<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-23946
PEDIATRIC SERVICES OF AMERICA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 58-1873345
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 Technology Parkway, Norcross GA 30092-2929
(Address of principal executive offices, including zip code)
(770) 441-1580
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
As of February 7, 2000, the Registrant had 6,658,305 shares of Common Stock,
$0.01 Par Value, outstanding.
- --------------------------------------------------------------------------------
Page 1 of 19
Index of Exhibits on page 18
<PAGE>
FORM 10-Q
PEDIATRIC SERVICES OF AMERICA, INC.
INDEX
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of
December 31, 1999 and September 30, 1999................... 3
Condensed Consolidated Statements of Operations for
the three months ended December 31, 1999 and 1998.......... 5
Condensed Consolidated Statements of Cash Flows for
the three months ended December 31, 1999 and 1998.......... 6
Notes to Condensed Consolidated Financial
Statements................................................. 7
ITEM 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................... 11
ITEM 3: Quantitative and Qualitative Disclosures about Market Risk...... 15
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings............................................... 15
ITEM 4: Submission of Matters to a Vote of Security Holders............. 16
ITEM 6: Exhibits and Reports on Form 8-K................................ 16
Signatures...................................................... 17
Index of Exhibits............................................... 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PEDIATRIC SERVICES OF AMERICA, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................................. $ 17,044 $ 8,361
Accounts receivable, less allowances for doubtful
accounts of $15,351 and $14,649, respectively............................ 49,908 55,482
Prepaid expenses........................................................... 698 667
Income taxes receivable.................................................... 351 345
Other current assets....................................................... 5,639 4,011
Net current assets of discontinued operations.............................. - 25,192
-------- --------
Total current assets......................................................... 73,640 94,058
Property and equipment:
Home care equipment held for rental........................................ 30,269 30,096
Furniture and fixtures..................................................... 9,729 9,813
Vehicles................................................................... 805 805
Leasehold improvements..................................................... 1,043 1,032
-------- --------
41,846 41,746
Accumulated depreciation and amortization.................................. (26,353) (25,071)
-------- --------
15,493 16,675
Other assets:
Goodwill, less accumulated amortization of
$5,716 and $5,159, respectively.......................................... 35,603 36,160
Certificates of need, less accumulated amortization of
$327 and $302, respectively.............................................. 345 371
Deferred financing fees, less accumulated
amortization of $496 and $1,119, respectively............................ 2,512 2,719
Noncompete agreements, less accumulated amortization of
$1,052 and $1,032, respectively.......................................... 108 28
Other...................................................................... 278 367
Non-current assets of discontinued operations.............................. - 27,253
-------- --------
38,846 66,898
-------- --------
Total assets................................................................. $127,979 $177,631
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS--(Continued)
(In thousands)
<TABLE>
<CAPTION>
December 31, September 30,
1999 1999
(Unaudited)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable............................................................... $ 7,220 $ 9,126
Accrued compensation........................................................... 3,985 9,116
Accrued insurance.............................................................. 5,524 4,602
Other accrued liabilities...................................................... 8,345 8,718
Deferred revenue............................................................... 714 714
Current maturities of long-term obligations to related parties................. 220 1,141
Current maturities of long-term obligations.................................... 26 31
-------- --------
Total current liabilities....................................................... 26,034 33,448
Long-term obligations to related parties, net of current
maturities.................................................................. 77 25
Long-term obligations, net of current maturities................................ 75,000 137,272
Stockholders' equity:
Preferred stock, $.01 par value, 2,000 shares
authorized, no shares issued and outstanding................................. - -
Common stock, $.01 par value, 80,000 shares
authorized; 6,652 shares issued and outstanding at December 31, 1999
and September 30, 1999........................................................ 67 67
Additional paid-in capital..................................................... 48,362 48,362
Accumulated deficit............................................................ (21,561) (41,543)
-------- --------
Total stockholders' equity...................................................... 26,868 6,886
-------- --------
Total liabilities and stockholders' equity...................................... $127,979 $177,631
======== ========
</TABLE>
See accompanying notes.
4
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1999 1998
---------------------------
(Unaudited)
<S> <C> <C>
Net revenue................................................................ $48,104 $56,741
Costs and expenses:
Operating salaries, wages and employee benefits........................... 22,658 27,455
Other operating costs..................................................... 17,651 18,261
Corporate, general and administrative..................................... 4,752 4,129
Provision for doubtful accounts........................................... 2,344 3,164
Depreciation and amortization............................................. 2,064 2,155
------- -------
Total costs and expenses................................................. 49,469 55,164
------- -------
Operating income (loss).................................................... (1,365) 1,577
Interest expense........................................................... 2,967 3,094
------- -------
Loss from continuing operations, before minority
interest and income taxes.............................................. (4,332) (1,517)
Minority interest in loss of subsidiary.................................... - 43
------- -------
Loss from continuing operations, before income taxes....................... (4,332) (1,474)
Income tax benefit......................................................... - (475)
------- -------
Loss from continuing operations............................................ (4,332) (999)
Discontinued operations:
Income from discontinued operations, net of tax........................... - 1,107
Gain on disposal of discontinued operations................................ 24,314 -
------- -------
Net income................................................................. $19,982 $ 108
======= =======
Basic and diluted net income per share data:
Loss from continuing operations............................................ $ (0.65) $ (0.15)
Income from discontinued operations........................................ 0.00 0.17
Gain on disposal of discontinued operations................................ 3.65 0.00
------- -------
Net income................................................................. $ 3.00 $ 0.02
======= =======
Weighted average shares outstanding:
Basic and diluted.......................................................... 6,652 6,653
======= =======
</TABLE>
See accompanying notes.
5
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended December 31,
1999 1998
-------- --------
(Unaudited)
Operating activities
<S> <C> <C>
Loss from continuing operations............................................................ $ (4,332) $ (999)
Adjustments to reconcile loss from continuing operations to net cash provided by
(used in) operating activities:
Depreciation and amortization............................................................ 2,064 2,155
Provision for doubtful accounts.......................................................... 2,344 3,164
Amortization of deferred financing fees.................................................. 412 126
Minority interest in loss of subsidiary.................................................. - (43)
Changes in operating assets and liabilities, net of effects from
dispositions of business:
Accounts receivable.................................................................... 3,230 (4,429)
Prepaid expenses....................................................................... (31) 238
Other assets........................................................................... (1,626) (1,055)
Accounts payable....................................................................... (1,906) 2,688
Income taxes........................................................................... (5) 89
Accrued liabilities.................................................................... (4,582) (1,411)
-------- -------
Net cash provided by (used in) operating activities of continuing
operations.............................................................................. (4,432) 523
Net cash provided by (used in) operating activities of discontinued
operations.............................................................................. (1,087) 455
-------- -------
Net cash provided by (used in) operating activities........................................ (5,519) 978
Investing activities
Purchases of property and equipment........................................................ (255) (965)
Proceeds from sale of division............................................................. 77,869 -
Other, net................................................................................. 64 (45)
-------- -------
Net cash provided by (used in) investing activities of continuing operations............... 77,678 (1,010)
Net cash used in investing activities of discontinued operations........................... (24) (319)
-------- -------
Net cash provided by (used in) investing activities........................................ 77,654 (1,329)
Financing activities
Principal payments on long-term debt....................................................... (63,247) (6,313)
Borrowings on long-term debt............................................................... - 13,500
Deferred financing fees.................................................................... (205) (16)
Proceeds from exercise of stock options.................................................... - 1
-------- -------
Net cash provided by (used in) financing activities........................................ (63,452) 7,172
-------- -------
Increase in cash and cash equivalents...................................................... 8,683 6,821
Cash and cash equivalents at beginning of period........................................... 8,361 1,444
-------- -------
Cash and cash equivalents at end of period................................................. $ 17,044 $ 8,265
======== =======
Supplemental disclosure of cash flow information
Cash paid for interest..................................................................... $ 4,446 $ 4,840
======== =======
</TABLE>
See accompanying notes.
6
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Pediatric Services of America, Inc. (the "Company") and its majority-owned
subsidiaries have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly,
they do not include all information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included.
Results of operations for the three months ended December 31, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal
year ending September 30, 2000. These condensed consolidated financial
statements should be read in conjunction with the Company's audited
consolidated financial statements for the year ended September 30, 1999
included in the Company's Annual Report on Form 10-K for such year filed
with the Securities and Exchange Commission. Principal accounting policies
are set forth in the Company's 1999 Annual Report.
2. 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.
3. Use of Estimates
The preparation of the condensed 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 revenue and determining the provision 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.
4. Accounts Receivable
Accounts receivable include approximately $11.4 million and $10.5 million
for which services have been rendered but the amounts were unbilled as of
December 31, 1999 and September 30, 1999, 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.
7
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - (Continued)
5. Concentration of Credit Risk
The Company's principal financial instruments subject to potential
concentration of credit risk are 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 December 31, 1999, the Company had one interest rate swap agreement with
a commercial bank (the "Counter Party"), having a cumulative notional
principal amount of $25 million. The Company paid 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. On
January 13, 2000, the Company settled and received a final payment of $0.1
million under the Interest Rate Swap Agreement.
6. Reclassifications
Certain amounts for prior periods have been reclassified to conform to the
current year presentation.
7. 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. On November 1, 1999, the Company concluded the sale of the
assets of its paramedical testing division to Hooper Holmes, Inc. During
the first quarter of fiscal 2000, the Company recorded a gain on the sale
of this division of $24.3 million, including the deferred operating losses
of $10.6 million incurred between the measurement date and disposal date.
As a result, the paramedical testing operations are reflected as a
discontinued operation and the condensed 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 (in thousands):
<TABLE>
<CAPTION>
Three Months Ended December 31,
1999 1998
---------- ------------
<S> <C> <C>
Net revenue........................................................... $6,415 $22,634
Income before income tax expense...................................... - 1,640
Income tax expense.................................................... - 533
------ -------
Net income............................................................ $ - $ 1,107
====== =======
</TABLE>
8
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - (Continued)
Discontinued Operations - continued
Assets and liabilities of the discontinued operations have been reflected
in the condensed 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 (in
thousands):
<TABLE>
<CAPTION>
September 30,
1999
--------------
<S> <C>
Cash................................................................ $ 541
Accounts receivable, net............................................ 12,691
Prepaid expenses.................................................... 29
Other current assets................................................ 12,471
-------
Total current assets 25,732
Accrued compensation................................................ 540
-------
Net current assets of discontinued operations....................... $25,192
=======
Property, net....................................................... $ 5,025
Goodwill, net....................................................... 22,173
Other............................................................... 55
-------
Non-current assets of discontinued operations....................... $27,253
=======
</TABLE>
Accounts receivable for discontinued operations include approximately $9.4
million for which services have been rendered but the amounts were unbilled
as of September 30, 1999. 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 which totaled
approximately $4.2 million at December 31, 1999.
8. Income Taxes
The Company recorded a full valuation allowance against the net deferred
tax assets as of December 31, 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 deferral tax asset required a full valuation
allowance. Accordingly, the Company did not recognize any income taxes for
the three months ended December 31, 1999.
9. Long-Term Borrowing Arrangements
A portion of the proceeds from the sale of the Company's paramedical
testing division were used to pay down to zero all outstanding amounts
under the Company's existing Credit Agreement. Simultaneous 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 is comprised of a revolving line of
credit up to the available limit, consisting of Loans and Letters of Credit
(as defined therein). As of this report date no amounts were outstanding
under the Amended and Restated Loan Security Agreement.
10. Basic and Diluted Net Income Per Share
Basic net income per share is computed using the weighted average number of
shares of common stock outstanding during the period. Diluted net income
per share is computed using the weighted average
9
<PAGE>
number of shares of common stock outstanding and the dilutive effect of
common equivalent shares (calculated using the treasury stock method). For
the three months ended December 31, 1999 and 1998, weighted average shares
outstanding for continuing operations for basic and diluted computations
are the same since the impact of common equivalent shares on earnings per
share is anti-dilutive.
10
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward-Looking Statements
This Form 10-Q contains certain forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) relating to
future financial performance of Pediatric Services of America, Inc. (the
"Company"). When used in this Form 10-Q, 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 hereunder 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 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.
The following discussion should be read in conjunction with the unaudited
Condensed Consolidated Financial Statements of the Company included in this
Quarterly Report.
Recent Developments
In the first quarter of fiscal 2000, 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
redirect the Company to its core businesses, the pediatric home healthcare and
adult respiratory businesses. On November 1, 1999, the Company sold its
paramedical division to Hooper Holmes, Inc.
The Company also made progress on 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. The Company continued to evaluate its portfolio of
managed care contracts with its intentions to withdraw or renegotiate those with
minimal profitability and cash flow performance. While progress to date has
impacted operating results to a lesser degree than anticipated, as contracts
reach their respective renewal dates the Company believes its ability to impact
future results will improve. 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
11
<PAGE>
be revised or updated, with the changes recorded in subsequent periods as
additional information becomes available to management.
The following table is derived from the Company's unaudited condensed
consolidated statements of operations for the periods indicated and presents
results of continuing operations as a percentage of net revenue and the
percentage change in the dollar amounts of each item from the comparative prior
period:
<TABLE>
<CAPTION>
Period-to-Period Percentage
Increase
Percentage of Net Revenue (Decrease)
Three Months Ended Three Months Ended
December 31, December 31,
1999 1998 1999 to 1998
---- ---- ------------
<S> <C> <C> <C>
Net revenue................................................... 100% 100% (15)%
Operating salaries, wages and employee benefits............... 47.1 48.4 (18)
Other operating costs......................................... 36.7 32.2 (3)
Corporate, general and administrative......................... 9.9 7.3 15
Provision for doubtful accounts............................... 4.9 5.6 (26)
Depreciation and amortization................................. 4.3 3.8 (4)
--------------------------------------------
Operating income (loss)....................................... (2.9) 2.7 (187)
Interest expense.............................................. 6.2 5.5 (4)
--------------------------------------------
Loss from continuing operations, before minority interest and
income taxes................................................. (9.1) (2.8) (186)
Minority interest in loss of subsidiary....................... - 0.1 -
--------------------------------------------
Loss from continuing operations before income taxes........... (9.1) (2.7) (194)
Income tax benefit............................................ - (0.8) (100)
--------------------------------------------
Loss from continuing operations............................... (9.1)% (1.9)% (334)%
==== === ====
</TABLE>
The following table sets forth for the periods indicated the net revenue
breakdown by service:
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1999 1998
------------- ------------
<S> <C> <C>
Pediatric Home Health Care
Nursing......................................................................... $20,972 $23,350
Respiratory Therapy Equipment................................................... 4,781 6,560
Home Medical Equipment.......................................................... 514 863
Pharmacy and Other.............................................................. 8,526 9,755
------- -------
Total Pediatric Home Health Care........................................... 34,793 40,528
------- -------
Adult Home Health Care:
Nursing......................................................................... 2,947 5,009
Respiratory Therapy Equipment................................................... 4,865 6,037
Home Medical Equipment.......................................................... 1,224 1,891
Pharmacy and Other.............................................................. 4,275 3,276
------- -------
Total Adult Home Health Care............................................... 13,311 16,213
------- -------
Total Net Revenue.......................................................... $48,104 $56,741
======= =======
</TABLE>
Three Months Ended December 31, 1999 Compared to Three Months Ended December 31,
1998
Net revenue decreased $8.6 million, or 15%, to $48.1 million in the three months
ended December 31, 1999 from $56.7 million in the three months ended December
31, 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 $8.6 million decrease in net revenue for the three months ended December
31, 1999, pediatric health care net revenue accounted for $5.7 million,
primarily attributable to the closure of select locations. Adult health care
net revenue accounted for a
12
<PAGE>
decrease of $2.9 million for the three months ended December 31, 1999. The
decline in net revenue was primarily the result of the Company's sale of the
medical staffing business. In the three months ended December 31, 1999, the
Company derived approximately 51% of its net revenue from commercial insurers
and other private payors, 42% 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
$4.8 million, or 18%, to $22.7 million in the three months ended December 31,
1999 from $27.5 million in the three months ended December 31, 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. However, due to the impact of the nursing shortage in
particular markets, location scheduling efficiencies have declined resulting in
higher overtime costs. As a percentage of net revenue, operating salaries, wages
and employee benefits for the three months ended December 31, 1999 decreased to
47% from 48% for the three months ended December 31, 1998.
Other operating costs include medical supplies, branch office rent, utilities,
vehicle expenses, allocated insurance costs and cost of sales. Cost of sales
consists primarily of the costs of pharmaceuticals and related services. Other
operating costs decreased $0.6 million, or 3%, to $17.7 million in the three
months ended December 31, 1999, from $18.3 million in the three months ended
December 31, 1998. As a percentage of net revenue, other operating costs for the
three months ended December 31, 1999 increased to 37% from 32% for the three
months ended December 31, 1998. The increase primarily relates to increased
costs for the product mix for infusion services delivered in the three months
ended December 31, 1999, as compared to the three months ended December 31,
1998, as well as the impact of location fixed costs relative to the decline in
net revenue.
Corporate, general and administrative costs increased $0.6 million, or 15%, to
$4.7 million in the three months ended December 31, 1999, from $4.1 million in
the three months ended December 31, 1998. As a percentage of net revenue,
corporate, general and administrative costs for the three months ended December
31, 1999, increased to 10% from 7% in the three months ended December 31, 1998.
The Company has chosen to selectively invest in key areas where improvements
have a tangible impact on cash flow from operations. In addition, there are
certain non-labor fixed costs necessary to sustain the Company's infrastructure
at historic revenue levels. As the Company's Plan impacts future periods,
certain non-recurring historical costs should be able to be avoided.
Provision for doubtful accounts decreased $0.8 million, or 26%, to $2.3 million
in the three months ended December 31, 1999, from $3.1 million in the three
months ended December 31, 1998. During the three months ended December 31, 1999,
the Company recorded provision levels consistent with current industry
reimbursement conditions. The Company has experienced improved cash collections
throughout the three months ended December 31, 1999 and these provision levels
were deemed to be appropriate.
Depreciation and amortization decreased $0.1 million, or 4%, to $2.1 million in
the three months ended December 31, 1999 from $2.2 million in the three months
ended December 31, 1998. As a percentage of the Company's net revenue,
depreciation and amortization costs for the three months ended December 31, 1999
increased slightly compared to the three months ended December 31, 1998.
Interest expense decreased $0.1 million, or 4%, to $3.0 million in the three
months ended December 31, 1999, from $3.1 million in the three months ended
December 31, 1998. The Company's average debt outstanding decreased $28.2
million as the amount outstanding under the Company's existing Credit Agreement
was paid down to zero on November 1, 1999.
Income tax benefit decreased $0.5 million to zero in the three months ended
December 31, 1999, from $0.5 million in the three months ended December 31,
1998. The Company recorded a full valuation allowance against the net deferred
tax assets as of December 31, 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 deferral tax
asset required a full valuation allowance. Accordingly, the Company did not
recognize any income taxes for the three months ended December 31, 1999.
13
<PAGE>
Liquidity and Capital Resources
At December 31, 1999, total borrowings under the Notes were $75.0 million.
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 is 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 December 31, 1999, the Company had one interest rate swap agreement with a
commercial bank (the "Counter Party"), having a cumulative notional principal
amount of $25 million. The Company paid 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. On January 13, 2000, the Company
settled and received a final payment of $0.1 million under the Interest Rate
Swap Agreement.
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 which totaled approximately $4.2
million at December 31, 1999.
Overall cash collections for continuing operations increased approximately $3.5
million or 4% during the quarters ended December 31, 1999 and September 30, 1999
as compared to the quarters ended June 30, 1999 and March 31, 1999. The
organizational restructuring of the Company's reimbursement process continues
and indications of progress to date 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
sustained operating improvements and improved cash flow.
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 has suspended acquisition plans for the foreseeable future and will
be focusing resources on strengthening infrastructure, cash collections and
sales and marketing.
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
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
14
<PAGE>
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.
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.
Risks
Management believes that it has an effective Year 2000 Plan in place to resolve
any further Year 2000 issues in a timely manner. However, 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.
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 3. Quantitative and Qualitative Disclosures about Market Risk
At December 31, 1999, the Company had one interest rate swap agreement with a
commercial bank (the "Counter Party"), having a cumulative notional principal
amount of $25 million. The Company paid 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. On January 13, 2000, the Company
settled and received a final payment of $0.1 million under the Interest Rate
Swap Agreement.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.
On March 11, 1999, a putative class action complaint was filed against the
Company in the United States District Court for the Northern District of
Georgia. The Company and certain of its then current officers and directors were
named as defendants. To the Company's knowledge, no other putative class action
complaints were filed within the 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 allowance 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
15
<PAGE>
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,
Kids & Nurses, Inc. In the original complaint, in general, the plaintiffs
alleged that the defendants violated Federal and 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. On February 1, 2000, the
defendants filed an amended motion to dismiss addressing the allegations of the
amended complaint. 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 Holders
During the first quarter ended December 31, 1999, no matter was submitted to a
vote of the Company's stockholders through the solicitation of proxies or
otherwise.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
The following exhibits are filed as part of this Report.
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
On November 16, 1999, the Company filed a Current Report on Form 8-K
under Item 5, 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 Registrant filed a report on Form 8-K under
Item 5, announcing the setting of a meeting date and record date for
the 2000 Annual Meeting of Stockholders.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PEDIATRIC SERVICES OF AMERICA, INC.
(Registrant)
Date: February 14, 2000 By: /s/ James M. McNeill
--------------------------------
James M. McNeill
Senior Vice President,
Chief Financial Officer,
Treasurer and Secretary
(Duly authorized officer and
Principal Financial Officer)
17
<PAGE>
INDEX OF EXHIBITS
Page
No.
---
Exhibit 27. Financial Data Schedule.................................. 19
18
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<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-2000 SEP-30-1999
<PERIOD-START> OCT-01-1999 OCT-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 17,044 0
<SECURITIES> 0 0
<RECEIVABLES> 65,259 0
<ALLOWANCES> 15,351 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 73,640 0
<PP&E> 41,846 0
<DEPRECIATION> 26,353 0
<TOTAL-ASSETS> 127,979 0
<CURRENT-LIABILITIES> 26,034 0
<BONDS> 0 0
0 0
0 0
<COMMON> 67 0
<OTHER-SE> 26,801 0
<TOTAL-LIABILITY-AND-EQUITY> 127,979 0
<SALES> 48,104 56,741
<TOTAL-REVENUES> 48,104 56,741
<CGS> 0 0
<TOTAL-COSTS> 47,125 52,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 2,344 3,164
<INTEREST-EXPENSE> 2,967 3,094
<INCOME-PRETAX> (4,332) (1,474)
<INCOME-TAX> 0 (475)
<INCOME-CONTINUING> (4,332) (999)
<DISCONTINUED> 24,314 1,107
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 19,982 108
<EPS-BASIC> 3.00 0.02
<EPS-DILUTED> 3.00 0.02
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