During fiscal 1997, the
Company's provision increased $1.5 million, or 33%, to $6.2 million from $4.7
million in fiscal 1996. The increase is primarily due to growth of the business,
and an increase in total net revenue and days sales outstanding.
Depreciation and amortization increased $1.2 million, or 26%, to $6.1 million in
fiscal 1997 from $4.9 million in fiscal 1996. The increase was primarily
attributable to the Company's capital expenditures, the purchase of rental
equipment and the amortization of goodwill from the Company's acquisitions. As a
percentage of the Company's total net revenue, depreciation and amortization
costs were comparable for fiscal 1997 and 1996.
In fiscal 1996, the Company incurred non-recurring business combination costs of
approximately $1.2 million related to the business combination of the Company
with Premier Medical Services, Inc. ("Premier") on February 29, 1996. These
costs represent legal and professional fees, severance costs and other costs
related to consummating the business combination.
Interest expense increased $1.7 million, or 99%, to $3.5 million in fiscal 1997
from $1.8 million in fiscal 1996. The increase was primarily the result of a
$29.4 million increase in the Company's average debt outstanding incurred to
finance acquisitions and the Company's working capital for fiscal 1997.
Income tax expense increased $1.4 million, or 41%, to $4.8 million in fiscal
1997 from $3.4 million in fiscal 1996. This increase is due to an increase in
the profitability of the Company.
LIQUIDITY AND CAPITAL RESOURCES
In August 1997, the Company increased the amount of financing available under
the revolving Credit Agreement ("Credit Agreement") from $60.0 million to $100.0
million, consisting of a $95.0 million revolving loan (Credit Facility) with a
$5.0 million swingline loan credit subfacility.
9
<PAGE>
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.
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 a previously guaranteed price the shares issued to ChoicePoint
in the PMI transaction (see Note 4 to the Consolidated Financial Statements).
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.
Under the Credit Facility, as amended, commitment fees ranging from 0.300% to
0.500% per annum are charged 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 an applicable margin that varies from a minimum of
1.375% to a maximum of 3.50% and is based on the calculation of a leverage
ratio, or (2) the base rate plus the applicable margin. At the Company's option,
borrowings under the swingline loan credit subfacility bear interest at either
(1) a quoted rate established by the lender or (2) the prime rate. At September
30, 1998, the Company's applicable margin was 3.50%, and the interest rates
under the Credit Facility at September 30, 1998 ranged from 7.66% to 8.03%.
Outstanding borrowings under the Credit Facility at September 30, 1998 were
approximately $52.5 million.
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 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 significant reduction 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.
At September 30, 1998, total borrowings under the Notes and the Credit Agreement
were approximately $127.5 million.
10
<PAGE>
At September 30, 1998, the Company had one interest rate swap agreement with a
commercial bank (the "Counter Party"), having a cumulative notional principal
amount of $25 million. The Company pays a fixed rate of 6.61% plus the
applicable margin that varies from a minimum of 1.375% to a maximum of 3.50%
and is based on the calculation of a leverage ratio. The interest rate swap
terminates in June 2002. The Company is exposed to credit loss in the event of
non-performance by the Counter Party to the interest rate swap agreement.
However, the Company does not anticipate such non-performance.
Upon the purchase of Premier by the Company, the Redeemable Convertible
Preferred Stock of Premier was converted to Common Stock. In addition, the
Company paid the cumulative preferred stock dividend of approximately $281,000
as required upon the conversion of the Redeemable Convertible Preferred Stock to
Common Stock in February 1996. As of September 30, 1996, the Company had paid
substantially all of the non-recurring costs related to the combination.
The Company's operating cash flows are affected significantly by changes in
accounts receivable, which have grown substantially over time largely as a
result of the Company's net revenue growth and slowing collections. For fiscal
year 1998, 1997 and 1996, the Company's cash flows from operations were affected
by increases in accounts receivable balances of $44.0 million, $30.2 million and
$20.3 million, respectively. The Company's Days Sales Outstanding ("DSO") was
107 days, 126 days and 101 days as of September 30, 1998, 1997 and 1996,
respectively, based on the net revenue for the last quarter of the period. For
fiscal 1998, the decrease in DSO is primarily attributable to the increase in
the allowance for doubtful accounts. The Company has taken measures intended to
further improve DSO by hiring additional experienced reimbursement personnel,
making enhancements to the billing and collection system, improving training
programs, engaging an outside consulting firm to assess the billing and
collection functions and provide recommendations for process improvements, as
well as further utilization of the new billing and collection system to include
the integration of locations not currently on the system.
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. The Company's
investments in the acquisition of businesses were $38.5 million, $20.9 million
and $4.8 million in fiscal 1998, 1997 and 1996, respectively.
As of September 30, 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 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.
Development costs of new branch offices include, among other things, lease
deposits and payments, and leasehold improvements and start-up costs, including
marketing and labor costs. Management believes that the Company's cash
commitment for each new branch office that delivers a full range of the
Company's services may approximate $500,000. Such costs will vary depending upon
inflation and the size and location of each facility and, accordingly, may vary
substantially from this approximation.
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, subject to
obtaining necessary waivers and amendment of the Credit Agreement, borrowings
under such 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
11
<PAGE>
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 thirteen herein (the "Y2k Chart"),
the Company has completed approximately 80% 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. However,
testing will be required to confirm compliance. Some modifications and
replacements have been made or are planned with regard to approximately 66% of
the Company's Systems which the assessment indicated were not Year 2000
compliant including, without limitation, software and hardware used in pharmacy
ordering, and computer phone lines connecting the Company with certain of its
locations. After an assessment of its medical equipment and inquiry of material
suppliers, the Company does not believe that significant replacement of the
medical equipment sold or rented by the Company will require remediation to be
Year 2000 compliant.
The remediation phase of the Year 2000 Plan is approximately 66% 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 30, 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 adverse 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
12
<PAGE>
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) 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 account receivables. 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 $175,000 related to all phases of the Year 2000 project.
The total remaining project costs is currently estimated at $75,000.
CONTINGENCY PLANS
The Company has certain contingency plans 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 the 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
13
<PAGE>
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.
QUARTERLY OPERATING RESULTS AND SEASONALITY
The Company's quarterly results may vary significantly depending primarily on
factors such as rehospitalizations of patients, the timing of new branch office
openings and pricing pressures due to legislative and regulatory initiatives to
contain health care costs. The Company's operating results for any particular
quarter may not be indicative of the results for the full fiscal year.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
YEAR 2000 DISCLOSURE CHART(1) RESOLUTION PHASES(2)
- -----------------------------------------------------------------------------------------------------------------------------------
EXPOSURE TYPE ASSESSMENT REMEDIATION TESTING IMPLEMENTATION
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Information Technology Systems 80% Complete 66% Complete 50% Complete 50% Complete
Expected Expected Expected
completion date, completion date, completion date,
March 31, 1999 May 31, 1999 June 30, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Equipment with 100% Complete 100% Complete 100% Complete 100% Complete
Embedded Chips or Software(3)
- -----------------------------------------------------------------------------------------------------------------------------------
Products(4) N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
Third Party(5) 50% Complete 25% Complete 25% Complete 0% Complete
for system
interface; Develop Expected Expected
50% Complete contingency completion completion
for all other plans as date for system date for system
material appropriate, interface work, interface work
exposures March 31, 1999 September 30, 1999 November 30, 1999
Expected completion Implement contingency
date for surveying plans or other alternatives
all third parties: as necessary,
in process December 31, 1999
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon estimates derived from our detailed master Year 2000 plan.
Percentages are approximates 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, would start with a zero weighting
factor. A system designed for Year 2000 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 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.
================================================================================
14
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended September 30, 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,008,392 $ 500,629
Accounts receivable, less allowances for doubtful
accounts of $14,008,000 and $10,036,000, respectively 99,029,434 75,458,527
Prepaid expenses 807,376 507,905
Income taxes receivable 2,898,474 --
Deferred income taxes 3,266,288 3,879,862
Other current assets 5,836,457 3,481,517
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 113,846,421 83,828,440
PROPERTY AND EQUIPMENT:
Home care equipment held for rental 28,434,704 24,103,723
Furniture and fixtures 15,184,558 6,979,170
Vehicles 891,023 731,565
Leasehold improvements 915,189 580,675
- ---------------------------------------------------------------------------------------------------------------------
45,425,474 32,395,133
Accumulated depreciation and amortization (20,713,687) (15,678,405)
- ---------------------------------------------------------------------------------------------------------------------
24,711,787 16,716,728
OTHER ASSETS:
Goodwill, less accumulated amortization of
$6,672,000 and $3,695,000, respectively 89,171,431 50,421,121
Certificates of need, less accumulated amortization of
$508,000 and $279,000, respectively 2,739,379 1,542,996
Deferred financing fees, less accumulated
amortization of $521,000 and $192,000, respectively 3,251,074 632,449
Noncompete agreements, less accumulated amortization of
$875,000 and $719,000, respectively 185,000 320,555
Other 656,251 371,706
- ---------------------------------------------------------------------------------------------------------------------
96,003,135 53,288,827
- ---------------------------------------------------------------------------------------------------------------------
Total assets $234,561,343 $153,833,995
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 11,600,282 $ 6,302,182
Accrued compensation 11,147,033 5,146,786
Accrued insurance 3,516,392 2,392,780
Other accrued liabilities 7,361,506 3,559,100
Deferred revenue 1,101,008 852,899
Income taxes payable -- 1,119,526
Current maturities of long-term obligations to related parties 3,322,956 2,163,101
Current maturities of long-term obligations 416,200 98,590
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 38,465,377 21,634,964
Long-term obligations to related parties, net of current
maturities 220,000 3,887,339
Long-term obligations, net of current maturities 127,567,002 61,124,757
Deferred income taxes 3,878,485 4,690,651
Minority interest in subsidiary 747,438 815,794
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 2,000,000 shares
authorized, no shares issued and outstanding -- --
Common stock, $.01 par value, 80,000,000 shares
authorized, 6,651,964 and 6,257,979 shares issued and
outstanding in 1998 and 1997, respectively 66,520 62,580
Additional paid-in capital 50,037,261 41,746,450
Retained earnings 13,579,260 19,871,460
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 63,683,041 61,680,490
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $234,561,343 $153,833,995
=====================================================================================================================
See accompanying notes.
</TABLE>
15
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year ended September 30, 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
NET REVENUE $302,491,506 $204,022,726 $163,804,464
Costs and expenses:
Operating salaries, wages and employee benefits 123,983,873 87,943,066 72,026,197
Other operating costs 124,437,680 75,385,617 60,096,166
Corporate, general and administrative 23,029,813 12,885,475 10,783,957
Provision for doubtful accounts 22,963,191 6,238,965 4,707,989
Depreciation and amortization 8,792,121 6,102,522 4,858,319
Business combination costs -- -- 1,165,600
- ---------------------------------------------------------------------------------------------------------------------
Total costs and expenses 303,206,678 188,555,645 153,638,228
- ---------------------------------------------------------------------------------------------------------------------
Operating income (loss) (715,172) 15,467,081 10,166,236
Interest expense 8,955,976 3,534,262 1,778,384
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before minority interest and income tax expense (benefit) (9,671,148) 11,932,819 8,387,852
Minority interest in loss of subsidiary 68,356 119,341 64,965
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income tax expense (benefit) (9,602,792) 12,052,160 8,452,817
Income tax expense (benefit) (3,310,592) 4,797,462 3,406,484
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (6,292,200) $ 7,254,698 $ 5,046,333
=====================================================================================================================
Net income (loss) attributable to common and common equivalent shares:
Net income (loss) $ (6,292,200) $ 7,254,698 $ 5,046,333
Less accretion on redeemable preferred stock -- -- (10,174)
Less preferred stock dividends -- -- (85,750)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) attributable to common and common equivalent shares $ (6,292,200) $ 7,254,698 $ 4,950,409
=====================================================================================================================
NET INCOME (LOSS) PER SHARE DATA:
Basic $ (0.91) $ 1.16 $ 0.82
=====================================================================================================================
Diluted $ (0.91) $ 1.13 $ 0.77
=====================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 6,910,760 6,256,567 6,057,182
=====================================================================================================================
Diluted 6,910,760 6,445,755 6,437,325
=====================================================================================================================
See accompanying notes.
</TABLE>
16
<PAGE>
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED
STOCK, COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Redeemable
Convertible Additional Total
Preferred Common Paid-in Retained Stockholders'
Stock Stock Capital Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at October 1, 1995 $ 3,490,178 $56,039 $36,898,971 $ 7,666,353 $ 44,621,363
63,563 shares of common stock issued through
exercise of stock options -- 636 355,356 -- 355,992
51,124 shares of common stock issued in
connection with the acquisition of a business -- 511 999,489 -- 1,000,000
Accretion on redeemable preferred stock 10,174 -- -- (10,174) (10,174)
Preferred stock dividends 85,750 -- -- (85,750) (85,750)
Conversion of preferred stock upon a business
combination (3,586,102) 3,324 3,261,505 -- 3,264,829
97,409 shares of common stock issued from the
conversion of warrants and stock options
upon the business combination -- 974 (974) -- --
99,233 shares of common stock issued upon
the exercise of warrants -- 992 (992) -- --
Net income -- -- -- 5,046,333 5,046,333
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1996 -- 62,476 41,513,355 12,616,762 54,192,593
43,753 shares of common stock issued through
exercise of stock options -- 437 232,762 -- 233,199
33,341 shares of common stock cancelled from escrow -- (333) 333 -- --
Net income -- -- -- 7,254,698 7,254,698
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1997 -- 62,580 41,746,450 19,871,460 61,680,490
16,899 shares of common stock issued through
exercise of stock options -- 169 154,577 -- 154,746
872,136 shares of common stock issued in
connection with the acquisition of businesses -- 8,721 18,131,284 -- 18,140,005
495,050 shares of common stock repurchased and retired in
connection with the acquisition of a business -- (4,950) (9,995,050) -- (10,000,000)
Net loss -- -- -- (6,292,200) (6,292,200)
- -----------------------------------------------------------------------------------------------------------------------------------
Balances at September 30, 1998 $ -- $66,520 $50,037,261 $13,579,260 $ 63,683,041
===================================================================================================================================
See accompanying notes.
</TABLE>
17
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30, 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ (6,292,200) $ 7,254,698 $ 5,046,333
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 8,792,121 6,102,522 4,858,319
Provision for doubtful accounts 22,963,191 6,238,965 4,707,989
Amortization of deferred financing fees 329,193 115,621 48,713
Deferred income taxes 359,362 3,257,996 (526,145)
Minority interest in loss of subsidiary (68,356) (119,341) (64,965)
Changes in operating assets and liabilities, net of
effects from acquisitions of businesses:
Accounts receivable (43,983,236) (30,202,092) (20,258,758)
Prepaid expenses (109,212) (44,955) 81,708
Other assets (2,074,005) (1,377,765) (1,295,488)
Accounts payable 4,627,938 288,183 2,671,756
Income taxes (4,018,000) (752,602) 1,034,234
Accrued liabilities 9,692,853 2,206,288 1,281,231
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (9,780,351) (7,032,482) (2,415,073)
INVESTING ACTIVITIES
Purchases of property and equipment (11,162,021) (6,866,888) (6,478,823)
Acquisitions of businesses (38,507,574) (20,943,121) (4,780,619)
Proceeds from minority partner in joint venture -- 100 1,000,000
Other, net (52,190) 38,846 (56,204)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (49,721,785) (27,771,063) (10,315,646)
FINANCING ACTIVITIES
Borrowings (payments) on revolving line of credit, net -- -- (3,892,054)
Principal payments on long-term debt (90,697,029) (9,231,503) (2,290,404)
Borrowings on long-term debt 154,500,000 44,064,000 19,735,276
Deferred financing fees (2,947,818) (531,728) (94,770)
Payment of preferred stock dividend -- -- (280,693)
Proceeds from exercise of stock options 154,746 233,199 223,008
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 61,009,899 34,533,968 13,400,363
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 1,507,763 (269,577) 669,644
Cash and cash equivalents at beginning of year 500,629 770,206 100,562
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 2,008,392 $ 500,629 $ 770,206
===================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $ 5,186,805 $ 2,957,313 $ 1,843,000
===================================================================================================================================
Cash paid for income taxes $ 337,583 $ 4,344,976 $ 2,689,000
===================================================================================================================================
See accompanying notes.
</TABLE>
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION The consolidated financial statements include the accounts of
Pediatric Services of America, Inc. ("PSA" or "the Company") and its majority-
owned subsidiaries. All significant intercompany accounts and transactions have
been eliminated in consolidation.
USE OF ESTIMATES The preparation of the consolidated financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of net revenue and expenses
during the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments
with a maturity of three months or less when purchased to be cash equivalents.
Deposits with banks are federally insured in limited amounts.
ACCOUNTS RECEIVABLE Accounts receivable includes approximately $33,085,000 and
$12,729,000 for which services have been rendered but the amounts were unbilled
as of September 30, 1998 and 1997, respectively.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost and are
depreciated on the straight-line method over the related asset's estimated
useful life, generally five to ten years for assets other than home care
equipment.
OTHER ASSETS Goodwill represents the excess of the purchase price of acquired
businesses over the fair value of net assets acquired and is being amortized
using the straight-line method over thirty years. The carrying value of goodwill
is reviewed on an ongoing basis to determine if the facts and circumstances
suggest that it may be impaired. If this review indicates that goodwill will not
be recoverable, as determined based on the undiscounted cash flows of the entity
acquired over the remaining amortization period, the Company's carrying value of
the goodwill and related assets will be reduced to their fair value.
Certificates of need are certificates which allow the Company to provide home
care services in the states of Maryland, the District of Columbia, North
Carolina, New Jersey, Tennessee and Washington. The certificates
of need were acquired in connection with business acquisitions by Premier
Medical Services, Inc. ("Premier") and business acquisitions by the Company. The
certificates of need are being amortized over their useful lives which is
primarily twenty-five years. (see Note 4).
Financing fees incurred in connection with the new credit agreement (see Note
3), and the issuance of the Senior Subordinated Notes are being amortized using
the straight-line method over their respective terms.
The cost of non-compete agreements with former owners of acquired businesses are
being amortized over the respective lives of each agreement which range from
three to five years (see Note 4).
NET REVENUE Net revenue represents the estimated net realizable amounts from
patients, third-party payors and others for patient services rendered. Such
revenue is recognized as the related services are performed. Approximately 30%,
36%, and 37% of the Company's net revenue for the years ended September 30,
1998, 1997 and 1996 respectively, were reimbursed under arrangements with
Medicare and Medicaid. Certain equipment rentals are billed in advance of the
Company rendering the related services. Such amounts are deferred in the balance
sheet until the related services are performed.
ADVERTISING COSTS Advertising costs are charged to expense in the period the
costs are incurred. Advertising expense was approximately $796,000, $587,000 and
$354,000 for the years ended September 30, 1998, 1997 and 1996, respectively.
CONCENTRATION OF CREDIT RISK The Company's principal financial instrument
subject to potential concentration of credit risk is accounts receivable. The
concentration of credit risk with respect to accounts receivable is limited due
to the large number of payors including Medicare and Medicaid, insurance
companies, and individuals and the diversity of geographic locations in which
the Company operates.
At September 30, 1998, the Company had one interest rate swap agreement with a
commercial bank (the "Counter Party"), having a cumulative notional principal
amount of $25 million. The Company pays a fixed rate of 6.61% plus the
applicable margin that varies from a minimum of 1.375% to a maximum of 3.000%
and is based on the calculation of a leverage ratio. The interest rate
differential to be received or paid is recognized over the life of the agreement
as an adjustment to interest expense. The interest rate swap terminates in June
2002. The Company is exposed to credit loss in the event of non-performance
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued
by the Counter Party to the interest rate swap agreement. However, the Company
does not anticipate such non-performance.
INCOME TAXES The liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS In the first quarter of fiscal
year 1997, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." The adoption of this Statement did not have a
material effect on the Company's financial position or on results of operations.
In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123). The new accounting standards prescribed by SFAS
No. 123 are optional, and the Company is permitted and has elected to account
for its stock incentive and stock purchase plans under previously issued
accounting standards (see Note 6).
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share." This Statement
replaced the previously reported primary and fully diluted earnings per share
with basic and diluted earning per share. Unlike primary earnings per share,
basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where necessary, restated to
conform to the Statement's requirements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The
Statement, which is effective for the first quarter of the Company's fiscal year
ending September 30, 1999, establishes standards for the reporting and display
of comprehensive income and its components in a full set of general purpose
financial statements. The adoption of this Statement is not anticipated to have
a material effect on the Company's financial position or results of operations.
In the first quarter of fiscal year 1999, the Company will adopt Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The adoption of this Statement will not
have a material effect on the Company's financial position or results of
operations.
In March 1998, the AICPA issued SOP 98-1, "Accounting For the Costs of Computer
Software Developed For or Obtained For Internal use." The SOP which was adopted
as of the second quarter, requires capitalization of certain costs incurred in
connection with developing or obtaining internal use software. In the prior and
current year, the Company capitalized such costs as incurred. The SOP requires
companies to adopt its provisions as of the beginning of the year and restate
previously reported interim results. Because the Company had previously
capitalized such costs restatement is not necessary.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is required to be adopted in years beginning
after June 15, 1999. Because of the Company's minimal use of derivatives,
management does not anticipate that the adoption of the new Statement will have
a significant effect on the financial position or results of operations of the
Company.
2. PREFERRED STOCK AND COMMON STOCK
As of September 30, 1998, a total of 1,803,389 shares of Common Stock have been
reserved for future issuance under the Company's stock option plans.
Shares of Preferred Stock and Common Stock outstanding and related changes for
the three years ended September 30, 1998 are as follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Redeemable
Convertible Common
Preferred Stock Stock
<S> <C> <C>
- ----------------------------------------------------------------------
Balances at October 1, 1995 34,300 5,603,852
Exercise of stock options -- 63,563
Exercise of warrants -- 99,233
Shares issued in connection with
the acquisition of a business -- 51,124
Conversion of warrants and stock
options upon a business
combination -- 97,409
Conversion of preferred stock
upon a business combination (34,300) 332,386
- ----------------------------------------------------------------------
Balances at September 30, 1996 -- 6,247,567
Exercise of stock options -- 43,753
Shares cancelled from escrow -- (33,341)
- ----------------------------------------------------------------------
Balances at September 30, 1997 -- 6,257,979
Exercise of stock options -- 16,899
Shares issued in connection with
the acquisition of businesses -- 872,136
Shares repurchased and retired
in connection with the
acquisition of a business -- (495,050)
- ----------------------------------------------------------------------
Balances at September 30, 1998 -- 6,651,964
======================================================================
</TABLE>
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
3. LONG-TERM BORROWING ARRANGEMENTS
The Company's long-term obligations as of September 30, 1998 and 1997, consist
of the following:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Subordinated notes $ 75,000,000 $ --
Note payable to bank 52,500,000 61,000,000
Related party notes payable 3,542,956 6,050,440
Other notes payable 483,202 223,347
- ---------------------------------------------------------------------
131,526,158 67,273,787
Less current maturities of
related party notes payable 3,322,956 98,590
Less current maturities 416,200 2,163,101
- ---------------------------------------------------------------------
Total long-term borrowings $127,787,002 $65,012,096
- ---------------------------------------------------------------------
</TABLE>
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.
Note payable to bank represents a revolving credit agreement ("Credit
Agreement"). From May 1996 to August 1997, the Company increased the amount of
financing available from $28 million to $100 million consisting of a $95 million
revolving loan and a $5 million swingline facility. Amounts available to borrow
under this agreement are subject to rate limits as defined in the agreement. The
loan is due August 2002. Borrowings under the Credit Agreement bear interest at
LIBOR, the bank's prime rate or at a rate equal to the bank's cost of funds,
plus an applicable margin. The applicable margin varies from a minimum of .875%
to a maximum of 1.625% at September 1997 and is based on the calculation of a
leverage ratio. At September 30, 1997, the Company's applicable margin was
1.250% and the interest rates under this Credit Agreement ranged from 6.91% to
7.12%. The principal balance outstanding at September 30, 1997 on the revolving
loan was $61.0 million.
The Credit Agreement was amended April 16, 1998 ("Amendment No. 1"), effective
upon the issuance of the Subordinated Notes, changing the commitment fees and
the financial ratio requirements. The Credit Agreement is collateralized by 100%
of the voting stock of the Company, requires the Company to maintain certain
financial ratios and places restrictions on the sale and purchase of assets,
payment of dividends and other distributions relating to the Company's
outstanding capital stock.
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, 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 a
previously guaranteed price the shares issued to ChoicePoint in the PMI
transaction (see Note 4). 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.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
A commitment fee ranging from .300% to .500% per annum is charged on the average
daily unused portion of the Credit Agreement. At September 30, 1998, the
Company's applicable margin was 3.50% and the interest rates under the Credit
Agreement ranged from 7.66% to 8.03%. The principal balance outstanding at
September 30, 1998 on the Credit Agreement was $52.5 million.
In connection with these extended agreements, the Company incurred loan costs of
approximately $194,799. These costs include loan closing fees, legal and
professional fees.
On December 4, 1998, the Company provided notice to its lenders, as required
under the terms of the Amended Credit Agreement, of non compliance with
financial covenants contained in the Credit Agreement. The above term were
modified as discussed in footnote 14 (see Note 14).
In fiscal year 1997, the Company entered into twelve related party notes
payable, and thirteen non-compete agreements with individuals in connection with
the acquisition of businesses. In fiscal year 1998, the Company entered into
three related party notes and one non-compete agreement with individuals in
connection with the acquisitions of businesses. The notes are payable in
monthly, quarterly or annual installments and bear interest at rates ranging
from 6.0% to 7.0%. The maturity dates range from January 1998 to August 2000.
The aggregate amount of required principal payments during each of the next five
fiscal years and thereafter on all long-term obligations as of September 30,
1998 is as follows:
<TABLE>
<CAPTION>
Year ending September 30,
<S> <C>
- -----------------------------------------
1999 $ 3,739,156
2000 52,735,316
2001 43,502
2002 8,184
2003 and thereafter 75,000,000
- -----------------------------------------
$131,526,158
- -----------------------------------------
</TABLE>
Warrants were issued to a bank for the purchase of 124,094 shares of Common
Stock or Series B Preferred Stock at an exercise price of $0.01 per share. Upon
closing of the Company's initial public offering, warrants for 24,819 shares of
Common Stock were exercised. As a result of the termination of a put right and
exercise of certain of the warrants, the Company transferred $629,443 from
redeemable warrants to Common Stock and Additional Paid-in Capital. In May,
1996, the remaining warrants were exercised for 99,233 shares of Common Stock.
4. ACQUISITIONS
The Company acquired twelve companies during fiscal 1998. Proforma net loss and
net loss per share would not be materially different than actual net loss and
net loss per share reported in the statement of operations. The aggregate fiscal
year net revenue for these acquisitions was approximately $66.2 million
and total net assets were $7.2 million. The aggregate purchase price of these
companies was approximately $46.6 million.
For three of the fiscal 1998 acquisitions, the Company granted price protection
to the sellers for the Company's common stock. On August 19, 1998, ChoicePoint
tendered to the Company all of its 495,050 shares of the Company's common stock.
The Company paid a total of $10.0 million cash, the contractual protection price
under the terms of the agreement between ChoicePoint and the Company, and
immediately retired the common stock. For the remaining two acquisitions, the
Company's current market price per share is below the price protection. The
price protection is for 31,927 shares at $18.79 and 69,247 shares at $19.35.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--continued
The Company also acquired eighteen companies and a home health agency with a
certificate of need, during fiscal 1997 and 1996. Proforma net income and net
income per share would not be materially different than actual net income and
net income per share reported in the statement of operations. The aggregate
fiscal year net revenue for these acquisitions was approximately $38.3 million
and total assets of $7.6 million. The aggregate purchase price of these
companies was approximately $29.5 million.
PSA entered into a Stock Exchange Agreement with Premier on February 29, 1996.
Based on the exchange ratio set forth in the Stock Exchange Agreement, PSA
issued approximately 845,000 shares of its Common Stock for approximately
1,926,000 shares of Premier common stock outstanding, after giving effect to the
conversion of Premier redeemable convertible preferred stock, warrants and
certain options immediately prior to the transaction. The transaction has been
accounted for using the pooling-of-interests method and, as a result, the
financial position, results of operations and cash flows are presented as if the
combining companies had been consolidated for all periods presented. Premier was
incorporated in March 1993 and its results have been included since that date.
The consolidated financial statements for 1996 include the costs related to the
combination of approximately $1.2 million ($687,700 after tax, or $0.11 per
share). These costs consist primarily of payments required under certain
employment agreements due to a change in control of Premier and professional
fees.
The purchase method of accounting was used to record each of the above
acquisitions except Premier. Accordingly, the purchase price was allocated to
the assets acquired and liabilities assumed based on estimated fair values at
the purchase dates. Operating results for the acquired companies have been
included in the Company's consolidated results of operations from the respective
purchase dates.
5. LEASES
The Company leases office space as well as certain automobiles and medical
equipment under operating leases that expire at various dates through 2008. Rent
expense approximated $6,532,000, $4,209,000 and $3,978,000 under these leases
for the years ended September 30, 1998, 1997 and 1996, respectively.
At September 30, 1998, the future minimum lease payments under non-cancelable
operating leases with initial or remaining terms equal to or exceeding one year
were as follows:
<TABLE>
<CAPTION>
Year ending September 30,
- ---------------------------------------
<S> <C>
1999 $5,218,877
2000 3,652,656
2001 1,961,689
2002 958,301
2003 and thereafter 2,257,837
- ---------------------------------------
$14,049,360
=======================================
</TABLE>
6. STOCK OPTION PLANS
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related interpretations
in accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FASB Statement No. 123,
"Accounting for Stock-Based Compensation," requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
The Company's Stock Option Plan (the "Option Plan") provides for the granting
of stock options covering up to 1,750,000 shares of Common Stock, of which
633,992 options have been granted to eligible participants as of September 30,
1998. A proposal to increase the number of shares of Common Stock issuable under
the Option Plan from 700,000 shares to 1,750,000 shares was submitted and
approved by the shareholders at the 1998 Annual Meeting of Shareholders. Options
may be issued as either incentive stock options or as nonqualified stock
options. Options may be granted only to those persons who are officers or
employees of the Company or to certain outside consultants.
The terms and conditions of options granted under the Option Plan, including the
number of shares, the
23
<PAGE>
exercise price and the time at which such options become exercisable are
determined by the Board of Directors. Upon the occurrence of certain events, the
vesting period of the options accelerate. The term of options granted under the
Option Plan are typically 3 to 5 years but may not exceed 10 years. The Company
has the right to repurchase the Common Stock issued upon the exercise of these
options at the then fair market value of such shares, if the Company or the
holders of such shares terminate their employment with the Company.
Under the Company's Directors' Stock Option Plan, directors of the Company who
are not officers or employees of the Company may receive stock options each year
to purchase up to 6,000 shares of Common Stock, at an exercise price equal to
the fair market value on the date of grant and expiring 10 years after issuance.
The options vest on the first anniversary of their issuance, provided that the
grantee is then a director of the Company. A total of 300,000 shares of Common
Stock have been reserved for issuance pursuant to options granted under the
Directors' Stock Option Plan of which 140,000 options have been granted to
eligible participants as of September 30, 1998. A proposal to increase the
number of shares of Common Stock issuable under the Directors' Option Plan from
95,000 shares to 300,000 shares was submitted and approved by shareholders at
the 1998 Annual Meeting of Shareholders, together with a proposal to permit
discretionary grants under the plan.
Pro forma information regarding net income and earnings per share is required by
Statement 123, which also requires that the information be determined as if the
Company had accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method. The fair value for these options
was estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted-average assumptions for 1998, 1997 and 1996,
respectively: risk-free interest rates of 4.18%, 5.99% and 6.40%; a dividend
yield of 0.0%; volatility factors of the expected market price of the Company's
common stock of 2.12 and a weighted-average expected life of the option of 4
years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. The Company's pro forma
information follows (in thousands, except for earnings (loss) per share
information):
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------
Pro forma net income (loss) $(7,194) $ 6,506 $4,708
Pro forma earnings (loss)
per share
Basic $ (1.04) $ 1.04 $ 0.78
Diluted $ (1.04) $ 1.01 $ 0.75
- ------------------------------------------------------------------------------------
</TABLE>
<PAGE>
A summary of stock option activity is as follows:
<TABLE>
Weighted
Average
Exercise
Price per
Shares Share
- ------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at October 1, 1995 586,136 $ 9.30
Granted 185,600 19.55
Exercised (124,707) 3.51
Cancelled (65,376) 11.92
- ------------------------------------------------------------------------------------
Outstanding at September 30, 1996 581,653 13.20
Granted 194,500 18.46
Exercised (43,753) 5.33
Cancelled (20,537) 16.54
- ------------------------------------------------------------------------------------
Outstanding at September 30, 1997 711,863 15.02
Granted 384,000 20.52
Exercised (16,899) 9.16
Cancelled (304,972) 20.26
- ------------------------------------------------------------------------------------
Outstanding at September 30, 1998 773,992 $15.82
====================================================================================
</TABLE>
At September 30, 1998, 1997 and 1996, options to acquire 476,742, 322,821, and
247,084 shares, respectively, were exercisable. The weighted average fair value
of options granted in 1998, 1997 and 1996 was $8.84, $7.97 and $8.64,
respectively.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-continued
The following table summarizes the ranges of exercise prices and weighted
average contractual lives for options outstanding and the weighted average
exercise price for options exercisable as of September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------------------------
Weighted
Average Weighted
Remaining Number Average
Exercise Contractual Options Exercise
Price Outstanding Life Exercisable Price
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 0.014-$ 0.714 16,474 2.0 16,474 $ 0.47
1.43 11,667 3.3 11,667 1.43
4.29-5.70 102,726 4.4 102,726 4.42
8.00-10.26 45,000 5.7 45,000 8.92
13.38-19.87 554,625 8.2 262,375 18.39
20.00-24.75 43,500 8.2 38,500 22.87
- ------------------------------------------------------------------------
773,992 7.3 476,742 $13.82
========================================================================
7. INCOME TAXES
The income tax provision (benefit) for the years ended September 30, 1998, 1997
and 1996 are summarized below:
1998 1997 1996
- -----------------------------------------------------------------------
Current:
Federal $(2,621,000) $2,683,000 $3,421,000
State (491,000) 503,000 642,000
- -----------------------------------------------------------------------
(3,112,000) 3,186,000 4,063,000
Deferred:
Federal (167,165) 1,357,021 (552,856)
State (31,427) 254,441 (103,660)
- -----------------------------------------------------------------------
(198,592) 1,611,462 (656,516)
- -----------------------------------------------------------------------
$(3,310,592) $ 4,797,462 $3,406,484
- -----------------------------------------------------------------------
A reconciliation of the income tax provision (benefit) to the statutory federal
income tax rate is as follows:
1998 1997 1996
- -----------------------------------------------------------------------
Statutory rate of
34% applied
to pre-tax
income $(3,264,949) $4,097,734 $2,873,958
State income taxes,
net of federal
tax benefit (344,802) 448,340 338,113
Amortization of
goodwill 234,203 202,992 192,630
Other, net 64,956 48,396 1,783
- -----------------------------------------------------------------------
$(3,310,592) $ 4,797,462 $3,406,484
=======================================================================
<PAGE>
Deferred income taxes reflect the net effect of temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for income tax purposes. Significant components of the
Company's deferred tax assets and liabilities are as follows:
1998 1997
- -------------------------------------------------------------
Allowance for
doubtful accounts $ 3,637,406 $ 3,236,862
Mark to market accounting
for accounts receivable (3,902,239) (5,685,362)
Net operating loss
carryforward 441,270 1,830,844
Payroll related accruals 632,075 495,566
Insurance related accruals 1,336,229 1,068,684
Property and equipment
and intangibles (3,381,850) (2,242,151)
Other, net 624,912 484,768
- -------------------------------------------------------------
Net deferred tax liability $ (612,197) $ (810,789)
=============================================================
</TABLE>
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. In fiscal 1998, the mark to market election for accounts
receivable was repealed requiring the Company to recognize the related deferred
tax liabilities evenly over the next four years.
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.
For the year ended September 30, 1998, the Company realized approximately
$558,000 of a net operating loss relating to a business acquired through a stock
acquisition. This resulted in a reduction to the intangible asset and an
increase in the deferred income taxes recorded at the date of the acquisition.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments:
Cash and cash equivalents - The carrying amounts reported in the balance sheets
for cash and cash equivalents approximate their fair value.
Long and short-term debt - The carrying amounts of the Company's borrowings
under its revolving credit agreements approximate their fair value. The fair
values of the Company's long-term debt are estimated using discounted cash flow
analysis, based on the Company's current incremental borrowing rates for similar
types of borrowing arrangements. The Company's amount of long-term debt
approximates its fair value.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- continued
9. EMPLOYEE SAVINGS PLAN
The Company has a contributory savings plan (the "Plan"), which qualifies
under Section 401(k) of the Internal Revenue Code, covering all employees of the
Company (except, among others, highly compensated employees as defined in the
Plan, certain employees designated as part-time employees and employees deemed
to be leased employees within the meaning of certain provisions of the Code).
The Company, at its discretion, may match 33% of employee contributions to a
maximum of 6% of employee earnings each Plan year. Company contributions to the
Plan were approximately $403,000, $277,000 and $201,000 for the years ended
September 30, 1998, 1997 and 1996, respectively.
In October 1997, the Company amended the 401(k) Plan to remove certain selected
management or highly compensated employees earning more than $80,000 annually
from being eligible to participate in the 401(k) Plan. The Company adopted the
Pediatric Services of America, Inc. Non-Qualified Deferred Compensation Plan
(the "Non-Qualified Plan") for those employees of the Company. The purpose of
this plan is to provide the selected management or highly compensated personnel
of the Company with the opportunity to defer amounts of their compensation which
might not otherwise be deferrable under other Company plans, including the
401(k) Plan, and to receive the benefit of additions to their deferral, in
the absence of certain restrictions and limitations in the Code. Participants
elect the amount of pay they wish to defer up to the maximum percentage of
compensation for the tier to which the employee is a member. Maximum deferrals
range from 10% to 100% of compensation. The Company may contribute to the Plan
an amount equal to a percentage of the amount each Participant contributes to
the Plan. The Non-Qualified Plan is intended to be an unfunded plan
for purposes of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"). Company contributions and voluntary compensation deferrals
are held in a "Rabbi Trust" as that term is defined in Revenue Procedure 92-64,
1992-2 C.B. 422. Distributions of Plan contributions and earnings will be made
upon termination of employment, disability, retirement or the financial hardship
of the participant. In-service benefits are also available to participants.
Company contributions to the Non-Qualified Plan were approximately $55,412 for
fiscal 1998.
10. COMMITMENTS AND CONTINGENCIES
As of September 30, 1998, the Company's professional liability policy is on a
claims-made basis. Should this claims-made policy not be renewed or replaced
with equivalent insurance, claims based on occurrences during its term but
asserted subsequently would be uninsured.
The Company is subject to claims and suits arising in the ordinary course of
business. In the opinion of management, the ultimate resolution of such pending
legal proceedings will not have a material adverse effect on the Company's
consolidated financial position.
11. BASIC AND DILUTED NET INCOME (LOSS) PER 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 common stock
outstanding and the dilutive effect of common equivalent shares (calculated
using the treasury stock method).
The following table sets forth the reconciliation of the denominators of the
basic and diluted earnings per share:
<TABLE>
<CAPTION>
Year Ended September 30, 1998 1997 1996
- ------------------------------------------------------------------
<S> <C> <C> <C>
Denominator for basic income
(loss) per share -
weighted average shares 6,910,760 6,256,567 6,057,182
Effect of dilutive securities:
Warrants and options -- 189,188 243,026
Conversion of preferred stock
upon a business combination -- -- 137,117
- ------------------------------------------------------------------
Denominator for diluted income
(loss) per share-
adjusted weighted
average shares 6,910,760 6,445,755 6,437,325
==================================================================
</TABLE>
Supplemental earnings per common share was calculated for 1996 using the
weighted average number of common and common equivalent shares outstanding
during the period assuming the conversion of the redeemable convertible
preferred stock into common stock, the payment of accrued dividends and the
issuance of common stock in connection with the exercise of warrants as of the
beginning of fiscal 1996. For 1996, the supplemental earnings per share was
$0.78 using supplemental weighted average shares outstanding of 6,439,450.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- continued
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1998 and 1997 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER
Fiscal 1997 First Second Third Fourth
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue $46,554 $49,746 $ 53,890 $53,833
Operating income 3,309 3,683 4,032 4,443
Income before income taxes 2,774 2,903 3,064 3,311
Net income 1,656 1,733 1,839 2,027
Net income per share:
Basic 0.27 0.28 0.29 0.32
Diluted 0.26 0.27 0.29 0.31
QUARTER
Fiscal 1998 First Second Third Fourth
- ---------------------------------------------------------------------
Net revenue $61,559 $79,479 $ 78,480 $82,974
Operating income (loss) 5,019 5,476 (13,208) 1,998
Income (loss) before
income tax expense
(benefit) 3,554 3,576 (15,826) (907)
Net income (loss) 2,122 2,135 (9,909) (640)
Net income (loss) per share:
Basic 0.33 0.30 (1.39) (0.09)
Diluted 0.32 0.30 (1.39) (0.09)
- ---------------------------------------------------------------------
</TABLE>
13. STOCKHOLDERS' EQUITY
On September 22, 1998, the Board of Directors adopted a Shareholder Rights Plan
and declared a dividend of one Common Stock Purchase Right ("Right") for each
outstanding share of the Company's Common Stock to stockholders of record at the
close of business on October 13, 1998. The Rights will be attached and traded
with the Company's Common Stock, but will detach and become exercisable 10 days
after a person or group (Acquiring Person) has acquired beneficial ownership of
15% or more of the Common Stock, or 10 days after a person or group commences a
tender offer or an exchange offer that would result in their owning 15% or more
of the Common Stock. Each Right may be exercised to acquire a number of shares
of Common Stock equal to ten shares of Common Stock multiplied by a fraction,
the numerator of which is the number of shares of Common Stock outstanding on
the date that an Acquiring Person was first determined to be such (the Stock
Acquisition Date) and the denominator of which is the number of Rights
outstanding on the Stock Acquisition Date that are not owned by the Acquiring
Person. The Company may redeem the Rights at a price of $0.01 per share at any
time before a person becomes an Acquiring Person. Until a Right is exercised,
the Right holder will have no rights as a stockholder of the Company, including
the right to vote or to receive dividends. The Rights will expire on September
30, 2008, unless earlier redeemed or exchanged by the Company.
14. SUBSEQUENT EVENT
On December 24, 1998, the Credit Agreement discussed in Note 3 was further
amended 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 significant reduction
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.
27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Pediatric Services of America, Inc.
We have audited the accompanying consolidated balance sheets of Pediatric
Services of America, Inc. ("PSA"), as of September 30, 1998 and 1997, and
the related consolidated statements of operations, redeemable preferred stock,
common stock and other stockholders' equity and cash flows for each of the three
years in the period ended September 30, 1998. These financial statements are the
responsibility of PSA's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of PSA at September
30, 1998 and 1997, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended September 30, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
December 4, 1998, except for Note 14,
as to which the date is January 8, 1999
Atlanta, Georgia
28
<PAGE>
CORPORATE INFORMATION
CORPORATE OFFICES
Pediatric Services of America, Inc.
310 Technology Parkway
Norcross, Georgia 30092-2929
(770) 441-1580
TRANSFER AGENT
Chase Mellon Shareholder Services
Four Station Square
3rd Floor
Pittsburgh, Pennsylvania 15219
INDEPENDENT AUDITORS
Ernst & Young LLP
600 Peachtree Street
Atlanta, Georgia 30308
ATTORNEYS
Long Aldridge & Norman LLP
One Peachtree Center
Suite 5300
303 Peachtree Street
Atlanta, Georgia 30308
STOCK LISTING
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "PSAI".
SHAREHOLDER RELATIONS
Stephen M. Mengert
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
310 Technology Parkway
Norcross, Georgia 30092-2929
ANNUAL SHAREHOLDER'S MEETING
The Annual Meeting will be held at the Medlock Auditorium at the Northeast
Atlanta Hilton, 5993 Peachtree Industrial Boulevard, Norcross, Georgia on
January 20, 1999 at 9:00 A.M. local time.
FORM 10-K
A copy of the Company's Annual Report on Form 10-K for fiscal 1998, including
financial statement schedules (without exhibits), as filed with the Securities
and Exchange Commission, will be furnished without charge to shareholders upon
written request to:
Stephen M. Mengert
Pediatric Services of America, Inc.
310 Technology Parkway
Norcross, Georgia 30092-2929
MARKET MAKERS
The following firms make a market in the Company's Common Stock:
Equitable Securities Corp.
Herzog, Heine, Geduld, Inc.
Knight Securities L.P.
Mayer & Schweitzer, Inc.
Needham & Company, Inc.
Prudential Securities, Inc.
Salomon Smith Barney, Inc.
Sterne, Agee & Leach
Troster Singer Corp.
Wheat First Securities, Inc.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock trades on the NASDAQ National Market under the symbol
"PSAI". The following table sets forth the quarterly high and low closing sale
prices for the Common Stock for the periods indicated through September 30, 1998
as reported by NASDAQ. At December 1, 1998, there were approximately 116
shareholders of record and an estimated 1,600 beneficial owners holding stock in
nominee or "street" name. The Company has paid no cash dividends on its Common
Stock.
<TABLE>
<CAPTION>
High Low
- --------------------------------
<S> <C> <C>
1998
First Quarter $19.13 $18.25
Second Quarter $21.50 $20.38
Third Quarter $15.50 $14.88
Fourth Quarter $ 3.44 $ 3.25
- --------------------------------
1997
First Quarter $21.50 $15.38
Second Quarter $20.50 $16.88
Third Quarter $21.25 $16.00
Fourth Quarter $23.38 $19.88
</TABLE>
29
<PAGE>
DIRECTORS AND OFFICERS
[PHOTO OF CORPORATE AND EXECUTIVE OFFICERS APPEARS HERE]
Officers--Left to right: Linda K. Duval, Pamela H. Barrow, Elizabeth A. Rubio,
Lisa A. Palmer, Joseph D. Sansone, Joseph M. Harrelson, Julie A. Bowman,
James R. Henderson, Susan E. Dignan, James M. McNeill, David Nabors
and Stephen M. Mengert
CORPORATE AND EXECUTIVE OFFICERS
JOSEPH D. SANSONE
President and
Chief Executive Officer
STEPHEN M. MENGERT
Senior Vice President,
Chief Financial Officer,
Secretary and Treasurer
SUSAN E. DIGNAN
Assistant Secretary and
General Counsel
DAVID NABORS
Vice President of Diagnostic Services
JAMES R. HENDERSON
Senior Vice President of Operations
PAMELA H. BARROW
Vice President of Managed Care
ELIZABETH A. RUBIO
Vice President of Quality Assurance
JOSEPH M. HARRELSON
Divisional Vice President
JULIE A. BOWMAN
Divisional Vice President
LISA A. PALMER
Divisional Vice President
LINDA K. DUVAL
Divisional Vice President
JAMES M. MCNEILL
Chief Accounting Officer
BOARD OF DIRECTORS
JOSEPH D. SANSONE
Chairman of the Board of Directors, President and Chief Executive Officer of PSA
MICHAEL J. FINN
General Partner of Brantley Venture Partners, L.P.
ADAM O. HOLZHAUER
Chairman, Director and Chief Executive Officer of Royale Healthcare, Inc.
ROBERT P. PINKAS
General Partner of Brantley Venture Partners, L.P.
IRVING S. SHAPIRO
Of Counsel to the law firm of Skadden, Arps, Slate,
Meagher & Flom
RICHARD S. SMITH
President of Ventex Management, Inc. (an
investment company)
30
<PAGE>
[LOGO OF PEDIATRIC SERVICES OF AMERICA, INC. APPEARS HERE]
310 Technology Parkway
Norcross, Georgia 30092-2929
www.psakids.com
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
PSA Properties Corporation, a Delaware corporation
PSA Capital Corporation, a Delaware corporation
Pediatric Services of America, Inc., a Georgia corporation
Pediatric Partners, Inc., a Delaware corporation
Pediatric Services of America, Inc. (Connecticut), a Connecticut corporation
PSA Home HealthCare, Limited Partnership, a Florida Limited Partnership
Pediatric Home Nursing Services, Inc., a New York corporation
Premier Medical Services, Inc., a Nevada corporation
Premier Nurse Staffing, Inc., a Nevada corporation
Premier Certified Home Health Services, Inc., a Nevada corporation
ARO Health Services, Inc., a Washington corporation
Paramedical Services of America, Inc., a California corporation
PSA Licensing Corporation, a Delaware corporation
PSA/HRH, L.L.C., a North Carolina limited liability company
Tender HealthCare, a Georgia Joint Venture
<PAGE>
EXHIBIT 23.1
CONSENT AND REPORT AS TO SCHEDULES OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Annual Report (Form 10-K)
of Pediatric Services of America, Inc. of our report dated December 4, 1998,
except for Note 14, as to which the date is January 8, 1999, included in the
1998 Annual Report to the Shareholders of Pediatric Services of America, Inc.
Our audits also included the consolidated financial statement schedules of
Pediatric Services of America, Inc. listed in Item 14(a). These schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion based on our audits. In our opinion as of the dates of our
report referred to in the preceding paragraph, the consolidated financial
statement schedules referred to above, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 33-88406 and No. 33-99936) pertaining to various stock
option/purchase plans of Pediatric Services of America, Inc. of our report dated
December 4, 1998, except for Note 14, as to which the date is January 8, 1999,
with respect to the consolidated financial statements and schedules of Pediatric
Services of America, Inc. incorporated by reference and/or included in the
Annual Report (Form 10-K) for the year ended September 30, 1998.
ERNST & YOUNG LLP
Atlanta, Georgia
January 8, 1999
<PAGE>
EXHIBIT 25
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Joseph D. Sansone and Stephen M. Mengert, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign the Annual Report
on Form 10-K of Pediatric Services of America, Inc. for the fiscal year ended
September 30, 1998, and any and all amendments thereto and other documents in
connection therewith, with the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc., granting unto said attorneys-
in-fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 5th day of November, 1998
/s/ Michael J. Finn
--------------------------
Signature Michael J. Finn
<PAGE>
EXHIBIT 25
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Joseph D. Sansone and Stephen M. Mengert, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign the Annual Report
on form 10-K of Pediatric Services of America, Inc. for the fiscal year ended
September 30, 1998, and any and all amendments thereto and other documents in
connection therewith, with the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc., granting unto said attorneys-
in-fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 5th day of November, 1998
/s/ Irving S. Shapiro
--------------------------------
Signature Irving S. Shapiro
<PAGE>
EXHIBIT 25
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Joseph D. Sansone and Stephen M. Mengert, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign the Annual Report
on form 10-K of Pediatric Services of America, Inc. for the fiscal year ended
September 30, 1998, and any and all amendments thereto and other documents in
connection therewith, with the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc., granting unto said attorneys-
in-fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 5th day of November, 1998
/s/ Adam O. Holzhauer
------------------------------
Signature Adam O. Holzhauer
<PAGE>
EXHIBIT 25
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Joseph D. Sansone and Stephen M. Mengert, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign the Annual Report
on form 10-K of Pediatric Services of America, Inc. for the fiscal year ended
September 30, 1998, and any and all amendments thereto and other documents in
connection therewith, with the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc., granting unto said attorneys-
in-fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 5th day of November, 1998
/s/ Robert P. Pinkas
-----------------------------
Signature Robert P. Pinkas
<PAGE>
EXHIBIT 25
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Joseph D. Sansone and Stephen M. Mengert, and each of them, his true and lawful
attorneys-in-fact and agents, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign the Annual Report
on form 10-K of Pediatric Services of America, Inc. for the fiscal year ended
September 30, 1998, and any and all amendments thereto and other documents in
connection therewith, with the Securities and Exchange Commission and the
National Association of Securities Dealers, Inc., granting unto said attorneys-
in-fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
This 5th day of November, 1998
/s/ Richard S. Smith
-------------------------------
Signature Richard S. Smith
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 2,008
<SECURITIES> 0
<RECEIVABLES> 113,037
<ALLOWANCES> 14,008
<INVENTORY> 0
<CURRENT-ASSETS> 113,846
<PP&E> 45,425
<DEPRECIATION> 20,714
<TOTAL-ASSETS> 234,561
<CURRENT-LIABILITIES> 38,465
<BONDS> 0
0
0
<COMMON> 67
<OTHER-SE> 63,617
<TOTAL-LIABILITY-AND-EQUITY> 234,561
<SALES> 302,492
<TOTAL-REVENUES> 302,492
<CGS> 0
<TOTAL-COSTS> 280,243
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 22,963
<INTEREST-EXPENSE> 8,956
<INCOME-PRETAX> (9,603)
<INCOME-TAX> (3,311)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,292)
<EPS-PRIMARY> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
