-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IXUYYG4T7ntbBzcJCngdN4NPMDUk9SuHyiplaKpLfkUGvNYSguX/AhMe+tAdmdnZ I0MR8Pkh7u28XDca6udNFg== 0000898430-99-002195.txt : 19990524 0000898430-99-002195.hdr.sgml : 19990524 ACCESSION NUMBER: 0000898430-99-002195 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990521 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEDIATRIC SERVICES OF AMERICA INC CENTRAL INDEX KEY: 0000893430 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 581873345 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23946 FILM NUMBER: 99631603 BUSINESS ADDRESS: STREET 1: 31O TECHNOLOGY PKWY CITY: NORCROSS STATE: GA ZIP: 30092-2929 BUSINESS PHONE: 7704411580 MAIL ADDRESS: STREET 1: 310 TECHNOLOGY PKWY CITY: NORCROSS STATE: GA ZIP: 30092-2929 10-Q 1 FORM 10-Q - ------------------------------------------------------------------------------- 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 March 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 May 13, 1999, the Registrant had 6,652,005 shares of Common Stock, $0.01 Par Value, outstanding. - ------------------------------------------------------------------------------- Page 1 of 30 Index of Exhibits on page 30 FORM 10-Q PEDIATRIC SERVICES OF AMERICA, INC. INDEX PART I FINANCIAL INFORMATION Page Number ITEM 1: Financial Statements Condensed Consolidated Balance Sheets as of March 31, 1999 and September 30, 1998....................... 3 Condensed Consolidated Statements of Operations for the three and six months ended March 31, 1999 and 1998...... 5 Condensed Consolidated Statements of Cash Flows for the six months ended March 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 PART II OTHER INFORMATION ITEM 1: Legal Proceedings................................................ 27 ITEM 4: Submission of Matters to a Vote of Security Holders.............. 27 ITEM 5: Other Information................................................ 28 ITEM 6: Exhibits and Reports on Form 8-K................................. 28 Signatures....................................................... 29 Index of Exhibits................................................ 30 2 PART I -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, September 30, 1999 1998 (Unaudited) (Audited) ---------- ------------- Assets Current assets: Cash and cash equivalents ........................................... $ 8,714 $ 2,008 Accounts receivable, less allowance for doubtful accounts of $19,976 and $14,008, respectively .................... 99,752 99,030 Prepaid expenses .................................................... 454 807 Income taxes receivable ............................................. 1,974 2,898 Deferred income taxes ............................................... -- 3,266 Other current assets ................................................ 5,480 5,837 --------- --------- Total current assets ..................................................... 116,374 113,846 Property and equipment: Home care equipment held for rental ................................. 29,538 28,435 Furniture and fixtures .............................................. 16,263 15,185 Vehicles ............................................................ 891 891 Leasehold improvements .............................................. 988 915 --------- --------- 47,680 45,426 Accumulated depreciation and amortization ........................... (23,935) (20,714) --------- --------- 23,745 24,712 Other assets: Goodwill, less accumulated amortization of $6,249 and $6,672, respectively .................................. 68,798 89,172 Certificates of need, less accumulated amortization of $251 and $508, respectively ...................................... 421 2,739 Deferred financing fees, less accumulated amortization of $805 and $521, respectively ...................... 2,984 3,251 Noncompete agreements, less accumulated amortization of $953 and $875, respectively ...................................... 107 185 Other ............................................................... 649 656 --------- --------- 72,959 96,003 --------- --------- Total assets ............................................................. $ 213,078 $ 234,561 ========= =========
See accompanying notes. 3 PEDIATRIC SERVICES OF AMERICA, INC CONDENSED CONSOLIDATED BALANCE SHEETS--(Continued) (In thousands)
March 31, September 30, 1999 1998 (Unaudited) (Audited) ----------- ------------- Liabilities and stockholders' equity Current liabilities: Accounts payable...................................................................... $ 12,608 $ 11,600 Accrued compensation.................................................................. 11,337 11,147 Accrued insurance..................................................................... 3,970 3,516 Other accrued liabilities............................................................. 7,127 7,362 Deferred revenue...................................................................... 967 1,101 Current maturities of long-term obligations to related parties........................ 3,636 3,323 Current maturities of long-term obligations........................................... 321 416 -------- -------- Total current liabilities............................................................. 39,966 38,465 Long-term obligations to related parties, net of current maturities................... 170 220 Long-term obligations, net of current maturities...................................... 139,046 127,567 Deferred income taxes................................................................. -- 3,879 Minority interest in subsidiary....................................................... 580 747 Stockholders' equity: Preferred stock, $.01 par value, 2,000 shares authorized, no shares issued and outstanding........................................ -- -- Common stock, $.01 par value, 80,000 shares authorized; 6,652 shares at March 31, 1999 and 6,652 shares at September 30, 1998 issued and outstanding, respectively.... 67 67 Additional paid-in capital............................................................ 48,362 50,037 Retained earnings (deficit)........................................................... (15,113) 13,579 -------- -------- Total stockholders' equity............................................................ 33,316 63,683 -------- -------- Total liabilities and stockholders' equity............................................ $213,078 $234,561 ======== ========
See accompanying notes. 4 PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three Months Ended Six Months Ended March 31, March 31, (Unaudited) (Unaudited) ------------------------ ------------------------ 1999 1998 1999 1998 -------- ------- -------- -------- Net revenue...................................................... $ 76,999 $79,479 $156,373 $141,038 Costs and expenses: Operating salaries, wages and employee benefits............... 29,265 31,017 58,950 57,098 Other operating costs......................................... 36,054 32,524 70,880 55,467 Corporate, general and administrative......................... 6,359 6,070 12,398 9,907 Provision for doubtful accounts............................... 7,346 2,095 10,510 3,928 Depreciation and amortization................................. 2,657 2,297 5,099 4,144 Impairment of intangible assets............................... 20,984 -- 20,984 -- -------- ------- -------- -------- Total costs and expenses.................................... 102,665 74,003 178,821 130,544 -------- ------- -------- -------- Operating income (loss).......................................... (25,666) 5,476 (22,448) 10,494 Interest expense................................................. 3,870 1,926 6,964 3,392 -------- ------- -------- -------- Income (loss) before minority interest and income taxes......................................................... (29,536) 3,550 (29,412) 7,102 Minority interest in loss of subsidiary.......................... 124 26 167 27 -------- ------- -------- -------- Income (loss) before income taxes................................ (29,412) 3,576 (29,245) 7,129 Income tax expense (benefit)..................................... (612) 1,441 (553) 2,873 -------- ------- -------- -------- Net income (loss) ............................................... $(28,800) $ 2,135 $(28,692) $ 4,256 ======== ======= ======== ======== Net income (loss) per share data: Basic....................................................... $ (4.33) $ 0.30 $ (4.31) $ 0.63 ======== ======= ======== ======== Diluted..................................................... $ (4.33) $ 0.30 $ (4.31) $ 0.61 ======== ======= ======== ======== Weighted average shares outstanding: Basic....................................................... 6,652 7,075 6,652 6,789 ======== ======= ======== ======== Diluted..................................................... 6,652 7,234 6,652 6,971 ======== ======= ======== ========
See accompanying notes. 5 PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended March 31, (Unaudited) ----------------------- 1999 1998 -------- -------- Operating activities Net income (loss)............................................................................ $(28,692) $ 4,256 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization............................................................ 5,099 4,144 Impairment of intangible assets.......................................................... 20,984 -- Provision for doubtful accounts.......................................................... 10,510 3,928 Amortization of deferred financing fees.................................................. 284 90 Deferred income taxes.................................................................... (612) 2,418 Minority interest in loss of subsidiary.................................................. (167) (27) Changes in operating assets and liabilities, net of effects from acquisitions of businesses: Accounts receivable...................................................................... (11,233) (27,663) Prepaid expenses and other current assets................................................ 651 (809) Accounts payable......................................................................... 1,007 920 Income taxes............................................................................. 925 (18) Accrued liabilities...................................................................... 274 1,682 -------- -------- Net cash used in operating activities........................................................ (970) (11,079) Investing activities Purchases of property and equipment...................................................... (2,295) (3,804) Acquisitions of businesses............................................................... -- (23,356) Other, net............................................................................... 16 (26) -------- -------- Net cash used in investing activities........................................................ (2,279) (27,186) Financing activities Principal payments on long-term debt..................................................... (6,530) (5,961) Borrowings on long-term debt............................................................. 16,500 44,000 Deferred financing fees.................................................................. (16) (33) Proceeds from exercise of stock options.................................................. 1 69 -------- -------- Net cash provided by financing activities.................................................... 9,955 38,075 -------- -------- Increase (decrease) in cash and cash equivalents............................................. 6,706 (190) Cash and cash equivalents at beginning of period............................................. 2,008 501 -------- -------- Cash and cash equivalents at end of period................................................... $ 8,714 $ 311 ======== ======== Supplemental disclosure of cash flow information Cash paid for interest................................................................... $ 6,754 $ 3,370 ======== ======== Cash paid for income taxes............................................................... $ 95 $ 577 ======== ========
See accompanying notes. 6 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 and six months ended March 31, 1999 are not necessarily indicative of the results to be expected for the entire fiscal year ending September 30, 1999. These condensed consolidated financial statements should be read in conjunction with the Company's audited financial statements for the year ended September 30, 1998 included in the Company's Annual Report on Form 10-K for such year filed with the Securities and Exchange Commission. Principal accounting policies are set forth in the Company's 1998 Annual Report. 2. Accounts Receivable Accounts receivable include approximately $24.0 million and $33.1 million for which services have been rendered but the amounts were unbilled as of March 31, 1999 and September 30, 1998, respectively. Such unbilled amounts result primarily from the medical testing division which bills one month in arrears. Other unbilled amounts are due to normal time delays in processing. 3. Allowance for Doubtful Accounts During the three months ended March 31, 1999, the Company's provision for doubtful accounts increased approximately $5.3 million to $7.4 million from $2.1 million in the three months ended March 31, 1998. During the three months ended March 31, 1999 the Company experienced a significant deterioration in the aging of its accounts receivable and an increase in the days sales outstanding ("DSO"). The increase in the provision during the three months ended March 31, 1999 is primarily attributable to: (1) continued difficulties in the health care reimbursement environment including extended payor claim review and delayed payment; (2) significant organizational disruption caused by excessive personnel turnover in the Company's reimbursement department including all levels of reimbursement management; (3) increased personnel resources dedicated to the resolution of the medical testing division case management and billing system issues; (4) continued assessment of payor requirements and payment performance; and (5) continued claim formatting and electronic transmission difficulties with a significant number of large payors. Due to the above mentioned issues and ongoing changes in the business environment, the Company's management reassessed its estimate of the allowance for doubtful accounts resulting in an increase in the allowance provision. 7 4. Intangible and Other Long-lived Assets An impairment of intangible assets was recorded during the three months ended March 31, 1999. The impairment resulted primarily from the impact on certain non-core business locations and activities of the Company's strategic plan formulated in the second quarter of fiscal 1999 which will focus the Company on its core businesses. See further discussion in Recent Developments. Additionally, certain locations were negatively impacted by the cancellation of certain large contracts which impacted the future profitability of the locations. Finally, certain second quarter of fiscal 1999 conditions, including failure of the Company to meet management projections, declining gross margins, recurring location operating losses and slower than expected progress in improving collections were identified by management as indications of potential intangible asset impairment. Management conducted an evaluation of the carrying value of the Company's recorded intangible assets. Management considered current and anticipated industry conditions and recent changes in its business strategies and concluded that an impairment charge of $21.0 million in the second quarter of fiscal 1999 was appropriate. The charge includes a write-off of $7.9 million in goodwill and $2.2 million in certificates of need associated with the specific locations to be closed in the third quarter of fiscal 1999 and $10.9 million in goodwill related to changes within certain locations arising from the cancellation of certain contracts which impacted location profitability and the termination of certain non-core activities. For purposes of assessing impairment, assets were grouped at the location level, which is the lowest level for which there are identifiable cash flows that are largely independent. Asset impairment was deemed to exist if the Company's estimate of undiscounted cash flows was less than the carrying amount of the long-lived assets and goodwill at the location. In estimating future cash flows, management used its best estimates of anticipated operating results over the remaining useful life of the assets. For those locations where asset impairment was identified, the amount of impairment was measured by comparing the carrying amount of the long-lived assets and goodwill to the estimated fair value for each location. Fair value was estimated using a valuation technique based on the present value of the expected future cash flows. In conjunction with the impairment evaluation, management reduced the amortization periods for intangible assets at March 31, 1999 from 30 and 25 years to 20 years. This change in estimate will be accounted for prospectively. 5. Long-Term Borrowings Arrangements On April 23, 1999, the Company provided notice to its lenders, as required under the terms of its Credit Agreement, as amended, of non-compliance with certain financial covenants contained in the Credit Agreement. On May 13, 1999 the Credit Agreement was further amended ("Amendment No. 5"), waiving the defaults under the Credit Agreement, revising the financial covenants and reducing the total commitment from $70.0 million to $65.0 million effective May 13, 1999. Further, Amendment No. 5 revised the interest payment date to be 8 monthly and extended the time period which prohibits the Company from borrowing for acquisitions. The new covenants become more restrictive over the remaining life of the Credit Agreement. Under the Credit Agreement, as amended, commitment fees were set at 0.500% per annum on the average daily unused portion of the loan facility. On the effective date of Amendment No. 5, all LIBOR and swingline borrowings were converted to a base rate loan bearing interest at base rate plus 2.50%. Base rate is defined as the greater of (a) federal funds rate plus 1/2 of 1% or (b) prime rate. At March 31, 1999, the interest rates on LIBOR and swingline borrowings under the Credit Agreement ranged from 8.48% to 8.69%. Outstanding borrowings under the Credit Agreement at March 31, 1999 were approximately $64.0 million. 6. Net Income (Loss) per Common and Common Equivalent Share Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock outstanding and the dilutive effect of common equivalent shares (calculated using the treasury stock method). The dilutive effect of the weighted average number of options included in the diluted earnings per share is 159,708, and 182,126 for the three and six months ended March 31, 1998, respectively. For the three and six months ended March 31, 1999, the effect of the stock options were excluded from the calculation of weighted average shares outstanding for diluted loss per share as such amounts were antidilutive. 7. Interest Rate Swap Agreement At March 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 pays a fixed rate of 6.61%. The interest rate differential to LIBOR is received or paid and recognized over the life of the agreement as an adjustment to interest expense. The interest rate swap terminates in June 2002. The Company is exposed to credit loss in the event of non-performance by the Counter Party to the interest rate swap agreement. However, the Company does not anticipate such non-performance. 8. Segments of an Enterprise Effective December 31, 1998, the Company adopted the provisions of Statement of Financial Accounting Standard No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). Under the provisions of SFAS 131, the Company has restated its prior year disclosures to conform to the requirements of SFAS 131. The Company has two reportable segments: medical services and medical testing. The medical services division provides a broad range of pediatric health care services, including nursing, respiratory therapy and other medical equipment, pharmacy and infusion therapy. 9 The medical testing division provides a broad range of paramedical testing services, including taking health histories, collecting blood and urine samples, administering physical examinations and performing electrocardiogram examinations on insurance applicants. Unaudited financial data by segment is as follows:
General Medical Medical Corporate Services Testing Expense Consolidated --------- ------- --------- ------------ For the three months ended March 31, 1999 Net revenue............................... $ 54,870 $ 22,129 $ -- $ 76,999 Operating income (loss) (1)............... (22,326) 3,239 (6,579) (25,666) Depreciation/amortization................. 1,956 480 221 2,657 Impairment of intangible assets........... 20,984 -- -- 20,984 For the three months ended March 31, 1998 Net revenue............................... $ 57,302 $ 22,177 $ -- $ 79,479 Operating income (loss) (1)............... 6,983 4,665 (6,172) 5,476 Depreciation/amortization................. 1,944 252 101 2,297
General Medical Medical Corporate Services Testing Expense Consolidated -------- --------- ---------- ------------ For the six months ended March 31, 1999 Net revenue.............................. $ 111,610 $ 44,763 $ -- $ 156,373 Operating income (loss) (1).............. (16,412) 6,791 (12,827) (22,448) Depreciation/amortization................ 3,903 767 429 5,099 Impairment of intangible assets.......... 20,984 -- -- 20,984 For the six months ended March 31, 1998 Net revenue.............................. $ 109,217 $ 31,821 $ -- $ 141,038 Operating income (loss) (1).............. 15,342 5,234 (10,082) 10,494 Depreciation/amortization................ 3,630 339 175 4,144
Medical Medical General Services Testing Corporate Consolidated -------- ------- --------- ------------ As of March 31, 1999 Accounts receivable (less allowance for doubtful accounts).. $74,643 $25,109 $ -- $99,752 Property and equipment (less depreciation and amortization).. 15,368 4,991 3,386 23,745 Goodwill (less accumulated amortization)..................... 45,999 22,799 -- 68,798 As of September 30, 1998 Accounts receivable (less allowance for doubtful accounts)... $72,636 $26,394 $ -- $99,030 Property and equipment (less depreciation and amortization).. 16,582 4,842 3,288 24,712 Goodwill (less accumulated amortization)..................... 65,969 23,203 -- 89,172
(1) Operating income (loss) represents business segment's income (loss) before corporate general and administrative expenses, interest and taxes. 10 Unaudited reconciliation to income (loss) before minority interest and income taxes
For the Three Months Ended March 31, ---------------------------------- 1999 1998 ---- ---- Consolidated operating income (loss) ................... $(25,666) $ 5,476 Interest expense ........................................ 3,870 1,926 -------- -------- Income (loss) before minority interest and income taxes . $(29,536) $ 3,550 ======== ========
For the Six Months Ended March 31, ---------------------------------- 1999 1998 ---- ---- Consolidated operating income (loss) .................... $(22,448) $ 10,494 Interest expense ........................................ 6,964 3,392 -------- -------- Income (loss) before minority interest and income taxes . $(29,412) $ 7,102 ======== ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-Q contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) relating to future financial performance of the Company. When used in this Form 10-Q, the words "may," "could," "should," "would," "believe," "feel", "anticipate," "estimate," "intend," "plan" and similar expressions or statements are intended to identify forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company's control. The Company cautions that various factors, including the factors described hereunder and those discussed in the Company's filings with the Securities and Exchange Commission, as well as general economic conditions and industry trends, the Company's ability to collect for equipment sold or rented, or for services provided, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements of the Company made by or on behalf of the Company. Any forward-looking statements speak only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of an unanticipated event. New factors emerge from time to time, and it is not possible for management to predict all of such factors. Further, management cannot assess the impact of each such factor on 11 the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward- looking statements. Recent Developments In the second quarter of fiscal 1999, the Company's senior management finalized its strategic plan to improve the Company's performance. The primary focus of the strategic plan relating to medical services is to refocus the Company on its core businesses, the pediatric home healthcare and adult respiratory businesses. As a result, the Company anticipates undergoing many changes. The key changes are: (1) a refocus on core business including closing of non-core businesses and termination of certain non-core activities at ongoing locations; (2) the sale of certain non-core business assets; (3) withdrawal from certain unprofitable contracts and locations; (4) reduction in location operating costs and corporate general and administrative expenses; (5) expansion of field sales organization; and (6) evaluation of recapitalization alternatives by retaining an investment banking firm as its financial advisor. The strategic plan has given rise to a number of charges which are discussed herein. In addition, the increasing difficulties within the health care industry relating to the timely collection of accounts receivable combined with certain internal challenges within the Company's reimbursement organization made it necessary for the Company to increase the allowance for doubtful accounts in the current quarter. In response to these problems, management is (1) reassessing its authorization process to improve the probability of timely payment from providers, (2) reevaluating contracts with managed care organizations in an effort to cancel contracts not meeting minimum profitability and cash flow levels and (3) refocusing resources within the reimbursement organization of the Company. Although the strategic plan is expected to reduce operating costs, there can be no assurance that the Company will be able to achieve the expected cost savings from the strategic plan efforts or will be able to reduce costs without negatively impacting operations. Further, it is not possible to predict the ultimate outcome of the cost reductions the Company has implemented or whether they will be sufficient to offset the reductions in net revenue. 12 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 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 operations as a percentage of net revenue and the percentage change in the dollar amounts of each item from the comparative prior period:
Period-to-Period Percentage Percentage of Net Revenue Increase (Decrease) ------------------------------------------ ----------------------- Three Months Six Months Three Six Months Months Ended Ended Ended Ended March 31, March 31, March 31, March 31, ----------------- ----------------- ----------------------- 1999 1998 1999 1998 1999 1999 ----- ---- ----- ---- ------ ---- Net revenue............................................ 100% 100% 100% 100% (3)% 11% Operating salaries, wages and employee benefits........ 38.0 39.0 37.7 40.5 (6) 3 Other operating costs.................................. 46.8 40.9 45.3 39.3 11 28 Corporate, general and administrative.................. 8.3 7.6 7.9 7.0 5 25 Provision for doubtful accounts........................ 9.5 2.6 6.7 2.8 251 168 Depreciation and amortization.......................... 3.5 2.9 3.3 2.9 16 23 Impairment of intangible assets........................ 27.3 - 13.4 - - - ----- ---- ----- ---- ------ ---- Operating income (loss)................................ (33.4) 7.0 (14.3) 7.5 (569) (314) Interest expense....................................... 5.0 2.4 4.5 2.4 101 105 ----- ---- ----- ---- ------ ---- Income (loss) before minority interest and income taxes.................................................. (38.4) 4.6 (18.8) 5.1 (932) (514) Minority interest in loss of subsidiary................ 0.2 - 0.1 - 371 508 ----- ---- ----- ---- ------ ---- Income (loss) before income taxes...................... (38.2) 4.6 (18.7) 5.1 (923) (510) Income tax expense (benefit)........................... (0.8) 1.8 (0.4) 2.0 (143) (119) ----- ---- ----- ---- ------ ---- Net income (loss)...................................... (37.4)% 2.8% (18.3)% 3.1% (1,449)% (774)% ===== ==== ===== ==== ====== ====
13 The following table sets forth for the periods indicated the net revenue breakdown by service:
THREE MONTHS SIX MONTHS ENDED ENDED MARCH 31, MARCH 31, 1999 1998 1999 1998 -------- -------- -------- -------- Pediatric Home Health Care Nursing.......................................................... $22,811 $22,418 $ 46,161 $ 44,973 Respiratory Therapy Equipment.................................... 6,288 6,891 12,847 11,643 Home Medical Equipment........................................... 825 777 1,688 1,574 Pharmacy and Other............................................... 9,245 9,878 19,000 17,980 ------- ------- -------- -------- Total Pediatric Home Health Care......................... 39,169 39,964 79,696 76,170 ------- ------- -------- -------- Adult Home Health Care: Nursing.......................................................... 5,250 4,714 10,259 8,825 Respiratory Therapy Equipment.................................... 5,670 5,504 11,707 11,491 Home Medical Equipment........................................... 1,730 1,507 3,621 3,071 Pharmacy and Other............................................... 3,051 5,613 6,327 9,660 ------- ------- -------- -------- Total Adult Home Health Care............................. 15,701 17,338 31,914 33,047 ------- ------- -------- -------- Total Medical Testing Services........................... 22,129 22,177 44,763 31,821 ------- ------- -------- -------- Total Net Revenue........................................ $76,999 $79,479 $156,373 $141,038 ======= ======= ======== ========
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Net revenue decreased $2.5 million, or 3%, to $77.0 million in the three months ended March 31, 1999 from $79.5 million in the three months ended March 31, 1998. The Company's acquisitions accounted for an approximately $2.8 million increase in net revenue and a decline in net revenue from existing branch offices accounted for a decrease of $5.3 million. The decline in net revenue was 7% for the three months ended March 31, 1999. Of the $2.5 million decrease in net revenue for the three months ended March 31, 1999, pediatric health care net revenue accounted for $0.8 million. Decreased pediatric health care net revenue for the three months ended March 31, 1999 was primarily attributable to a significant increase in unstaffed pediatric nursing cases due to location specific nursing shortages for the three months ended March 31, 1999 compared to the three months ended March 31, 1998, offset by revenues related to acquired businesses. Reductions in adult health care net revenue accounted for $1.6 million of the total decrease in net revenue for the three months ended March 31, 1999, which was primarily the result of the termination of contracts for adult infusion services during the three months ended March 31, 1999. During the three months ended March 31, 1999, the Company derived approximately 72% of its net revenue from commercial insurers and other private payors, 23% from Medicaid and 5% from Medicare. Operating salaries, wages and employee benefits consist primarily of branch office employee costs. Operating salaries, wages and employee benefits decreased $1.8 million, or 6%, to $29.2 million in the three months ended March 31,1999, from $31.0 million in the three months ended March 31, 1998. As a percentage of net revenue, operating salaries, wages and employee benefits for the three months ended March 31, 1999, decreased to 38% from 39% in the three months ended March 31, 1998. Other operating costs include medical supplies, branch office rent, utilities, vehicle expenses, independent medical testing technician payments and cost of sales. Cost of sales consists primarily 14 of the costs of pharmacy products sold. Other operating costs increased $3.5 million or 11%, to $36.0 million in the three months ended March 31, 1999, from $32.5 million in the three months ended March 31, 1998. As a percentage of net revenue, other operating costs for the three months ended March 31, 1999 increased to 47% from 41% in the three months ended March 31, 1998. During the three months ended March 31, 1999, other operating costs increased due to: (1) relocating selected offices to new facilities and support costs related to the newly developed case management and billing system in the medical testing division; (2) increased costs for infusion services; and (3) higher fixed costs as a percentage of declining net revenue in the medical services division. Corporate, general and administrative costs increased $0.3 million, or 5%, to $6.4 million in the three months ended March 31, 1999 from $6.1 million in the three months ended March 31, 1998. As a percentage of net revenue, corporate, general and administrative costs increased for the three months ended March 31, 1999 to 8.3% from 7.6% in the three months ended March 31, 1998. The Company has experienced high turnover within the reimbursement organization, including senior level management. This turnover has resulted in increased recruiting, overtime and temporary labor costs. In the medical testing division additional field sales staff were hired to increase market penetration in the three months ended March 31, 1999, when compared to the three months ended March 31, 1998. Provision for doubtful accounts consists of the amount of accounts receivable that management estimates to be uncollectible. During the three months ended March 31, 1999 the Company's provision for doubtful accounts increased approximately $5.3 million, or 251%, to $7.4 million from $2.1 million in the three months ended March 31, 1998. During the three months ended March 31, 1999 the Company experienced a significant deterioration in the aging of its accounts receivable and an increase in the days sales outstanding ("DSO"). The increase in the provision during the three months ended March 31, 1999 is primarily attributable to: (1) continued difficulties in the health care reimbursement environment including extended payor claim review and delayed payment; (2) significant organizational disruption caused by excessive personnel turnover in the Company's reimbursement department including all levels of reimbursement management; (3) increased personnel resources dedicated to the resolution of the medical testing division case management and billing system issues; (4) continued assessment of payor requirements and payment performance; and (5) continued claim formatting and electronic transmission difficulties with a significant number of large payors. Due to the above mentioned issues and ongoing changes in the business environment, the Company's management reassessed its estimate of the allowance for doubtful accounts resulting in an increase in the allowance provision. Depreciation and amortization increased $0.4 million, or 16%, to $2.7 million in the three months ended March 31, 1999, from $2.3 million in the three months ended March 31, 1998. As a percentage of the Company's total net revenue, depreciation and amortization costs increased for the three months ended March 31, 1999, to 4% from 3% in the three months ended March 31, 1998. The increase in depreciation was primarily due to the newly developed medical testing case management and billing system. An impairment of intangible assets was recorded during the three months ended March 31, 1999. The impairment resulted primarily from the impact on certain non-core business locations and 15 activities of the Company's strategic plan formulated in the second quarter of fiscal 1999 which will focus the Company on its core businesses. See further discussion in Recent Developments. Additionally, certain locations were negatively impacted by the cancellation of certain large contracts which impacted the future profitability of the locations. Finally, certain second quarter of fiscal 1999 conditions, including failure of the Company to meet management projections, declining gross margins, recurring location operating losses and slower than expected progress in improving collections were identified by management as indications of potential intangible asset impairment. Management conducted an evaluation of the carrying value of the Company's recorded intangible assets. Management considered current and anticipated industry conditions and recent changes in its business strategies and concluded that an impairment charge of $21.0 million in the second quarter of fiscal 1999 was appropriate. The charge includes a write-off of $7.9 million in goodwill and $2.2 million in certificates of need associated with the specific locations to be closed in the third quarter of fiscal 1999 and $10.9 million in goodwill related to changes within certain locations arising from the cancellation of certain contracts which impacted location profitability and the termination of certain non-core activities. For purposes of assessing impairment, assets were grouped at the location level, which is the lowest level for which there are identifiable cash flows that are largely independent. Asset impairment was deemed to exist if the Company's estimate of undiscounted cash flows was less than the carrying amount of the long-lived assets and goodwill at the location. In estimating future cash flows, management used its best estimates of anticipated operating results over the remaining useful life of the assets. For those locations where asset impairment was identified, the amount of impairment was measured by comparing the carrying amount of the long-lived assets and goodwill to the estimated fair value for each location. Fair value was estimated using a valuation technique based on the present value of the expected future cash flows. In conjunction with the impairment evaluation, management reduced the amortization periods for intangible assets at March 31, 1999 from 30 and 25 years to 20 years. This change in estimate will be accounted for prospectively. Interest expense increased $1.9 million, or 101%, to $3.9 million in the three months ended March 31, 1999, from $1.9 million in the three months ended March 31, 1998. The increase was primarily the result of a $42.0 million increase in the Company's average debt outstanding incurred to finance acquisitions and the Company's working capital, compared to the prior fiscal year period. The increase was also due to an increase in interest rates related to the Company's issuance of $75.0 million aggregate principal amount of 10% Senior Subordinated Notes due 2008 and the increase in the interest rates under Amendment No. 4 of the Credit Agreement. Income tax expense (benefit) decreased $2.0 million to ($0.6) million in the three months ended March 31, 1999, from $1.4 million in the three months ended March 31, 1998. In the three months ended March 31, 1999, an income tax benefit was recorded to the extent of the net deferred tax liability of $0.6 million. The Company recorded a $10.6 million valuation allowance against the remaining $10.6 million of net deferred tax assets generated this quarter 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, 16 and tax planning strategies. Six Months Ended March 31, 1999 Compared to Six Months Ended March 31, 1998 Net revenue increased $15.3 million, or 11%, to $156.3 million in the six months ended March 31, 1999, from $141.0 million in the six months ended March 31, 1998. The Company's acquisitions accounted for approximately $19.4 million of the increase in net revenue offset by a decline in net revenue from existing branch offices of $4.1 million. The decline in net revenue was 3% for the six months ended March 31, 1999. Of the $15.3 million increase in net revenue for the six months ended March 31, 1999, pediatric health care net revenue accounted for $3.5 million. Increased pediatric health care net revenue for the six months ended March 31, 1999, was primarily attributable to the Company's acquisitions offset by a decline in internal growth primarily driven by a significant increase in unstaffed pediatric nursing cases due to location specific nursing shortages for the six months ended March 31, 1999 compared to the six months ended March 31, 1998. Adult health care net revenue accounted for a decrease of $1.1 million for the six months ended March 31, 1999. Increased adult health care net revenue for the six months ended March 31, 1999, attributable to the Company's acquisitions was offset by a decline in net revenue from existing branch offices primarily the result of the termination of contracts for adult infusion services during the six months ended March 31, 1999. Medical testing services net revenue accounted for $12.9 million of the increase in net revenue for the six months ended March 31, 1999, primarily due to the December 1997 acquisition of PMI which added $11.6 million in net revenue for the period. In the six months ended March 31, 1999 the Company derived approximately 71% of its net revenue from commercial insurers and other private payors, 24% from Medicaid and 5% from Medicare. Operating salaries, wages and employee benefits consist primarily of branch office employee costs. Operating salaries, wages and employee benefits increased $1.9 million, or 3%, to $59.0 million in the six months ended March 31,1999, from $57.1 million in the six months ended March 31, 1998. The increase was primarily due to the Company's acquisitions which added approximately $6.7 million offset by a decrease of $4.8 million in internal operations. As a percentage of net revenue, operating salaries, wages and employee benefits for the six months ended March 31, 1999, decreased to 38% from 41% in the six months ended March 31, 1998. This decrease as a percentage of net revenue is due to the PMI acquisition in December 1997, which has a lower salaries, wages and employee benefits component as compared to the medical services division. Other operating costs include medical supplies, branch office rent, utilities, vehicle expenses, independent medical testing technician payments and cost of sales. Cost of sales consists primarily of the costs of pharmacy products sold. Other operating costs increased $15.4 million, or 28%, to $70.9 million in the six months ended March 31, 1999, from $55.5 million in the six months ended March 31, 1998. As a percentage of net revenue, other operating costs for the six months ended March 31, 1999, increased to 45% from 39% in the six months ended March 31, 1998. Of the increase, $9.3 million relates to acquisitions, primarily the acquisition of PMI in the medical testing business. The remaining increase relates to: (1) relocating selected offices to new facilities and support costs related to the newly developed case management and billing system in the medical testing division; (2) increased costs for infusion services; and (3) higher fixed costs as a percentage of declining net revenue in the medical services division. 17 Corporate, general and administrative costs increased $2.5 million, or 25%, to $12.4 million in the six months ended March 31, 1999, from $9.9 million in the six months ended March 31, 1998. As a percentage of net revenue, corporate, general and administrative costs for the six months ended March 31, 1999, increased to 7.9% from 7.0% in the six months ended March 31, 1998. Of the increase, $1.7 million relates to the December 1997 acquisition of PMI in the medical testing business. The Company has experienced high turnover within the reimbursement department, including senior level management. This has resulted in increased recruiting, overtime and temporary labor costs. In the medical testing division, additional field sales staff were hired to increase market penetration in the six months ended March 31, 1999, when compared to the six months ended March 31, 1998. Provision for doubtful accounts consists of the amount of accounts receivable that management estimates to be uncollectible. During the six months ended March 31, 1999 the Company's provision for doubtful accounts increased approximately $6.6 million, or 168%, to $10.5 million from $3.9 million in the six months ended March 31, 1998. During the six months ended March 31, 1999 the Company experienced a significant deterioration in the aging of its accounts receivable and an increase in the days sales outstanding ("DSO"). The increase in the provision during the six months ended March 31, 1999 is primarily attributable to: (1) continued difficulties in the health care reimbursement environment including extended payor claim review and delayed payment; (2) significant organizational disruption caused by excessive personnel turnover in the Company's reimbursement department including all levels of reimbursement management; (3) increased personnel resources dedicated to the resolution of the medical testing division case management and billing system issues; (4) continued assessment of payor requirements and payment performance; and (5) continued claim formatting and electronic transmission difficulties with a significant number of large payors. Due to the above mentioned issues and ongoing changes in the business environment, the Company's management reassessed its estimate of the allowance for doubtful accounts resulting in an increase in the allowance provision. Depreciation and amortization increased $1.0 million, or 23%, to $5.1 million in the six months ended March 31, 1999 from $4.1 million in the six months ended March 31, 1998. As a percentage of the Company's net revenue, depreciation and amortization costs for the six months ended March 31, 1999 increased to 3.3% from 2.9% in the six months ended March 31, 1998. The increase in depreciation was primarily due to the newly developed medical testing case management and billing system, as well as the amortization of goodwill from the Company's acquisitions. An impairment of intangible assets was recorded during the six months ended March 31, 1999. The impairment resulted primarily from the impact on certain non-core business locations and activities of the Company's strategic plan formulated in the second quarter of fiscal 1999 which will focus the Company on its core businesses. See further discussion in Recent Developments. Additionally, certain locations were negatively impacted by the cancellation of certain large contracts which impacted the future profitability of the locations. Finally, certain second quarter of fiscal 1999 conditions, including failure of the Company to meet management projections, declining gross margins, recurring location operating losses and slower than expected progress in improving collections were identified by management as indications of potential intangible asset impairment. Management conducted an evaluation of the carrying value of the Company's recorded intangible assets. Management considered current and anticipated industry conditions and recent changes in its business strategies 18 and concluded that an impairment charge of $21.0 million in the second quarter of fiscal 1999 was appropriate. The charge includes a write-off of $7.9 million in goodwill and $2.2 million in certificates of need associated with the specific locations to be closed in the third quarter of fiscal 1999 and $10.9 million in goodwill related to changes within certain locations arising from the cancellation of certain contracts which impacted location profitability and the termination of certain non-core activities. For purposes of assessing impairment, assets were grouped at the location level, which is the lowest level for which there are identifiable cash flows that are largely independent. Asset impairment was deemed to exist if the Company's estimate of undiscounted cash flows was less than the carrying amount of the long-lived assets and goodwill at the location. In estimating future cash flows, management used its best estimates of anticipated operating results over the remaining useful life of the assets. For those locations where asset impairment was identified, the amount of impairment was measured by comparing the carrying amount of the long-lived assets and goodwill to the estimated fair value for each location. Fair value was estimated using a valuation technique based on the present value of the expected future cash flows. In conjunction with the impairment evaluation, management reduced the amortization periods for intangible assets at March 31, 1999 from 30 and 25 years to 20 years. This change in estimate will be accounted for prospectively. Interest expense increased $3.6 million, or 105%, to $7.0 million in the six months ended March 31, 1999, from $3.4 million in the six months ended March 31, 1998. The increase was primarily the result of a $50.8 million increase in the Company's average debt outstanding incurred to finance acquisitions and the Company's working capital, compared to the prior fiscal year period. The increase was also due to an increase in interest rates related to the Company's issuance of $75.0 million aggregrate principal amount of 10% Senior Subordinated Notes due 2008 and the increase in the interest rates under Amendment No. 4 of the Credit Agreement. Income tax expense (benefit) decreased $3.4 million to ($0.6) million in the six months ended March 31, 1999, from $2.9 million in the six months ended March 31, 1998. In the six months ended March 31, 1999, an income tax benefit was recorded to the extent of the net deferred tax liability of $0.6 million. The Company recorded a $10.6 million valuation allowance against the remaining $10.6 million of net deferred tax assets generated during the six months ended March 31, 1999, as a result of net operating losses. In recording the valuation allowance, management considered whether it is more likely than not that some or all of the deferred tax assets will be realized. This analysis includes considering scheduled reversal of deferred tax liabilities, projected future taxable income, carryback potential, and tax planning strategies. Liquidity and Capital Resources Operating Cash Flow The Company's operating cash flows are significantly affected by changes in accounts receivable, which have grown substantially over time largely as a result of the Company's net revenue growth and slowing collections. See "Accounts Receivable" below. Cash used in operating activities was 19 $1.0 million for the six months ended March 31, 1999 compared to $11.1 million for the same period in the prior year. The increase in accounts receivable in the six months ended March 31, 1998 was due, in part, to the acquisition of PMI. The DSO was 117 days as of March 31, 1999 and 107 days as of September 30, 1998, based on the net revenue for the last quarter of the period. For the three and six months ended March 31, 1999, the increase in DSO is largely attributable to the slower collections in the medical services business. The Company's investments in property and equipment are attributable largely to purchases of medical equipment that is rented to patients and computer equipment needed for the Company's new systems, primarily billing and collection systems for both medical services and medical testing and financial systems. Capital expenditures for computer equipment and software development have been substantially completed. The Company cannot be certain that cash flows from operations or cash on hand will be adequate to allow the Company to continue to meet its debt service obligations, including interest payments, working capital and other capital expenditures. The Company is currently reviewing its future capital requirements and financing alternatives. These alternatives may be severely limited as a result of the current home health care industry environment. There can be no assurance that the Company's internally generated funds and funds from alternative financings, if any, will be sufficient to fund the Company's operations. Accounts Receivable The Company experienced a significant deterioration in the aging of its accounts receivable and an increase in the DSO. The deterioration is primarily attributable to: (1) continued difficulties in the health care reimbursement environment including extended payor claim review and delayed payment; (2) significant organizational disruption caused by excessive personnel turnover in the Company's reimbursement department including all levels of reimbursement management; (3) increased personnel resources dedicated to the resolution of the medical testing division case management and billing system issues; (4) continued assessment of payor requirements and payment performance; and (5) continued claim formatting and electronic transmission difficulties with a significant number of large payors. Due to the above mentioned issues and ongoing changes in the business environment, the Company's management reassessed its estimate of the allowance for doubtful accounts resulting in an increase in the allowance provision. A key component of the Company's strategic plan involves an organizational reengineering of the reimbursement process. However, there can be no assurances that these efforts will result in the Company realizing operating improvements and improved cash flow. Impairment of Intangible Assets An impairment of intangible assets was recorded during the quarter ended March 31, 1999. The impairment resulted primarily from the impact on certain non-core business locations and activities of the Company's strategic plan formulated in the second quarter of fiscal 1999 which will focus the Company on its core businesses. See further discussion in Recent Developments. Additionally, certain locations were negatively impacted by the cancellation of certain large contracts which impacted the future profitability of the locations. Finally, certain second quarter of fiscal 1999 conditions, including 20 failure of the Company to meet management projections, declining gross margins, recurring location operating losses and slower than expected progress in improving collections were identified by management as indications of potential intangible asset impairment. Management conducted an evaluation of the carrying value of the Company's recorded intangible assets. Management considered current and anticipated industry conditions and recent changes in its business strategies and concluded that an impairment charge of $21.0 million in the second quarter of fiscal 1999 was appropriate. The charge includes a write-off of $7.9 million in goodwill and $2.2 million in certificates of need associated with the specific locations to be closed in the third quarter of fiscal 1999 and $10.9 million in goodwill related to changes within certain locations arising from the cancellation of certain contracts which impacted location profitability and the termination of certain non-core activities. In conjunction with the impairment evaluation, management reduced the amortization periods for intangible assets at March 31, 1999 from 30 and 25 years to 20 years. This change in estimate will be accounted for prospectively. Long-Term Debt Senior Subordinated Notes On April 16, 1998, the Company issued, in a private placement, $75.0 million aggregate principal amount of 10% Senior Subordinated Notes due 2008, which were subsequently replaced on May 12, 1998, with $75.0 million aggregate principal amount of 10% Senior Subordinated Notes due 2008, Series A, registered with the Securities and Exchange Commission (the "Notes"). After paying issuance costs of approximately $2.7 million, the Company received proceeds of $72.3 million, which were used to repay a portion of the indebtedness outstanding under its Credit Agreement. Interest on the Notes accrues from April 16, 1998, and is payable semi-annually on April 15 and October 15 of each year, commencing October 15,1998. The Notes are redeemable for cash at any time on or after April 15, 2003, at the option of the Company, in whole or in part at redemption prices set forth in the Indenture. The Notes place certain restrictions on the incurrence of additional indebtedness, the creation of liens, sales of assets, mergers and consolidations and payment of dividends, among other things. A default and acceleration of any indebtedness and failure to pay any indebtedness of the Company at maturity results in a default under the Notes. Credit Agreement On July 31, 1998, the Company provided notice to its lenders, as required under the terms of the Credit Agreement, of non-compliance with certain financial covenants contained in the Credit Agreement. As a result, the Credit Agreement was further amended on August 13,1998 ("Amendment No. 2"), waiving the default under the Credit Agreement, amending the financial covenants applicable after August 13, 1998, placing a limitation on aggregate borrowings for working capital purposes and prohibiting the Company from borrowing for acquisitions until February 1999 without the approval of the lenders, and stipulating that the Company must meet certain financial criteria as defined in Amendment No. 2 before borrowing for acquisitions. In addition, Amendment No. 2 reduced total borrowings allowed under the Credit Agreement from $100.0 million to $75.0 million, and changed the commitment fees and applicable margins. Amendment No. 2 also granted the Company a waiver to permit the Company to comply with its contractual obligations relating to the 21 PMI acquisition by allowing the Company to repurchase at the previously guaranteed price the shares issued to ChoicePoint in the PMI transaction. The Security Agreement executed in connection with Amendment No. 2 granted to the lenders under the Credit Agreement, subject to certain permitted liens and exceptions, a security interest in substantially all of the assets of the Company. On December 4, 1998 the Company provided notice to its lenders, as required under the terms of the Credit Agreement, as amended, of non-compliance with certain financial covenants contained in the Credit Agreement. On December 24, 1998, the Credit Agreement was further amended ("Amendment No. 3"), waiving the default under the Credit Agreement through January 29, 1999 and providing the Company temporary borrowing availability while revised financial covenants and other modifications were negotiated. On January 8, 1999, an amendment ("Amendment No. 4") was signed with a revised set of financial covenants. The new financial covenants continue to require certain liquidity ratios and DSO targets to be met. Amendment No. 4 also revised the Credit Agreement termination date from August 13, 2002 to October 1, 2000 and reduced the total commitment from $75 million to $70 million, with a further reduction to $65 million on June 30, 1999. On April 23, 1999, the Company provided notice to its lenders, as required under the terms of the Credit Agreement, as amended, of non-compliance with certain financials covenants contained in the Credit Agreement. On May 13, 1999 the Credit Agreement was further amended ("Amendment No. 5"), waiving the default under the Credit Agreement, revising the financial covenants and reducing the total commitment from $70.0 million to $65.0 million effective May 13, 1999. Further, Amendment No. 5 revised the interest payment date to be monthly and extended the time period which prohibits the Company from borrowing for acquisitions. The new covenants become more restrictive over the remaining life of the Credit Agreement which, in the opinion of management, is reflective of the anticipated improvements in the business. Management believes that the Company will remain in compliance with the new financial covenants. Though not anticipated, if the Company fails to remain in compliance with the new financial covenants it could have a material adverse effect on the Company. The financial statements for the period ended March 31, 1999 are in compliance with the new financial covenants contained in Amendment No. 5. Under the Credit Agreement, as amended, commitment fees were set at 0.500% per annum on the average daily unused portion of the loan facility. On the effective date of Amendment No. 5, all LIBOR and swingline borrowings were converted to a base rate loan bearing interest at base rate plus 2.50%. Base rate is defined as the greater of (a) Federal Funds rate plus 1/2 of 1% or (b) prime rate. At March 31, 1999, the interest rates on LIBOR and swingline borrowings under the Credit Agreement ranged from 8.48% to 8.69%. Outstanding borrowings under the Credit Agreement at March 31, 1999 were approximately $64.0 million. At March 31, 1999, total borrowings under the Notes and the Credit Agreement were approximately $139.0 million. Interest Rate Swap Agreement 22 At March 31, 1999, the Company had one interest rate swap agreement with a commercial bank (the "Counter Party"), having a cumulative notional principal amount of $25.0 million. The Company pays a fixed rate of 6.61%. The interest rate differential to LIBOR is received or paid and recognized over the life of the agreement as an adjustment to interest expense. The interest rate swap terminates in June 2002. The Company is exposed to credit loss in the event of non-performance by the Counter Party to the interest rate swap agreement. However, the Company does not anticipate such non-performance. Year 2000 Compliance General Description of the Year 2000 Issue As the Year 2000 approaches, an issue impacting all companies has emerged regarding how existing application software programs and computer operating systems ("Systems"), and other operating equipment ("Equipment") which use embedded computer chips can accommodate this date value. The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's Systems that have date- sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. The Company's plan to resolve the Year 2000 Issue (the "Year 2000 Plan") involves the following four phases: assessment, remediation, testing, and implementation. In addition to the Company's internal initiatives, the Company has requested information about the Year 2000 compliance status of its material suppliers and payors through internally developed Year 2000 surveys and written warranty information. Based solely on such inquiry and research and the Company's Year 2000 assessment to date (discussed below), management does not currently believe that the Company should incur significant operating expenses or be required to invest heavily in Systems improvements or Equipment relating to the Year 2000 Issue, however, the Company does expect to experience payment delays, particularly from federal and state welfare programs. It is impossible to quantify the effects of any payment delays at this time, but the Company will continue to monitor and update Year 2000 compliance efforts of the Company and of its material suppliers and payors. Status of Year 2000 Plan As indicated on the Year 2000 chart set forth below, the Company has completed approximately 98% of its assessment of all Systems that could be significantly affected by the Year 2000 issue. Based on the Company's continuing assessment, the Company is not modifying or replacing significant portions of its Systems. Testing of Systems is being actively performed on all Systems that could be significantly affected by the Year 2000 issue. The remediation phase of the Year 2000 Plan for the Company's information technology systems is approximately 80% complete. Remediation involves upgrading or replacing Systems and equipment which the assessment phase indicates are not Year 2000 compliant. Remediation of the critical 23 software systems is essentially complete. Non Year 2000 compliant hardware is now being replaced throughout the Company. The testing phase of the Year 2000 plan is approximately 65% complete. Testing involves operation of Systems and Equipment using dates after December 31, 1999. The Company expects to complete testing by July 15, 1999. The revised completion date was extended by two months due to the extensiveness of testing required for recently included improvements in the invoicing and pricing modules of key Systems. This change in planned completion dates is primarily due to significant improvements and changes to the programs in several critical applications. The implementation phase of the Year 2000 Plan begins upon completion of material phases of remediation and testing, and involves operating under Year 2000 conditions. It also encompasses contingency plans for any problems arising when Year 2000 dates begin to affect the Company's Systems and Equipment and those of third party suppliers and payors. Importance of Third Party Exposure to the Year 2000 Certain of the Company's Systems interface directly with significant third party vendors and payors including federal and state Medicare and Medicaid agencies. The Company also conducts business electronically with certain external parties, including some payors and vendors. Management does not know at this time, what impact Year 2000 compliance may have on its payor and vendor sources and the impact, if any, on the Company if such payors are not fully compliant. The Company has requested information regarding Year 2000 readiness from its significant payors including commercial insurance companies, and has sought to gather information about the Year 2000 compliance status of the federal and state Medicare and Medicaid agencies with which it conducts business through its Year 2000 surveys and through research of external information sources, including government sources. To date, the Company has received a limited number of responses to its Year 2000 survey from commercial insurance carriers, no direct response to its Year 2000 survey from any state Medicaid agency, and only one response from a Medicare carrier. At this juncture, the Company is not aware of any specific payor with a Year 2000 issue that would materially impact the Company's results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that such payors, including federal and state Medicare and Medicaid agencies will be Year 2000 ready. The inability of these payors to complete their Year 2000 resolution process in a timely fashion could have a material adverse impact on the Company's ability to bill and collect accounts receivable. The effect of non-compliance by such payors is not determinable. Estimated Costs The Company has, will and will continue to utilize both internal and external resources to reprogram, or replace, test, and implement the Systems and Equipment for Year 2000 modifications. The original estimated costs for the Year 2000 project excluded consulting fees that are estimated to be approximately $190,000. The estimated total has been revised to be approximately $440,000 and is being funded through operating cash flows. Through March 31, 1999, the Company has incurred approximately $180,500, related to all phases of the Year 2000 project. The total remaining project costs is currently estimated at $259,500. 24 Contingency Plans The Company already has certain contingency planning and safeguards in place in the event of system shutdowns and problems including: diagrams for reconstruction of databases, backup computer tapes of all network information which are stored offsite and a help desk available during working hours to solve computer problems. However, in response to Year 2000 issues, the Company is now formulating a more specific disaster recovery and contingency plan for certain critical applications. This plan involves, among other things, manual workarounds, hiring additional personnel, and adjusting staffing strategies. Additional safeguards are also being considered. Specifically, the Company plans to revert to manual billing and collection, if required and keep a "hard copy" of System and billing information at the end of the 1999 and beginning of the 2000 calendar years. The Company also intends to have a backup plan for its telephone systems and a full inventory of critical medical supplies and equipment on hand at the end of 1999. There can be no assurance that the Year 2000 issues will not impact the Company even if any contingency plans are implemented, which could have a material adverse effect on the Company. Risks Management of the Company believes that it has an effective Year 2000 Plan in place to resolve the Year 2000 issues in a timely manner. As noted above, the Company has not yet completed all necessary phases of the Year 2000 Plan. In the event that the Company does not complete critical portions of such plan, the Company could be unable to take customer orders, invoice customers or collect payments. Furthermore, the Company has no means of ensuring that such payors, including federal and state Medicare and Medicaid agencies will be Year 2000 compliant. The inability of these payors to be Year 2000 compliant could have a material adverse effect on the Company. In addition, disruptions in the economy generally resulting from Year 2000 issues could also materially adversely affect the Company, and the Company could be subject to litigation for Systems or Equipment failure or malfunctions relating to Year 2000 problems. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. 25 Year 2000 Disclosure Chart(1)
Resolution Phases(2) -------------------------------------------------------------------------------------------------------------------- Assessment Remediation Testing Implementation -------------------------------------------------------------------------------------------------------------------- Information 98% Complete 80% Complete 65% Complete 50% Complete Technology Systems Expected completion Expected completion Expected completion date, July 15, 1999 date, July 15, 1999 date, August 30, 1999 -------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------- Operating 100% Complete 100% Complete 100% Complete 100% Complete E Equipment with x Embedded Chips p or Software(3) o -------------------------------------------------------------------------------------------------------------------- s -------------------------------------------------------------------------------------------------------------------- u Products(4) N/A N/A N/A N/A r e -------------------------------------------------------------------------------------------------------------------- T 3rd Party(5) 100% Complete for 25% Complete 25% Complete 0% Complete y direct system p interface; 75% Expected completion Expected completion e Complete for all Develop contingency date for system date for system other material plans as appropriate, interface work, interface work, exposures March 31, 1999 September 30, 1999 November 30, 1999 Expected Implement contingency completion date plans or other for surveying all alternatives as third parties: in necessary, December process 31, 1999 --------------------------------------------------------------------------------------------------------------------
(1) Based upon estimates derived from our detailed master Year 2000 plan. Percentages are approximate and best estimates. (2) Where systems have been designed with Year 2000 in mind, but not yet validated, a weighted success factor has been included. The assumption is that the system will execute with minimal, if any, remediation. For example, a system not intended to be Year 2000 compliant, would start with a zero weighting factor. A system designed for Year 2000 compliance is considered to be at least 75% completed. (3) Letters from our key suppliers and payors stating their compliance for critical Year 2000 issues have been placed on file. The Company does not intend to test medical equipment any further. (4) The category Products does not apply to the Company in general and therefore is not applicable. (5) Percentages reflect third party systems that interface directly with the Company's systems. The effect of non-compliance by other third party payors is not determinable at this time and may be beyond the Company's control. 26 QUARTERLY OPERATING RESULTS AND SEASONALITY The Company's quarterly results may vary significantly depending primarily on factors such as rehospitalizations of patients, the time of new branch office openings and pricing pressures due to legislative and regulatory initiatives to contain health care costs. The Company's operating results for any particular quarter may not be indicative of the results for the full fiscal year. 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. 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. The complaint purports to be filed on behalf of all persons who purchased the Company's common stock during the period from December 23, 1997 through and including July 29, 1998. To the Company's knowledge, no other putative class action complaints were filed within the sixty day time period provided for in the Private Securities Litigation Reform Act. The Company expects that the plaintiffs and their counsel will be appointed lead plaintiffs and lead counsel and that an amended complaint will be filed. The Company and the individuals named as defendants deny that they have violated any of the requirements or obligations of the Federal Securities Laws; however, there can be no assurance that the Company will not sustain material liability as a result of or related to this shareholder suit. ITEM 4. Submission of Matters to a Vote of Security Holders The 1999 Annual Meeting of Shareholders of the Company was held on February 19, 1999. Proxies with regard to the matters to be voted upon at the Annual Meeting were solicited under Regulation 14A of the Securities Exchange Act of 1934, as amended. Set forth below is a brief description of each matter voted upon at the Annual Meeting and the results of the voting on each matter. (a) Election of the two directors named below for a term of three years expiring at the 2002 Annual Meeting of Shareholders. There was no solicitation in opposition to any of the nominees listed in the proxy statement, and each of the nominees was elected. Votes Broker ------------------- ---------------------- Nominees For Withheld Abstentions Non-votes ----------------- --------- -------- ----------- --------- Adam O. Holzhauer 5,807,750 73,655 - - Michael J. Finn 5,807,750 73,655 - - 27 (b) Ratification of the appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending September 30, 1999. The Shareholders approved the proposal. Votes -------------------------------------------- For Against Abstentions --------- ------- ----------- 5,799,385 29,357 52,653 ITEM 5. Other Information On April 26, 1999, the Company issued a press release announcing the resignation of Stephen M. Mengert as Senior Vice President, Chief Financial Officer, Secretary and Treasurer of the Company. James M. McNeill, the Company's Chief Accounting Officer has been named as his replacement. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits -------- The following exhibits are filed as part of this Report. 10.20 Amendment No. 5 to the Credit Agreement, dated May 13, 1999, filed herewith. 27 Financial Data Schedule (b) Report on Form 8-K ------------------ On March 25, 1999, the Registrant filed a Current Report on Form 8-K under Item 5, announcing that the listing of the Company's Common Stock moved to The Nasdaq SmallCap Market effective March 22, 1999. 28 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: May 21, 1999 By: /s/ James M. McNeill -------------------------------- James M. McNeill Senior Vice President, Chief Financial Officer, Treasurer and Secretary (Duly authorized officer and Principal Financial Officer) 29 INDEX OF EXHIBITS Page No. -------- 10.20 Amendment No. 5 to the Credit Agreement, dated May 13, 1999..... 31 27 Financial Data Schedule......................................... 41 30 EX-10.20 2 AMENDMENT NO. 5 DATED MAY 13, 1999 EXHIBIT 10.20 AMENDMENT NO. 5 THIS AMENDMENT NO. 5 (the "Amendment") dated as of May 13, 1999, to the --------- Credit Agreement referenced below, is by and among PEDIATRIC SERVICES OF AMERICA, INC., a Georgia corporation, PEDIATRIC SERVICES OF AMERICA, INC., a Delaware corporation, the subsidiaries and affiliates identified herein, the lenders identified herein, and NATIONSBANK, N.A., as Administrative Agent. Terms used but no otherwise defined shall have the meanings provided in the Credit Agreement. W I T N E S S E T H WHEREAS, a credit facility has been established in favor of Pediatric Services of America, Inc., a Georgia corporation (the "Borrower") pursuant to -------- the terms of that Credit Agreement dated as of August 13, 1997 (as amended and modified, the "Credit Agreement") among the Borrower, the Guarantors and Lenders ---------------- identified therein, and NationsBank, N.A., as Administrative Agent; WHEREAS, the Borrower has requested that the Lenders make certain amendments to the Credit Agreement; WHEREAS, the requested amendments require the consent of the Required Lenders; WHEREAS, the Required Lenders, for and on behalf of the Lenders, have agreed to the requested amendments on the terms and conditions set forth herein; NOW, THEREFORE, IN CONSIDERATION of the premises and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties agrees as follows: 1. The Credit Agreement is amended and modified in the following respects: 1.1 The following definitions in Section 1.1 are amended and modified to read as follows: "Aggregate Revolving Committed Amount" means aggregate amount of ------------------------------------ Revolving Commitments in effect from time to time, being from May 13, 1999 (the date of Amendment No. 5), and thereafter, SIXTY-FIVE MILLION DOLLARS ($65,000,000). "EBITDA" means for any period, the sum of net income (exclusive ------ of extraordinary gains and losses and related tax effects on any such excluded gains and losses), plus, to the extent deducted in arriving ---- at net income, the sum of the following: (a) interest expense (including amortization of debt discount and premium, the interest component under Capital Leases and the implied interest component under Securitization Transactions) plus (b) all provisions for ---- Federal, state or other domestic and foreign income taxes plus (c) ---- depreciation and amortization, plus (d) special non-cash charges of up ---- to (i) $21,000,000 for asset impairment and $4,000,000 of incremental provision for doubtful accounts taken against earnings in the second fiscal quarter of 1999, (ii) $5,000,000 for asset impairment and $20,000,000 for incremental provision for doubtful accounts in the third fiscal quarter of 1999, and (iii) $1,200,000 for non-recurring costs related to the closing of locations in the fourth quarter of 1999, in each case determined in accordance with GAAP applied on a consistent basis. "Interest Payment Date" means the last day of each month and the --------------------- Termination Date. If an Interest Payment Date falls on a date which is not a Business Day, such Interest Payment Date shall be deemed to be the next succeeding Business Day. In addition, the definition of "Permitted Investments" is amended and modified by deleting subsection (xiv), adding the word "and" before "(xiii)", and a period after "(xiii)". 1.2 Amendment Fee. The Borrower agrees to pay to the Administrative ------------- Agent for the ratable benefit of the Lenders an amendment fee ("Amendment Fee") in the amount of $325,000, fully earned on the date of this Amendment, one-half of which shall be due and payable on May 13, 1999, and one-half of which shall be due and payable on the earlier of (a) the date all Obligations are paid in full and each Lender's Revolving Commitment is terminated, and (b) August 15, 1999. 1.3 Borrower, Swing Line Lender, and Lenders hereby agree that the Swing Line Commitment is terminated, effective immediately. 1.4 Notwithstanding anything in the Credit Agreement or in any other Loan Document, the Borrower may not request, and Administrative Agent and Lenders will not make, Eurodollar Loans, and each Eurodollar -2- Loan outstanding on the date hereof shall be converted to a Base Rate Loan, effective immediately. 1.5 Section 7.2 is amended by adding the following subparagraphs (f) and (g): (f) Promptly after each such development occurs, detailed information with respect to significant developments in any material transaction, and in any event, information with respect to progress in connection with that transaction in a conference call held not less frequently than once every other week, in addition to such other written and verbal information with respect thereto as any Lender shall reasonably request. (g) Weekly Cash Report. On or before Wednesday of the following ------------------ week, a weekly cash receipts and disbursements report for the preceding week in form and substance satisfactory to Required Lenders. 1.6 The financial covenants in Section 7.9 are amended in their entirety to read as follows: 7.9 Financial Covenants. ------------------- (a) Consolidated Leverage Ratio. As of the end of each fiscal --------------------------- quarter to occur during the periods set forth below, the Consolidated Leverage Ratio shall be not greater than: January 1, 1999 through March 31, 1999 10.00:1.0 April 1, 1999 through June 30, 1999 13.00:1.0 July 1, 1999 through September 30, 1999 8.00:1.0 October 1, 1999 through December 31, 1999 6.00:1.0 January 1, 2000 through March 31, 2000 4.00:1.0 April 1, 2000 and thereafter 3.50:1.0 (b) Consolidated Fixed Charge Coverage Ratio. As of the end of ---------------------------------------- each fiscal quarter to occur during the periods set forth below, the Consolidated Fixed Charge Coverage Ratio shall be not less than: January 1, 2000 and thereafter 1.40:1.0 (c) Consolidated Net Worth. On March 31, 2000, and at all times ---------------------- thereafter, Consolidated Net Worth shall be not less than the sum of 85% of Consolidated Net Worth as of the Closing Date -3- plus on the last day of each fiscal quarter to occur after the Closing ---- Date, 50% of Consolidated Net Income for the fiscal quarter then ended (but not less than zero), such increases to be cumulative, plus 75% of ---- the net proceeds from Equity Transactions (including for purposes hereof, any increases in shareholder equity on account of acquisitions made by issuance of stock or stock swap) occurring after the Closing Date. (d) Consolidated Senior Leverage Ratio. As of the end of each ---------------------------------- fiscal quarter to occur during the periods set forth below, the Consolidated Senior Leverage Ratio shall be not greater than: January 1, 1999 through March 31, 1999 5.00:1.0 April 1, 1999 through June 30, 1999 6.00:1.0 July 1, 1999 through September 30, 1999 4.00:1.0 October 1, 1999 through December 31, 1999 3.00:1.0 January 1, 2000 and thereafter 1.75:1.0 (e) Capital Expenditures. The aggregate amount of capital -------------------- expenditures made or incurred by members of the Consolidated Group during the fiscal quarters set forth below shall not exceed: Fiscal Quarter ending on or about March 31, 1999 $900,000 Fiscal Quarter ending on or about June 30, 1999 and thereafter $1,500,000 The unused portion of capital expenditures permitted but not used in any fiscal quarter may be carried over and used in the next fiscal quarter (one quarter carry-over). (f) Days Sales Outstanding. As of the end of each fiscal quarter ---------------------- to occur during the periods set forth below, Days Sales Outstanding of the Consolidated Group for the lines of business set forth below shall not be greater than: medical services business ------------------------- January 1, 1999 through March 31, 1999 130 days April 1, 1999 through June 30, 1999 105 days July 1, 1999 through September 30, 1999 110 days October 1, 1999 through December 31, 1999 and thereafter 115 days paramedical testing business ---------------------------- -4- January 1, 1999 through March 31, 1999 110 days April 1, 1999 through June 30, 1999 110 days July 1, 1999 through September 30, 1999 105 days October 1, 1999 through December 31, 1999 and thereafter 100 days provided, however, that Days Sales Outstanding for the medical services business assume a $20,000,000 special incremental charge in the third fiscal quarter of 1999 for doubtful accounts; to the extent such charge shall be less than $20,000,000, minimum Days Sales Outstanding will increase to an amount demonstrated by the Borrower to be reasonable and a direct result of not taking such charge in a schedule attached to the Officer's Certificate required to be delivered for that quarter pursuant to Section 7.2(b). (g) Consolidated EBITDA. From January 1, 1999 through the end of ------------------- each of the following months, Consolidated EBITDA on a cumulative basis shall not be less than the following: March, 1999 2,100,000 April, 1999 2,400,000 May, 1999 3,100,000 June, 1999 5,400,000 July, 1999 5,900,000 August, 1999 6,900,000 September, 1999 10,500,000 October, 1999 11,300,000 November, 1999 12,900,000 December, 1999 18,700,000 January, 2000 19,500,000 February, 2000 21,100,000 March, 2000 26,900,000 1.7 Subparagraph (h) of Section 8.1 is hereby amended in its entirety to read as follows: (h) other unsecured Indebtedness of the Company and/or the Borrower incurred before May 6, 1999 of up to $10,000,000 in the aggregate at any time outstanding; and 1.8 Subparagraphs (a) and (c) of Section 8.4 are hereby amended in their entirety to read as follows: (a) Enter into a transaction of merger or consolidation. -5- (c) Other than in connection with the Non-Qualified Plan, after May 6, 1999, acquire all or any portion of the capital stock or other ownership interest in any Person or all or any substantial portion of the assets, property and/or operations of a Person. 1.9 Section 8.10 is hereby amended in its entirety to read as follows: 8.10 Restricted Payments. ------------------- Other than with respect to the Non-Qualified Plan, and share guaranty payments to Medical Equipment and Supply, Inc., in the amount of $289,942.38 each on June 1, 1999, and July 15, 1999, and share guaranty payments to Pediatric Nursing Service, Inc., in the amount of $129,088.84, on May 20, 1999, make or permit any Restricted Payments. 2. In accordance with the provisions of Section 3.4(a) of the Credit Agreement, the Revolving Commitments are hereby permanently reduced by FIVE MILLION DOLLARS ($5,000,000) to a revised Aggregate Revolving Committed Amount of SIXTY-FIVE MILLION DOLLARS ($65,000,000), subject to further reduction as provided in the definition of "Aggregate Revolving Committed Amount" and as otherwise provided in the Credit Agreement. 3. This Amendment shall be effective upon satisfaction of the following conditions: (a) execution of this Amendment by the Credit Parties and the Required Lenders; (b) receipt by the Administrative Agent of legal opinions of counsel to the Credit Parties relating to this Amendment; and (c) receipt by the Administrative Agent for the ratable benefit of the Lenders the amount of $162,500, being one-half of the Amendment Fee. 4. Each of the Credit Parties hereby represents and warrants that (i) it has the requisite corporate power and authority to execute, deliver and perform this Agreement, (ii) it is duly authorized to, and has been authorized by all necessary corporate action, to execute, deliver and perform under this Agreement, (iii) it has no claims, counterclaims, offsets or defenses to the Credit Documents, and the performance of its obligations thereunder, or if it has any such claims, counterclaims, offsets or defenses, they are hereby waived, relinquished and released in consideration of the execution and -6- delivery of this Agreement by the Required Lenders, (iv) after giving effect to this Amendment, the representations and warranties in Section 6 of the Credit Agreement are true and correct in all material respects (except (x) those which expressly relate to an earlier period and, (y) with respect to Section 6.6, to the extent disclosed to the Lenders in a letter dated March 15, 1999, describing litigation which, if adversely determined, would reasonably be expected to have a Material Adverse Effect), and (v) after giving effect to this Amendment, no Default or Events of Default has occurred or is continuing. 5. The Borrower agrees to pay all reasonable costs and expenses of the Administrative Agent and the Lenders in connection with the Credit Agreement, including without limitation the reasonable fees and expenses of counsel and financial consultants to the Administrative Agent and Lenders. 6. Except as modified hereby, all of the terms and provisions of the Credit Agreement (including Schedules and Exhibits) shall remain in full force and effect. 7. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original and it shall not be necessary in making proof of this Amendment to produce or account for more than one such counterpart. 8. This Amendment shall be deemed to be a contract made under, and for all purposes shall be construed in accordance with the laws of the State of North Carolina. [Remainder of Page Intentionally Left Blank - Signature Pages Follow] -7- IN WITNESS WHEREOF, each of the parties hereto has caused a counterpart of this Amendment to be duly executed and delivered as of the date first above written. BORROWER: PEDIATRIC SERVICES OF AMERICA, INC., - -------- a Georgia corporation By: /s/ James McNeill ----------------- Name: James McNeill Title: Senior Vice President and Chief Financial Officer GUARANTORS: PEDIATRIC SERVICES OF AMERICA, INC., - ---------- a Delaware corporation By: /s/ James McNeill ----------------- Name: James McNeill Title: Senior Vice President and Chief Financial Officer PSA LICENSING CORPORATION, a Delaware corporation PSA PROPERTIES CORPORATION, a Delaware corporation By: /s/ Susan E. Dignan ------------------- Name: Susan E. Dignan Title: President for each for the foregoing PEDIATRIC SERVICES OF AMERICA (CONNECTICUT), INC., a Connecticut corporation PREMIER MEDICAL SERVICES, INC., a Nevada corporation PEDIATRIC HOME NURSING SERVICES, INC., a New York corporation PEDIATRIC PARTNERS, INC., a Delaware corporation PARAMEDICAL SERVICES OF AMERICA, INC., a California corporation PREMIER NURSE STAFFING, INC., a Nevada corporation PREMIER CERTIFIED HOME HEALTH SERVICES, INC., a Nevada corporation ARO HEALTH SERVICES, INC., a Washington corporation By: /s/ Joseph D. Sansone --------------------- Name: Joseph D. Sansone Title: President for each of the foregoing LENDERS: NATIONSBANK, N.A., - ------- individually in its capacity as a Lender and in its capacity as Administrative Agent By: /s/ Jay T. Wampler ------------------ Name: Jay T. Wampler -------------- Title: Managing Director ----------------- TORONTO DOMINION (TEXAS), INC. By: ------------------------------ Name: ---------------------------- Title: --------------------------- PNC BANK, NATIONAL ASSOCIATION By: /s/ Thomas J. McCool -------------------- Name: Thomas J. McCool ---------------- Title: Senior Vice President --------------------- SUNTRUST BANK, ATLANTA By: -------------------------------- Name: ------------------------------ Title: ----------------------------- MELLON BANK, N.A. By: /s/ Colleen McCullum -------------------- Name: Colleen McCullum ---------------- Title: Asst Vice President ------------------- BANK AUSTRIA CREDITANSTALT CORPORATE FINANCE, INC. By: /s/ Robert M. Biringer ---------------------- Name: Robert M. Biringer ------------------ Title: Executive Vice President ------------------------ By: /s/ Carl G. Drake ----------------- Name: Carl G. Drake ------------- Title: Vice President -------------- EX-27 3 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS SEP-30-1999 OCT-01-1998 MAR-31-1999 8,714 0 119,728 19,976 0 116,374 47,680 23,935 213,078 39,966 0 0 0 67 33,249 213,078 156,373 156,373 0 168,311 0 10,510 6,964 (29,245) (553) 0 0 0 0 (28,692) (4.31) (4.31)
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