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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, 1999
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from ________ to ______
Commission File Number 0-23946
Pediatric Services of America, Inc.
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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
Common Stock Purchase Rights
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 Annual Report on 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 January 10, 1999, based on a closing price of $0.75 per share, was
$4,642,942. As of January 10, 1999, the number of shares of the registrant's
Common Stock outstanding was 6,652,005 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the registrant's Proxy Statement for the 2000
Annual Meeting of Stockholders to be held on March 8, 2000 is incorporated
herein by reference in Part III of this Annual Report on Form 10-K.
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PEDIATRIC SERVICES OF AMERICA, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended September 30, 1999
Table of Contents
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PART I
Item Page
Number Number
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1. Business ................................................... 3
2. Properties ................................................. 17
3. Legal Proceedings .......................................... 18
4. Submission of Matters to a Vote of Security Holders ........ 18
4(A). Executive Officers of the Registrant ....................... 18
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters ........................................ 19
6. Selected Financial Data .................................... 20
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 21
7(A). Quantitative and Qualitative Disclosures about Market Risk .. 27
8. Financial Statements and Supplementary Data ................ 27
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure ................................... 28
PART III
10. Directors and Executive Officers of the Registrant........... 28
11. Executive Compensation....................................... 28
12. Security Ownership of Certain Beneficial Owners and
Management ................................................. 28
13. Certain Relationships and Related Transactions............... 28
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ................................................... 29
SIGNATURES ....................................................... 33
INDEX TO FINANCIAL STATEMENTS ..................................... 34
INDEX TO FINANCIAL STATEMENT SCHEDULE ............................. 57
INDEX TO EXHIBITS ................................................. 59
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Part I
Item 1. Business
Forward-Looking Statements
This Annual Report on 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 Annual Report on Form 10-K, the words "may,"
"could," "should," "would," "believe," "feel," "anticipate," "estimate,"
"intend," "plan" and similar expressions may be indicative of 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 this Annual Report on Form 10-K 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, assimilate and manage previously acquired field
operations, collect accounts receivable, including receivables related to
acquired businesses and receivables under appeal, hire and retain qualified
personnel and comply with and respond to billing requirements issues, including
those related to the Company's new billing and collection system 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. Management believes the Company is the nation's largest focused
pediatric home health care provider. The Company provides children's health
care services through 103 branch offices located in 24 states.
The Company provides a broad range of pediatric health care services and
equipment, including nursing, respiratory therapy, rental and sale of durable
medical equipment, pharmaceutical services and infusion therapy services. 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. As a complement to its pediatric
respiratory and infusion therapy services, the Company also provides respiratory
and infusion therapy and related services for adults.
Industry Overview
Health Care Services
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.
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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 typically 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 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.
Recent Developments
In the fourth quarter of fiscal 1999, the Company's senior management continued
implementation of its strategic plan (the "Plan") to improve the Company's
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performance. The primary focus of the Plan relating to medical services is to
refocus the Company on its core businesses, the pediatric home healthcare and
adult respiratory businesses.
The Company also made progress on other operating initiatives contained within
the Plan. The closure of identified under-performing locations has been
completed; however, the Company continues to experience some delays in the
discharge and transfer of care for certain patients. These delays could impact
future results of operations.
Although the Plan is expected to reduce operating costs, there can be no
assurance that the Company will be able to achieve the expected cost savings
from the Plan efforts or will be able to reduce costs without negatively
impacting operations. For a more detailed status of the internal
organizational and process changes, see information set forth under the caption
"Results of Operations" included in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" on page 21 of this
Annual Report on Form 10-K.
Acquisitions
The Company did not acquire any new businesses during fiscal 1999.
Dispositions
Sale of medical staffing business. On June 30, 1999, the Company sold the
assets of its medical staffing business in the Mid-Atlantic Region to Medical
Staffing Network, Inc. As part of the implementation of the Company's Plan, this
business was defined as part of the non-core activities of the Company. The
assets were sold for a total cash price of $1.8 million and the Company recorded
a loss of $1.0 million.
Sale of paramedical testing division. On November 1, 1999, the Company
completed the sale of the assets of its paramedical testing division to Hooper
Holmes, Inc. ("Hooper") pursuant to an Asset Purchase Agreement dated August 30,
1999 by and among the Company, Paramedical Services of America, Inc. and Hooper
(the "Asset Purchase Agreement"), as amended by the Amendment to Asset Purchase
Agreement dated as of November 1, 1999 (the "Amendment"). A portion of the
proceeds of the sale were used to pay down to zero all outstanding amounts under
the existing Credit Agreement dated August 13, 1998, as amended, with Banc of
America Commercial Finance Corporation ("Banc of America CF"), successor to
NationsBank, N.A., as Lender and sole credit party (the "Credit Agreement").
The Company's consolidated financial statements for all years presented have
been restated to reflect Paramedical Services of America, Inc. as discontinued
operations. See Item 8, "Financial Statements and Supplementary Data" on page 27
of this Annual Report on Form 10-K.
The foregoing is not a complete description of the terms of the Asset Purchase
Agreement or the Amendment and is subject to and qualified in its entirety by
reference to the Asset Purchase Agreement and the Amendment. The terms and
conditions of the Asset Purchase Agreement and the transactions contemplated
thereby are set forth in the Company's Current Reports on Form 8-K dated
September 2, 1999 and November 1, 1999, respectively (the "8-K Reports"), which
are incorporated herein by reference. A copy of the Asset Purchase Agreement is
filed as Exhibit 2.2 to the Company's 8-K Report dated September 2, 1999 and a
copy of the Amendment is filed as Exhibit 2.2 to the Company's 8-K Report dated
November 1, 1999. Other information relating to the sale is set forth below and
under Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on page 21 of this Annual Report on Form 10-K.
Credit Agreement
On November 1, 1999, simultaneously with the pay down of the existing Credit
Agreement, the Company amended and restated the Credit Agreement (the "Amended
and Restated Loan Security Agreement"). Subject to the terms and conditions of
the Amended and Restated Loan Security Agreement, the Lender made available a
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total credit facility of up to $30.0 million for use by the Company and its
subsidiaries from time to time during the term of the Amended and Restated Loan
and Security Agreement. The total credit facility is comprised of a revolving
line of credit up to the available limit, consisting of Loans and Letters of
Credit (as defined therein).
The foregoing is not a complete description of the terms of the Amended and
Restated Loan Security Agreement and is subject to and qualified in its entirety
by reference to the Amended and Restated Loan and Security Agreement, a copy of
which was filed as Exhibit 10.21 to the Company's Current Report on Form 8-K
dated November 1, 1999, and is incorporated herein by reference.
Class Action and Other Litigation
A description of certain litigation involving the Company is described in Item
3, "Legal Proceedings" on page 18 of this Annual Report on Form 10-K.
Revenue and Collection Initiatives
As a result of slower payment by commercial insurance companies under managed
care initiatives, State Medicaid directed changes to documentation and filing
requirements and the impact of the Interim Payment System ("IPS") for home care
reimbursement under Medicare, the Company has continued to experience
increasingly complex billing and documentation requirements, slower
reimbursement by payors, increased provisions for doubtful accounts and lower
profit margins. In response to these conditions the Company incorporated a
number of Revenue and Collection initiatives into its Plan. For further
information relating to these initiatives please refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
Nasdaq SmallCap Listing
On March 18, 1999, the Nasdaq Listing Qualification Panel determined that the
Company had not maintained the minimum requirements for continued listing on the
Nasdaq National Market. The Panel acknowledged that the Company satisfied all
requirements for inclusion on the Nasdaq SmallCap Market and transferred the
listing of the Company's Common Stock to the Nasadaq SmallCap Market on March
22, 1999. Unless the Company shows improvement, there is no assurance that the
Company will maintain its listing on the Nasdaq SmallCap Market.
Business Strategy
Focus on Pediatric Services. Pediatric health care services are generally
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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
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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.
Realization of Operating Efficiencies and Internal Growth. The Company
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currently has 103 pediatric health care branch offices in 24 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 in its more
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profitable product lines by increased emphasis on strengthening its
infrastructure, new managed care contracts and sales and marketing. The Company
will continue to focus on the realization of operating efficiencies, improving
billing and collection activities and internal profitability and growth.
Focus on Cash Collections. The Company also intends to continue aggressive
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collection efforts. Specifically, the Company has hired and will continue to
hire additional experienced reimbursement personnel and reorganized 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.
Services and Operations
General
The Company provides a broad range of health care services principally for
children and, to a lesser extent, young adults and geriatric patients. The
following table summarizes the percentages of net revenue to total net revenue
of each major category of service from continuing operations offered by the
Company for the periods indicated:
<TABLE>
<CAPTION>
Year Ended September 30,
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1999 1998 1997
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(In thousands) Revenue % Total Revenue % Total Revenue % Total
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<S> <C> <C> <C> <C> <C> <C>
Pediatric Home Health Care
Nursing.................................... $ 91,217 42.6% $ 93,248 42.0% $ 65,927 37.0%
Respiratory Therapy Equipment.............. 23,705 11.1 24,299 10.9 22,918 12.9
Home Medical Equipment..................... 2,983 1.4 3,293 1.5 2,566 1.4
Pharmacy and Other......................... 35,911 16.7 34,563 15.6 29,151 16.4
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Total Pediatric Home Health Care........ 153,816 71.8 155,403 70.0 120,562 67.7
Adult Home Health Care
Nursing.................................... 18,207 8.5 18,254 8.2 21,900 12.3
Respiratory Therapy Equipment.............. 22,071 10.3 22,614 10.2 21,719 12.2
Home Medical Equipment..................... 6,378 3.0 6,309 2.8 5,041 2.8
Pharmacy and Other......................... 13,881 6.4 19,602 8.8 8,757 5.0
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Total Adult Home Health Care............ 60,537 28.2 66,779 30.0 57,417 32.3
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Total...................................... $214,353 100.0% $222,182 100.0% $177,979 100.0%
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</TABLE>
Pediatric Health Care Services
Pediatric Nursing Services. The Company's pediatric nursing services consist
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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 pulmonary disease
(e.g., 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. Under a prescription or care
plan developed by the patient's physician, the Company's personnel monitor 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.
Private nursing care is often provided up to 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 10 to 11 hours. The Company's nurses emphasize education of the
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
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private duty care can be modified 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, the Company
may continue 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 6,750 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 expanded pediatric experience.
Although nursing services traditionally have provided the Company with lower
profit margins than some of 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 can facilitate marketing of the Company's higher margin
pediatric product lines. The Company intends to continue to monitor 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
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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 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
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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, a broad range of infections and diseases which would
otherwise have required patients to be hospitalized are considered treatable in
the home. These in-home therapies reduce the need for emergency room visits for
infusion therapy, and are popular with patients, their families, referring
physicians and payors.
The Company provides a 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.
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.
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Pediatric Home Medical Equipment and Services. The Company provides rentals,
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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 45 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.
Prescribed Pediatric Extended Care ("PPEC"). The Company currently has six PPEC
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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 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 patients similar health care services
provided to pediatric patients. 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. Few of these
patients receive nursing services. 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 respiratory therapists or technicians. 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.
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,
1999, the Company had over 6,750 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 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.
However, the home health industry has been experiencing difficulties in
recruiting qualified nurses due primarily to skills shortages and cutbacks in
the number of student nurses and training.
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Furthermore, current indications suggest that the supply of licensed nurses will
continue to decline in the foreseeable future.
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 audits, surveys, assessments and evaluations as well as other measures
designed to ensure compliance with the documentation and operating procedures
required by federal, state and local law as well as Company 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.
The Company maintains an internal audit function which reports to the Audit
Committee of the Board of Directors.
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
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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 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
Page - 10
<PAGE>
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.
Billing and Collection
The Company derives substantially all of its health care net revenue from
commercial insurance, other private third-party payors, Medicare and Medicaid.
The current reimbursement environment is complex, 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. A delay in reimbursement could materially
adversely affect the Company's financial condition. 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.
Local Office Network
The Company currently provides its health care services through a network of 103
branch offices located in 24 states. 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.
Corporate Compliance Program
The Company's corporate compliance program has continued to focus its efforts in
the areas of fraud and abuse avoidance, auditing and monitoring of legal
compliance, training of Company employees and providing support and guidance for
employees as they strive to be compliant with laws governing the Company. The
compliance program has been active in establishing several training programs
relating to proper documentation, and has provided inservice education regarding
compliance to substantially all employees. The corporate compliance program has
also been instrumental in the development and implementation of the Company's
compliance efforts at the field level. In addition, the Company has established
a toll-free Compliance Hotline to assist in its commitment to ethical conduct
throughout the Company. The telephone number is (800) 408-4442. Everyone,
including employees, vendors, contractors and agents is encouraged to use this
confidential means of communication to report any compliance issues.
The corporate compliance officer reports directly to the Company's Board of
Directors, and their activities have been focused in the area of building a
strong regulatory compliance program with measurable auditing tools. Emphasis
in the areas of employee education regarding honesty, respect and
responsibility are of continuing importance to the Company's compliance program.
Management Information Systems
The business of the Company is dependent in part upon its ability to store,
retrieve, process and manage billing and
Page - 11
<PAGE>
collection information for each patient. The Encore system provides
substantially all the Company's locations with immediate access to patient
information and performs substantially all necessary billing and collection
services.
During fiscal 1999, the Company's information systems department focused on its
priorities to support the Plan. Significant resources were expended to insure
compliance with Year 2000 related issues. The Company's frame relay network was
upgraded, Encore's programs, procedures and database and development language
were remediated for Year 2000.
The Company has continued to make improvements in billing functionality to
comply with payor contract requirements. The Company also implemented additional
improvements in electronic billing capabilities during fiscal 1999. The Company
plans to extend electronic invoicing to more payors and product lines as part of
the Plan.
There can be no assurance that the Company's information systems will continue
to 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.
Year 2000 Compliance
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" beginning on page 21 of this Annual Report on
Form 10-K.
Reimbursement
The Company focuses its health care marketing efforts on patients with private
insurance; however, the Company has experienced a trend in recent years toward a
higher percentage of government payor revenues over private payor revenues. 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 from
continuing operations attributable to reimbursement from various payors of the
health care services the Company currently provides, for the periods presented:
<TABLE>
<CAPTION>
Year Ended Year Ended
Payor September 30, 1999 September 30, 1998
----- -------------------------- ----------------------------
<S> <C> <C>
Commercial Insurance and Other Private Payors............. 57% 59%
Medicaid and Other State Programs......................... 36% 32%
Medicare and Other Federal Programs....................... 7% 9%
--- ---
Total........................................... 100% 100%
=== ===
</TABLE>
During the past decade, federal and state governments and private 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 certain of these cost
containment efforts. As expenditures on home health care services grew,
however, initiatives aimed at reducing the cost of health care delivery in non-
institutional settings have increased. 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
Page - 12
<PAGE>
Company could have a material adverse effect upon the Company's business.
Legislation
The 1997 Balanced Budget Act (BBA 1997) contains provisions intended to
significantly reduce Medicare reimbursement to the home health industry by
converting the Medicare home health payment methodology to a case-mix adjusted
prospective payment system (PPS). PPS would end cost-based reimbursement, which
is considered to create incentives to increase utilization. As a transition to
PPS, BBA 1997 mandated an interim payment system (IPS) initially to be in effect
for two years, designed to constrain substantially the growth in Medicare home
health expenditures. In addition, BBA 1997 required that home health and home
medical equipment companies post surety bonds in specified amounts and that
billing for durable medical equipment and medical supplies be consolidated. BBA
1997 also mandated reductions in oxygen equipment reimbursements. These
requirements are administered and regulated by the Health Care Financing
Administration (HCFA). According to the Congressional Budget Office (CBO) in
1997, the BBA 1997 changes in Medicare's home health reimbursement were designed
to achieve savings of $16.2 billion over five years. The most recent CBO
projections, however, indicated that the resulting spending savings would be
$47.9 billion over the same period. As a result, Congress acted quickly to
modify somewhat, the IPS payment methodology.
Additional federal legislation further ameliorating the impact of BBA 1997 was
signed into law by President Clinton on November 29, 1999 (the Medicare Balanced
Budget Refinement Act). According to its provisions, a home health agency will
be paid an additional $10.00 for each Medicare beneficiary to whom it provides
services in cost reporting periods beginning in year 2000, to defray the cost of
collecting and electronically reporting Outcome and Assessment Information Set
(OASIS) data. Further, the General Accounting Office will be required to report
to Congress on the cost to home health agencies of compliance with OASIS data
gathering requirements and the effect of those requirements on the privacy
interests of patients. An additional 15% reduction in home health
reimbursement, that has been scheduled to go into effect October 1, 2000 if PPS
was not implemented, was repealed. Second, a 15% cut in PPS reimbursement
(originally scheduled for October 1, 2000) was postponed until after the first
twelve months of PPS, whenever that system is implemented. Additionally, the
Department of Health and Human Services (HHS) is required to report to Congress
six months after the implementation of PPS on the need for this 15% reduction or
any reduction. A temporary increase in the consumer price index for durable
medical equipment and oxygen supplies was implemented and consolidated billing
was eliminated for durable medical equipment but retained for medical supplies.
Per-beneficiary limits were increased for some agencies. In addition, surety
bonds were limited to four years, with additional discretion granted, and set at
the lower of $50,000 or 10% of aggregate annual payments under Medicare and
Medicaid.
The Company believes that health care reform initiatives are likely to continue
in the future. There can be no assurance that such future reform initiatives
will not materially and adversely affect the business and financial condition of
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.
Medicaid Programs. 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. The program is
jointly financed by the Federal and State governments and administered by the
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 States 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
Page - 13
<PAGE>
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. Because a home health PPS methodology has not yet been developed, the
Medicare Part A home health benefit currently is reimbursed under IPS, which is
expected to be in place until at least October 2000. IPS contains a number of
elements designed to substantially reduce Medicare's home health expenditures,
including per-visit cost limits and per patient caps. The Company is required
to file an annual cost report for those branch offices performing services under
Part A and for the Company's home office.
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 effect that these changes ultimately will have on the home health industry
cannot be quantified at this time, and there can be no assurance that these and
other changes mandated by BBA 1997 and the Congressional reform package of
November 1999 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
Page - 14
<PAGE>
the Company's ability to maintain or increase its business and could adversely
affect the Company's operating results.
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, durable medical equipment 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 referral 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.
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 to the Medicare
- ---------------------------------
and Medicaid programs, the Company is subject to federal and state laws and
regulations governing reimbursement procedure 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 enacted the Health Insurance Portability and Accountability Act
of 1996 ("HIPAA"), expanding the government's fraud and abuse enforcement
powers. 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 a prohibition on
referrals contained in the Omnibus Budget Reconciliation Act of 1989 (Stark I),
which prohibits referrals by physicians to 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 for 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 remain in proposed form 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 sometimes
been
Page - 15
<PAGE>
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.
In recent years, 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. It has also implemented "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, diversion of management's time and attention, and 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 12 states.
Permits and Licensure. Many states require licensure of 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.
The Company currently is licensed as a home health agency in 14 states, is
licensed as a home care agency in 6 states and is licensed as a pharmacy in 31
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 14 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 the state's
health planning agency. Certificates of need are often difficult to obtain and
in many instances are 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.
Other Proposed Regulations
Certain other regulations which may increase the cost to the Company of service
delivery have been proposed. The Occupational Safety and Health Administration
(OSHA) issued a proposed rule for an ergonomics program standard in November
1999. The rule is specific to work-related injuries and establishes new
workplace requirements, which, if enacted, will impact home health agencies and
their employees. The proposed rule estimates the yearly cost per home health
agency at $8,643.00. Additionally, proposed rules governing privacy of medical
information stored or transmitted electronically were published in November
1999, under the President's administrative authority. These rules, if enacted,
are likely to increase the cost of health care services, including those
provided by the Company. These and other such regulations could have an adverse
effect on the Company.
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
Page - 16
<PAGE>
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 alternatives
to health care delivery 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 BBA 1997, as modified by the Medicare Balanced Budget
Refinement Act, have significantly impacted Medicare-reimbursed home health
services. The current reimbursement system for home health services will remain
in effect for an undetermined period until the implementation of the proposed
PPS.
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 BBA 1997, even in view of the November 1999 Medicare Balanced Budget
Refinement Act, will not adversely affect the business and financial condition
of the Company.
Employees
As of September 30, 1999, the Company's health care and related services
operations employed, or had on registry over 6,750 licensed or credentialed
nurses, therapists and pharmacists, and approximately 1,200 full-time employees
and 300 part-time employees. The Company believes that its relationship with
its employees is good.
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
threatened claim, investigation or enforcement action regarding environmental
issues which, if 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 103
branch offices in 24 states. 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
Page - 17
<PAGE>
office. Lease terms on branch offices are generally 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
On March 11, 1999, a putative class action complaint was filed against the
Company in the United States District Court for the Northern District of
Georgia. The Company and certain of its then current officers and directors
were named as defendants. To the Company's knowledge, no other putative class
action complaints were filed within the 60 day time period provided for in the
Private Securities Litigation Reform Act. The plaintiffs and their counsel were
appointed lead plaintiffs and lead counsel, and an amended complaint was filed
on or about July 22, 1999. In the amended complaint, the Company's auditors,
Ernst & Young LLP, were also named as a defendant.
In general, the plaintiffs allege that prior to the decline in the price of the
Company's Common Stock on July 28, 1998, there were violations of the Federal
Securities Laws arising from misstatements of material information in and/or
omissions of material information from certain of the Company's securities
filings and other public disclosures principally related to its reporting of
accounts receivable and the reserve for doubtful accounts. The amended
complaint purports to expand the class to include all persons who purchased the
Company's common stock during the period from July 29, 1997 through and
including July 29, 1998. On October 8, 1999, the Company and the individuals
named as defendants moved to dismiss the amended complaint on both substantive
and procedural grounds. The motion is currently pending before the Court.
The Company and the individuals named as defendants deny that they have violated
any of the requirements or obligations of the Federal Securities Laws.
On July 28, 1999, a civil action was filed against the Company and certain of
its current and former officers and directors in the United States District
Court for the Middle District of Tennessee. The action was filed by Phyllis T.
Craighead and Healthmark Partners, LLC, as well as a liquidating trust
apparently established to wind up the business affairs of their corporation,
K&N, Inc. In general, the plaintiffs allege that the defendants violated
Federal and State (i.e., Tennessee) Securities Laws and committed common law
fraud in connection with the Company's purchase of Kids and Nurses, Inc. in
November, 1997. The plaintiffs seek actual damages in an amount between $2.5
million and $3.5 million, plus punitive damages and the costs of litigation,
including reasonable attorney's fees. On September 24, 1999, the defendants
filed a motion to dismiss the complaint on both substantive and procedural
grounds. On December 20, 1999, the plaintiffs filed an amended complaint in
which they withdrew their claims under the Federal securities laws, and added
claims under Georgia's securities laws. The plaintiffs also filed a brief in
response to the Company's motion to dismiss. The motion to dismiss is currently
pending before the Court. The Company and the individuals named as defendants
deny that they have violated any of the requirements or obligations of any
applicable Federal or State Securities Laws, or any other applicable law.
In the opinion of the Company's management, the ultimate disposition of these
two lawsuits should not have a material adverse effect on the Company's
financial condition or results of operations, however, there can be no assurance
that the Company will not sustain material liability as a result of or related
to these lawsuits.
Item 4. Submission of Matters to a Vote of Security
During the fourth quarter of the Company's fiscal year ended September 30, 1999,
no matter was submitted to a vote of the Company's stockholders through the
solicitation of proxies or otherwise.
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 December 29,
1999, 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 (56) 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
Page - 18
<PAGE>
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.
James M. McNeill (41) joined the Company in 1996. Mr. McNeill has been Senior
Vice President, Chief Financial Officer, Secretary and Treasurer of the Company
since April, 1999. Mr. McNeill served as Chief Accounting Officer of the
Company from July, 1997 to April, 1999. Prior to joining the Company, Mr.
McNeill was employed in a senior financial management position in the
agribusiness industry from 1991 to 1995.
Part II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
At January 10, 2000, there were approximately 105 shareholders of record and an
estimated 1600 beneficial owners holding stock in nominee or "street" name. The
Company has paid no dividends on its Common Stock. 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.
Price Range of Common Stock
The Company's Common Stock trades on the Nasdaq SmallCap 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, 1999
as reported by Nasdaq.
<TABLE>
<CAPTION>
High Low
- ---------------------------------------------------------
1999
<S> <C> <C>
First Quarter $ 5.44 $ 2.13
Second Quarter $ 3.69 $ 1.13
Third Quarter $ 2.25 $ 1.25
Fourth Quarter $ 1.88 $ 1.00
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
</TABLE>
Page - 19
<PAGE>
Item 6. Selected Financial Data
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
===================================================================================================================================
(in thousands, except per share data)
Year ended September 30, 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of operations data (1)(2):
Net revenue......................................... $214,353 $222,182 $177,979 $144,798 $99,695
Operating salaries, wages and employee benefits..... 103,687 109,720 86,903 71,270 49,289
Other operating costs............................... 74,785 73,339 52,613 43,752 28,509
Corporate, general and administrative............... 18,509 16,370 12,885 10,784 7,217
Provision for doubtful accounts..................... 21,587 22,963 6,239 4,708 3,164
Depreciation and amortization....................... 8,826 7,824 5,924 4,720 3,529
Impairment of intangible assets..................... 29,464 - - - -
Business combination costs.......................... - - - 1,166 -
--------- --------- --------- --------- --------
Operating income (loss)............................. (42,505) (8,034) 13,415 8,398 7,987
Interest expense.................................... (14,912) (8,956) (3,534) (1,761) (1,565)
Loss on sale of business............................ (1,041) - - - -
Other income........................................ 581 - - - -
--------- --------- --------- --------- --------
Income (loss) from continuing operations,
before minority interest, income tax expense
(benefit), discontinued operations and
extraordinary item.............................. (57,877) (16,990) 9,881 6,637 6,422
Minority interest in loss of subsidiary............. 174 68 119 64 -
--------- --------- --------- --------- --------
Income (loss) from continuing operations, before
income tax expense (benefit).................... (57,703) (16,922) 10,000 6,701 6,422
Income tax expense (benefit)........................ - (7,205) 4,014 2,739 2,578
--------- --------- --------- --------- --------
Income (loss) from continuing operations............ (57,703) (9,717) 5,986 3,962 3,844
Income from discontinued operations, net of tax..... 2,581 3,425 1,269 1,084 368
--------- --------- --------- --------- --------
Income (loss) before extraordinary item............. (55,122) (6,292) 7,255 5,046 4,212
Extraordinary item, net of tax...................... - - - - 781
--------- --------- --------- --------- --------
Net income (loss)................................... $(55,122) $ (6,292) $ 7,255 $ 5,046 $ 4,993
========= ========= ========= ========= ========
Net income (loss) attributable to common and common
equivalent shares:
Income (loss) before extraordinary item............. $(55,122) $ (6,292) $ 7,255 $ 5,046 $ 4,212
Less accretion on redeemable preferred stock........ - - - (10) (36)
Less preferred stock dividends...................... - - - (86) (195)
--------- --------- --------- --------- --------
Income (loss) before extraordinary item attributable
to common and common equivalent shares.......... (55,122) (6,292) 7,255 4,950 3,981
Extraordinary item, net of tax...................... - - - - 781
--------- --------- --------- --------- --------
Net income (loss) attributable to common and common
equivalent shares............................... $(55,122) $ (6,292) $ 7,255 $ 4,950 $ 4,762
========= ========= ========= ========= ========
Denominator share data(2):
Denominator for basic income (loss) per share-
weighted average shares......................... 6,652 6,911 6,257 6,057 4,655
Effect of dilutive securities:
Warrants and options................................ - - 189 243 403
Redeemable convertible preferred stock.............. - - - 137 108
--------- --------- --------- --------- --------
Denominator for diluted income (loss) per share-
adjusted weighted average shares................ 6,652 6,911 6,446 6,437 5,166
Income (loss) per share data(3): ========= ========= ========= ========= ========
Basic net income (loss) per share data:
Income (loss) from continuing operations............ $ (8.67) $ (1.41) $ 0.96 $ 0.64 $ 0.77
Income from discontinuing operations, net of tax.... 0.38 0.50 0.20 0.18 0.08
Extraordinary item, net of tax...................... - - - - 0.17
--------- --------- --------- --------- --------
Net income (loss)................................... $ (8.29) $ (0.91) $ 1.16 $ 0.82 $ 1.02
========= ========= ========= ========= ========
Diluted net income (loss) per share data:
Income (loss) from continuing operations............ $ (8.67) $ (1.41) $ 0.93 $ 0.60 $ 0.70
Income from discontinuing operations, net of tax.... 0.38 0.50 0.20 0.17 0.07
Extraordinary item, net of tax...................... - - - - 0.15
--------- --------- --------- --------- --------
Net income (loss)................................... $ (8.29) $ (0.91) $ 1.13 $ 0.77 $ 0.92
========= ========= ========= ========= ========
- ------------------------------------------------------------------------------------------------------------------------------------
Balance sheet data:
Working capital.................................... $ 60,609 $ 75,381 $ 62,193 $ 35,673 $17,936
Total assets....................................... 177,631 234,072 153,834 98,736 73,151
Long-term obligations, net of current portion...... 137,297 127,787 65,012 23,638 6,243
Redeemable convertible preferred stock............. - - - - 3,490
Total stockholders' equity......................... 6,886 63,683 61,680 54,193 44,621
- ------------------------------------------------------------------------------------------------------------------------------------
(1) All amounts have been restated to reflect the Company's paramedical testing business, Paramedical Services of America, Inc., as
a discontinued operation.
(2) 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.
(3) All earnings per share information has been restated to conform with Financial Accounting Standards Board ("FASB") Statement
No. 128.
====================================================================================================================================
</TABLE>
Page - 20
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Selected
Consolidated Financial Data and the audited Consolidated Financial Statements of
the Company included in this report.
Recent Developments
In the fourth quarter of fiscal 1999, the Company's senior management continued
implementation of its strategic plan (the "Plan") to improve the Company's
performance. The primary focus of the Plan relating to medical services is to
refocus the Company on its core businesses, the pediatric home healthcare and
adult respiratory businesses. On November 1, 1999, the Company concluded the
sale of the assets of its paramedical testing division to Hooper Holmes, Inc. A
portion of the proceeds were used to pay down to zero all outstanding amounts
under the Company's existing Credit Agreement. Simultaneous with the pay down,
the Credit Agreement was further amended with Banc of America Commercial Finance
Corporation ("Banc of America CF"), successor to NationsBank, N.A., as Lender
and sole credit party (the "Amended and Restated Loan Security Agreement"). The
Company's consolidated statements of operations have been restated to reflect
discontinued operations.
The Company also made progress on the other operating initiatives contained
within the Plan. The closure of under-performing locations has been
substantially completed; however, the Company continues to experience some
delays in the discharge and transfer of care for certain patients. These delays
could impact future results of operations. Additionally, the Company has
significantly invested in its reimbursement organization by, among other things;
hiring more experienced senior managers, increasing incentive compensation for
billing and collection teams, improving its reporting and analysis capabilities
and increasing the amounts billed electronically.
Although the Plan is expected to reduce operating costs and improve cash flow,
there can be no assurance that the Company will be able to achieve the expected
cost savings from the Plan or will be able to reduce costs without negatively
impacting operations.
Results of Operations
Due to the nature of the industry and the reimbursement environment in which the
Company operates, certain estimates are required in recording net revenue.
Inherent in these estimates is the risk that net revenue will have to be revised
or updated, with the changes recorded in subsequent periods as additional
information becomes available to management.
Page - 21
<PAGE>
The following table sets forth, for the periods indicated, the percentage of net
revenue for continuing operations represented by the following items:
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------
1999 1998 1997
--------------- ------------- ------------
<S> <C> <C> <C>
Net revenue.................................................................... 100.0% 100.0% 100.0%
Operating salaries, wages and employee benefits................................ 48.4 49.4 48.8
Other operating costs.......................................................... 34.9 33.0 29.6
Corporate, general and administrative.......................................... 8.6 7.4 7.2
Provision for doubtful accounts................................................ 10.1 10.3 3.5
Depreciation and amortization.................................................. 4.1 3.5 3.3
Impairment of intangible assets................................................ 13.7 - -
------ ----- -----
Operating income (loss)........................................................ (19.8) (3.6) 7.6
Interest expense............................................................... (7.0) (4.0) (2.0)
Loss on sale of business....................................................... (0.5) - -
Other income................................................................... 0.3 - -
------ ----- -----
Income (loss) from continuing operations, before minority interest and income
tax expense (benefit)........................................................ (27.0) (7.6) 5.6
Minority interest in loss of subsidiary........................................ (0.1) (0.0) (0.1)
------ ----- -----
Income(loss) from continuing operations, before income taxes................... (26.9) (7.6) 5.7
Income tax expense (benefit)................................................... - (3.2) 2.3
------ ----- -----
Income (loss) from continuing operations....................................... (26.9)% (4.4)% 3.4%
====== ===== =====
</TABLE>
Fiscal 1999 Compared to Fiscal 1998
Net revenue decreased $7.8 million, or 4%, to $214.4 million in fiscal 1999 from
$222.2 million in fiscal 1998. The reduction in revenue reflects the continued
efforts to reduce non-core and/or non-profitable products and services
consistent with the Plan. Of the $7.8 million decrease in net revenue for fiscal
1999, pediatric health care net revenue accounted for $1.6 million, primarily
attributable to the closure of select locations. Adult health care net revenue
accounted for a decrease of $6.2 million for fiscal 1999. The decline in net
revenue was primarily the result of the Company's efforts in terminating
unprofitable adult infusion services contracts during fiscal 1999 and the sale
of the medical staffing business. In fiscal 1999, the Company derived
approximately 57% of its net revenue from commercial insurers and other private
payors, 36% from Medicaid and 7% from Medicare.
Operating salaries, wages and employee benefits consist primarily of branch
office employee costs. Operating salaries, wages and employee benefits
decreased $6.0 million, or 6%, to $103.7 million in fiscal 1999 from $109.7
million in fiscal 1998. Labor costs have decreased across all services as a
result of headcount reductions and reduced nursing services primarily
attributable to the closure and sale of select nursing locations. As a
percentage of net revenue, operating salaries, wages and employee benefits for
fiscal 1999 decreased to 48% from 49% in fiscal 1998.
Other operating costs include medical supplies, branch office rent, utilities,
vehicle expenses and cost of sales. Cost of sales consists primarily of the
costs of pharmaceutical and related services sold. Other operating costs
increased $1.5 million, or 2%, to $74.8 million in fiscal 1999, from $73.3
million in fiscal 1998. As a percentage of net revenue, other operating costs
for fiscal 1999, increased to 35% from 33% in fiscal 1998. The increase
primarily relates to increased costs for infusion services and the remaining
fixed costs incurred during the closure of select locations.
Corporate, general and administrative costs increased $2.1 million, or 13%, to
$18.5 million in fiscal 1999, from $16.4 million in fiscal 1998. As a
percentage of net revenue, corporate, general and administrative costs for
fiscal 1999, increased to 9% from 7% in fiscal 1998. The Company continues to
experience turnover within the reimbursement department and management
anticipates further turnover in the short term. This turnover has resulted in
increased recruiting, overtime and temporary labor costs. In addition, the
Company incurred costs to improve the functionality of and to respond to due
diligence inquiries about the paramedical testing division's case management
and billing system.
Provision for doubtful accounts decreased $1.4 million, or 6%, to $21.6 million
in fiscal 1999, from $23.0 million in fiscal 1998. During fiscal 1999, the
Company recorded provision levels consistent with current industry reimbursement
Page - 22
<PAGE>
conditions. Although the Company has experienced improved cash collections
throughout fiscal 1999, these provision levels were deemed to be appropriate.
Depreciation and amortization increased $1.0 million, or 13%, to $8.8 million in
fiscal 1999 from $7.8 million in fiscal 1998. As a percentage of the Company's
net revenue, depreciation and amortization costs for fiscal 1999 increased
slightly compared to fiscal 1998. The increase in amortization costs is due to
the decrease in the amortization period for intangible assets from 30 and 25
years to 20 years.
Impairment of intangible assets was recorded during fiscal 1999. The impairment
resulted in part from an assessment of the impact of disposing of certain non-
core business locations and activities as defined in the Company's Plan
formulated in the second quarter of fiscal 1999. Additionally, certain locations
were negatively impacted by the cancellation of certain large contracts which
impacted the future profitability of the locations. Finally, certain market
conditions of fiscal 1999, as well as ongoing failure of the Company to meet
management projections, declining gross margins, recurring location operating
losses and slower than expected progress in improving certain locations'
collections were identified by management as indications of potential intangible
asset impairment. Management conducted an evaluation of the carrying value of
the Company's recorded intangible assets based on an estimate of future cash
flows at each location. Management considered current and anticipated industry
conditions and recent changes in its business strategies and concluded that an
impairment charge of $29.5 million was appropriate. The charge includes a write-
off of $7.9 million in goodwill and $2.2 million in certificates of need
associated with the specific locations closed in fiscal 1999 and an additional
$19.4 million in goodwill related to changes within certain locations arising
from the cancellation of certain contracts which impacted location
profitability, the termination of certain non-core activities and the
competitive conditions of certain local markets.
Interest expense increased $6.0 million, or 67%, to $14.9 million in fiscal
1999, from $9.0 million in fiscal 1998. The Company's average debt outstanding
increased $35.6 million to finance the Company's working capital needs compared
to the prior fiscal year. The increase in interest expense was also due to an
increase in interest rates related to the Company's issuance of its 10% Senior
Subordinated Notes due 2008 and the increase in the interest rates under
Amendment No. 5 of the Credit Agreement.
During fiscal 1999, the Company recorded a loss on the sale of the Company's
medical staffing business in the Mid-Atlantic Region to Medical Staffing
Network, Inc. As part of the implementation of the Plan, this business was
defined as part of the non-core activities of the Company. The assets were sold
for a total cash price of $1.8 million and the Company recorded a loss of $1.0
million. In addition, the Company sold the assets of one of its Texas equipment
locations for a total cash price of $0.2 million.
Income tax benefit decreased $3.3 million to zero in fiscal 1999, from $3.3
million in fiscal 1998. The Company recorded an $18.3 million valuation
allowance against the $18.3 million net deferred tax assets as of September 30,
1999, generated primarily as a result of net operating losses. In recording the
valuation allowance, management considered whether it is more likely than not
that some or all of the deferred tax assets will be realized. This analysis
includes considering scheduled reversal of deferred tax liabilities, projected
future taxable income, carryback potential and tax planning strategies.
Management concluded that the net deferred tax asset required a full valuation
allowance.
Fiscal 1998 Compared to Fiscal 1997
Net revenue increased $44.2 million, or 25% to $222.2 million in fiscal 1998
from $178.0 million in fiscal 1997. The Company's acquisitions accounted for
approximately $33.4 million of the increase in net revenue and internal growth
accounted for the remaining $10.8 million. For branch offices that have been
under the Company's management for more than one year, the internal growth in
net revenue was 6% for fiscal 1998. Of the $44.2 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 a 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 revenue at
existing locations for adult patients of $5.5 million. In fiscal 1998, the
Company derived approximately 59% of its net revenues from commercial insurers
and other private payors, 32% from Medicaid and 9% from Medicare.
Page - 23
<PAGE>
Operating salaries, wages and employee benefits consist primarily of branch
office employee costs. Operating salaries, wages and employee benefits
increased $22.8 million, or 26% to $109.7 million in fiscal 1998 from $86.9
million in fiscal 1997. The increase was primarily due to the Company's
acquisitions which added approximately $18.0 million, with the remaining
increase due to growth at existing locations. As a percentage of net revenue,
operating salaries, wages and employee benefits were comparable for fiscal years
1998 and 1997.
Other operating costs include medical supplies, branch office rents, utilities,
vehicle expenses and cost of sales. The cost of sales consists primarily of the
costs of pharmaceutical and related services sold. Other operating costs
increased $20.7 million or 39% to $73.3 million in fiscal 1998 from $52.6
million in fiscal 1997. Of the increase, $11.3 million is primarily due to the
Company's acquisitions, with the remaining increase due to growth at existing
locations. As a percentage of net revenue, other operating costs for fiscal 1998
increased to 33% from 30% in fiscal 1997.
Corporate, general and administrative costs increased $3.5 million, or 27%, to
$16.4 million in fiscal 1998 from $12.9 million in fiscal 1997. The increase
was primarily due to the internal growth of the business. As a percentage of
net revenue, corporate, general and administrative costs were comparable for
fiscal years 1998 and 1997.
Provision for doubtful accounts consists of the amount of net 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 in fiscal 1998 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 and reflects: (1) continued
difficulties in the health care reimbursement environment, (2) lagging
collection on certain receivables primarily resulting from the implementation of
a new billing and collection system which diverted the Company's resources from
pursuing older receivable balances, (3) problems identified related primarily to
certain billings generated during the implementation phase of the new billing
and collection system, (4) collection experience on certain receivables of
acquired businesses and (5) the unfavorable outcome of certain receivables under
appeal. Due to the above mentioned factors and changes in the business
environment, the Company's management increased its estimate of the allowance
for doubtful accounts resulting in an increase in the allowance provision.
Depreciation and amortization increased $1.9 million, or 32%, to $7.8 million in
fiscal 1998 from $5.9 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 for fiscal
1998 increased to 4% from 3% in fiscal 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 benefit was recognized in fiscal 1998 due to the use of available net
operating loss carrybacks resulting from the Company's loss in fiscal 1998.
Liquidity and Capital Resources
On December 4, 1998, the Company provided notice to its lenders, as required
under the terms of the Credit Agreement, as amended, of non-compliance with
certain financial covenants contained in the Credit Agreement. On December 24,
1998, the Credit Agreement was further amended ("Amendment No. 3"), waiving the
default under the Credit Agreement through January 29, 1999 and providing the
Company temporary borrowing availability while revised financial covenants and
other modifications were negotiated. On January 8, 1999, an amendment
("Amendment No. 4") was signed with a revised set of financial covenants. The
new financial covenants continue to require certain liquidity ratios and days
sales outstanding targets to be met. The new covenants became more restrictive
over the remaining life of the Credit Agreement. 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
permanent reduction to $65 million on June 30, 1999.
On April 23, 1999, the Company provided notice to its lenders, as required under
the terms of the Credit Agreement, as amended, of non-compliance with certain
financial covenants contained in the Credit Agreement. On May 13, 1999, the
Credit Agreement was further amended ("Amendment No. 5"), waiving the default
under the Credit Agreement, revising
Page - 24
<PAGE>
the financial covenants and reducing the total commitment from $70.0 million to
$65.0 million effective May 13, 1999. Further, Amendment No. 5 revised the
interest payment date to be monthly and extended the time period which prohibits
the Company from borrowing for acquisitions. The new covenants became more
restrictive over the remaining life of the Credit Agreement. Under the Credit
Agreement, as amended, commitment fees were set at 0.500% per annum on the
average daily unused portion of the loan facility. On the effective date of
Amendment No. 5, all LIBOR and swingline borrowings were converted to a base
rate loan bearing interest at base rate plus 2.50%. Base rate is defined as the
greater of (a) Federal Funds rate plus 1/2 of 1% or (b) prime rate. At September
30, 1999, the interest rate on borrowings under the Credit Agreement was 10.75%.
Outstanding borrowings under the Credit Agreement at September 30, 1999 were
approximately $62.2 million.
As required under Amendment No. 5, the Company obtained Lender consent to sell a
medical staffing business and certain equipment locations resulting in proceeds
of $1.8 million. Under terms of the consent, proceeds from the sale were used to
permanently reduce availability under the Credit Agreement to $63.2 million.
At September 30, 1999, total borrowings under the Notes and the Credit Agreement
were approximately $137.2 million. The Company was in non-compliance with
certain financial covenants contained in the Credit Agreement. As a result of
the pay down of the Credit Agreement (as discussed below), the non-compliance
has been cured, and accordingly, the Credit Agreement is classified as a long-
term liability in the financial statements.
On November 1, 1999, the Company concluded the sale of the assets of its
paramedical testing division to Hooper Holmes, Inc. A portion of the proceeds
were used to pay down to zero all outstanding amounts under the Company's
existing Credit Agreement. Simultaneous with the pay down, the Credit Agreement
was further amended and restated with Banc of America Commercial Finance
Corporation, successor to NationsBank, N.A., as Lender and sole credit party
(the "Amended and Restated Loan Security Agreement").
Subject to the terms and conditions of the Amended and Restated Loan Security
Agreement, the Lender shall make available a total credit facility of up to
$30.0 million. The total credit facility shall be comprised of a revolving line
of credit up to the available limit, consisting of Loans and Letters of Credit.
As of the date of this Report, the Company has no outstanding borrowings under
the Amended and Restated Loan Security Agreement and given its current cash
position does not anticipate making any such borrowings in the near term.
At September 30, 1999, the Company had one interest rate swap agreement with a
commercial bank (the "Counter Party"), having a cumulative notional principal
amount of $25 million. The Company pays a fixed rate of 6.61%. The interest
rate differential to LIBOR is received or paid and recognized over the life of
the agreement as an adjustment to interest expense. The interest rate swap
terminates in June, 2002. The Company is exposed to credit loss in the event of
non-performance by the Counter Party to the interest rate swap agreement.
However, the Company does not anticipate such non-performance.
Overall cash collections for continuing operations increased approximately $9.0
million or 10% during the quarters ended September 30, 1999 and June 30, 1999 as
compared to the quarters ended March 31, 1999 and December 31, 1998. The
organizational restructuring of the Company's reimbursement process continues
and indications to date of progress are positive. While management anticipates
that continued implementation of the Plan will achieve the desired results,
there can be no assurance that this will result in the Company realizing
operating improvements and improved cash flow.
During fiscal 1999, the Company recorded a loss on the sale of the Company's
medical staffing business in the Mid-Atlantic Region to Medical Staffing
Network, Inc. As part of the implementation of the Plan, this business was
defined as part of the non-core activities of the Company. The assets were sold
for a total cash price of $1.8 million and the Company recorded a loss of $1.0
million.
The Company's investments in property and equipment are attributable largely to
purchases of medical equipment rented to patients and computer equipment.
Capital expenditures for computer equipment and software development, have been
substantially completed. The Company's investments in the acquisition of
businesses were $15.2 million and $20.9 million in fiscal 1998 and 1997,
respectively. No acquisitions were made in fiscal 1999.
The Company has suspended acquisition plans for the foreseeable future and will
be focusing resources on strengthening infrastructure, cash collections and
sales and marketing.
Page - 25
<PAGE>
Management currently believes that its cash on hand, internally generated funds
and current availability under the Amended and Restated Loan Security Agreement
will be more than adequate to satisfy the Company's working capital requirements
for the foreseeable future.
Year 2000 Compliance
Status of Year 2000 Performance
As indicated in the Year 2000 chart set forth below, the Company completed it's
Y2K preparations on time and there are no reportable significant problems as of
the date of this report. While it appears the Company's information systems
correctly accommodated the Year 2000 date change, computer analysts have
indicated that further Y2K problems may linger due to such factors as the
February 29th leap year date and pay and billing cycle variations that may occur
throughout the year.
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 had or may continue to have on its payor and vendor
sources and the impact, if any, on the Company if such payors continue to remain
non-compliant.
During fiscal 1999, the Company requested information regarding Year 2000
readiness from its significant payors including commercial insurance companies,
and sought to gather information about the Year 2000 compliance status of the
federal and state Medicare and Medicaid agencies, with which it conducts
business through its Year 2000 surveys and through research of external
information sources, including government sources. The Company continues to
receive responses to its Year 2000 survey from commercial insurance carriers and
government agencies and has received Y2K compliant electronic software for 13
State Medicaid 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.
Costs
The Company has and will continue to utilize both internal and external
resources to reprogram, or replace, test, and implement the systems and
equipment for Year 2000 modifications. The original estimated costs for the
Year 2000 project excluded consulting fees that were estimated to be
approximately $190,000. The estimated total was revised to be approximately
$440,000 and were funded through operating cash flows. Through December 31,
1999, the Company incurred costs of approximately $366,000, related to all
phases of the Year 2000 project.
Risks
Management believes that it has an effective Year 2000 Plan in place to resolve
any further Year 2000 issues in a timely manner. Furthermore, the Company has
no means of ensuring that payors, including federal and state Medicare and
Medicaid agencies will not incur additional Year 2000 problems. The inability
of these payors to be Year 2000 compliant could have a material adverse effect
on the Company. In addition, disruptions in the economy 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. However, no reportable
significant problems have been reported as of the date of this Report.
Page - 26
<PAGE>
Year 2000 Disclosure Chart
<TABLE>
<CAPTION>
Resolution Phases
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Assessment Remediation Testing Implementation
- ------------------------------------------------------------------------------------------------------------------------------------
Information 100% Complete 100% Complete 100% Complete 99% Complete
Technology
Systems
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Operating Equipment 100% Complete 100% Complete 100% Complete 100% Complete
E with Embedded Chips
x or Software(1)
p --------------------------------------------------------------------------------------------------------------------------------
o --------------------------------------------------------------------------------------------------------------------------------
s
u Products(2) N/A N/A N/A N/A
r
e
T --------------------------------------------------------------------------------------------------------------------------------
y 3rd Party(3) 100% Complete for direct 90% Complete 100% Complete 100% Complete
p system interface;
e 100% of all critical Third For all companies that For all known and
100% Complete for all Party software has been replied and allowed testing. available software.
other material exposures declared Y2K compliant by
the Vendors.
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Letters from our key suppliers and payors stating their compliance for
critical Year 2000 issues have been placed on file. The Company does not
intend to test medical equipment any further.
(2) The category Products does not apply to the Company in general and
therefore is not applicable.
(3) Percentages are estimates and reflect third party systems that interface
directly with the Company's systems. The effect of non-compliance by other
third party payors is not determinable at this time and may be beyond the
Company's control.
Quarterly Operating Results and Seasonality
The Company's quarterly results may vary significantly depending primarily on
factors such as rehospitalizations of patients, the 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.
Item 7(A). Quantitative and Qualitative Disclosures About Market Risk
At September 30, 1999, the Company had one interest rate swap agreement with a
commercial bank (the "Counter Party"), having a cumulative notional principal
amount of $25 million. The Company pays a fixed rate of 6.61%. The interest
rate differential to LIBOR is received or paid and recognized over the life of
the agreement as an adjustment to interest expense. The interest rate
differential to be received or paid is recognized over the life of the agreement
as an adjustment to interest expense. The interest rate swap terminates in
June, 2002. The Company is exposed to credit loss in the event of non-
performance by the Counter Party to the interest rate swap agreement. However,
the Company does not anticipate such non-performance.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplemental schedule of the Company
and the notes thereto as of September 30, 1999 and 1998, and for each of the
three years in the period ended September 30, 1999, together with the
independent auditors' report thereon, are set forth on pages 34-58 of this
Annual Report on Form 10-K.
Page - 27
<PAGE>
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, 1999 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.
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 - Nominee for Re-election as
Director at the 2000 Annual Meeting" and "Proposal 1 - Election of Directors -
Continuing Directors of the Company" in the Company's Proxy Statement for its
2000 Annual Meeting of Stockholders ("2000 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
Annual Report on Form 10-K 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
2000 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 2000
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 set forth under the caption "Stock Ownership" in the Company's
2000 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 2000 Proxy Statement is incorporated
herein by reference.
Page - 28
<PAGE>
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 report of independent auditors thereon which are required
to be filed as part of this Report are included in this Annual
Report on Form 10-K, are incorporated by reference in Item 8
hereof and are included herein. These consolidated financial
statements are as follows:
. Consolidated Balance Sheets as of September 30, 1999 and 1998.
. Consolidated Statements of Operations for the years ended
September 30, 1999, 1998 and 1997.
. Consolidated Statements of Stockholders' Equity for the years
ended September 30, 1999, 1998 and 1997.
. Consolidated Statements of Cash Flows for the years ended
September 30, 1999, 1998 and 1997.
. Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules
The financial statement schedule referred to in Item 8 is
described in the "Index to Financial Statement Schedule" included
in this Report on page 57. 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.
10.9(k) Employment Agreement, dated May 1, 1999, between the Company and
James M. McNeill, filed herewith.
10.9(l) Employment Agreement, dated August 30, 1999, between the Company
and David Nabors, filed herewith.
10.9(m) Employment Agreement, dated October 1, 1999, between the Company
and Joseph D. Sansone, filed herewith.
10.9(n) Non-Qualified Deferred Compensation Plan, dated January 1, 2000,
filed herewith.
21 Subsidiaries of the Company, filed herewith.
23.1 Consent of Independent Auditors, Ernst & Young LLP, filed
herewith.
25 Powers of Attorney, filed herewith.
27 Financial Data Schedule, filed herewith.
Page - 29
<PAGE>
(b) Reports on Form 8-K
On September 2, 1999, the Company filed a Current Report on Form
8-K announcing that the Company had entered into a definitive
agreement to sell the assets of its paramedical testing division
to Hooper Holmes, Inc.
On November 16, 1999, the Company filed a Current Report on Form
8-K, dated November 1, 1999, announcing that (i) the Company
completed the sale of the assets of its paramedical testing
division to Hooper Holmes, Inc. and (ii) the Company and its
subsidiaries amended and restated the Credit Agreement, dated
August 13, 1998 with NationsBank, N.A., which has been succeeded
by Banc of America CF, as Lender and sole credit party.
On December 16, 1999 the Company filed a Current Report on Form
8-K, dated December 14, 1999, announcing the setting of a meeting
date and record date for the Company's 2000 Annual Meeting of
Stockholders.
(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).
2.2 Asset Purchase Agreement, dated August 30, 1999, by among the
Company, its wholly-owned subsidiary, Paramedical Services of
America, Inc. and Hooper Holmes, Inc. (incorporated by reference
to Exhibit 2.2 to the Company's Report on Form 8-K, dated
September 2, 1999).
2.3 Amendment to Asset Purchase Agreement, dated November 1, 1999
(incorporated by reference to Exhibit 2.2 to the Company's Report
on Form 8-K, dated November 1, 1999).
3.1 Amended and Restated Certificate of Incorporation of the Company
(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).
Page - 30
<PAGE>
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. Directors' 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).
(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).
(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).
(k) Employment Agreement, dated May 1, 1999 between the Company
and James M. McNeill, filed herewith.
(l) Employment Agreement, dated August 30, 1999 between the
Company and David Nabors; filed herewith.
(m) Employment Agreement, dated October 1, 1999 between the
Company and Joseph D. Sansone, filed herewith.
(n) Non-Qualified Deferred Compensation Plan, dated January 1,
2000, filed herewith.
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).
10.16 Amendment No. 2 to the Credit Agreement, dated August 13, 1998
(incorporated by reference to
Page - 31
<PAGE>
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
(incorporated by reference to Exhibit 10.18 to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30,
1998).
10.19 Amendment No. 4 to the Credit Agreement, dated January 8, 1999
(incorporated by reference to Exhibit 10.19 to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30,
1998).
10.20 Amendment No. 5 to the Credit Agreement, dated May 13, 1999
(incorporated by reference to Exhibit 10.20 to the Company's
Quarterly Report on Form 10-Q for the quarter year ended March 31,
1999).
10.21 Amended and Restated Loan and Security Agreement, dated November
1, 1999, by and between the Company and Banc of America Commercial
Finance Corporation, as Lender (incorporated by reference to
Exhibit 10.21 to the Company's Current Report on Form 8-K, dated
November 1, 1999).
21 Subsidiaries of the Company, filed herewith.
23.1 Consent of Independent Auditors, Ernst & Young LLP, filed
herewith.
25 Powers of Attorney, filed herewith.
27 Financial Data Schedule, filed herewith.
Page - 32
<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 set forth on January 13, 2000.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------------ ------------------------------------------- --------------------------
<S> <C> <C>
/s/ Joseph D. Sansone Chairman of the Board of January 13, 2000
- ------------------------------------------------ Directors, President and
Joseph D. Sansone Chief Executive Officer
(Principal Executive Officer)
/s/ James M. McNeill Senior Vice President, January 13, 2000
- ------------------------------------------------ Chief Financial Officer,
James M. McNeill Secretary and Treasurer
(Principal Financial and
Accounting Officer)
* Director January 13, 2000
- ------------------------------------------------
Michael J. Finn
* Director January 13, 2000
- ------------------------------------------------
Adam O. Holzhauer
* Director January 13, 2000
- ------------------------------------------------
Robert P. Pinkas
* Director January 13, 2000
- ------------------------------------------------
Richard S. Smith
*By: /s/ James M. McNeill
--------------------------
James M. McNeill
(Attorney in Fact)
</TABLE>
Page - 33
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets................................ 35
Consolidated Statements of Operations...................... 37
Consolidated Statements of Stockholders' Equity............ 38
Consolidated Statements of Cash Flows...................... 39
Notes to Consolidated Financial Statements................. 40
Report of Independent Auditors............................. 56
Page - 34
<PAGE>
Financial Statements
PEDIATRIC SERVICES OF AMERICA, INC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
---------------------------------------
1999 1998
------------------- ------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................................ $ 8,361,480 $ 1,443,529
Accounts receivable, less allowances for doubtful
accounts of $14,649,000 and $14,008,000, respectively.............. 55,482,088 72,635,853
Prepaid expenses..................................................... 666,497 592,595
Income taxes receivable.............................................. 345,121 2,898,474
Deferred income taxes................................................ -- 3,266,288
Other current assets................................................. 4,011,177 3,874,230
Net current assets of discontinued operations........................ 25,191,638 28,646,269
------------ ------------
Total current assets................................................... 94,058,001 113,357,238
Property and equipment:
Home care equipment held for rental.................................. 30,095,816 28,434,704
Furniture and fixtures............................................... 9,813,252 9,895,207
Vehicles............................................................. 804,773 891,023
Leasehold improvements............................................... 1,031,770 915,189
------------ ------------
41,745,611 40,136,123
Accumulated depreciation and amortization............................ (25,070,830) (20,265,913)
------------ ------------
16,674,781 19,870,210
Other assets:
Goodwill, less accumulated amortization of
$5,159,000 and $5,489,000, respectively............................ 36,160,122 65,968,875
Certificates of need, less accumulated amortization of
$302,000 and $508,000, respectively................................ 370,520 2,739,379
Deferred financing fees, less accumulated
amortization of $1,119,000 and $521,000, respectively.............. 2,719,460 3,251,074
Noncompete agreements, less accumulated amortization of
$1,032,000 and $875,000, respectively.............................. 28,333 185,000
Other................................................................ 367,083 648,514
Non-current assets of discontinued operations........................ 27,252,843 28,051,870
------------ ------------
66,898,361 100,844,712
------------ ------------
Total assets........................................................... $177,631,143 $234,072,160
============ ============
</TABLE>
See accompanying notes.
Page - 35
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS--(Continued)
<TABLE>
<CAPTION>
September 30,
-------------------------------------
1999 1998
------------------ -----------------
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable........................................................ $ 9,126,255 $ 11,600,282
Accrued compensation.................................................... 9,116,023 10,657,850
Accrued insurance....................................................... 4,601,629 3,516,392
Other accrued liabilities............................................... 8,717,825 7,627,464
Deferred revenue........................................................ 714,381 835,050
Current maturities of long-term obligations to related parties.......... 1,141,479 3,322,956
Current maturities of long-term obligations............................. 31,029 416,200
------------ ------------
Total current liabilities................................................ 33,448,621 37,976,194
Long-term obligations to related parties, net of current
maturities............................................................. 25,000 220,000
Long-term obligations, net of current maturities......................... 137,271,548 127,567,002
Deferred income taxes.................................................... -- 3,878,485
Minority interest in subsidiary.......................................... -- 747,438
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, 6,652,005 and 6,651,964 shares issued and
outstanding in 1999 and 1998, respectively........................... 66,520 66,520
Additional paid-in capital............................................. 48,362,234 50,037,261
Retained earnings (deficit)............................................ (41,542,780) 13,579,260
------------- -------------
Total stockholders' equity............................................... 6,885,974 63,683,041
------------- -------------
Total liabilities and stockholders' equity............................... $177,631,143 $234,072,160
============= =============
</TABLE>
See accompanying notes.
Page - 36
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------------------------------------
1999 1998 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
Net revenue........................................................ $214,352,919 $222,182,337 $177,979,161
Costs and expenses:
Operating salaries, wages and employee benefits................... 103,687,280 109,720,240 86,902,900
Other operating costs............................................. 74,785,239 73,338,718 52,612,716
Corporate, general and administrative............................. 18,508,667 16,369,904 12,885,475
Provision for doubtful accounts................................... 21,587,031 22,963,191 6,238,965
Depreciation and amortization..................................... 8,825,715 7,824,274 5,924,295
Impairment of intangible assets................................... 29,464,420 -- --
------------ ------------ ------------
Total costs and expenses......................................... 256,858,352 230,216,327 164,564,351
------------ ------------ ------------
Operating income (loss)............................................ (42,505,433) (8,033,990) 13,414,810
Interest expense................................................... (14,912,330) (8,955,976) (3,534,262)
Loss on sale of business........................................... (1,040,852) -- --
Other income....................................................... 581,424 -- --
------------ ------------ ------------
Income (loss) from continuing operations, before minority
interest and income taxes...................................... (57,877,191) (16,989,966) 9,880,548
Minority interest in loss of subsidiary............................ 174,333 68,356 119,341
------------ ------------ ------------
Income (loss) from continuing operations, before income tax
expense (benefit).............................................. (57,702,858) (16,921,610) 9,999,889
Income tax expense (benefit)....................................... -- (7,204,631) 4,013,885
------------ ------------ ------------
Income (loss) from continuing operations........................... (57,702,858) (9,716,979) 5,986,004
Discontinued operations:
Income from discontinued operations, net of tax.................... 2,580,818 3,424,779 1,268,694
------------ ------------ ------------
Net income (loss).................................................. $(55,122,040) $ (6,292,200) $ 7,254,698
============ ============ ============
Basic net income (loss) per share data:
Income (loss) from continuing operations........................... $ (8.67) $ (1.41) $ 0.96
Income from discontinued operations................................ 0.38 0.50 0.20
------------ ------------ ------------
Net income (loss).................................................. $ (8.29) $ (0.91) $ 1.16
============ ============ ============
Diluted net income (loss) per share data:
Income (loss) from continuing operations........................... $ (8.67) $ (1.41) $ 0.93
Income from discontinued operations................................ 0.38 0.50 0.20
------------ ------------ ------------
Net income (loss).................................................. $ (8.29) $ (0.91) $ 1.13
============ ============ ============
Weighted average shares outstanding:
Basic............................................................ 6,652,212 6,910,760 6,256,567
============ ============ ============
Diluted.......................................................... 6,652,212 6,910,760 6,445,755
============ ============ ============
</TABLE>
See accompanying notes.
Page - 37
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Retained Total
Common Paid-in Earnings Stockholders'
Stock Capital (Deficit) Equity
----------------- ------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Balances at October 1, 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 (1)................................... -- -- 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 (1)..................................... -- -- (6,292,200) (6,292,200)
------- ----------- ------------ ------------
Balances at September 30, 1998................... 66,520 50,037,261 13,579,260 63,683,041
1,190 shares of common stock issued through
exercise of stock options..................... 11 1,089 -- 1,100
1,149 shares of common stock cancelled from
escrow........................................ (11) 11 -- --
Stock price guarantee payments related
to the acquisition of businesses.............. -- (1,676,127) -- (1,676,127)
Net loss (1)..................................... -- -- (55,122,040) (55,122,040)
------- ----------- ------------ ------------
Balances at September 30, 1999................... $66,520 $48,362,234 $(41,542,780) $ 6,885,974
======= =========== ============ ============
</TABLE>
(1) Comprehensive net income (loss) is the same as reported net income (loss).
See accompanying notes.
Page - 38
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------------
1999 1998 1997
------------ ------------ --------------
<S> <C> <C> <C>
Operating activities
Income (loss) from continuing operations................................. $(57,702,858) $ (9,716,979) $ 5,986,004
Adjustments to reconcile income (loss) from continuing operations to net
cash provided by(used in) operating activities:
Depreciation and amortization.......................................... 8,825,715 7,824,274 5,924,295
Impairment of intangible assets........................................ 29,464,420 - -
Provision for doubtful accounts........................................ 21,587,031 22,963,191 6,238,965
Amortization of deferred financing fees................................ 598,107 329,193 115,621
Deferred income taxes.................................................. (612,197) 359,362 3,257,996
Minority interest in loss of subsidiary................................ (174,333) (68,356) (119,341)
Loss on sale of business............................................... 1,040,852 -- --
Other income........................................................... (581,424) -- --
Changes in operating assets and liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable.................................................. (7,521,222) (21,192,933) (29,238,633)
Prepaid expenses..................................................... (83,902) (73,747) (64,578)
Other assets......................................................... 490,482 (799,622) (1,380,547)
Accounts payable..................................................... (2,474,027) 4,627,938 288,183
Income taxes......................................................... 2,553,353 (4,018,000) (752,602)
Accrued liabilities.................................................. 280,519 9,203,670 2,206,288
------------ ------------ ------------
Net cash provided by (used in) operating activities of continuing
operations............................................................ (4,309,484) 9,437,991 (7,538,349)
Net cash provided by (used in) operating activities of discontinued
operations............................................................ 7,982,521 (19,781,954) 507,210
------------ ------------ ------------
Net cash provided by (used in) operating activities...................... 3,673,037 (10,343,963) (7,031,139)
Investing activities
Purchases of property and equipment...................................... (2,810,695) (7,710,232) (6,730,191)
Acquisitions of businesses............................................... -- (15,229,930) (20,943,121)
Stock price guarantee.................................................... (1,676,127) -- --
Proceeds from sale of businesses......................................... 1,972,083 -- --
Proceeds from minority partner in joint venture.......................... -- -- 100
Other, net............................................................... 30,194 (52,190) 38,846
------------ ------------ ------------
Net cash used in investing activities of continuing operations........... (2,484,545) (22,992,352) (27,634,366)
Net cash used in investing activities of discontinued operations......... (1,148,045) (26,729,433) (136,697)
------------ ------------ ------------
Net cash used in investing activities.................................... (3,632,590) (49,721,785) (27,771,063)
Financing activities
Principal payments on long-term debt..................................... (9,557,103) (90,697,029) (9,231,503)
Borrowings on long-term debt............................................. 16,500,000 154,500,000 44,064,000
Deferred financing fees.................................................. (66,493) (2,947,818) (531,728)
Proceeds from exercise of stock options.................................. 1,100 154,746 233,199
------------ ------------ ------------
Net cash provided by financing activities................................ 6,877,504 61,009,899 34,533,968
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents......................... 6,917,951 944,151 (268,234)
Cash and cash equivalents at beginning of year........................... 1,443,529 499,378 767,612
------------ ------------ ------------
Cash and cash equivalents at end of year................................. $ 8,361,480 $ 1,443,529 $ 499,378
============ ============ ============
Supplemental disclosure of cash flow information
Cash paid for interest................................................... $ 15,263,695 $ 5,186,805 $ 2,957,313
============ ============ ============
</TABLE>
See accompanying notes.
Page - 39
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Description of Business
The Company provides a broad range of pediatric health care services, and
equipment including nursing, respiratory therapy, rental and sale of
durable medical equipment, pharmaceutical services and infusion therapy
services. 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. As a complement to its pediatric respiratory
and infusion therapy services, the Company also provides respiratory and
infusion therapy and related services for adults.
Discontinued Operations
During the third quarter of fiscal 1999, the Company's Board of Directors
approved management's plan to sell the Company's paramedical testing
operations (see Note 15). As a result, the paramedical testing operations
are reflected as a discontinued operation. The consolidated financial
statements of the Company for all periods presented have been restated to
reflect the discontinued operations.
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 and the differences could be material. Due to the nature
of the industry and the reimbursement environment in which the Company
operates, certain estimates are required in recording net revenues and
determining provisions for doubtful accounts. Inherent in these estimates
is the risk that they will have to be revised or updated as additional
information becomes available to management.
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.
Page - 40
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Summary of Significant Accounting Policies - continued
Accounts Receivable
Accounts receivable include approximately $10.5 million and $15.9 million
for which services have been rendered but the amounts were unbilled as of
September 30, 1999 and September 30, 1998, respectively. Such unbilled
amounts are primarily a result of the time required to obtain and reconcile
information from field locations in order to process bills for services
rendered.
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 three to ten years.
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 twenty 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 are 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 are being amortized over their useful lives which is generally twenty
years.
Financing fees incurred in connection with the credit agreement (see Note
4), 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.
Impairment of intangible assets was recorded during fiscal 1999. The
impairment resulted in part from an assessment of the impact of disposing
of certain non-core business locations and activities as defined in the
Company's strategic plan formulated in the second quarter of fiscal 1999.
Additionally, certain locations were negatively impacted by the
cancellation of certain large contracts which impacted the future
profitability of the locations. Finally, certain market conditions of
fiscal 1999, as well as ongoing failure of the Company to meet management
projections, declining gross margins, recurring location operating losses
and slower than expected progress in improving certain locations'
collections were identified by management as indications of potential
intangible asset impairment. Management conducted an evaluation of the
carrying value of the Company's recorded intangible assets based on an
estimate of future cash flow at each location. Management considered
current and anticipated cash flows, industry conditions and recent changes
in its business strategies and concluded that an impairment charge of $29.5
million, was appropriate. The charges include a write-off of $7.9 million
in goodwill and $2.2 million in certificates of need associated with the
specific locations closed in fiscal 1999 and an additional $19.4 million in
goodwill related to changes within certain locations arising from the
cancellation of certain contracts which impacted location profitability,
the termination of certain non-core activities and the competitive
conditions of certain local markets.
For purposes of assessing impairment, assets were grouped at the location
level, which is the lowest level for which there are identifiable cash
flows that are largely independent. Asset impairment was deemed to exist
if the Company's estimate of undiscounted cash flows was less than the
carrying amount of the long-lived assets and goodwill at the location. In
estimating future cash flows, management used its best estimates of
anticipated
Page - 41
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summary of Significant Accounting Policies - continued
operating results over the remaining useful life of the assets. For those
locations where asset impairment was identified, the amount of impairment
was measured by comparing the carrying amount of the long-lived assets and
goodwill to the estimated fair value for each location. Fair value was
estimated using a valuation technique based on the present value of the
expected future cash flows.
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 43%,
41%, and 41% of the Company's continuing operations net revenue for the
years ended September 30, 1999, 1998 and 1997, 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 for continuing operations was approximately
$565,000, $641,000 and $576,000 for the years ended September 30, 1999,
1998 and 1997, respectively. Advertising expense for discontinued
operations was approximately $195,000, $155,000 and $11,000 for the years
ended September 30, 1999, 1998 and 1997, respectively.
Concentration of Credit Risk
The Company's principal financial instruments subject to potential
concentration of credit risk is accounts receivable. The concentration of
credit risk with respect to accounts receivable, which are primarily health
care industry related, represent a risk to the Company given the current
health care environment. The risk is somewhat 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, 1999, the Company had one interest rate swap agreement
with a commercial bank (the "Counter Party"), having a cumulative notional
principal amount of $25 million. The Company pays a fixed rate of 6.61%.
The interest rate differential to LIBOR is received or paid and recognized
over the life of the agreement as an adjustment to interest expense. The
interest rate swap terminates in June 2002. The Company is exposed to
credit loss in the event of non-performance by the Counter Party to the
interest rate swap agreement. However, the Company does not anticipate
such non-performance.
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 June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
The Statement, which was adopted 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 did not have an effect on the Company's financial position or
results of operations.
Page - 42
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summary of Significant Accounting Policies - continued
In the first quarter of fiscal year 1999, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The adoption of this Statement did
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
consistent with the provisions of SOP 98-1, the adoption of SOP 98-1 did
not have a material effect on the Company's financial position or results
of operations.
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, 2000. 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.
Reclassifications
Certain amounts for prior periods have been reclassified to conform to the
current year presentation.
2. Discontinued Operations
During the third quarter of fiscal 1999, the Company's Board of Directors
approved management's plan of its intent to sell the Company's paramedical
testing operations (see Note 15). As a result, the paramedical testing
operations are reflected as a discontinued operation. The consolidated
financial statements of the Company for all periods presented have been
restated to reflect the discontinued operations. The operating results of
the discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------
1999 1998 1997
------------------ ------------------ -----------------
<S> <C> <C> <C>
Net revenue............................................ $79,006,452 $80,309,272 $26,043,565
Income before income tax expense....................... 2,580,818 7,318,818 2,052,271
Income tax expense..................................... -- 3,894,039 783,577
----------- ----------- -----------
Net income............................................. $ 2,580,818 $ 3,424,779 $ 1,268,694
=========== =========== ===========
Net income per share:
Basic............................................... $ 0.38 $ 0.50 $ 0.20
=========== =========== ===========
Diluted............................................. $ 0.38 $ 0.50 $ 0.20
=========== =========== ===========
</TABLE>
Page - 43
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summary of Significant Accounting Policies - continued
Discontinued Operations - continued
Assets and liabilities of the discontinued operations have been reflected
in the consolidated balance sheets as current or non-current based on the
original classification of the accounts, except certain current liabilities
are netted against current assets. The following is a summary of assets
and liabilities of discontinued operations:
<TABLE>
<CAPTION>
September 30
--------------------------------------
1999 1998
------------------- -----------------
<S> <C> <C>
Cash............................................................. $ 540,891 $ 564,863
Accounts receivable, net......................................... 12,690,712 26,393,581
Prepaid expenses................................................. 29,004 214,781
Other current assets............................................. 12,471,031 1,962,227
----------- -----------
Total current assets............................................. 25,731,638 29,135,452
Accrued compensation............................................. 540,000 489,183
----------- -----------
Net current assets of discontinued operations.................... $25,191,638 $28,646,269
=========== ===========
Property, net.................................................... $ 5,024,710 $ 4,841,576
Goodwill, net.................................................... 22,173,319 23,202,556
Other............................................................ 54,814 7,738
----------- -----------
Non-current assets of discontinued operations.................... $27,252,843 $28,051,870
=========== ===========
</TABLE>
Accounts receivable for discontinued operations include approximately $9.4
million and $17.2 million for which services have been rendered but the
amounts were unbilled as of September 30, 1999 and September 30, 1998,
respectively. Primarily such unbilled amounts result from the paramedical
testing division's practice of billing one month in arrears. Certain
liabilities were not assumed by Hooper Holmes, Inc. in the sale of the
paramedical testing division. These include accounts payable, additional
accrued compensation and other accrued liabilities.
3. Preferred Stock and Common Stock
As of September 30, 1999, a total of 1,802,199 shares of Common Stock have
been reserved for future issuance under the Company's stock option plans.
Shares of Common Stock outstanding and related changes for the three years
ended September 30, 1999 are as follows:
<TABLE>
<S> <C>
Balances at October 1, 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
Exercise of stock options........................ 1,190
Shares cancelled from escrow..................... (1,149)
---------
Balances at September 30, 1999....................... 6,652,005
=========
</TABLE>
Page - 44
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Long-Term Borrowing Arrangements
The Company's long-term obligations as of September 30, 1999 and 1998,
consist of the following:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Subordinated notes...................................... $ 75,000,000 $ 75,000,000
Note payable to bank.................................... 62,240,000 52,500,000
Related party notes payable............................. 1,166,479 3,542,956
Other notes payable..................................... 62,577 483,202
------------ ------------
138,469,056 131,526,158
Less current maturities of related party notes payable.. 1,141,479 3,322,956
Less current maturities................................. 31,029 416,200
------------ ------------
Total long-term borrowing............................. $137,296,548 $127,787,002
============ ============
</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 incurring
additional indebtedness, the creation of liens, sales of assets, mergers
and consolidations and payment of dividends, among other things. A default
provision defines acceleration of any indebtedness and failure to pay any
indebtedness of the Company at maturity and results in a default under the
Notes.
Note payable to bank represents a revolving credit agreement ("Credit
Agreement") entered into on August 13, 1997 with a maximum availability of
$100 million (subsequently reduced to $63.2 million as discussed below).
Amounts available to borrow under this agreement are subject to rate limits
as defined in the agreement. The loan was originally due August 13, 2002,
(subsequently changed to October 1, 2000 and ultimately paid down as
discussed below). 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 Credit Agreement contains several
financial and non-financial covenants including but not limited to certain
leverage and coverage ratios and working capital requirements.
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. The Credit Agreement is collateralized by
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
Page - 45
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Term Borrowing Arrangements - continued
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 5.) 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.
At September 30, 1998, the Company's applicable margin was 3.500% 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.
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. 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. 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. Amendment No. 4 also revised the Credit Agreement termination
date from August 13, 2002 to October 1, 2000 and reduced the total
commitment from $75 million to $70 million, with a further reduction to $65
million on June 30, 1999.
On April 23, 1999, the Company provided notice to its lenders, as required
under the terms of its Credit Agreement, as amended, of non-compliance with
certain financial covenants contained in the Credit Agreement. On May 13,
1999 the Credit Agreement was further amended ("Amendment No. 5"), waiving
the defaults under the Credit Agreement, revising the financial covenants
and reducing the total commitment from $70.0 million to $65.0 million
effective May 13, 1999. Further, Amendment No. 5 revised the interest
payment date to be monthly and extended the time period during which the
Company is prohibited from borrowing for acquisitions. The new covenants
become more restrictive over the remaining life of the Credit Agreement.
Under the Credit Agreement, as amended, commitment fees were set at 0.500%
per annum on the average daily unused portion of the loan facility. On the
effective date of Amendment No. 5, all LIBOR and swingline borrowings were
converted to a base rate loan bearing interest at base rate plus 2.50%.
Base rate is defined as the greater of (a) Federal Funds rate plus 1/2 of
1% or (b) prime rate. At September 30, 1999, the interest rate on
borrowings under the Credit Agreement was 10.75%. Outstanding borrowings
under the Credit Agreement at September 30, 1999 were approximately $62.2
million.
As required under Amendment No. 5, the Company obtained Lender consent to
sell a medical staffing business and certain equipment locations resulting
in proceeds of $1.8 million. Under terms of the consent, proceeds from the
sale were used to permanently reduce availability under the Credit
Agreement to $63.2 million.
As of September 30, 1999, the Company was in non-compliance with the
financial covenants contained in Amendment No. 5. As a result of the pay
down of all outstanding amounts under the Credit Agreement, (see Note 15)
the non-compliance with certain financial covenants has been cured and
accordingly the Credit Agreement is classified as a long-term liability in
the financial statements.
In connection with these amendments to the Credit Agreement, the Company
incurred loan costs of approximately $324,027. These costs include
amendment fees, legal and professional fees.
At September 30, 1999, total borrowings under the Notes and the Credit
Agreement were approximately $137.2 million.
Page - 46
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Term Borrowing Arrangements - continued
The Company has entered into several related party notes payable and non-
compete agreements with individuals in connection with the acquisition 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 vary but do not extend beyond December 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, 1999, is as follows:
Year ending September 30,
2000 .................................... $ 1,172,508
2001 .................................... 62,282,761
2002 .................................... 11,339
2003 .................................... 2,448
2004 and thereafter...................... 75,000,000
------------
$138,469,056
============
5. Acquisitions and Dispositions
During fiscal 1999, the Company sold the assets of its medical staffing
business in the Mid-Atlantic Region to Medical Staffing Network, Inc., a
medical staffing company. As part of the implementation of the Company's
Plan, this business was defined as part of the non-core activities of the
Company. The assets were sold for a total cash price of $1.8 million and
the Company recorded a loss of $1.0 million. In addition, the Company sold
the assets of one of its Texas equipment locations for a total cash price
of $0.2 million.
The Company acquired ten companies during fiscal 1998. Pro forma net loss
and net loss per share would not be materially different than reported in
the Statements of Operations. The aggregate fiscal year net revenue for
these acquisitions was approximately $17.9 million and total net assets
were $5.1 million. The aggregate purchase price of these companies was
approximately $23.5 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, 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 paid a total of $1.7 million to
satisfy the contractual price protection under the terms of the agreement.
The Company also acquired thirteen companies and a home health agency with
a certificate of need, during fiscal 1997. Pro forma net income and net
income per share would not be materially different than actual net income
and net income per share reported in the Statements of Operations. The
aggregate fiscal year net revenue for these acquisitions was approximately
$29.0 million and total assets were $6.1 million. The aggregate purchase
price of these companies was approximately $25.5 million.
The purchase method of accounting was used to record each of the above
acquisitions. Accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on estimated fair values at the
purchase dates. Operating results for the acquired companies have been
included in the Company's consolidated results of operations from the
respective purchase dates.
Page - 47
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. 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 for continuing operations approximated $7,047,000, $4,088,000
and $4,052,000 under these leases for the years ended September 30, 1999,
1998 and 1997, respectively. Rent expense for discontinued operations
approximated $2,947,000, $2,444,000 and $157,000 for the years ended
September 30, 1999, 1998 and 1997, respectively.
At September 30, 1999, the future minimum lease payments under non-
cancelable operating leases with initial or remaining terms equal to or
exceeding one year were as follows:
Year ending September 30, Continuing Discontinued
Operations Operations
---------- ------------
2000............................ $ 4,026,000 $1,944,000
2001............................ 2,742,000 1,520,000
2002............................ 1,765,000 1,024,000
2003............................ 1,011,000 636,000
2004 and thereafter............. 3,087,000 391,000
----------- ----------
$12,631,000 $5,515,000
=========== ==========
7. 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 855,797 options have been granted to eligible participants as of
September 30, 1999. 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 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
190,000 options have been granted to eligible participants as of September
30, 1999.
Page - 48
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Plans - Continued
Pro forma information regarding net income and earnings per share is
required by Statement 123, 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 of these options was estimated at
the date of grant using a Black-Scholes option pricing model with the
following weighted-average assumptions for 1999, 1998 and 1997,
respectively: risk-free interest rates of 5.92%, 4.18% and 5.99%; a
dividend yield of 0.0%; volatility factors of the expected market price of
the Company's Common Stock of 100%, 49.41% and 45.80% 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 net income (loss) per
share information):
1999 1998 1997
-------- ------- ------
Pro forma net income (loss)............... $(55,299) $(7,194) $6,506
Pro forma net income (loss) per share
Basic................................... $ (8.31) $ (1.04) $ 1.04
Diluted................................. $ (8.31) $ (1.04) $ 1.01
A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
Shares per Share
-------------- -----------------
<S> <C> <C>
Outstanding at October 1, 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
Granted........................................................... 342,500 2.44
Exercised......................................................... (1,190) 0.92
Cancelled......................................................... (69,505) 14.46
--------- ------
Outstanding at September 30, 1999...................................... 1,045,797 $11.54
========= ======
</TABLE>
Page - 49
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Plans - Continued
At September 30, 1999, 1998 and 1997, options to acquire 585,797, 476,742
and 322,821 shares, respectively, were exercisable. The weighted average
fair value of options granted in 1999, 1998 and 1997 was $1.75, $8.84 and
$7.97, respectively.
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, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average
Remaining Contractual Number Options Weighted Average
Exercise Price Outstanding Life Exercisable Exercise Price
------------- ----------- --------------------- -------------- ----------------
<S> <C> <C> <C> <C>
$ 0.014-$ 0.714 15,634 1.1 15,634 $ 0.45
1.43-1.63 252,817 9.5 11,317 1.43
4.29-5.70 183,476 5.7 100,976 4.43
8.00-10.26 45,000 4.8 45,000 8.92
13.38-19.87 507,370 6.9 373,245 18.55
20.00-24.88 41,500 7.2 39,625 22.87
--------- --- ------- ------
1,045,797 7.1 585,797 $14.85
========= === ======= ======
</TABLE>
8. Income Taxes
The income tax provision (benefit) for the years ended September 30, 1999,
1998 and 1997 are summarized below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------- ---------------- --------------
<S> <C> <C> <C>
Current:
Federal................................................. $ (890,457) $(2,621,000) $2,683,000
State................................................... (166,961) (491,000) 503,000
----------- ----------- ----------
(1,057,418) (3,112,000) 3,186,000
Deferred:
Federal................................................. 890,457 (167,165) 1,357,021
State................................................... 166,961 (31,427) 254,441
----------- ----------- ----------
1,057,418 (198,592) 1,611,462
----------- ----------- ----------
-- (3,310,592) 4,797,462
Discontinued operations................................... -- 3,894,039 783,577
----------- ----------- ----------
Continuing operations..................................... $ -- $(7,204,631) $4,013,885
=========== =========== ==========
</TABLE>
A reconciliation of the income tax provision (benefit) to the statutory
federal income tax rate is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------------ -------------- --------------
<S> <C> <C> <C>
Statutory rate of 34% applied to pre-tax income.............. $(18,741,432) $(3,264,949) $4,097,734
State income taxes, net of federal tax benefit............... (2,182,826) (344,802) 448,340
Amortization and impairment of intangibles................... 2,199,516 234,203 202,992
Valuation allowance.......................................... 18,346,172 -- --
Discontinued operations...................................... -- (3,894,039) (783,577)
Other, net................................................... 378,570 64,956 48,396
------------ ----------- ----------
$ -- $(7,204,631) $4,013,885
============ =========== ==========
</TABLE>
Page - 50
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes - continued
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:
<TABLE>
<CAPTION>
1999 1998
------------------- ------------------
<S> <C> <C>
Allowance for doubtful accounts.......................................... $ 6,933,566 $ 3,637,406
Deferred losses on discontinued operations............................... (3,918,349) --
Mark to market accounting for accounts receivable........................ (3,542,667) (3,902,239)
Net operating loss carryforward.......................................... 11,575,581 441,270
Payroll related accruals................................................. 768,602 632,075
Insurance related accruals............................................... 1,748,619 1,336,229
Property and equipment and intangibles................................... 4,179,755 (3,381,850)
Other, net............................................................... 601,065 624,912
------------ -----------
Net deferred tax asset/(liability)....................................... 18,346,172 (612,197)
Valuation allowance...................................................... (18,346,172) --
------------ -----------
Net deferred tax liability............................................... $ -- $ (612,197)
============ ===========
</TABLE>
The Company recorded an $18.3 million valuation allowance against the $18.3
million net deferred tax assets as of September 30, 1999, generated
primarily as a result of net operating losses. In recording the valuation
allowance, management considered whether it is more likely than not that
some or all of the deferred tax assets will be realized. This analysis
includes considering scheduled reversal of deferred tax liabilities,
projected future taxable income, carryback potential and tax planning
strategies. Management concluded that the net deferred tax asset required a
full valuation allowance.
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 $29.5 million of net operating losses for
income tax purposes available to offset future taxable income. Such losses
expire by the year 2011 through 2019.
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.
Refunds from income taxes exceeded net taxes paid in the years ended
September 30, 1999 and 1998. Taxes paid for the year ended September 30,
1997 was approximately $4.3 million.
9. 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 - The carrying amounts reported in the balance sheets for cash
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 fair value of the
Company's Notes as determined by quotations on the applicable exchange was
approximately $35.3 million at September 30, 1999.
10. 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 for continuing operations were
approximately $387,000, $320,000 and $270,000 for the years ended
September 30, 1999, 1998 and 1997 respectively.
Page - 51
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Employee Savings Plan - continued
Company contributions to the Plan for discontinued operations were
$105,000, $83,000 and $7,000 for the years ended September 30, 1999, 1998
and 1997.
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 un-funded 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 $28,000
and $55,000 for the years ended September 30, 1999 and 1998, respectively.
On March 22, 1999, the Company terminated the Plan and distributed Plan
contributions to those employees who participated in the Plan.
11. Commitments and Contingencies
As of September 30, 1999, 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 should not have a material adverse effect on the
Company's consolidated financial position.
Shareholder Litigation
On March 11, 1999, a putative class action complaint was filed against the
Company in the United States District Court for the Northern District of
Georgia. The Company and certain of its then current officers and
directors were named as defendants. To the Company's knowledge, no other
putative class action complaints were filed within the 60 day time period
provided for in the Private Securities Litigation Reform Act. The
plaintiffs and their counsel were appointed lead plaintiffs and lead
counsel, and an amended complaint was filed on or about July 22, 1999.
In general, the plaintiffs allege that prior to the decline in the price of
the Company's Common Stock on July 28, 1998, there were violations of the
Federal Securities Laws arising from misstatements of material information
in and/or omissions of material information from certain of the Company's
securities filings and other public disclosures principally related to its
reporting of accounts receivable and the reserve for doubtful accounts.
The amended complaint purports to expand the class to include all persons
who purchased the Company's Common Stock during the period from July 29,
1997 through and including July 29, 1998. On October 8, 1999, the Company
and the individuals named as defendants moved to dismiss the amended
complaint on both substantive and procedural grounds. The motion is
currently pending before the Court. The
Page - 52
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commitments and Contingencies - Continued
Company and the individuals named as defendants deny that they have
violated any of the requirements or obligations of the Federal Securities
Laws.
On July 28, 1999, a civil action was filed against the Company and certain
of its current and former officers and directors in the United States
District Court for the Middle District of Tennessee. The action was filed
by Phyllis T. Craighead and Healthmark Partners, LLC, as well as a
liquidating trust apparently established to wind up the business affairs of
their corporation, K&N, Inc. In general, the plaintiffs allege that the
defendants violated Federal and State (i.e., Tennessee) Securities Laws and
committed common law fraud in connection with the Company's purchase of
Kids and Nurses, Inc. in November, 1997. The plaintiffs seek actual
damages in an amount between $2.5 million and $3.5 million, plus punitive
damages and the costs of litigation, including reasonable attorneys fees.
On September 24, 1999, the defendants filed a motion to dismiss the
complaint on both substantive and procedural grounds. On December 20, 1999,
the plaintiffs filed an amended complaint in which they withdrew their
claims under the Federal securities laws, and added claims under Georgia's
securities laws. The plaintiffs also filed a brief in response to the
Company's motion to dismiss. The motion to dismiss is currently pending
before the Court. The Company and the individuals named as defendants deny
that they have violated any of the requirements or obligations of any
applicable Federal or State Securities Laws, or any other applicable law.
In the opinion of the Company's management, the ultimate disposition of
these two lawsuits should not have a material adverse effect on the
Company's financial condition or results of operations, however, there can
be no assurance that the Company will not sustain material liability as a
result of or related to these lawsuits.
12. 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 shares of common stock outstanding and the dilutive effect of common
equivalent shares (calculated using the treasury stock method). For 1999
and 1998, weighted average shares outstanding for continuing operations for
basic and diluted computations are the same as the impact of common
equivalent shares on earnings per share is anti-dilutive.
The following table sets forth the reconciliation of denominators used in
the computation of the basic and diluted income (loss) from continuing and
discontinued operations per share:
<TABLE>
<CAPTION>
Year Ended September 30,
------------------------------------------------------
1999 1998 1997
--------------- --------------- --------------
<S> <C> <C> <C>
Denominator for basic income (loss) per share-
weighted average shares............................... 6,652,212 6,910,760 6,256,567
Effect of dilutive securities:
Options.................................................. -- -- 189,188
--------- --------- ---------
Denominator for diluted income (loss) per share-
adjusted weighted average shares...................... 6,652,212 6,910,760 6,445,755
========= ========= =========
</TABLE>
Page - 53
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 1999 and 1998 is as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
QUARTER
------------------------------------------------------
Fiscal 1999(1) First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net revenue...................................... $56,741 $ 54,870 $ 53,134 $ 49,608
Operating income (loss).......................... 1,577 (26,866) (3,197) (14,019)
Loss from continuing operations
before income tax expense (benefit)........... (1,473) (30,613) (8,372) (17,245)
Loss from continuing operations.................. (999) (29,428) (8,372) (18,904)
Income (loss) from discontinued operations,
net of tax.................................... 1,107 628 (260) 1,106
Net income (loss)................................ 108 (28,800) (8,632) (17,798)
Net income (loss) per share:
Basic.......................................... $ 0.02 $ (4.33) $ (1.30) $ (2.68)
Diluted........................................ $ 0.02 $ (4.33) $ (1.30) $ (2.68)
QUARTER
------------------------------------------------------
Fiscal 1998(2) First Second Third Fourth
- ------------------------------------------------------------------------------------------------------------------
Net revenue...................................... $51,915 $ 57,302 $ 54,803 $ 58,162
Operating income (loss).......................... 4,449 2,555 (15,378) 340
Income (loss) from continuing operations before
income tax expense (benefit)................... 2,984 655 (17,996) (2,565)
Income (loss) from continuing operations......... 1,908 425 (11,485) (565)
Income (loss) from discontinued operations,
net of tax..................................... 214 1,709 1,576 (74)
Net income (loss)................................ 2,122 2,135 (9,909) (640)
Net income (loss) per share:
Basic.......................................... $ 0.33 $ 0.30 $ (1.39) $ (0.10)
Diluted........................................ $ 0.32 $ 0.30 $ (1.39) $ (0.10)
</TABLE>
(1) Results of Operations in the second and fourth quarters includes charges
related to impairment of goodwill of $21.0 million and $8.5 million,
respectively.
(2) Results of Operations in the third quarter include an additional $13.0
million provision for doubtful accounts.
14. 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.
Page - 54
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
15. Subsequent Event
On November 1, 1999, the Company concluded the sale of the assets of its
paramedical testing division to Hooper Holmes, Inc. The aggregate purchase
price for the assets was $85.0 million, subject to an adjustment as set
forth in the amendment to the Asset Purchase Agreement estimated at closing
to be $4.0 million, and subject to additional post-closing escrows for
possible further adjustments of up to $2.2 million. The Company has
estimated the gain on this sale to be approximately $27.0 million (net of
estimated deferred operating losses of approximately $10.3 million).
Deferred loss from discontinued operations represents losses incurred after
the measurement date which were capitalized and deferred until the
estimated gain is realized. This gain has not been recorded in the
accompanying financial statements as the disposal date was after year end.
A portion of the proceeds of the sale were used to pay down to zero all
outstanding amounts under the existing Credit Agreement, dated August 13,
1998, as amended.
On November 1, 1999, simultaneously with the pay down of the existing
Credit Agreement, the Company amended and restated the Credit Agreement
(the "Amended and Restated Loan Security Agreement"). Subject to the terms
and conditions of the Amended and Restated Loan Security Agreement, the
Lender made available a total credit facility of up to $30.0 million for
use by the Company and its subsidiaries from time to time during the term
of the Amended and Restated Loan and Security Agreement. The total credit
facility comprised of a revolving line of credit up to the available limit,
consisting of Loans and Letters of Credit (as defined therein).
Page - 55
<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, 1999 and 1998, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 1999. Our
audits also included the financial statement schedule listed in the index at
Item 14. These financial statements and schedule are the responsibility of PSA's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and 1998, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended September 30,
1999, in conformity with accounting principles generally accepted in the United
States.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
Ernst & Young LLP
December 21, 1999
Atlanta, Georgia
Page - 56
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
Schedules numbered in accordance with Rule 5.04 of Regulation S-X
II Valuation and Qualifying Accounts....................................... 58
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.
Page - 57
<PAGE>
<TABLE>
<CAPTION>
===================================================================================================================================
SCHEDULE II---VALUATION AND QUALIFYING ACCOUNTS
PEDIATRIC SERVICES OF AMERICA, INC. AND SUBSIDIARY
COL. A COL. B COL. C COL. D COL. E
------ ------ ------ ------ ------
Additions
------------------
Charged to
Balance at Charged to Other
Beginning Costs and Accounts Deductions Balance at End
Descriptions of Period Expenses --Describe --Describe of Period
------------ ---------- ---------- ---------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Year ended September 30, 1997:
Deducted from asset accounts:
Allowance for doubtful accounts... $ 8,532,000 $ 6,239,000 $ 1,406,000(2) $ 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(3) $21,105,000(1) $14,008,000
=========== =========== =========== =========== ===========
Year ended September 30, 1999:
Deducted from asset accounts:
Allowance for doubtful accounts... $14,008,000 $21,587,000 $(1,215,000)(4) $19,731,000(1) $14,649,000
=========== =========== =========== =========== ===========
Valuation Allowance for net
deferred tax asset.............. -- -- $18,346,000(5) -- $18,346,000
=========== =========== =========== =========== ===========
(1) Uncollectible accounts written off, net of recoveries.
(2) 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.
(3) 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., Kid's Nurses, Inc,
and Medical Equipment and Supply, Inc.
(4) Allowance for doubtful accounts charged off in connection with the sale of the Company's medical staffing business and an
equipment location.
(5) Valuation allowance for net deferred taxes was recorded against the $18,346,000 net deferred tax asset.
====================================================================================================================================
</TABLE>
Page - 58
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibits Page No.
---------
<S> <C> <C>
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.
10.9(k) Employment Agreement, dated May 1, 1999 between the Company and James M. McNeill..... 60
10.9(l) Employment Agreement, dated August 30, 1999 between the Company and David Nabors..... 66
10.9(m) Employment Agreement, dated October 1, 1999 between the Company and Joseph D. Sansone 77
10.9(n) Non-Qualified Deferred Compensation Plan, dated January 1, 2000...................... 83
21 Subsidiaries of the Company.......................................................... 99
23.1 Consent of Independent Auditors, Ernst & Young LLP................................... 100
25 Powers of Attorney................................................................... 101
27 Financial Data Schedule.............................................................. 105
</TABLE>
Page - 59
<PAGE>
EXHIBIT-10.9(k)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated and commencing on May 1, 1999 (the
"Commencement Date") by and between Pediatric Services of America, Inc., a
Delaware Corporation (the "Company"), and James M. McNeill (the "Executive").
W I T N E S S E T H:
--------------------
WHEREAS, the parties wish to provide for the Executive's employment by
the Company on the terms and conditions herein set forth;
NOW, THEREFORE, it is agreed that:
1. Employment Term. Subject to the terms and conditions hereof, the
Company shall employ the Executive, and the Executive shall serve the Company,
as Senior Vice President and Chief Financial Officer of the Company for a period
beginning on the date hereof and terminating on the second anniversary of the
Commencement Date (the "Initial Term"). After the Initial Term, the Executive
shall continue to serve the Company on the terms provided for herein for
successive one (1) year periods commencing on each anniversary of the
Commencement Date from and after the anniversary thereof occurring in 2001
(each, an "Additional Term"), unless and until either party hereto gives the
other not less than thirty (30) days prior written notice of such party's intent
to terminate the Agreement at the end of the Initial Term or the Additional
Term, if any, then in effect, whereupon the Executive's employment shall
terminate on the date specified in such notice. The term of the Executive's
employment hereunder, as it may be extended from time to time, is herein
referred to as the "Term".
2. Duties. During the term, the Executive shall serve as Senior Vice
President and Chief Financial Officer of the Company, with such responsibilities
as shall be specified from time to time by the Chief Executive Officer and the
Board of Directors of the Company, and subject at all times to the by-laws of
the Company and the right of the Board of Directors and stockholders of the
Company to determine the officers and directors of the Company, respectively.
The Executive shall, during the Term, serve the Company on a full-time basis,
faithfully, diligently, and competently and to the best of his ability, and will
hold, in addition to the offices set forth above, such other offices in the
Company and its subsidiaries and affiliates, if any, to which he may be elected,
appointed or assigned by the Chief Executive Officer from time to time, and will
discharge such duties in connection therewith as may from time to time be
assigned to him .
3. Compensation.
(a) During the Initial Term, the Company shall pay the Executive for
the services rendered to the Company a salary ("Salary") of $155,000.00 (One
Hundred Fifty Five Thousand Dollars) per annum for each year during the Initial
Term, payable in installments (net of applicable withholding) not less
frequently than bi-weekly in accordance with the Company's regular policies.
(b) At any time during the first year of the Initial Term, the Salary
shall be subject to review by the Board of Directors and may, if the Executive's
performance is satisfactory to the Board of Directors and in the Board's sole
discretion, be increased by an amount determined by the Board.
(c) During each Additional Term, if any, the Company shall pay the
Executive a Salary equal to the Salary being paid to the Executive on the last
day of the Initial Term or Additional Term immediately prior to such Additional
Term, unless otherwise agreed by the Company and the Executive.
(d) In addition to the Salary payable to the Executive, the Executive
shall be entitled to participate in a bonus plan, the terms of which shall be
determined and approved by the Board of Directors. Such bonus, if any, shall be
payable upon determination of the amount due, but in no event later than thirty
(30) days after the end of each fiscal year for the prior fiscal year of the
Company.
4. Benefits and Perquisites.
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(a) During the Term, the Company shall reimburse the Executive for all
reasonable travel and other business expenses reasonably incurred by him in
connection with the rendering of services hereunder against submission of
appropriate vouchers and receipts in accordance with the Company's policies from
time to time in effect.
(b) The Executive shall be entitled during the Term to participate in
employee benefit plans and programs of the Company, including individual and
family medical coverage and retirement plans, to the extent that his position,
tenure, salary, age, health and other qualifications make him eligible so to
participate. Except as set forth above, the Company does not guarantee the
adoption or continuance of any particular employee benefit plan or program
during the Term, and the Executive's participation in any such plan or program
shall be subject to the provisions, rules and regulations and laws applicable
thereto.
(c) During the Term, the Company shall provide for the Executive's use
a Company automobile of a value not to exceed $18,000.00 (eighteen thousand
dollars) and shall pay reasonable and appropriate maintenance, insurance and
operating expenses related thereto. To the extent the Company is able to do so,
it shall provide the Executive the option to purchase such automobile at any
time during the Term for a purchase price equal to the greater of the book value
thereof or $100.00 (one hundred dollars). If the Company and the Executive so
agree, the Executive may elect not to use a Company automobile as set forth
above, and in such event the Company shall pay to the Executive during the Term
the sum of $500.00 (five hundred dollars) per month, together with reimbursement
of the reasonable expenses incurred by the Executive for fuel, oil, and routine
maintenance in connection with the use of the Executive's own automobile.
(d) The Executive shall be entitled to three weeks paid vacation
during each year of the Term. Such vacation must be taken with each year during
the Term and may not be accumulated. Vacation will accrue during each calendar
year on a pro rata basis.
--------
5. Disclosure of Information; Inventions and Discoveries. The
Executive shall promptly disclose to the Company all inventions, improvements,
discoveries, data, processes, know-how, trademarks and other financial,
scientific, marketing, operational and other information related to the business
of the Company and its subsidiaries and affiliates (collectively,
"Developments") conceived, developed, learned or acquired by the Executive along
or with others or of which the Executive obtains knowledge during the Term,
whether or not during regular working hours or through the use of materials or
facilities of the Company. All Developments shall be the sole and exclusive
property of the Company, and upon requests the Executive shall deliver to the
Company all data, drawings, sketches, models and other records relating thereto.
In the event any such development shall be deemed by the Company to be
patentable or otherwise protectable, the Executive shall, at the expense of the
Company, assist the Company in obtaining in its name patents, trademarks and
copyrights, as appropriate, in respect of such Development and shall execute all
documents and do all other things necessary or proper to vest in the Company
full title thereto.
6. Confidentiality. The Executive shall not at any time after the
date of the Agreement divulge, furnish or make accessible to anyone (otherwise
than in the regular course of business of the Company) any knowledge or
information with respect to confidential or secret processes, inventions,
discoveries, improvements, formulae, plans, material, devices, ideas, know-how
or data, whether patentable or not, with respect to any operations, financial,
scientific, engineering, development or research work or with respect to any
other confidential or secret aspects of the Company's business (including,
without limitation, financial and marketing data, customer and supplier lists,
personnel information and other data and pricing arrangements with customers and
suppliers, in each case relating to the Company).
The covenant herein contained shall not extend for more than two years after
termination of employment with respect to matters that are confidential to the
business of the Company but do not constitute "trade secrets" as defined in
O.C.G.A. 19-1-760.
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7. Non-Competition. The Company and the Executive agree that the
services rendered by the Executive hereunder are unique and irreplaceable and
that the Executive's services to the Company will bring him into close contact
with confidential information concerning the Company, its employees, independent
contractors, suppliers, customers and others with whom it does business.
Accordingly, the Executive hereby agrees that during the Term and for a period
of two years thereafter, the Executive shall not (a) within a 25 mile radius of
any office where the Company or any subsidiary or affiliate thereof conducts
business during the Term, engage or participate in, directly or indirectly
(whether as an officer, director, employee, partner, agent, independent
contractor, consultant, holder of an equity or debt investment, lender or in any
other manner or capacity), or lend the Executive's name (or any part or variant
thereof) to any business which is or as a result of the Executive's engagement
or participation would become competitive with any aspect of the Business of the
Company or any such subsidiary or affiliate, (b) deal, directly or indirectly,
in a competitive manner with any employee, independent contractor or supplier
doing business with the Company or any subsidiary or affiliate thereof during
the Term, (c) solicit any officer, director, employee, independent contractor or
agent of the Company or any subsidiary or affiliate thereof to become an
officer, director, employee, independent contractor or agent of the Executive,
any entity with which the Executive is affiliated or anyone else, or (d) engage
in or participate in, directly or indirectly, any business conducted under any
name that shall be the same as or similar to the name of the Company or any
subsidiary or affiliate thereof or any trade name used by them. For purposes of
this Agreement, "Business" shall mean providing pediatric home health services.
Notwithstanding the foregoing, and subject to the Executive's compliance with
Section 6 hereof, subsequent to the Term (i) the Executive may serve as an
employee of a corporation or other entity in which the Executive does not have
an equity, debt or other investment or ownership interest (except that if the
Executive is employed by a corporation or other entity described in clause (ii)
below, the Executive may receive employee stock options and stock issuable upon
exercise thereof constituting not more than one percent of the total outstanding
securities of such corporation or other entity), provided such employment is
otherwise in compliance with this Section 7, and (ii) except in the instances
contemplated by clause (i) above, the ownership, in the aggregate, of less than
2% (two percent) of the outstanding shares of any class of capital stock of any
corporation with one or more classes of its capital stock listed on a national
securities exchange or publicly traded in the over-the-counter market shall not
constitute a violation of the foregoing provision.
8. Remedies. The Executive acknowledges that irreparable damage
would result to the Company if the provisions of Sections 5, 6 and 7 of this
Agreement were not specifically enforced, and agrees that the Company shall be
entitled to all appropriate legal, equitable and other remedies, including
injunctive relief, in respect of any failure to comply with the provisions of
such sections.
9. Termination of Employment.
(a) This Agreement shall terminate upon the death of the Executive.
This Agreement may be terminated by the Board of Directors if the Executive
shall be rendered incapable, by physical or mental illness or any other
disability determined by a physician designated by the Company, from complying
with the terms,, conditions and provisions hereof on the Executive's part to be
kept, observed and performed ("Disability"). If this Agreement is terminated by
reason of the Executive's Disability, the Company shall give written notice to
that effect to the Executive in the manner provided herein. In addition to and
not in substitution for any other benefits which may be payable by the Company
in respect of the death or Disability of the Executive, in the event of such
death or Disability of the Executive, the Salary payable hereunder shall
continue to be paid at the then current rate for three months after termination
of the Executive's employment as a result of Disability or until the end of the
month in which death occurs. In the event of the death of the Executive during
the Term, the sums payable hereunder shall be paid to the Executive's personal
representative.
(b) The Executive's employment with the company may be terminated by
the Board of Directors, with or without cause, in accordance with the provisions
hereof. Cause for termination shall include (i) the Executive's conviction for,
or plea of nolo contendere with respect to a charge of, a felony or a crime
---------------
involving moral turpitude, (ii) the Executive's commission of an act of personal
dishonesty or breach of fiduciary duty involving personal profit in connection
with the Executive's employment by the Company, (iii) habitual absenteeism,
chronic alcoholism or any other form of addiction to illegal
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substances on the part of the Executive, (iv) the Executive's material breach of
Sections 5, 6, or 7 of this Agreement or (v) the Executive's material failure to
perform his duties under this Agreement as determined in good faith by the Board
of Directors of the Company, which failure continues for, or is not remedied
within, a period of 30 days after the Executive has received written notice
thereof (it being understood that in the event of such a determination by the
Board of Directors the Executive will be afforded the opportunity to be heard by
the Board of Directors prior to such determination becoming final). In the event
of termination by the Company under this Section 9(b) without cause, or by
employee for Good Reason (as defined in 8(d) below), or failure to extend the
Initial Term or the Additional Term as outlined in Section 1, the Company shall
(a) pay the Executive all bonuses and unreimbursed expenses owed to Employee
that have accrued but have not been paid as of the date of termination (the
annual bonus to be pro-rated for the portion of the year prior to termination).
(b) continue to pay to Executive his salary set forth in Section 8 (a) hereof
for the longer of (i) the remaining term of this Agreement or (ii) a period of
12 (twelve) months, (c) continue to provide the insurance and other benefits of
Section 9 hereof for the period the salary is paid, (d) cause all grants of
outstanding options, restricted stock, bonus stock and any other incentive stock
award to become fully vested, and (e) cause all deferred compensation,
supplemental retirement programs and similar programs to become fully funded. In
the event of termination by the Company under this Section 9(b) with cause, or
in the event the Executive shall voluntarily terminate his employment, in
addition to any other rights it may have the Company shall not be obligated to
pay any additional salary or other benefits to the Executive. Notwithstanding
any termination of this Agreement pursuant to this Section, the Executive, in
consideration of his employment hereunder to the date of such termination, shall
remain bound by the provisions of Sections 5, 6, and 7 hereunder.
(c) Upon termination of the Term, whether pursuant to Section 1 or
this Section 9, the Executive or his personal representative shall promptly, and
in any event within ten days after such termination, deliver to the Company all
books, memoranda, plans, records and written and other data of every kind
relating to the business and affairs of the Company which are then in the
Executive's possession.
(d) Termination by the Employee. The Employee may terminate his
employment hereunder for Good Reason. For purposes of this Agreement, "Good
Reason" shall mean (A) a change in control of the Company (as defined below), as
well as, and as a direct result thereof, (i) a decrease in the total amount of
the Employee's base salary below its level in effect on the date hereof, or a
decrease in the bonus percentage to which the Employee is entitled, without the
Employee's consent, provided, however, nothing herein shall be construed to
guarantee the Employee's bonus award if performance is below target, (ii) a
reduction in the importance of the Employee's job responsibilities without the
Employee's consent, with the determination of whether a reduction in job
responsibility has taken place to be in the sole discretion of the Employee or
(iii) a geographical relocation of the Employee of more than 25 miles within six
months of a change in control without Employee's written consent, or (B) a
failure by the Company to comply with any material provision of this Agreement
which has not been cured within ten (10) days after notice of such noncompliance
has been given by the Employee. Absent written consent, after a change in
control of the Company (as defined below), no action or inaction by the Employee
within ninety (90) days following the occurrence of the events described above
shall be deemed consent to such events.
A "change in control" shall be deemed to have occurred on (i) the
closing date of any merger or consolidation with or into another company and the
Company does not survive the transaction or survive only as a subsidiary of
another company or (ii) the date on which the Board of Directors becomes aware
that any person or group (as such terms are defined in section 13(d) of the
Securities Exchange Act of 1934, as amended) has become the holder of 50% or
more of the outstanding voting securities of the Company or has the power,
directly or indirectly, to designate a majority of the members of the Board of
directors.
(e) Mutual Consent. By mutual written agreement of the Company and
Employee.
10. Insurance. The Company shall have the right at its own cost
and expense to apply for and to secure in its own name or otherwise life, health
and/or accident insurance covering the
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Executive. The Executive agrees to submit to usual and customary medical
examinations and otherwise cooperate with the Company in connection with the
procurement of any such insurance and the assertion of any claims thereunder.
11. Certain Representations. The Executive hereby represents and
warrants to the Company that neither the execution and delivery of the Agreement
nor the performance by him of his obligations hereunder violates or constitutes
a breach of any agreement or undertaking to which the Executive is a party or by
which he is bound.
12. Severability. To the extent any provision of this Agreement
shall be invalid or unenforceable, it shall be considered deleted here from and
the remainder of such provision and this Agreement shall be unaffected and shall
continue in full force and effect. In furtherance and not in limitation of the
foregoing, should the duration or geographical extent of or business activities
covered by any provision of this Agreement be in excess of that which is valid
and enforceable under applicable law, then such provision shall be construed to
cover only that duration, extent or activities which may be validly and
enforceably covered.
13. Notices. All notices, requests and other communications
pursuant to this Agreement shall be in writing and shall be deemed to have been
duly given if delivered in person or by courier, telegraphed, telexed,
transmitted by facsimile or mailed by registered or certified mail, postage
prepaid, addressed as follows:
If to the Executive:
James M. McNeill
1940 Bethwick Drive
Lawrenceville, GA 30044
If to the Company:
Pediatric Services of America, Inc.
310 Technology Parkway
Norcross, Georgia 30092
Either party may, by written notice to the other, change the address to which
notices to such party are to be delivered or mailed.
14. General. Any waiver of any breach of this Agreement shall
not be construed to be a continuing waiver or consent to any subsequent breach
on the part of either party hereto. Neither party hereto may assign such party's
rights or delegate such party's duties under this Agreement without the prior
written consent of the other party; provided, however, that this Agreement may
------------------
be assigned and the Company's duties delegated by, and this Agreement shall
inure to the benefit of and be binding upon the successors and assigns of, the
Company upon any sale of all or substantially all of the Company's assets or
upon any merger or consolidation of the Company with or into any other
corporation, all as though such successors and assigns of the Company and their
respective successors and assigns were the Company. The terms and provisions of
this Agreement shall be governed by and construed and enforced in accordance
with the laws of the State of Georgia, shall constitute the entire Agreement by
the Company and the Executive with respect to the subject matter hereof, and
shall supersede any and all prior agreement or understandings between the
Executive and the Company, whether written or oral. This Agreement may be
amended or modified only by a written instrument executed by the Executive and
the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the day and year first above written.
PEDIATRIC SERVICES OF AMERICA, INC.
Date: 4/30/99 /s/ Joseph D. Sansone
---------- ----------------------------------
Joseph D. Sansone
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President and Chief Executive Officer
EXECUTIVE
Date: 4/30/99 /s/ James M. McNeill
----------- ----------------------------
James M. McNeill
Senior Vice President and Chief Financial Officer
Date: 4/30/99 NOTARY PUBLIC
-----------
/s/ Charlotte J. Mitchell
----------------------------
Charlotte J. Mitchell
State of Georgia
County of Cherokee
Commission Expires: 03/12/2000
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EXHIBIT-10.9(l)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated August 30, 1999 (the "Commencement Date")
by and between Pediatric Services of America, Inc., a Delaware Corporation (the
"Company"), and David Nabors (the "Executive").
W I T N E S S E T H:
--------------------
WHEREAS, the parties wish to provide for the Executive's employment by
the Company on the terms and conditions herein set forth;
NOW, THEREFORE, it is agreed that:
1. Employment Term. Subject to the terms and conditions hereof,
the Company shall employ the Executive, and the Executive shall serve the
Company, as Chief Operating Officer of the Company for a period beginning on the
Commencement Date and terminating on the second anniversary of the Commencement
Date (the "Initial Term"). After the Initial Term, the Executive shall continue
to serve the Company on the terms provided for herein for successive one (1)
year periods commencing on each anniversary of the Commencement Date (an
"Additional Term") unless and until either party hereto gives the other party
written notice of such party's intent to terminate the Agreement not less than
thirty (30) days prior to the end of the Initial Term or the Additional Term, if
any, then in effect, whereupon the Executive's employment shall terminate on the
last day of such Initial Term or Additional Term. The term of the Executive's
employment hereunder, as it may be extended from time to time, is herein
referred to as the "Term".
2. Duties. During the Term, the Executive shall serve as Chief
Operating Officer of the Company, with such responsibilities as shall be
specified from time to time by the Chief Executive Officer or the Board of
Directors of the Company, and subject at all times to the by-laws of the Company
and the right of the Board of Directors and stockholders of the Company to
determine the officers and directors of the Company, respectively. The Executive
shall, during the Term, serve the Company on a full-time basis, faithfully,
diligently, and competently and to the best of his ability, and will hold, in
addition to the offices set forth above, such other offices in the Company and
its subsidiaries and affiliates, if any, to which he may be elected, appointed
or assigned by the Chief Executive Officer or Board of Directors from time to
time, and will discharge such duties in connection therewith as may from time to
time be assigned to him.
3. Compensation.
(a) During the Initial Term, the Company shall pay the Executive for
the services rendered to the Company a salary ("Salary") of $160,000.00 (One
Hundred Sixty Thousand Dollars) per annum for each year during the Initial Term,
payable in installments (net of applicable withholding) not less frequently than
bi-weekly in accordance with the Company's regular policies.
(b) At the end of the first year of the Initial Term, the Salary shall
be subject to review by the Board of Directors and may, if the Executive's
performance is satisfactory to the Board of Directors and in the Board's sole
discretion, be increased by an amount determined by the Board.
(c) On the Commencement Date, the Executive will receive stock options
under the Amended and Restated Stock Option Plan (the "Plan", a copy of which is
attached hereto as Exhibit A) of Pediatric Services of America, Inc., a Delaware
corporation ("PSA"), to purchase 75,000 (seventy-five thousand) shares of PSA's
common stock at a price per share equal to the fair market value of such PSA
stock on the date of its grant by the Board of Directors (the "Options"). Such
grant of Options shall provide for vesting of 25,000 Options on each of the
following dates: six (6) months from the
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Commencement Date, one (1) year from the Commencement Date, and two (2) years
from the Commencement Date. Beginning six (6) months from the Commencement Date
and provided the Executive is employed at such time, the Options shall fully
vest upon the death or permanent and total disability (within the meaning of
Section 422A(c)(7) of the Internal Revenue Code of 1996, as amended) of the
Executive while an employee of the Company, or upon the happening of any of the
events described in Section 5(i) of the Plan. If the Options fully vest because
of the death of the Executive, then such Options may at any time within six (6)
months following the death of the Executive be exercised by the person or
persons to whom the Executive's rights under such Options pass by will or by the
laws of descent and distribution.
(d) In addition to the Salary payable to the Executive, the Executive
shall be entitled to participate in a bonus plan, the terms of which shall be
determined and approved by the Board of Directors. Such bonus, if any, shall be
payable upon determination of the amount due, but in no event later than thirty
(30) days after the end of each fiscal year for the prior fiscal year of the
Company.
4. Benefits and Perquisites.
(a) During the Term, the Company shall reimburse the Executive for all
reasonable travel and other business expenses reasonably incurred by him in
connection with the rendering of services hereunder against submission of
appropriate vouchers and receipts in accordance with the Company's policies from
time to time in effect.
(b) The Executive shall be entitled during the Term to participate in
employee benefit plans and programs of the Company on the same basis as other
Company executives, including individual and family medical coverage and
retirement plans, to the extent that his position, tenure, salary, age and other
qualifications make him eligible so to participate. Except as set forth above,
the Company does not guarantee the adoption or continuance of any particular
employee benefit plan or program during the Term, and the Executive's
participation in any such plan or program shall be subject to the provisions,
rules and regulations and laws applicable thereto.
(c) During the Term, the Company shall provide for the Executive's use
a Company automobile of a value not to exceed $18,000 (eighteen thousand
dollars) and shall pay reasonable and appropriate maintenance and operating
expenses related thereto. If the Company and the Executive so agree, the
Executive may elect not to use a Company automobile as set forth above, and in
such event the Company shall pay to the Executive during the Term the sum of
$650.00 (six hundred fifty dollars) per month, together with reimbursement of
the reasonable expenses incurred by the Executive for fuel, oil, and routine
maintenance in connection with the use of the Executive's own automobile.
(d) The Executive shall be entitled to three (3) weeks paid vacation
during each year of the Term, which shall accrue in accordance with Company
policy. Such vacation must be taken with each year during the Term and may not
be accumulated.
5. Disclosure of Information; Inventions and Discoveries. The
Executive shall promptly disclose to the Company all inventions, improvements,
discoveries, data, processes, know-how, trademarks and other financial,
scientific, marketing, operational and other information related to the business
of the Company and its subsidiaries and affiliates (collectively,
"Developments") conceived, developed, learned or acquired by the Executive along
or with others or of which the Executive obtains knowledge during the Term,
whether or not during regular working hours or through the use of materials or
facilities of the Company. All Developments shall be the sole and exclusive
property of the Company, and upon request the Executive shall deliver to the
Company all data, drawings, sketches, models and other records relating thereto.
In the event any such development shall be deemed by the Company to be
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patentable or otherwise protectable, the Executive shall, at the expense of the
Company, assist the Company in obtaining in its name patents, trademarks and
copyrights, as appropriate, in respect of such Development and shall execute all
documents and do all other things necessary or proper to vest in the Company
full title thereto.
6. Confidentiality. (a) The Executive shall not at any time
after the date of this Agreement divulge, furnish or make accessible to anyone
(otherwise than in the regular course of business of the Company) any
Confidential Information. "Confidential Information" means information solely
related to the business of the Company that, although not a "Trade Secret" (as
defined below), is not generally known and from which the Company derives actual
or potential economic value because such information is not generally known by
third parties. Confidential Information includes, but is not limited to, sales
and marketing information, customer account records, training and operations
materials and memoranda, personnel records, pricing and financial information
relating to the business, accounts, customers, employees and affairs of the
Company, any information marked "Confidential" by the Company, and any other
such information solely related to the business of the Company that is not a
Trade Secret. Confidential Information does not include information which:
(i) becomes available to the public other than as a result of
disclosure by the Executive, his agents or
representatives;
(ii) becomes available to the Executive on a non-confidential
basis from a source other the Company, provided that such
source lawfully obtained such information and is not bound
by a confidentiality agreement with any party hereto; or
(iii) is required by law to be disclosed.
(b) The Executive shall not, at any time during or after the
term of this Agreement, use, reveal, or divulge any "Trade Secret" of the
Company. For the purposes of this Agreement, "Trade Secret" means information
including, but not limited to, technical or nontechnical data, a formula, a
pattern, a compilation, a program, a device, a method, a technique, a drawing, a
process, financial data, financial plans, product plans, or a list of actual or
potential customers or suppliers which:
(i) derives economic value, actual or potential, from not
being generally known to, and not being readily
ascertainable by proper means by, other persons who can
obtain economic value from its disclosure or use; and
(ii) is the subject of efforts that are reasonable under the
circumstances to maintain its secrecy.
7. Non-Competition. (a) The Company and the Executive agree
that the services rendered by the Executive hereunder are valuable and that the
Executive's services to the Company will bring him into close contact with
Confidential Information concerning the Company, its employees, independent
contractors, suppliers, customers and others with whom it does business.
Accordingly, the Executive hereby agrees that during the Term and for any period
of time for which the Executive is or has been compensated under the Termination
provisions contained in Section 9 hereof, the Executive shall not (A) within a
25 mile radius of any office where the Company or any subsidiary or affiliate
thereof conducts business during the Term, engage or participate in, directly or
indirectly (whether as an officer, director, executive, partner, agent,
independent contractor, consultant, holder of an equity or debt investment,
lender or in any other manner or capacity), or lend the Executive's name (or any
part or variant thereof) to any business which is or as a result of the
Executive's engagement or participation
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would become competitive with any aspect of the Pediatric Business (as
hereinafter defined) of the Company or any such subsidiary or affiliate, (B)
transact business, directly or indirectly, in a competitive manner with any
employee, independent contractor or supplier doing business with the Company or
any subsidiary or affiliate thereof during the Term, (C) solicit any officer,
director, employee, independent contractor or agent of the Company or any
subsidiary or affiliate thereof to become an officer, director, employee,
independent contractor or agent of the Executive, any entity with which the
Executive is affiliated, or (D) engage in or participate in, directly or
indirectly, any business conducted under any name that shall be the same as or
similar to the name of the Company or any subsidiary or affiliate thereof or any
trade name used by them. For purposes of this Agreement, "Pediatric Business"
shall mean providing pediatric home health services, including equipment rentals
and sales, private duty nursing and pharmacy and infusion products and services.
(b) In addition to the above provisions, for so long as the
Company is engaged in the Paramedical Business (as hereinafter defined) and for
a period ending the earlier of (i) one (1) year after the termination by the
Company of its engagement in the Paramedical Business (which termination shall
be effective on the closing date of any sale of the Paramedical Business), or
(ii) one (1) year after the termination of this Agreement, the Executive shall
not (A) within a 75-mile radius of any office where the Company or any
subsidiary or affiliate thereof conducts or conducted the Paramedical Business
during the Term, engage or participate in, directly or indirectly (whether as an
officer, director, employee, partner, agent, independent contractor, consultant,
holder of an equity or debt investment, lender or in any other manner or
capacity), or lend the Executive's name (or any part or variant thereof) to any
business which is or as a result of the Executive's engagement or participation
would become competitive with any aspect of the Paramedical Business, (B)
transact business, directly or indirectly, in a competitive manner to the
Paramedical Business with any employee, independent contractor or supplier doing
business during the Term with the Paramedical Business, (C) solicit any officer,
director, employee, independent contractor or agent of the Paramedical Business,
as conducted during any part of the Term, to become an officer, director,
employee, independent contractor or agent of the Executive, any entity with
which the Executive is affiliated, or (D) engage in or participate in, directly
or indirectly, any business conducted under any name that shall be the same as
or similar to the name of the Paramedical Business. For purposes of this
Agreement, "Paramedical Business" shall mean providing paramedical examination
services for the life and health insurance industries in connection with
applications for life and health insurance, as such business is being conducted
by Paramedical Services of America, Inc., a wholly-owned subsidiary of the
Company, on the date hereof. In consideration of the agreement of the Executive
not to compete with the Paramedical Business in case of a sale to Hooper Holmes,
Inc., the compensation contained in the Executive Retention and Non-Competition
Agreement, attached hereto as Exhibit A shall be paid to the Executive.
Notwithstanding the foregoing, the ownership, in the aggregate, of less than 2%
(two percent) of the outstanding shares of any class of capital stock of any
corporation with one or more classes of its capital stock listed on a national
securities exchange or publicly traded in the over-the-counter market shall not
constitute a violation of the foregoing provision.
8. Remedies. The Executive acknowledges that irreparable
damage would result to the Company if the provisions of Sections 5, 6 and 7 of
this Agreement were not specifically enforced, and agrees that the Company shall
be entitled to all appropriate legal, equitable and other remedies, including
injunctive relief, in respect of any failure to comply with the provisions of
such sections .
9. Termination of Employment.
(a) This Agreement shall terminate upon the death of the
Executive. This Agreement may be terminated by the Board of Directors if the
Executive shall be rendered incapable, by physical or mental
4
<PAGE>
illness or any other disability determined by a physician designated by the
Company, from complying with the terms, conditions and provisions hereof on the
Executive's part to be kept, observed and performed ("Disability"). If this
Agreement is terminated by reason of the Executive's Disability, the Company
shall give written notice to that effect to the Executive in the manner provided
herein. In addition to and not in substitution for any other benefits which may
be payable by the Company in respect of the death or Disability of the
Executive, in the event of such death or Disability of the Executive, the Salary
payable hereunder shall continue to be paid at the then current rate for six (6)
months after termination of the Executive's employment as a result of Disability
or until the end of the month in which death occurs. In the event of the death
of the Executive during the Term, the sums payable hereunder shall be paid to
the Executive's executor/administrator.
(b) The Executive's employment with the Company may be terminated
by the Board of Directors, with or without cause, in accordance with the
provisions hereof. Cause for termination shall include (i) the Executive's
conviction for, or plea of nolo contendere with respect to a charge of, a felony
---------------
or a crime involving moral turpitude, (ii) the Executive's commission of an act
of personal dishonesty or breach of fiduciary duty involving personal profit in
connection with the Executive's employment by the Company, (iii) habitual
absenteeism, current use of alcohol or any current use of illegal substances on
the part of the Executive, (iv) the Executive's material breach of Sections 5,
6, or 7 of this Agreement or (v) the Executive's material failure to perform his
duties under this Agreement as determined in good faith by the Board of
Directors of the Company, which failure continues for, or is not remedied
within, a period of 30 days after the Executive has received written notice
thereof (it being understood that in the event of such a determination by the
Board of Directors the Executive will be afforded the opportunity to be heard by
the Board of Directors prior to such determination becoming final). In the event
of termination by the Company under this Section 9(b) without cause, or by
employee for Good Reason (as defined in 8(d) below), the Company shall (a) (i)
if terminated during the Initial Term, pay the Executive the full salary
provided herein for the remainder of such Initial Term plus One Hundred Sixty
Thousand Dollars ($160,000), or (ii) if terminated during any Additional Term,
pay the Executive the full salary then in effect for the remainder of the
Additional Term, (b) continue to provide the insurance and other benefits
provided herein for the period the salary is paid, (c) cause all grants of all
eligible outstanding Options to become vested in accordance with the provisions
of Section 3(c) of this Agreement, and (d) cause all deferred compensation,
supplemental retirement programs and similar programs to become fully funded. In
the event of termination by the Company under this Section 9(b) with cause, or
in the event the Executive shall voluntarily terminate his employment without
Good Reason, in addition to any other rights it may have the Company shall not
be obligated to pay any additional salary or other benefits to the Executive.
Notwithstanding any termination of this Agreement pursuant to this Section, the
Executive, in consideration of his employment hereunder to the date of such
termination, shall remain bound by the provisions of Sections 5, 6, and 7
hereunder.
(c) This Agreement may be terminated by the Company or by the
Executive if the Paramedical Business is sold to a third party, whether by way
of sale of assets, sale of stock, merger or other business combination, unless
such third party is Hooper Holmes, Inc., a New York corporation, or any similar
buyer that would be construed as strategic to the Paramedical Business. Such
termination shall be effective upon the closing date of such transaction,
however, if neither the Company nor the Executive provides the other party
notice of its intent to terminate under this Section prior to the closing date,
then this provision shall be deemed waived. In the event of termination under
this Section 9(c), the Company shall not be obligated to pay any additional
salary or other benefits to the Executive. Notwithstanding any termination of
this Agreement pursuant to this Section, the Executive, in consideration of his
employment hereunder to the date of such termination, shall remain bound by the
provisions of Sections 5, 6, and 7 hereunder.
(d) Upon termination of the Term, whether pursuant to Section 1 or
this Section 9, the Executive or his executor/administrator shall promptly, and
in any event within ten days after such
5
<PAGE>
termination, deliver to the Company all books, memoranda, plans, records and
written and other data of every kind relating to the business and affairs of the
Company which are then in the Executive's possession.
(e) Termination by the Employee. The Employee may terminate his
employment hereunder for Good Reason. For purposes of this Agreement, "Good
Reason" shall mean (A) a change in control of the Company (as defined below), as
well as, and as a direct result thereof, (i) a decrease in the total amount of
the Employee's base salary below its level in effect on the date hereof, or a
decrease in the bonus percentage to which the Employee is then entitled, without
the Employee's consent, provided, however, nothing herein shall be construed to
guarantee the Employee's bonus award if performance is below target, (ii) a
reduction in the importance of the Employee's job responsibilities without the
Employee's consent, with the determination of whether a reduction in job
responsibility has taken place to be in the reasonable judgment of the Executive
or (iii) a geographical relocation of the Executive of more than 25 miles within
six months of a change in control without Executive's written consent, or (B) a
failure by the Company to comply with any material provision of this Agreement
which has not been cured within ten (10) days after written notice of such
noncompliance has been given by the Executive. Absent written consent, after a
change in control of the Company (as defined below), no action or inaction by
the Employee within ninety (90) days following the occurrence of the events
described above shall be deemed consent to such events.
A "change in control" shall be deemed to have occurred on (i) the
closing date of any merger or consolidation by the Company with or into another
company and the Company does not survive the transaction or survives only as a
subsidiary of another company or (ii) the date on which the Board of Directors
becomes aware that any person or group (as such terms are defined in section
13(d) of the Securities Exchange Act of 1934, as amended) has become the holder
of 50% or more of the outstanding voting securities of the Company or has the
power, directly or indirectly, to designate a majority of the members of the
Board of directors.
(f) Mutual Consent. This Agreement may be terminated by mutual
written agreement of the Company and Employee.
10. Insurance. The Company shall have the right at its own
cost and expense to apply for and to secure in its own name or otherwise life,
health and/or accident insurance covering the Executive. The Executive agrees to
submit to usual and customary medical examinations and otherwise cooperate with
the Company in connection with the procurement of any such insurance and the
assertion of any claims thereunder.
11. Certain Representations. The Executive hereby represents
and warrants to the Company that neither the execution and delivery of this
Agreement nor the performance by him of his obligations hereunder violates or
constitutes a breach of any agreement or undertaking to which the Executive is a
party or by which he is bound.
12. Severability. To the extent any provision of this
Agreement shall be invalid or unenforceable, it shall be considered deleted here
from and the remainder of such provision and this Agreement shall be unaffected
and shall continue in full force and effect. In furtherance and not in
limitation of the foregoing, should the duration or geographical extent of or
business activities covered by any provision of this Agreement be in excess of
that which is valid and enforceable under applicable law, then such provision
shall be construed to cover only that duration, extent or activities which may
be validly and enforceably covered.
13. Notices. All notices, requests and other communications
pursuant to this
6
<PAGE>
Agreement shall be in writing and shall be deemed to have been duly given if
delivered in person or by courier, telegraphed, telexed, transmitted by
facsimile or mailed by registered or certified mail, postage prepaid, addressed
as follows:
If to the Executive:
David Nabors
165 Willow Way
Roswell, Georgia 30071
If to the Company:
Pediatric Services of America, Inc.
310 Technology Parkway
Norcross, Georgia 30092
Either party may, by written notice to the other, change the address to which
notices to such party are to be delivered or mailed.
14. General. Any waiver of any breach of this Agreement shall
not be construed to be a continuing waiver or consent to any subsequent breach
on the part of either party hereto. Neither party hereto may assign such party's
rights or delegate such party's duties under this Agreement without the prior
written consent of the other party; provided, however, that this Agreement may
-------- -------
be assigned and the Company's duties delegated by, and this Agreement shall
inure to the benefit of and be binding upon the successors and assigns of, the
Company upon any sale of all or substantially all of the Company's assets or
upon any merger or consolidation of the Company with or into any other
corporation, all as though such successors and assigns of the Company and their
respective successors and assigns were the Company. The terms and provisions of
this Agreement shall be governed by and construed and enforced in accordance
with the laws of the State of Georgia, shall constitute the entire Agreement by
the Company and the Executive with respect to the subject matter hereof, and
shall supersede any and all prior agreement or understandings between the
Executive and the Company, whether written or oral. This Agreement may be
amended or modified only by a written instrument executed by the Executive and
the Company.
7
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on
the day and year first above written.
PEDIATRIC SERVICES OF AMERICA, INC.
Date: 8/30/99 By /s/ Joseph D. Sansone
---------------- --------------------------
Joseph D. Sansone
President and Chief Executive Officer
Date: 8/30/99 By /s/ David Nabors
---------------- -------------------------
8
<PAGE>
EXHIBIT A
EXECUTIVE RETENTION AND NON-COMPETITION AGREEMENT
This EXECUTIVE RETENTION AND NON-COMPETITION AGREEMENT (the "Agreement") is
made and entered into this 30th day of August, 1999, by and between Pediatric
Services of America, Inc., a Delaware corporation (the "Company"), and David
Nabors (the "Executive").
W I T N E S S E T H:
-------------------
WHEREAS, the Executive is a key and valued officer of the Company having
served as the Vice President of Paramedical Services of America, Inc. ("PmSA"),
a wholly-owned subsidiary of the Company; and
WHEREAS, the Company has decided to sell the paramedical testing business
of the Company and PmSA;
WHEREAS, the Company desires to continue to retain the services of the
Executive prior to and following the Transaction (as defined in Section 3
below), and the potential purchaser described in Section 3 hereof has required a
non-competition provision applicable to the Executive after the consummation of
the potential Transaction; and
WHEREAS, in order to retain the Executive's services and assistance during
this process, and to secure the Executive's agreement not to compete after
completion of the potential Transaction, the Company desires to provide the
Executive additional compensation;
NOW, THEREFORE, the parties hereto agree as follows:
1. (a) Employment of Executive. The Company hereby agrees to continue
-----------------------
the employment of the Executive as Chief Operating Officer of the Company,
pursuant to the terms of the Employment Agreement dated August 30, 1999 by and
between the Company and the Executive (the "Employment Agreement"), and the
Executive agrees to continue such employment and agrees to faithfully and
diligently perform such duties and responsibilities relating to the business of
the Company as may be assigned or delegated to him by the Board of Directors of
the Company.
(b) Non-Competition Agreement of Executive. The Company hereby
--------------------------------------
agrees to pay Executive additional amounts (set forth in Section 2, subject to
the terms of this Agreement) to secure the agreement of Executive not to compete
with the paramedical business, as more fully provided for Section 7(b) of the
Employment Agreement, after the completion of the potential Transaction.
9
<PAGE>
2. Payment of Payment Amount and Non-Competition Amounts. The total
-----------------------------------------------------
amount payable under this Agreement, subject to the terms and conditions
contained in this Agreement, shall be $250,000 (the "Payment Amount"), allocable
as follows: $10,000 pursuant to Section 1(a) of this Agreement as a retention
bonus, and $240,000 pursuant to Section 1(b) of this Agreement as payment for
the agreement of Executive not to compete. The Company shall pay, or cause to be
paid, the Payment Amount to the Executive in a lump sum (subject to applicable
withholdings) in accordance with the Company's normal payroll practices,
pursuant to the terms hereof; provided, however, that payment of the Payment
-------- -------
Amount shall be made hereunder only if (a) the Transaction is actually
consummated on or before the termination of this Agreement pursuant to Section
5; (b) the Executive fulfills all of his obligations under this Agreement and
the Employment Agreement, including without limitation his obligations not to
compete with the paramedical business, and to cooperate and assist in
negotiations, due diligence and closing of the Transaction; and (c) continues
his employment with the Company through the closing of such Transaction and the
date of payment of the Payment Amount.
3. Payment Amount Payable Upon Closing of the Transaction. The Payment
-------------------------------------------------------
Amount shall be payable on the thirtieth (30/th/) day after the closing date of
the Transaction. For purposes of this Agreement, the term "Transaction" shall
mean the sale of all, or substantially all, of the assets of the paramedical
testing business of the Company to Hooper Holmes, Inc. ("Hooper Holmes").
4. Covenant of Executive. The Executive hereby covenants and agrees that
---------------------
before and during any efforts to effect the Transaction, the Executive will
diligently assist the Company, as requested, in working toward and effecting
such Transaction, including assisting and participating in negotiations, due
diligence and closing the Transaction.
5. Termination. This Agreement shall terminate:
-----------
(a) upon the death of Executive; or
(b) if the paramedical business of the Company is sold to a third
party other than Hooper Holmes, whether by way of sale of assets, sale of
stock, merger or other business combination, with such termination being
effective upon the closing date of such transaction; or
(c) October 1, 1999, if the Company, PmSA and Hooper Holmes have not
executed a definitive Asset Purchase Agreement with respect to the
Transaction on or before such date; or]
(d) on December 31, 1999, if the Transaction has not been
consummated by such date.
<PAGE>
6. Miscellaneous.
-------------
(a) This Agreement shall be governed by the laws of the State of
Georgia, without giving effect to principles of conflicts of law.
(b) This Agreement sets forth the entire agreement between the
parties with respect to the Payment Amount and supersedes all prior
agreements, arrangements or other communications, whether written or oral.
(c) The terms and provisions of this Agreement shall not require the
Company, or any of its subsidiaries or affiliates to effect the
Transaction, to pursue any particular transaction or structure of
transaction or to achieve any particular result or price in any transaction
that the Company or any of its subsidiaries or affiliates choose to pursue.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
PEDIATRIC SERVICES OF AMERICA, INC.
By:____________________________________________
Joseph D. Sansone
President and Chief Executive Officer
EXECUTIVE:
_______________________________________________
David Nabors
<PAGE>
EXHIBIT 10.9(m)
EMPLOYMENT AGREEMENT
EMPLOYMENT AGREEMENT, dated July 29, 1999 and commencing on October
1, 1999 (the "Commencement Date") by and between Pediatric Services of America,
Inc., a Delaware Corporation (the "Company"), and Joseph D. Sansone (the
"Executive").
W I T N E S S E T H:
--------------------
WHEREAS, the parties wish to provide for the Executive's employment by
the Company on the terms and conditions herein set forth;
NOW, THEREFORE, it is agreed that:
1. Employment Term. Subject to the terms and conditions hereof, the
Company shall employ the Executive, and the Executive shall serve the Company,
as President and Chief Executive Officer of the Company for a period beginning
on the date hereof and terminating on the second anniversary of the
Commencement Date (the "Initial Term"). During the Initial Term, the Company
shall also take all steps within the Company's control to cause the Executive to
be a member of the Board of Directors of the Company. After the Initial Term,
the Executive shall continue to serve the Company on the terms provided for
herein for successive one (1) year periods commencing on each anniversary of the
Commencement Date from and after the anniversary thereof occurring in 2001
(each, an "Additional Term"), unless and until either party hereto gives the
other not less than thirty (30) days prior written notice of such party's intent
to terminate the Agreement at the end of the Initial Term or the Additional
Term, if any, then in effect, whereupon the Executive's employment shall
terminate on the date specified in such notice. The term of the Executive's
employment hereunder, as it may be extended from time to time, is herein
referred to as the "Term".
2. Duties. During the term, the Executive shall serve as President
and Chief Executive Officer of the Company, with such responsibilities as shall
be specified from time to time by the Board of Directors of the Company, and
subject at all times to the by-laws of the Company and the right of the Board of
Directors and stockholders of the Company to determine the officers and
directors of the Company, respectively. The Executive shall, during the Term,
serve the Company on a full-time basis, faithfully, diligently, and competently
and to the best of his ability, and will hold, in addition to the offices set
forth above, such other offices in the Company and its subsidiaries and
affiliates, if any, to which he may be elected, appointed or assigned by the
Board of Directors from time to time, and will discharge such duties in
connection therewith as may from time to time be assigned to him.
3. Compensation.
(a) During the Initial Term, the Company shall pay the Executive for
the services rendered to the Company a salary ("Salary") of $275,000.00 (Two
Hundred seventy Five Thousand Dollars) per annum for each year during the
Initial Term, payable in installments (net of applicable withholding) not less
frequently than bi-weekly in accordance with the Company's regular policies.
(b) At any time during the first year of the Initial Term, the Salary
shall be subject to review by the Board of Directors and may, if the Executive's
performance is satisfactory to the Board of Directors and in the Board's sole
discretion, be increased by an amount determined by the Board.
(c) During each Additional Term, if any, the Company shall pay the
Executive a Salary equal to the Salary being paid to the Executive on the last
day of the Initial Term or Additional Term immediately prior to such Additional
Term, unless otherwise agreed by the Company and the Executive.
(d) In addition to the Salary payable to the Executive, the Executive
shall be entitled to participate in a bonus plan, the terms of which shall be
determined and approved by the Board of Directors. Such bonus, if any, shall be
payable upon determination of the amount due, but in no event later than thirty
(30) days after the end of each fiscal year for the prior fiscal year of the
Company.
<PAGE>
4. Benefits and Perquisites.
(a) During the Term, the Company shall reimburse the Executive for all
reasonable travel and other business expenses reasonably incurred by him in
connection with the rendering of services hereunder against submission of
appropriate vouchers and receipts in accordance with the Company's policies from
time to time in effect.
(b) The Executive shall be entitled during the Term to participate in
employee benefit plans and programs of the Company, including individual and
family medical coverage and retirement plans, to the extent that his position,
tenure, salary, age, health and other qualifications make him eligible so to
participate. Subject to the foregoing, the Executive shall be covered by life
insurance in the amount of $500,000 (five hundred thousand dollars) payable to
the beneficiary of his choice and a long-term disability benefit plan pursuant
to which he shall be eligible to receive 60% (sixty percent) of his annual
compensation up to a monthly maximum of $8,000 (eight thousand dollars) for
documented medical disability which continues beyond a 90 (ninety) day waiting
period. Except as set forth above, the Company does not guarantee the adoption
or continuance of any particular employee benefit plan or program during the
Term, and the Executive's participation in any such plan or program shall be
subject to the provisions, rules and regulations and laws applicable thereto.
(c) During the Term, the Company shall provide for the Executive's use
a Company automobile of a value not to exceed $80,000 (eighty thousand dollars)
and shall pay reasonable and appropriate maintenance, insurance and operating
expenses related thereto. To the extent the Company is able to do so, it shall
provide the Executive the option to purchase such automobile at any time during
the Term for a purchase price equal to the greater of the book value thereof or
$100.00 (one hundred dollars). If the Company and the Executive so agree, the
Executive may elect not to use a Company automobile as set forth above, and in
such event the Company shall pay to the Executive during the Term the sum of
$750.00 (seven hundred fifty dollars) per month, together with reimbursement of
the reasonable expenses incurred by the Executive for fuel, oil, and routine
maintenance in connection with the use of the Executive's own automobile.
(d) The Executive shall be entitled to four weeks paid vacation during
each year of the Term. Such vacation must be taken with each year during the
Term and may not be accumulated. Vacation will accrue during each calendar year
on a pro rata basis.
--------
(e) The Company shall provide the Executive with basic annual
physicals and subsequent follow up physicals.
(f) The Company shall provide the Executive with legal and accounting
services for matters relating to the Executive's estate planning activities.
5. Disclosure of Information; Inventions and Discoveries. The
Executive shall promptly disclose to the Company all inventions, improvements,
discoveries, data, processes, know-how, trademarks and other financial,
scientific, marketing, operational and other information related to the business
of the Company and its subsidiaries and affiliates (collectively,
"Developments") conceived, developed, learned or acquired by the Executive along
or with others or of which the Executive obtains knowledge during the Term,
whether or not during regular working hours or through the use of materials or
facilities of the Company. All Developments shall be the sole and exclusive
property of the Company, and upon requests the Executive shall deliver to the
Company all data, drawings, sketches, models and other records relating thereto.
In the event any such development shall be deemed by the Company to be
patentable or otherwise protectable, the Executive shall, at the expense of the
Company, assist the Company in obtaining in its name patents, trademarks and
copyrights, as appropriate, in respect of such Development and shall execute all
documents and do all other things necessary or proper to vest in the Company
full title thereto.
6. Confidentiality. The Executive shall not at any time after the
date of the Agreement divulge, furnish or make accessible to anyone (otherwise
than in the regular course of business of the Company) any knowledge or
information with respect to confidential or secret processes, inventions,
discoveries, improvements,
<PAGE>
formulae, plans, material, devices, ideas, know-how or data, whether patentable
or not, with respect to any operations, financial, scientific, engineering,
development or research work or with respect to any other confidential or secret
aspects of the Company's business (including, without limitation, financial and
marketing data, customer and supplier lists, personnel information and other
data and pricing arrangements with customers and suppliers, in each case
relating to the Company).
The covenant herein contained shall not extend for more than two years after
termination of employment with respect to matters that are confidential to the
business of the Company but do not constitute "trade secrets" as defined in
O.C.G.A. 19-1-760.
7. Non-Competition. The Company and the Executive agree that the
services rendered by the Executive hereunder are unique and irreplaceable and
that the Executive's services to the Company will bring him into close contact
with confidential information concerning the Company, its employees, independent
contractors, suppliers, customers and others with whom it does business.
Accordingly, the Executive hereby agrees that during the Term and for a period
of two years thereafter, the Executive shall not (a) within a 25 mile radius of
any office where the Company or any subsidiary or affiliate thereof conducts
business during the Term, engage or participate in, directly or indirectly
(whether as an officer, director, employee, partner, agent, independent
contractor, consultant, holder of an equity or debt investment, lender or in any
other manner or capacity), or lend the Executive's name (or any part or variant
thereof) to any business which is or as a result of the Executive's engagement
or participation would become competitive with any aspect of the Business of the
Company or any such subsidiary or affiliate, (b) deal, directly or indirectly,
in a competitive manner with any employee, independent contractor or supplier
doing business with the Company or any subsidiary or affiliate thereof during
the Term, (c) solicit any officer, director, employee, independent contractor or
agent of the Company or any subsidiary or affiliate thereof to become an
officer, director, employee, independent contractor or agent of the Executive,
any entity with which the Executive is affiliated or anyone else, or (d) engage
in or participate in, directly or indirectly, any business conducted under any
name that shall be the same as or similar to the name of the Company or any
subsidiary or affiliate thereof or any trade name used by them. For purposes of
this Agreement, "Business" shall mean providing pediatric home health services.
Notwithstanding the foregoing, and subject to the Executive's compliance with
Section 6 hereof, subsequent to the Term (i) the Executive may serve as an
employee of a corporation or other entity in which the Executive does not have
an equity, debt or other investment or ownership interest (except that if the
Executive is employed by a corporation or other entity described in clause (ii)
below, the Executive may receive employee stock options and stock issuable upon
exercise thereof constituting not more than one percent of the total outstanding
securities of such corporation or other entity), provided such employment is
otherwise in compliance with this Section 7, and (ii) except in the instances
contemplated by clause (i) above, the ownership, in the aggregate, of less than
2% (two percent) of the outstanding shares of any class of capital stock of any
corporation with one or more classes of its capital stock listed on a national
securities exchange or publicly traded in the over-the-counter market shall not
constitute a violation of the foregoing provision.
8. Remedies. The Executive acknowledges that irreparable damage
would result to the Company if the provisions of Sections 5, 6 and 7 of this
Agreement were not specifically enforced, and agrees that the Company shall be
entitled to all appropriate legal, equitable and other remedies, including
injunctive relief, in respect of any failure to comply with the provisions of
such sections.
9. Termination of Employment.
(a) This Agreement shall terminate upon the death of the Executive.
This Agreement may be terminated by the Board of Directors if the Executive
shall be rendered incapable, by physical or mental illness or any other
disability determined by a physician designated by the Company, from complying
with the terms,, conditions and provisions hereof on the Executive's part to be
kept, observed and performed ("Disability"). If this Agreement is terminated by
reason of the Executive's Disability, the Company shall give written notice to
that effect to the Executive in the manner provided herein. In addition to and
not in substitution for any other benefits which may be payable by the Company
in respect of the death or Disability of the Executive, in the event of such
death or Disability of the Executive, the Salary payable hereunder shall
continue to be paid at the then current rate for three months after termination
of the Executive's employment as a result of Disability or until the end of the
month in which death occurs. In the event of the death of the Executive during
the Term, the sums payable hereunder shall be paid to the Executive's personal
representative.
(b) The Executive's employment with the company may be terminated by
the Board of Directors, with or without cause, in accordance with the provisions
hereof. Cause for termination shall include (i) the
<PAGE>
Executive's conviction for, or plea of nolo contendere with respect to a charge
---------------
of, a felony or a crime involving moral turpitude, (ii) the Executive's
commission of an act of personal dishonesty or breach of fiduciary duty
involving personal profit in connection with the Executive's employment by the
Company, (iii) habitual absenteeism, chronic alcoholism or any other form of
addiction to illegal substances on the part of the Executive, (iv) the
Executive's material breach of Sections 5, 6, or 7 of this Agreement or (v) the
Executive's material failure to perform his duties under this Agreement as
determined in good faith by the Board of Directors of the Company, which failure
continues for, or is not remedied within, a period of 30 days after the
Executive has received written notice thereof (it being understood that in the
event of such a determination by the Board of Directors the Executive will be
afforded the opportunity to be heard by the Board of Directors prior to such
determination becoming final). In the event of termination by the Company under
this Section 9(b) without cause, or by employee for Good Reason (as defined in
8(d) below), or failure to extend the Initial Term or the Additional Term as
outlined in Section 1, the Company shall (a) pay the Executive the full salary
provided herein for the term of this Agreement and a period of 18 (eighteen)
months thereafter, (b) continue to provide the insurance and other benefits
provided herein for the period the salary is paid, (c) cause all grants of
outstanding options, restricted stock, bonus stock and any other incentive stock
award to become fully vested, and (d) cause all deferred compensation,
supplemental retirement programs and similar programs to become fully funded. In
the event of termination by the Company under this Section 9(b) with cause, or
in the event the Executive shall voluntarily terminate his employment, in
addition to any other rights it may have the Company shall not be obligated to
pay any additional salary or other benefits to the Executive. Notwithstanding
any termination of this Agreement pursuant to this Section, the Executive, in
consideration of his employment hereunder to the date of such termination, shall
remain bound by the provisions of Sections 5, 6, and 7 hereunder.
(c) Upon termination of the Term, whether pursuant to Section 1 or
this Section 9, the Executive or his personal representative shall promptly, and
in any event within ten days after such termination, deliver to the Company all
books, memoranda, plans, records and written and other data of every kind
relating to the business and affairs of the Company which are then in the
Executive's possession.
(d) Termination by the Employee. The Employee may terminate his
employment hereunder for Good Reason. For purposes of this Agreement, "Good
Reason" shall mean (A) a change in control of the Company (as defined below), as
well as, and as a direct result thereof, (i) a decrease in the total amount of
the Employee's base salary below its level in effect on the date hereof, or a
decrease in the bonus percentage to which the Employee is entitled, without the
Employee's consent, provided, however, nothing herein shall be construed to
guarantee the Employee's bonus award if performance is below target, (ii) a
reduction in the importance of the Employee's job responsibilities without the
Employee's consent, with the determination of whether a reduction in job
responsibility has taken place to be in the sole discretion of the Employee or
(iii) a geographical relocation of the Employee of more than 25 miles within six
months of a change in control without Employee's written consent, or (B) a
failure by the Company to comply with any material provision of this Agreement
which has not been cured within ten (10) days after notice of such noncompliance
has been given by the Employee. Absent written consent, after a change in
control of the Company (as defined below), no action or inaction by the Employee
within ninety (90) days following the occurrence of the events described above
shall be deemed consent to such events.
A "change in control" shall be deemed to have occurred on (i) the
closing date of any merger or consolidation with or into another company and the
Company does not survive the transaction or survive only as a subsidiary of
another company or (ii) the date on which the Board of Directors becomes aware
that any person or group (as such terms are defined in section 13(d) of the
Securities Exchange Act of 1934, as amended) has become the holder of 50% or
more of the outstanding voting securities of the Company or has the power,
directly or indirectly, to designate a majority of the members of the Board of
directors.
(e) Mutual Consent. By mutual written agreement of the Company and
Employee.
10. Insurance. The Company shall have the right at its own cost and
expense to apply for and to secure in its own name or otherwise life, health
and/or accident insurance covering the Executive. The Executive agrees to submit
to usual and customary medical examinations and otherwise cooperate with the
Company in connection with the procurement of any such insurance and the
assertion of any claims thereunder.
<PAGE>
11. Certain Representations. The Executive hereby represents and
warrants to the Company that neither the execution and delivery of the Agreement
nor the performance by him of his obligations hereunder violates or constitutes
a breach of any agreement or undertaking to which the Executive is a party or by
which he is bound.
12. Severability. To the extent any provision of this Agreement shall
be invalid or unenforceable, it shall be considered deleted here from and the
remainder of such provision and this Agreement shall be unaffected and shall
continue in full force and effect. In furtherance and not in limitation of the
foregoing, should the duration or geographical extent of or business activities
covered by any provision of this Agreement be in excess of that which is valid
and enforceable under applicable law, then such provision shall be construed to
cover only that duration, extent or activities which may be validly and
enforceably covered.
13. Notices. All notices, requests and other communications pursuant
to this Agreement shall be in writing and shall be deemed to have been duly
given if delivered in person or by courier, telegraphed, telexed, transmitted by
facsimile or mailed by registered or certified mail, postage prepaid, addressed
as follows:
If to the Executive:
Joseph D. Sansone
945 Tiverton Lane
Alpharetta, GA 30022
If to the Company:
Pediatric Services of America, Inc.
310 Technology Parkway
Norcross, Georgia 30092
Either party may, by written notice to the other, change the address to which
notices to such party are to be delivered or mailed.
14. General. Any waiver of any breach of this Agreement shall not be
construed to be a continuing waiver or consent to any subsequent breach on the
part of either party hereto. Neither party hereto may assign such party's
rights or delegate such party's duties under this Agreement without the prior
written consent of the other party; provided, however, that this Agreement may
------------------
be assigned and the Company's duties delegated by, and this Agreement shall
inure to the benefit of and be binding upon the successors and assigns of, the
Company upon any sale of all or substantially all of the Company's assets or
upon any merger or consolidation of the Company with or into any other
corporation, all as though such successors and assigns of the Company and their
respective successors and assigns were the Company. The terms and provisions of
this Agreement shall be governed by and construed and enforced in accordance
with the laws of the State of Georgia, shall constitute the entire Agreement by
the Company and the Executive with respect to the subject matter hereof, and
shall supersede any and all prior agreement or understandings between the
Executive and the Company, whether written or oral. This Agreement may be
amended or modified only by a written instrument executed by the Executive and
the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement on the
day and year first above written.
PEDIATRIC SERVICES OF AMERICA, INC.
Date: 7/29/99 By /s/ Robert Pinkas
---------------- -------------------------------------
Robert Pinkas
Compensation Committee Director
Member, Board of Directors
Witness: By /s/ Michael Finn
-------------------------------------
Michael Finn
Member, Board of Directors
EXECUTIVE:
<PAGE>
Date: 7/29/99 /s/ Joseph D. Sansone
--------------- -------------------------------------
Joseph D. Sansone
President and Chief Executive Officer
Date: 7/29/99 NOTARY PUBLIC
---------------
/s/ Amelia Logan
-------------------------------------
Amelia Logan
State of Georgia
County of Gwinnett
Commission Expires: 11/1/99
<PAGE>
EXHIBIT 10.9(n)
PEDIATRIC SERVICES OF AMERICA, INC.
NON-QUALIFIED DEFERRED COMPENSATION PLAN
Prepared by:
REISH & LUFTMAN
A PROFESSIONAL CORPORATION
ATTORNEYS AT LAW
Tenth Floor
11755 Wilshire Boulevard
Los Angeles, California 90025
(310) 478-5656
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NON-QUALIFIED DEFERRED COMPENSATION PLAN
THIS NON-QUALIFIED DEFERRED COMPENSATION PLAN is adopted by PEDIATRIC
SERVICES OF AMERICA, INC., a Georgia corporation (the "Company"), effective as
of January 1, 2000 (the "Effective Date"), with reference to the following:
A. The Company is establishing this Plan to provide key employees a
tax deferred, capital accumulation, retention program.
B. This Plan is intended to provide benefits to a select group of
management or highly compensated personnel in order to attract and retain the
highest quality executives. Therefore, this Plan is not intended to be a
---
qualified plan within the meaning of sections 401(a) and 501(a) of the Internal
Revenue Code of 1986, as amended (the "Code").
C. This 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 shall be held in a "Rabbi
Trust," as that term is defined in Revenue Procedure 92-64, 1992-2 C.B. 422.
NOW, THEREFORE, the Company hereby adopts the PEDIATRIC SERVICES OF
AMERICA, INC. NON-QUALIFIED DEFERRED COMPENSATION PLAN on the following terms
and conditions:
1. Definitions. Whenever used in this Plan, the following words and
-----------
phrases shall have the meaning set forth below, unless a different meaning is
expressly provided or plainly required by the context in which the words or
phrases are used
1.1 Beneficiary means a person designated by a Participant to
-----------
receive Plan benefits in the event of the Participant's death.
1.2 Board means the Board of Directors of the Company and its
-----
successors.
1.3 Change in Control of Company means.
(A) a change in ownership, holding or power to vote more than fifty
percent (50%) of the voting stock of the Company;
(B) during any period of two consecutive years, individuals who at
the beginning of such period constitute the Board cease for any reason to
constitute at least a majority thereof, unless the election or the nomination
for election by the Company's shareholders of each new director was approved by
a vote of at least three-quarters of the directors still in office of the
Company who were directors at the beginning of the period;
Page 1 of 16
<PAGE>
(C) the shareholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company;
(D) substantially all of the assets of the Company are sold or
otherwise transferred to parties that are not within the "controlled group of
corporations" (as defined in section 1563 of the Internal Revenue Code of 1986)
in which the Company is a member
(E) the Company voluntarily files a petition for bankruptcy under
federal bankruptcy law, or an involuntary bankruptcy petition is filed against
the Company under federal bankruptcy law, which is not dismissed within 120 days
of the filing;
(F) the Company makes a general assignment for the benefit of
creditors;
(G) the Company seeks or consents to the appointment of a trustee,
receiver, liquidator or similar person; or
(H) a merger, consolidation, or reorganization of the Company with or
involving any other corporation, other than a merger, consolidation, or
reorganization that would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) more than fifty percent (50%) of the combined voting power of
the voting securities of the Company (or such surviving entity) outstanding
immediately after such merger, consolidation, or reorganization.
1.4. Company means Pediatric Services of America, Inc., a Georgia
-------
corporation.
1.5. Disability means (A) "disability" as defined in any group long-
----------
term disability policy or program sponsored by the Company and in effect at the
time a Participant who has suffered a physical or mental impairment makes
application under this Plan for a disability distribution, or (B) if no such
policy or program is in force at such time, "disability" as defined in section
1382c(a)(3) of volume 42 of the United States Code and regulations promulgated
thereunder, provided, however, that the disability (whether under the definition
in (A) or in (B)) must be of a duration of at least six (6) consecutive months
from the date the Participant suffers the disability notwithstanding any
different requirements of duration under either definition in the actual policy
or program or in the United States Code, respectively.
A Participant who has suffered a Disability shall be Disabled within
the meaning of this Section 1.5.
The determination of whether a Participant is Disabled within the
meaning of this Section 1.5 shall be made by the Plan Committee. A Participant
who believes he has suffered a Disability within the meaning of this Section 1.5
shall make application to the Plan Committee, on a form prescribed by the Plan
Committee, for a determination of whether he is Disabled under the terms of this
Section 1.5. The Participant shall make such written application to the Plan
Committee on or after the date which is at least five (5) consecutive months
following the date he
Page 2 of 16
<PAGE>
first suffered the impairment under consideration. Any determination by the Plan
Committee that a Disability exists under the provisions of this Section 1.5
shall be effective only after the date the Disability has existed for six (6)
consecutive months. All determinations made by the Plan Committee shall be
final, and no Participant shall be considered Disabled for any purpose
whatsoever under the provisions of this Plan if determined not to be Disabled by
the Plan Committee under the procedures set forth in this Section 1.5.
The Plan Committee shall notify each Participant who has made
application under this Section 1.5, in writing, of his determination within
three (3) months of the date the Plan Committee receives the Participant's
application hereunder. The Participant shall cooperate in providing any
information to the Plan Committee which it requires in making its determination,
including, but not limited to, access to the Participant's medical records,
direct contact with his physician and physical examination by a physician
selected by the Company. Any Participant who does not fully cooperate shall be
deemed not Disabled by the Plan Committee and so notified.
1.6. Key Employee means an employee of the Company, selected by the
------------
Board, who is a member of a select group of management or highly compensated
employees within the meaning of (S)2520.104-23 of the Department of Labor ERISA
Regulations.
1.7. Participant means (A) a Key Employee designated by the Board, in
-----------
writing, to participate in the benefits under the Plan who timely files a
written election pursuant to Section 2.4, below, and (B) a former Employee who,
at the time of his termination from employment, retirement, death, or occurrence
of Disability, retains, or whose beneficiary retains, benefits earned under the
Plan in accordance with its terms.
1.8. Plan means the Pediatric Services of America, Inc. Non-
----
Qualified Deferred Compensation Plan established by this document and the Trust
Agreement established in connection herewith.
1.9. Plan Committee means the body of individuals, and their
--------------
successors, appointed by the Board to handle the day-to-day responsibilities of
administering the Plan.
1.10. Plan Year means, the twelve (12)-consecutive-month period
---------
beginning each January 1 and ending each December 31.
1.11. Plan Year Compensation means for purposes of the elections
----------------------
under Section 2.4 of the Plan, Plan Year Compensation shall consist of annual
base salary.
1.12. Trust Agreement means the grantor trust established in
---------------
connection with this Plan between the Company as grantor and the Trustee.
1.13. Trustee means Joseph D. Sansone, or any successor trustee named
-------
to succeed such Trustee under the terms of the Trust Agreement established in
connection with this Plan.
Page 3 of 16
<PAGE>
2. Participation.
-------------
2.1. Eligibility. A Key Employee of the Company is eligible to
-----------
participate in this Plan on the Entry Date first following the date as of which
each of the following events has occurred:
(A) the Board has designated him in writing as a Participant in the
Plan;
(B) the Key Employee has made a Written Election in accordance with
the terms of Section 2.4 below; and
(C) the Key Employee has completed the lesser of either: (i) twelve
months of continuous service, or (ii) another number of months of continuous
service determined and approved by the President of the Company.
2.2. Entry Date. Any Key Employee who has met the Eligibility
----------
requirements specified in Section 2.1 as of the Effective Date of this Plan
shall become a Participant in the Plan as of the Effective Date. Any Key
Employee of the Company who meets the Eligibility requirements specified in
Section 2.1 after the Effective Date of this Plan shall become a Participant on
the first day of the payroll period immediately following the date on which he
has met the Eligibility requirements.
2.3. Designation. The Board shall designate for each Plan Year, in
-----------
writing, the name of each Key Employee who shall be entitled to participate in
the Plan for the Plan Year and the tier to which each Key Employee shall be a
member. Such designation by the Board shall occur on a date such that each
designated Key Employee shall have sufficient time to make his Written Election
as required by Section 2.4 below.
2.4. Written Election by Participant. Each Key Employee designated
-------------------------------
by the Board as a Participant for a Plan Year shall submit to the Plan Committee
a Written Election within 30 days before or after the first such Plan year in
which he will be a Participant. If a key Employee becomes a Participant after
the first day of a Plan Year, he shall have 30 days before or after the first
day of participation to submit the Written Election.
(A) Such Written Election shall be made on the form presented to the
Key Employee by the Plan Committee and shall set forth:
(1) his participation in this Plan under the terms hereof;
(2) the percentage of Plan Year Compensation the Key Employee has
determined to defer under the Plan for the Plan Year, pursuant
to Section 3.1 below;
page 4 of 16
<PAGE>
(3) the investment vehicles into which the Key Employee requests to
invest his Participant Deferral Account and his Company
Contribution Account and the percentage of his Participant
Deferral Account and his Company Contribution Account allocated
to each elected investment vehicle;
(4) the date on which his benefit is to be distributed which is the
earlier of a specific date or when he terminates employment with
the Company due to termination of service, retirement,
Disability or death;
(5) the form in which his benefit is to be distributed upon
termination of service or retirement;
(B) A Participant may change a submitted Written Election in
accordance with the following:
(1) A Participant may request to change the investment vehicle(s)
and the percentage of his Participant Deferral Account and his
Company Contribution Account allocated to each investment
vehicle by completing and submitting any form or forms required
by the Company. Any changes made shall be at the sole discretion
of the Plan Committee and shall be effective on the first day of
the quarter following the quarter in which the form was
submitted to the Plan Committee;
(2) A Participant may change the date or form of distribution by
submitting a new Written Election to the Company, provided that
such change is submitted at least sixty (60) days prior to the
original date of distribution, the new date of distribution is
subsequent to the original date of distribution, and only one
change may be made after the original election.
(3) The portion of Plan Year Compensation deferred pursuant to
Section 3.1 may not be changed more frequently than each Plan
Year.
2.5. Duration of Participation. Any Key Employee who has become a
-------------------------
Participant at any time shall remain a Participant, even though he is no longer
an Active Participant, until his entire benefit under the terms of the Plan has
been paid to him (or to his Beneficiary in the event of his death), at which
time he ceases to be a Participant.
2.6. Maintenance of Records. The annual Designation of Participants
----------------------
by the Board shall be maintained in the corporate minute book. The Written
Elections by Participants shall be maintained in the corporate records with all
other files pertaining to this Plan by the Board.
3. Contributions and Allocation.
----------------------------
3.1 Participant Contributions.
-------------------------
page 5 of 16
<PAGE>
(A) A Participant may elect to defer a portion of his Plan Year
Compensation each Plan Year, up to a the maximum amount allowed, from the
following schedule, for the tier to which such Participant is a member:
Tier Maximum Deferral %
---- ------------------
Tier 1 100%
Tier 2 25%
Tier 3 12%
Tier 4 10%
Once a Participant's contributions for a Plan Year has reached his
elected dollar amount, such Participant shall not be allowed to defer additional
portions of his Plan Year Compensation for the remainder of the Plan Year. Any
deferred amounts in excess of his elected dollar amount shall be refunded to the
Participant as soon as practicable.
3.2. Company Contributions. On behalf of each Participant for any
---------------------
Plan Year, the Company may contribute to the Plan an amount equal to a
percentage of the amount each Participant contributes to the Plan as a
Participant Contribution. The applicable percentage of the amount contributed
by each Participant shall be determined and authorized by the Board.
3.3. Allocation of Participant Contributions. All amounts which a
---------------------------------------
Participant elects to defer under the terms of this Plan shall be allocated to
his Participant Deferral Account. Each such Participant Deferral Account shall
be credited with earnings as provided in Section 3.5 below.
3.4. Allocation of Company Contributions. In each Plan Year, the
-----------------------------------
amount of any contribution determined for each Participant under Section 3.1
above shall be allocated to the Company Contribution Account of each Participant
by the first day of the month following the time in which the deferral from pay
was made. Each such Company Contribution Account shall be credited with
earnings as in Section 3.5 below.
3.5. Credited Earnings.
(A) The amount credited to the Participant Deferral Account and
Company Contribution Account of each Participant shall be deemed to be invested
and reinvested in mutual funds, stocks, bonds, securities, and any other asset
or investment vehicles, as may be selected by the Plan Committee in its sole
discretion.
(B) Although each Participant shall have the right to request, among
the investment vehicles designated by the Plan Committee, the investments in
which all amounts allocated to his Participant Deferral Account and his Company
Contribution Account are deemed to be invested and to request to change such
designation, the actual selection is within the Plan Committee's sole
discretion.
(C) At the close of each calendar quarter, the Participant Deferral
Account and Company Contribution Account of each Participant shall be credited
or charged with income,
Page 6 of 16
<PAGE>
gains, losses, and expenses of investments deemed held in such account at the
close of each calendar quarter.
(D) A Participant, by electing to participate in this Plan, agrees
that neither the Company nor the Plan Committee has any liability for the
investment results of the assets set aside in the rabbi trust.
(E) The Trustee, as directed by the Plan Committee, shall have the
duty and sole authority to invest the trust assets and funds in accordance with
the terms of the Trust Agreement, and all rights associated with the trust
assets shall be exercised by the Trustee, as designated by the Board.
3.6. Forfeitures. If any amount of Participant Contributions are
-----------
forfeited in any year, such forfeited amounts shall be returned to the Company
or used to reduce future employer contributions.
3.7. Funding. The assets of the Plan shall be held under the Trust
-------
Agreement (a "grantor trust") designated in Article I above. As such, the Plan
is intended to be an unfunded plan for purposes of the requirements of ERISA and
the Code.
Notwithstanding the provisions under the terms of the Plan that
amounts contributed to this Plan, plus earnings thereon, shall be allocated to
separate Accounts of Participants, all such amounts credited to such individual
Accounts shall remain the general assets of the Employer, and as such shall
remain subject to the claims of the general creditors of the Company. This Plan
and the related Trust Agreement do not create, nor does any Employee,
Participant or Beneficiary have, any right with respect to any specific assets
of the Company.
4. Vesting of Benefits.
-------------------
4.1. Vesting of Participant Deferral Accounts. The Participant
----------------------------------------
Deferral Account of each Participant shall be one hundred percent (100%) vested
in such Participant at all times. However, in the event of an Unplanned In-
Service Benefit of Section 5.7, a portion of such Account shall be forfeited in
accordance with Section 5.7.
4.2. Company Contribution Account. The Company Contribution Account
----------------------------
of each Participant shall be one hundred percent (100%) vested in such
Participant at all times. However, in the event of an Unplanned In-Service
Benefit of Section 5.7, a portion of such Account shall be forfeited in
accordance with Section 5.7.
5. Types of Benefits.
-----------------
5.1. Retirement Benefit. A Participant's Retirement Benefit is the
------------------
unpaid balance of his Participant Deferral Account and his Company Contribution
Account which equals the total of all contributions made by the Participant and
allocated to his Participant Deferral Account, all vested contributions made by
the Company and allocated to his Company Contribution Account, and all earnings
credited to his Participant Deferral Account and his
Page 7 of 16
<PAGE>
Company Contribution Account in accordance with the terms of the Plan and the
Trust Agreement, less any distributions already paid.
5.2. Projected Retirement Benefit. A Participant's Projected
----------------------------
Retirement Benefit is a projection of such Participant Retirement Benefit upon
the date of his retirement at age 65, taking into account his past Participant
Contributions allocated to his Participant Deferral Account, and the fixed
annual rate of earnings determined by the Board.
5.3. Termination of Service Benefit. If a Participant elects to
------------------------------
receive his Retirement Benefit upon termination of his employment with the
Company, or if a Participant's employment with the Company terminates prior to
distribution of his In-Service Benefit, the Company will pay his Retirement
Benefit, calculated under Section 5.1, under the applicable form elected by the
Participant in his Written Election.
5.4. Disability Benefit. If a Participant becomes Disabled as defined
------------------
in Section 1.5 above, the Company will pay his Retirement Benefit, calculated
under Section 5.1, under the applicable form elected by the Participant in his
Written Election. If such Disabled Participant's life is insured under a life
insurance contract acquired in connection with the Plan and such life insurance
contract contains a waiver of premiums benefit in the event of Disability, then
the amount that would have been such Participant's Contribution had such
Participant not suffered a Disability shall continue to be contributed to his
Participant Deferral Account, up to the following limits:
Age in which Disability Occurred Maximum Amount
19-30 $30,000
31-40 $40,000
41-59 $50,000
60-65 $ 0
5.5. Death Benefit.
-------------
(A) If a Participant dies after a distribution has commenced, the
Company will continue the payments of such distribution otherwise due to the
Participant to his designated Beneficiary, under the applicable form elected by
the Participant in his Written Election.
(B) If a Participant dies before a distribution has commenced and
the Company has not purchased a life insurance contract in connection with such
Participant's Retirement Benefit, the Company will pay the Participant's
designated Beneficiary his Retirement Benefit as determined under Section 5.1
above, under the applicable form elected by the Participant in his Written
Election.
(C) If a Participant dies before a distribution has commenced and
the Company has acquired a life insurance contract in connection with such
Participant's Retirement Benefit, the Company will pay the Participant's
designated Beneficiary his Projected Retirement Benefit as determined under
Section 5.2, under the applicable form elected by the Participant in his Written
Election.
Page 8 of 16
<PAGE>
5.6. In-Service Benefit. A Participant may designate a date ("In-
------------------
Service Benefit Date") that is at least five (5) years after the effective date
of his election to defer his Plan Year Compensation, in which he will receive a
distribution of his Participant Contribution, without Credited Earnings
attributable to such Participant Contribution ("In-Service Benefit"). Such
Credited Earnings and Company Contributions contributed to match such
Participant Contributions shall be distributed in the form of a lump sum upon
termination of service; provided that such Participant must be an employee of
the Company on the In-Service Benefit Date in order to receive such In-Service
Benefit.
5.7. Unplanned In-Service Benefit. A Participant may elect to receive
----------------------------
his Retirement Benefit as an Unplanned In-Service Benefit at any time by
providing the Plan Committee with a written election to do so. In consideration
for receiving an Unplanned In-Service Benefit, such Participant shall
permanently forfeit an amount equal to ten percent (10%) of his Retirement
Benefit and forgo all future participation in the Plan.
5.8. Financial Hardship Benefit. A Participant may request a portion
--------------------------
of his Retirement Benefit as a Financial Hardship Benefit at any time by
providing the Plan Committee, to its satisfaction, with a written election to do
so, proof of an unforeseeable financial hardship, and proof that all other
financial resources have been explored and utilized. The amount of a Financial
Hardship Benefit shall be limited to the lesser of the amount needed for the
financial hardship or such Participant's Retirement Benefit. In consideration
for receiving a Financial Hardship Benefit, such Participant shall forgo all
future participation for the remainder of the Plan Year and the following Plan
Year.
6. Distributions.
-------------
6.1. Form of Benefits. The Company shall pay benefits in the form
----------------
associated with Type of Benefit elected by the Participant, and, to the extent a
Type of Benefit may be distributed in various forms, the Company shall pay
benefits in the form elected by the Participant. The forms of benefits
associated with the Types of Benefits are the following:
(A) Retirement Benefit, Termination of Service Benefit, Disability
Benefit, and Death Benefit shall be paid in (i) one lump sum; (ii) 5 yearly
installments; (iii) 10 yearly installments; or (iv) 15 yearly installments.
(B) In-Service Benefit shall be paid in 4 equal yearly installments;
(C) Unplanned In-Service Benefit shall be paid in one lump sum; and
(D) Financial Hardship Benefit shall be paid in one lump sum.
6.2 Commencement of Payments. The Company will pay, or begin to pay,
------------------------
the Types of Benefits under this Plan to the Participant in accordance with the
following:
Page 9 of 16
<PAGE>
(A) Retirement Benefit, Termination of Service Benefit, Disability
Benefit, and Death Benefit payments shall commence no later than January 15 of
the Plan Year following the Plan Year in which the Participant retires,
terminates service, becomes disabled, or dies;
(B) In-Service Benefit payments shall commence on the date
designated by the Participant on his Written Election pursuant to Section 2.4,
provided that such payments are from Participant Contributions that have been in
such Participant's Account for at least five years;
(C) Unplanned In-Service Benefit payments shall commence no later
than one hundred and twenty (120) days after a written request for an Unplanned
In-Service Benefit is received by the Committee;
(D) Financial Hardship Benefit payments shall commence no later than
one hundred twenty (120) days after a request for a Financial Hardship Benefit
is approved by the Plan Committee.
7. Amendment, Termination of Plan, Change in Control.
7.1. Amendment. The Company reserves the right to amend the Plan at
---------
any time by resolution of the Board. The Board will determine the effective
date of any such amendment. The amendment may not deprive any Participant or
Beneficiary of any portion of a benefit under the terms of this Plan at the time
of the amendment.
7.2. Termination of Plan. The Company reserves the right to terminate
-------------------
the Plan at any time by resolution of the Board. In the event of Plan
termination, the Company will calculate the Retirement Benefit of each
Participant and distribute such amounts to the Participant or Beneficiary in a
lump sum within thirty (30) days of the Plan's termination.
7.3. Change in Control. In the event of a Change in Control, the Plan
shall terminate and the provisions of Section 7.2 shall control.
8. Benefits not Funded. Participants and Beneficiaries have the
-------------------
status of unsecured creditors of the Company, and the Plan constitutes a mere
promise by the Company to make benefit payments in the future. A Participant's
or Beneficiary's interest in the Plan is an unsecured claim against the general
assets of the Company, and neither the Participant nor a Beneficiary has any
right against the account until the Plan has distributed the benefit. All
amounts credited to an account are the general assets of the Company and may be
disposed of or used by the Company in such manner as it determines.
Notwithstanding the first paragraph of this Article VIII, the Company
will transfer sufficient cash to a trust pursuant to a Trust Agreement, a copy
of which is attached. Such Trust Agreement created by the Company is intended
to be a grantor trust, and any assets held by such trust to assist the Company
in meeting its obligations under the Plan will conform to the terms of the model
trust, as described in Revenue Procedure 92-64, 1992-2 C.B. 422, promulgated by
the Internal Revenue Service. The Company will make a transfer of cash to the
trust annually in the amount necessary to pay the deferred compensation
required.
Page 10 of 16
<PAGE>
It is the intention of the parties that this Plan and the accompanying
Trust Agreement shall constitute an unfunded arrangement maintained for the
purpose of providing deferred compensation for a select group of management or
highly compensated employees for purposes of Title I of the Employee Retirement
Income Security Act of 1974.
9. Miscellaneous.
-------------
9.1 Designation of Beneficiary. Each Participant shall designate, in
--------------------------
writing, prior to the date he first becomes a Participant in the Plan, one or
more beneficiaries to receive his benefit under the provisions of Section 5.5.
The Participant shall file the written designation with the Plan Committee. The
Participant may revoke a previous beneficiary designation by filing a new
written beneficiary designation with the Plan Committee.
In any event, if a Participant or Beneficiary who has designated
another Beneficiary is divorced, all beneficiary designations executed prior to
the effective date of the dissolution of marriage (or other decree or order
entered under applicable state law) are automatically revoked under the terms of
this Section 9.1. In such event, the Participant or Beneficiary may designate
one or more Beneficiaries in accordance with the terms of this Section 9.1. If
none is made following the effective date of the dissolution of the marriage,
the individual's benefit shall pass under the laws of intestate succession and
the terms of the next following paragraph.
If a Participant fails to file a valid designation of beneficiary with
the Plan Committee under the provisions of this Section 9.1, or if a designated
Beneficiary fails to survive to receive any or all payments due hereunder, then
the death benefit payable under this Plan shall be payable to the Participant's
(or the Beneficiary's) spouse; if no spouse survives, then to the Participant's
(or Beneficiary's) children, with equal shares among living children and with
the living descendants of a deceased child receiving equal portions of the
deceased child's share; in the absence of spouse or descendants, to the
Participant's (or Beneficiary's) parents; and in the absence of spouse,
descendants or parents, to the Participant's (or Beneficiary's) brothers and
sisters, with the living descendants of a deceased brother and those of a
deceased sister receiving equal portions of the deceased brother's or sister's
share; in the absence of any of the persons name herein, to the Participant's
(or Beneficiary's) estate.
For purposes of this Section 9.1, the term "descendant" means all
persons who are descended from the person referred to either by birth to or
legal adoption by such person, and "child" or "children" includes adopted
children.
9.2. Benefits Not Assignable. The rights of each Participant are not
-----------------------
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, attachment, or garnishment by creditors of the Participant
nor any Beneficiary. Neither the Participant nor Beneficiary may assign,
transfer or pledge the benefits under this Plan. Any attempt to assign,
transfer or pledge a Participant's benefits under this Plan is void.
Page 11 of 16
<PAGE>
9.3. Benefit. This Plan constitutes an agreement between the Company
-------
and each of the Participants which is binding upon and inures to the Company,
its successors and assigns and upon the Participant and his heirs and legal
representatives.
9.4. Headings. The headings of the Articles and Sections of this Plan
--------
are included for purposes of convenience only, and shall not affect the
construction or interpretation of any of its provisions.
9.5. Notices. All notices, requests, demands, and other
-------
communications under this Plan shall be in writing and shall be deemed to have
been duly given on the date of service if served personally on the party to whom
notice is to be given, or on the third day after mailing if mailed to the party
to whom notice is to be given, by first class mail, registered or certified
(return receipt requested), postage prepaid, and properly addressed to the last
known address to each party as set forth on the first page thereof. Any party
may change its address for purposes of this Section by giving the other parties
written notice of the new address in the manner set forth above.
9.6. No Loans. The Plan does not permit any loans to be made to any
--------
Participant or Beneficiary.
9.7. Gender Usage. The use of the masculine gender includes the
------------
feminine gender for all purposes of this Plan.
9.8. Expenses. Costs of administration of the Plan shall be paid by
--------
the Company.
9.9. Claims Review Procedure.
-----------------------
(A) A claim for benefits may be filed, in writing, with the Plan
Committee. A written disposition of a claim shall be furnished to the claimant
with a reasonable time after the claim for benefits is filed. In the event a
claim for benefits is denied, the Plan Committee shall provide the claimant with
the reasons for denial.
(B) A claimant whose claim for benefits was denied may file for a
review of such denial, with the Plan Committee, no later than 60 days after he
has received written notification of the denial.
(C) The Plan Committee shall give a request for review a full and
fair review. If the claim for benefits is denied upon completion of a full and
fair review, notice of such denial shall be provided to the claimant within 60
days after the Plan Committee's receipt of such written claim for review. This
60-day period may be extended in the event of special circumstances. Such
special circumstances shall be communicated to the claimant in writing within
the 60-day period. If there is an extension, a decision shall be made as soon as
possible, but not later than 120 days after receipt by the Plan Committee of
such claim for review.
Page 12 of 16
<PAGE>
(D) If benefits are provided or administered by an insurance
company, insurance service, or other similar organization which is subject to
regulation under the insurance laws, the claims procedure relating to these
benefits may provide for review. If so, that company, service, or organization
will be the entity to which claims are addressed.
9.10. No Other Agreements or Understandings. This Plan represents
-------------------------------------
the sole agreement between the Company and Participants concerning its subject
matter and it supersedes all prior agreements, arrangements, understandings,
warranties, representations, and statements between the parties concerning its
subject matter.
10. Administration.
--------------
10.1. Plan Committee. The Plan shall be administered by the Plan
--------------
Committee. The Plan Committee shall have full authority and power to administer
and construe the Plan, subject to applicable requirements of law. Without
limiting the generality of the foregoing, the Plan Committee shall have the
following powers and duties:
(A) To make and enforce such rules and regulations as it deems
necessary or proper for the administration of the Plan;
(B) To interpret the Plan and to decide all questions concerning the
Plan;
(C) To determine the eligibility of any person to participate in the
Plan, and to determine the amount and the recipient of any payments to be made
under the Plan;
(D) To designate and value any investments deemed held in the
Participant Deferral Accounts and the Company Contribution Accounts;
(E) To appoint such agents, counsel, accountants, consultants and
other persons as may be required to assist in administering the Plan; and
(F) To make all other determinations and to take all other steps
necessary or advisable for the administration of the Plan.
All decisions made by the Plan Committee pursuant to the provisions of
the Plan shall be made in its sole discretion and shall be final, conclusive,
and binding upon all parties.
10.2. Delegation of Duties. The Plan Committee may delegate such of
--------------------
its duties and may engage such experts and other persons as it deems appropriate
in connection with administering the Plan. The Plan Committee shall be entitled
to rely conclusively upon, and shall be fully protected in any action taken by
the Plan Committee, in good faith in reliance upon any opinions or reports
furnished them by any such experts or other persons.
10.3. Indemnification of Committee. The Company agrees to indemnify
----------------------------
and to defend to the fullest extent permitted by law any person serving as a
member of the Plan Committee, and each employee of the Company or any of its
affiliates appointed by the Plan
Page 13 of 16
<PAGE>
Committee to carry out duties under this Plan, against all liabilities, damages,
costs and expenses (including attorneys' fees and amounts paid in settlement of
any claims approved by the Company) occasioned by any act or omission to act in
connection with the Plan, if such act or omission is in good faith.
10.4. Liability. To the extent permitted by law, neither the Plan
---------
Committee nor any other person shall incur any liability for any acts or for any
failure to act except for liability arising out of such person's own willful
misconduct or willful breach of the Plan.
Page 14 of 16
<PAGE>
IN WITNESS WHEREOF, the Company has adopted the Plan on January 1,
2000
PEDIATRIC SERVICES OF AMERICA, INC.
By: /s/ Joseph D. Sansone
---------------------
Joseph D. Sansone
President
By: /s/ James M. McNeill
--------------------
James M. McNeill
Secretary
Page 15 of 16
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
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 OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No. 333-45907) pertaining to the Amended and Restated Stock Option Plan and
Directors' Stock Option Plan of Pediatric Services of America, Inc. of our
report dated December 21, 1999, with respect to the consolidated financial
statements and schedule of Pediatric Services of America, Inc. included in the
Annual Report (Form 10-K) for the year ended September 30, 1999.
ERNST & YOUNG LLP
Atlanta, Georgia
January 12, 2000
<PAGE>
EXHIBIT 25
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned constitutes and appoints
Joseph D. Sansone and James M. McNeill, 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, 1999, 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 1st day of December, 1999
/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 James M. McNeill, 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, 1999, 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 1st day of December, 1999
/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 James M. McNeill, 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, 1999, 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 1st day of December, 1999
/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 James M. McNeill, 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, 1999, 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 1st day of December, 1999
/s/ Richard S. Smith
---------------------------
Signature Richard S. Smith
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998
<PERIOD-START> OCT-01-1998 OCT-01-1997
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 8,361 1,443
<SECURITIES> 0 0
<RECEIVABLES> 70,131 86,644
<ALLOWANCES> 14,649 14,008
<INVENTORY> 0 0
<CURRENT-ASSETS> 94,058 113,357
<PP&E> 41,746 40,136
<DEPRECIATION> 25,071 20,266
<TOTAL-ASSETS> 177,631 234,072
<CURRENT-LIABILITIES> 33,449 37,976
<BONDS> 0 0
0 0
0 0
<COMMON> 67 67
<OTHER-SE> 6,819 63,616
<TOTAL-LIABILITY-AND-EQUITY> 177,631 234,072
<SALES> 214,353 222,182
<TOTAL-REVENUES> 214,353 222,182
<CGS> 0 0
<TOTAL-COSTS> 235,271 207,253
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 21,587 22,963
<INTEREST-EXPENSE> 14,912 8,956
<INCOME-PRETAX> (57,703) (16,922)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (57,703) (9,717)
<DISCONTINUED> 2,581 3,425
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (55,122) (6,292)
<EPS-BASIC> (8.29) (0.91)
<EPS-DILUTED> (8.29) (0.91)
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