<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 EXCHANG E ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission file number 0-23946
PEDIATRIC SERVICES OF AMERICA, INC.
(Exact name of Registrant as specified in its charter)
Delaware 58-1873345
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
310 Technology Parkway, Norcross GA 30092-2929
(Address of principal executive offices, including zip code)
(770) 441-1580
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of August 10, 2000, the Registrant had 6,658,305 shares of Common Stock,
$0.01 Par Value, outstanding.
--------------------------------------------------------------------------------
Page 1 of 21
Index of Exhibits on page 20
<PAGE>
FORM 10-Q
PEDIATRIC SERVICES OF AMERICA, INC.
INDEX
Page
Number
------
<TABLE>
<CAPTION>
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1: Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2000
and September 30, 1999............................................ 3
Condensed Consolidated Statements of Operations for the three
and nine months ended June 30, 2000 and 1999...................... 5
Condensed Consolidated Statements of Cash Flows for
the nine months ended June 30, 2000 and 1999...................... 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.........16
PART II OTHER INFORMATION
ITEM 1: Legal Proceedings..................................................17
ITEM 6: Exhibits and Reports on Form 8-K...................................18
Signatures.........................................................19
Index of Exhibits..................................................20
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
PEDIATRIC SERVICES OF AMERICA, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
----------- -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.................................. $ 7,531 $ 8,361
Accounts receivable, less allowances for doubtful
accounts of $11,182 and $14,649, respectively............. 39,856 55,482
Prepaid expenses........................................... 895 667
Income taxes receivable.................................... - 345
Deferred income taxes...................................... 7,673 -
Other current assets....................................... 3,416 4,011
Net current assets of discontinued operations.............. - 25,192
-------- --------
Total current assets......................................... 59,371 94,058
Property and equipment:
Home care equipment held for rental........................ 29,831 30,096
Furniture and fixtures..................................... 10,134 9,813
Vehicles................................................... 815 805
Leasehold improvements..................................... 1,054 1,032
-------- --------
41,834 41,746
Accumulated depreciation and amortization.................. (28,369) (25,071)
-------- --------
13,465 16,675
Other assets:
Goodwill, less accumulated amortization of
$6,829 and $5,159, respectively........................... 34,490 36,160
Certificates of need, less accumulated amortization of
$378 and $302, respectively............................... 295 371
Deferred financing fees, less accumulated
amortization of $463 and $1,119, respectively............. 1,505 2,719
Non-compete agreements, less accumulated amortization of
$1,076 and $1,032, respectively........................... 84 28
Other...................................................... 233 367
Non-current assets of discontinued operations.............. - 27,253
-------- --------
36,607 66,898
-------- --------
Total assets................................................. $109,443 $177,631
======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS--(Continued)
(In thousands)
<TABLE>
<CAPTION>
June 30, September 30,
2000 1999
----------- -------------
(Unaudited)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable........................................................... $ 4,957 $ 9,126
Accrued compensation....................................................... 4,805 9,116
Accrued insurance.......................................................... 5,199 4,602
Other accrued liabilities.................................................. 7,258 8,718
Income taxes payable......................................................... 2,462 -
Deferred revenue........................................................... 610 714
Current maturities of long-term obligations to related parties............. 170 1,141
Current maturities of long-term obligations................................ 19 31
----------- -------------
Total current liabilities.................................................... 25,480 33,448
Long-term obligations to related parties, net of current
Maturities............................................................... 50 25
Long-term obligations, net of current maturities............................. 45,442 137,272
Deferred income taxes........................................................ 4,114 -
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; 6,658 and 6,652 shares issued and outstanding at
June 30, 2000 and September 30, 1999, respectively...................... 67 67
Additional paid-in capital................................................. 48,363 48,362
Accumulated deficit........................................................ (14,073) (41,543)
----------- -------------
Total stockholders' equity................................................... 34,357 6,886
----------- -------------
Total liabilities and stockholders' equity................................... $109,443 $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 Nine Months Ended
June 30, June 30,
2000 1999 2000 1999
-------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Net revenue............................................ $45,397 $53,134 $140,902 $164,745
Costs and expenses:
Operating salaries, wages and employee benefits...... 21,219 26,222 65,913 80,787
Other operating costs................................ 16,439 18,830 50,939 56,888
Corporate, general and administrative................ 4,276 4,590 14,092 13,040
Provision for doubtful accounts...................... 1,121 4,452 5,413 14,962
Depreciation and amortization........................ 2,009 2,237 6,113 6,570
Impairment of intangible assets...................... - - - 20,984
-------- -------- -------- --------
Total costs and expenses...................... 45,064 56,331 142,470 193,231
-------- -------- -------- --------
Operating income (loss)................................ 333 (3,197) (1,568) (28,486)
Interest income........................................ (161) - (388) -
Interest expense....................................... 1,468 3,950 6,370 10,914
Loss on sale of business............................... - 1,258 - 1,258
-------- -------- -------- --------
Loss from continuing operations, before minority
interest and income taxes........................ (974) (8,405) (7,550) (40,658)
Minority interest in loss of subsidiary................ - 33 - 200
-------- -------- -------- --------
Loss from continuing operations, before income taxes... (974) (8,372) (7,550) (40,458)
Income tax benefit..................................... - - - (1,659)
-------- -------- -------- --------
Loss from continuing operations........................ (974) (8,372) (7,550) (38,799)
Discontinued operations
(Loss) income from discontinued operations, net of tax. - (260) - 1,475
Gain on disposal of discontinued operations............ 407 - 24,721 -
-------- -------- -------- --------
(Loss) income before extraordinary item................ (567) (8,632) 17,171 (37,324)
Extraordinary item
Gain on early extinguishment of debt................ 10,299 - 10,299 -
-------- -------- -------- --------
Net income (loss)...................................... $ 9,732 $(8,632) $ 27,470 $(37,324)
======== ======== ======== ========
Basic and diluted net income (loss) per share data:
Loss from continuing operations........................ $ (0.15) $ (1.26) $ (1.13) $ (5.83)
(Loss) income from discontinued operations............. - (0.04) - 0.22
Gain on disposal of discontinued operations............ 0.06 - 3.71 -
-------- -------- -------- --------
(Loss) income before extraordinary item................ (0.09) (1.30) 2.58 (5.61)
Extraordinary item
Gain on early extinguishment of debt................ 1.55 - 1.55 -
-------- -------- -------- --------
Net income (loss)...................................... $ 1.46 $ (1.30) $ 4.13 $ (5.61)
======== ======== ======== ========
Weighted average shares outstanding:
Basic and diluted...................................... 6,658 6,652 6,654 6,652
======== ======== ======== ========
</TABLE>
See accompanying notes.
5
<PAGE>
PEDIATRIC SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
2000 1999
-------- ---------
Operating activities (Unaudited)
<S> <C> <C>
Loss from continuing operations............................................... $ (7,550) $(38,799)
Adjustments to reconcile loss from continuing operations to net cash
provided by (used in) operating activities:
Depreciation and amortization............................................ 6,113 6,570
Provision for doubtful accounts.......................................... 5,413 14,962
Loss on sale of business................................................. - 1,258
Impairment of intangible assets.......................................... - 20,984
Amortization of deferred financing fees.................................. 599 441
Deferred income taxes.................................................... (3,559) (612)
Minority interest in loss of subsidiary.................................. - (200)
Changes in operating assets and liabilities:
Accounts receivable.................................................... 10,213 (10,717)
Prepaid expenses....................................................... (228) 393
Other assets........................................................... 615 105
Accounts payable....................................................... (4,169) (1,169)
Income taxes........................................................... 2,807 1,875
Accrued liabilities.................................................... (5,277) (2,345)
-------- ---------
Net cash provided by (used in) operating activities of continuing
operations................................................................. 4,977 (7,254)
Net cash (used in) provided by operating activities of discontinued
operations................................................................. (842) 8,473
-------- ---------
Net cash provided by operating activities..................................... 4,135 1,219
Investing activities
Purchases of property and equipment........................................... (1,039) (2,387)
Proceeds from sale of division................................................ 78,031 -
Proceeds from sale of business................................................ - 1,770
Other, net.................................................................... 41 43
-------- ---------
Net cash provided by (used in) investing activities of continuing operations.. 77,033 (574)
Net cash used in investing activities of discontinued operations.............. (24) (960)
-------- ---------
Net cash provided by (used in) investing activities........................... 77,009 (1,534)
Financing activities
Principal payments on long-term debt.......................................... (81,723) (9,279)
Borrowings on long-term debt.................................................. - 16,500
Deferred financing fees....................................................... (251) (16)
Proceeds from exercise of stock options....................................... - 1
-------- ---------
Net cash (used in) provided by financing activities........................... (81,974) 7,206
-------- ---------
(Decrease) increase in cash and cash equivalents.............................. (830) 6,891
Cash and cash equivalents at beginning of period.............................. 8,361 1,444
-------- ---------
Cash and cash equivalents at end of period.................................... $ 7,531 $ 8,335
======== =========
Supplemental disclosure of cash flow information
Cash paid for interest........................................................ $ 8,327 $ 13,181
======== =========
Cash paid for taxes........................................................... $ 667 $ 565
======== =========
See accompanying notes.
</TABLE>
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 accounting principles
generally accepted in the United States for interim financial information
and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all information and notes required by
generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Results of operations for the three and nine months ended June
30, 2000 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 accounting principles generally accepted in the United
States 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 $8.5 million and $10.5 million
for which services have been rendered but the amounts were unbilled as of
June 30, 2000 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 cash and cash equivalents and accounts
receivable. Cash and cash equivalents are held primarily in one financial
institution. The Company performs periodic evaluations of the relative
credit standing of this financial institution. 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.
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.
During the third quarter of fiscal 2000 certain retained lease obligations
and retention bonuses were paid at less than originally estimated amounts
resulting in a gain of $0.4 million. 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 Nine Months Ended
June 30, June 30,
1999 2000 1999
------------------ -------- --------
<S> <C> <C> <C>
Net revenue............................... $21,296 $6,415 $66,059
(Loss) income before income tax expense... (260) - 2,581
Income tax expense........................ - - 1,106
------- ------ -------
Net (loss) income $ (260) $ - $ 1,475
------- ------ -------
</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):
September 30,
1999
--------------
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
=======
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 liabilities include accounts
payable, additional accrued compensation and other accrued liabilities
which totaled approximately $2.2 million at June 30, 2000.
8. Income Taxes
In the three months ended June 30, 2000, the Company had a current income
tax expense of $3.6 million which was offset by the reduction of the
valuation allowance related to the deferred tax asset resulting in zero
income tax expense.
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 (in thousands):
<TABLE>
<S> <C> <C>
June 30, September 30,
2000 1999
-------- ------------
Allowance for doubtful accounts.......................................... $ 6,398 $ 6,934
Deferred losses on discontinued operations............................... - (3,918)
Mark to market accounting for accounts receivable........................ (2,029) (3,543)
Net operating loss carryforward.......................................... - 11,575
Payroll related accruals................................................. 585 769
Insurance related accruals............................................... 1,898 1,748
Property and equipment and intangibles................................... 3,956 4,180
Other, net............................................................... 1,311 601
------- --------
Net deferred tax asset................................................... 12,119 18,346
Valuation allowance...................................................... (8,560) (18,346)
------- --------
Net deferred tax asset................................................... $ 3,559 $ --
======= ========
</TABLE>
The Company recorded a partial valuation allowance against net deferred tax
assets as of June 30, 2000 and a full valuation allowance against net
deferred tax assets as of September 30, 1999. 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 partial valuation allowance as of June 30, 2000.
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.
9
<PAGE>
During the third quarter of fiscal year 2000, the Company completed a
series of transactions to repurchase a total of $29.6 million of the $75.0
million aggregate principal amount of 10% Senior Subordinated Notes due
2008 (the "Notes") for $18.4 million cash plus accrued interest. The pre-
tax gain (net of the write-off of deferred financing fees) of $10.3 million
is reflected as an extraordinary gain in the condensed consolidated
statement of operations.
10. 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 the
three and nine months ended June 30, 2000 and 1999, 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 third 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 is to redirect the Company to its
core businesses, the pediatric home health care and adult respiratory
businesses.
The Company made progress on multiple operating initiatives contained within the
Plan. The Company continued to evaluate its portfolio of managed care contracts
with the intention to cancel or renegotiate those with minimal profitability and
cash flow performance. As contracts reach their respective renewal dates the
Company intends to base its decision to renew upon profitability and cash flow
criteria. Therefore, the possibility exists that certain contracts will not be
renewed resulting in future revenue reductions. The Company continues to focus
its marketing efforts on its core competencies to facilitate future internal
revenue growth and has invested in additional marketing staff and related
programs to support this initiative. While there will continue to be revenue
from non-core services previously marketed, the Company anticipates these
amounts will continue to decline and hopes to offset this decline with
internally generated revenue growth within the core services from the results of
the aforementioned initiatives. The Company continues to refine its best
practices methodology for assessing and improving branch office performance. In
response to best practices findings to date, ongoing organizational changes are
occurring. Additionally, the Company has invested significantly in its
reimbursement organization by, among other things, hiring more experienced
senior managers, increasing incentive compensation for billing and collection
teams and improving its reporting and analysis capabilities.
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.
11
<PAGE>
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.
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
Percentage of Net Revenue Increase (Decrease)
----------------------------------------- ----------------------------
Three Months Nine Months Three Months Nine Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
----------------- ------------------ ------------ -----------
2000 1999 2000 1999 2000 2000
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net revenue........................................... 100.0% 100.0% 100.0% 100.0% (15)% (15)%
Operating salaries, wages and employee benefits....... 46.7 49.3 46.8 49.0 (19) (18)
Other operating costs................................. 36.2 35.4 36.2 34.5 (13) (11)
Corporate, general and administrative................. 9.4 8.6 10.0 7.9 (7) 8
Provision for doubtful accounts....................... 2.5 8.4 3.8 9.1 (75) (64)
Depreciation and amortization......................... 4.5 4.2 4.3 4.0 (10) (7)
Impairment of intangible assets....................... - - - 12.7 - (100)
----- ---- ---- ----- ---- ----
Operating income (loss)............................... 0.7 (5.9) (1.1) (17.2) (110) (95)
Interest income....................................... (0.4) - (0.3) - - -
Interest expense...................................... 3.2 7.4 4.5 6.6 (63) (42)
Loss on sale of business.............................. - 2.4 - 0.8 (100) (100)
----- ---- ---- ----- ---- ----
Loss from continuing operations, before minority
interest and income taxes............................ (2.1) (15.7) (5.3) (24.6) (87) (81)
Minority interest in loss of subsidiary............... - 0.1 - 0.1 (100) (100)
----- ---- ---- ----- ---- ----
Loss from continuing operations before income taxes... (2.1) (15.6) (5.3) (24.5) (86) (80)
Income tax benefit.................................... - - - (0.9) - (100)
----- ---- ---- ----- ---- ----
Net loss from continuing operations................... (2.1)% (15.6)% (5.3)% (23.6)% (86)% (80)%
===== ===== ==== ===== ==== ====
</TABLE>
12
<PAGE>
The following table sets forth for the periods indicated the net revenue
breakdown by service:
<TABLE>
<CAPTION>
(in thousands)
Three Months Nine Months
Ended Ended
June 30, June 30,
2000 1999 2000 1999
------- ------- -------- --------
<S> <C> <C> <C> <C>
Pediatric Home Health Care
Nursing................................. $20,466 $24,048 $ 62,668 $ 70,209
Respiratory Therapy Equipment........... 4,119 5,694 13,336 18,541
Home Medical Equipment.................. 454 683 1,484 2,372
Pharmacy and Other...................... 8,904 8,419 26,361 27,419
------- ------- -------- --------
Total Pediatric Home Health Care...... 33,943 38,844 103,849 118,541
------- ------- -------- --------
Adult Home Health Care:
Nursing................................. 2,800 4,803 8,787 15,062
Respiratory Therapy Equipment........... 4,384 5,178 13,543 16,885
Home Medical Equipment.................. 1,073 1,395 3,444 5,016
Pharmacy and Other...................... 3,197 2,914 11,279 9,241
------- ------- -------- --------
Total Adult Home Health Care.......... 11,454 14,290 37,053 46,204
------- ------- -------- --------
Total Net Revenue..................... $45,397 $53,134 $140,902 $164,745
======= ======= ======== ========
</TABLE>
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Net revenue decreased $7.7 million, or 15%, to $45.4 million in the three months
ended June 30, 2000 from $53.1 million in the three months ended June 30, 1999.
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
$7.7 million decrease in net revenue for the three months ended June 30, 2000,
pediatric health care net revenue accounted for $4.9 million, primarily
attributable to the closure of select locations. Adult health care net revenue
accounted for a decrease of $2.8 million for the three months ended June 30,
2000, primarily as a result of the Company's sale of the medical staffing
business and reduction in adult nursing. In the three months ended June 30,
2000, the Company derived approximately 50% of its net revenue from commercial
insurers and other private payors, 43% 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 $5.0 million, or 19%, to $21.2 million in the three months ended June
30, 2000 from $26.2 million in the three months ended June 30, 1999. Labor
costs have decreased across all services as a result of headcount reductions,
reduced nursing services primarily attributable to the closure and sale of
select nursing locations and an increase in unstaffed hours due to the nursing
shortage in selected markets. However, due to the impact of the nursing
shortage in selected 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 June 30, 2000
decreased to 47% from 49% for the three months ended June 30, 1999.
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 $2.4 million, or 13%, to $16.4 million in the three
months ended June 30, 2000, from $18.8 million in the three months ended June
30, 1999. As a percentage of net revenue, other operating costs for the three
months ended June 30, 2000 increased to 36% from 35% for the three months ended
June 30, 1999.
Corporate, general and administrative costs decreased $0.3 million, or 7%, to
$4.3 million in the three months ended June 30, 2000, from $4.6 million in the
three months ended June 30, 1999. As a percentage of net revenue, corporate,
general and administrative costs for the three months ended June 30, 2000,
increased slightly compared to the three months ended June 30, 1999. 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
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<PAGE>
costs necessary to sustain the Company's infrastructure. As the Company's Plan
impacts future periods, certain of these costs should be able to be reduced,
though there can be no guarantees.
Provision for doubtful accounts decreased $3.3 million, or 75%, to $1.1 million
in the three months ended June 30, 2000, from $4.4 million in the three months
ended June 30, 1999. Overall cash collections for continuing operations
decreased approximately $0.4 million or 0.7% during the three months ended June
30, 2000 as compared to the three months ended June 30, 1999. Cash collections
as a percentage of net revenue were 112% and 96%, respectively. Management
deemed the provision levels to be appropriate.
Depreciation and amortization decreased $0.2 million, or 10%, to $2.0 million in
the three months ended June 30, 2000 from $2.2 million in the three months ended
June 30, 1999. As a percentage of the Company's net revenue, depreciation and
amortization costs for the three months ended June 30, 2000 increased slightly
compared to the three months ended June 30, 1999.
Interest expense decreased $2.5 million, or 63%, to $1.5 million in the three
months ended June 30, 2000, from $4.0 million in the three months ended June 30,
1999. The Company's average debt outstanding decreased $82.5 million as the
amount outstanding under the Credit Agreement was paid down to zero on November
1, 1999 and the Company completed a series of transactions to repurchase $29.6
million of the $75.0 million Notes during the three months ended June 30, 2000.
Interest income increased $0.2 million in the three months ended June 30, 2000.
The Company invested its excess cash balances in highly liquid investments.
Nine Months Ended June 30, 2000 Compared to Nine Months Ended June 30, 1999
Net revenue decreased $23.8 million, or 15%, to $140.9 million in the nine
months ended June 30, 2000 from $164.7 million in the nine months ended June 30,
1999. 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 $23.8 million decrease in net revenue for the nine months ended June 30,
2000, pediatric health care net revenue accounted for $14.7 million, primarily
attributable to the closure of select locations. Adult health care net revenue
accounted for a decrease of $9.1 million for the nine months ended June 30,
2000, primarily as a result of the Company's sale of the medical staffing
business and reduction in adult nursing. In the nine months ended June 30,
2000, 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 $14.9 million, or 18%, to $65.9 million in the nine months ended June
30, 2000 from $80.8 million in the nine months ended June 30, 1999. Labor costs
have decreased across all services as a result of headcount reductions, reduced
nursing services primarily attributable to the closure and sale of select
nursing locations and an increase in unstaffed hours due to the nursing shortage
in selected markets. However, due to the impact of the nursing shortage in
selected 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 nine months ended June 30, 2000 decreased
to 47% from 49% for the nine months ended June 30, 1999.
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 $6.0 million, or 11%, to $50.9 million in the nine
months ended June 30, 2000, from $56.9 million in the nine months ended June 30,
1999. As a percentage of net revenue, other operating costs for the nine months
ended June 30, 2000 increased to 36% from 35% for the nine months ended June
30, 1999. The increase primarily relates to the impact of location fixed costs
relative to the decline in net revenue for the nine months ended June 30, 2000
as compared to the nine months ended June 30, 1999.
Corporate, general and administrative costs increased $1.1 million, or 8%, to
$14.1 million in the nine months ended
14
<PAGE>
June 30, 2000, from $13.0 million in the nine months ended June 30, 1999. As a
percentage of net revenue, corporate, general and administrative costs for the
nine months ended June 30, 2000, increased to 10% from 8% in the nine months
ended June 30, 1999. 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. As the Company's Plan impacts future periods, certain
of these costs should be able to be reduced, though there can be no guarantees.
Provision for doubtful accounts decreased $9.5 million, or 64%, to $5.4 million
in the nine months ended June 30, 2000, from $14.9 million in the nine months
ended June 30, 1999. Overall cash collections for continuing operations
increased approximately $6.7 million or 5% during the nine months ended June 30,
2000 as compared to the nine months ended June 30, 1999. Management deemed the
provision levels to be appropriate.
Depreciation and amortization decreased $0.5 million, or 7%, to $6.1 million in
the nine months ended June 30, 2000 from $6.6 million in the nine months ended
June 30, 1999. As a percentage of the Company's net revenue, depreciation and
amortization costs for the nine months ended June 30, 2000 increased slightly
compared to the nine months ended June 30, 1999.
Interest expense decreased $4.5 million, or 42%, to $6.4 million in the nine
months ended June 30, 2000, from $10.9 million in the nine months ended June 30,
1999. The Company's average debt outstanding decreased $59.8 million as the
amount outstanding under the Credit Agreement was paid down to zero on November
1, 1999 and the Company completed a series of transactions to repurchase $29.6
million of the $75.0 million Notes during the nine months ended June 30, 2000.
Interest income increased $0.4 million in the nine months ended June 30, 2000.
The Company invested its excess cash balances in highly liquid investments.
Income tax benefit decreased $1.7 million to zero in the nine months ended June
30, 2000, from $1.7 million in the nine months ended June 30, 1999. The Company
recorded a partial valuation allowance against the net deferred tax assets as of
June 30, 2000.
Liquidity and Capital Resources
At June 30, 2000, total borrowings under the Notes were $45.4 million. The
Company recently completed a series of transactions to repurchase a total of
$29.6 million of the $75.0 million Notes for $18.4 million cash plus accrued
interest. The pre-tax gain (net of the write-off of the related deferred
financing fees) of $10.3 million is reflected as an extraordinary item in the
condensed consolidated statements of operations.
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.
On January 13, 2000, the Company settled and received a final payment of $0.1
million under the Interest Rate Swap Agreement with a commercial bank, having a
cumulative notional principle amount of $25 million.
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
$2.2 million at June 30, 2000.
The Company has utilized all net operating loss carryforwards that are
available.
15
<PAGE>
Overall cash collections from continuing operations decreased approximately $0.4
million or 0.7% during the three months ended June 30, 2000 as compared to the
three months ended June 30, 1999. Cash collections as a percentage of net
revenue were 112% and 96%, respectively. 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 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 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.
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
The Company's principal financial instruments subject to potential concentration
of credit risk are cash and cash equivalents and accounts receivable. Cash and
cash equivalents are held primarily in one financial institution. The Company
performs periodic evaluations of the relative credit standing of this financial
institution. The
16
<PAGE>
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.
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 procedural grounds. On March 30, 2000, the Court denied the
Company's motion to dismiss. On May 15, 2000, the Company and the individuals
named as defendants filed their answer, denying liability. Discovery in the
case is proceeding. 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.
17
<PAGE>
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
-------------------
The Company did not file a Current Report on Form 8-K during the
quarter ended June 30, 2000.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
PEDIATRIC SERVICES OF AMERICA, INC.
(Registrant)
Date: August 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)
19
<PAGE>
INDEX OF EXHIBITS
Page
No.
----
Exhibit 27. Financial Data Schedule ........... 21
20
