10-Q 1 0001.txt QUARTERLY FINANCIAL REPORT -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANG E ACT OF 1934 For the quarterly period ended June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ______ to ______ Commission file number 0-23946 PEDIATRIC SERVICES OF AMERICA, INC. (Exact name of Registrant as specified in its charter) Delaware 58-1873345 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 310 Technology Parkway, Norcross GA 30092-2929 (Address of principal executive offices, including zip code) (770) 441-1580 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 10, 2000, the Registrant had 6,658,305 shares of Common Stock, $0.01 Par Value, outstanding. -------------------------------------------------------------------------------- Page 1 of 21 Index of Exhibits on page 20 FORM 10-Q PEDIATRIC SERVICES OF AMERICA, INC. INDEX Page Number ------
PART I FINANCIAL INFORMATION ITEM 1: Financial Statements Condensed Consolidated Balance Sheets as of June 30, 2000 and September 30, 1999............................................ 3 Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2000 and 1999...................... 5 Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2000 and 1999...................... 6 Notes to Condensed Consolidated Financial Statements............... 7 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................11 ITEM 3: Quantitative and Qualitative Disclosures about Market Risk.........16 PART II OTHER INFORMATION ITEM 1: Legal Proceedings..................................................17 ITEM 6: Exhibits and Reports on Form 8-K...................................18 Signatures.........................................................19 Index of Exhibits..................................................20
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements PEDIATRIC SERVICES OF AMERICA, INC CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
June 30, September 30, 2000 1999 ----------- ------------- (Unaudited) Assets Current assets: Cash and cash equivalents.................................. $ 7,531 $ 8,361 Accounts receivable, less allowances for doubtful accounts of $11,182 and $14,649, respectively............. 39,856 55,482 Prepaid expenses........................................... 895 667 Income taxes receivable.................................... - 345 Deferred income taxes...................................... 7,673 - Other current assets....................................... 3,416 4,011 Net current assets of discontinued operations.............. - 25,192 -------- -------- Total current assets......................................... 59,371 94,058 Property and equipment: Home care equipment held for rental........................ 29,831 30,096 Furniture and fixtures..................................... 10,134 9,813 Vehicles................................................... 815 805 Leasehold improvements..................................... 1,054 1,032 -------- -------- 41,834 41,746 Accumulated depreciation and amortization.................. (28,369) (25,071) -------- -------- 13,465 16,675 Other assets: Goodwill, less accumulated amortization of $6,829 and $5,159, respectively........................... 34,490 36,160 Certificates of need, less accumulated amortization of $378 and $302, respectively............................... 295 371 Deferred financing fees, less accumulated amortization of $463 and $1,119, respectively............. 1,505 2,719 Non-compete agreements, less accumulated amortization of $1,076 and $1,032, respectively........................... 84 28 Other...................................................... 233 367 Non-current assets of discontinued operations.............. - 27,253 -------- -------- 36,607 66,898 -------- -------- Total assets................................................. $109,443 $177,631 ======== ========
See accompanying notes. 3 PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS--(Continued) (In thousands)
June 30, September 30, 2000 1999 ----------- ------------- (Unaudited) Liabilities and stockholders' equity Current liabilities: Accounts payable........................................................... $ 4,957 $ 9,126 Accrued compensation....................................................... 4,805 9,116 Accrued insurance.......................................................... 5,199 4,602 Other accrued liabilities.................................................. 7,258 8,718 Income taxes payable......................................................... 2,462 - Deferred revenue........................................................... 610 714 Current maturities of long-term obligations to related parties............. 170 1,141 Current maturities of long-term obligations................................ 19 31 ----------- ------------- Total current liabilities.................................................... 25,480 33,448 Long-term obligations to related parties, net of current Maturities............................................................... 50 25 Long-term obligations, net of current maturities............................. 45,442 137,272 Deferred income taxes........................................................ 4,114 - Stockholders' equity: Preferred stock, $.01 par value, 2,000 shares authorized, no shares issued and outstanding.............................. - - Common stock, $.01 par value, 80,000 shares authorized; 6,658 and 6,652 shares issued and outstanding at June 30, 2000 and September 30, 1999, respectively...................... 67 67 Additional paid-in capital................................................. 48,363 48,362 Accumulated deficit........................................................ (14,073) (41,543) ----------- ------------- Total stockholders' equity................................................... 34,357 6,886 ----------- ------------- Total liabilities and stockholders' equity................................... $109,443 $177,631 =========== =============
See accompanying notes. 4 PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three Months Ended Nine Months Ended June 30, June 30, 2000 1999 2000 1999 -------- -------- -------- -------- (Unaudited) (Unaudited) Net revenue............................................ $45,397 $53,134 $140,902 $164,745 Costs and expenses: Operating salaries, wages and employee benefits...... 21,219 26,222 65,913 80,787 Other operating costs................................ 16,439 18,830 50,939 56,888 Corporate, general and administrative................ 4,276 4,590 14,092 13,040 Provision for doubtful accounts...................... 1,121 4,452 5,413 14,962 Depreciation and amortization........................ 2,009 2,237 6,113 6,570 Impairment of intangible assets...................... - - - 20,984 -------- -------- -------- -------- Total costs and expenses...................... 45,064 56,331 142,470 193,231 -------- -------- -------- -------- Operating income (loss)................................ 333 (3,197) (1,568) (28,486) Interest income........................................ (161) - (388) - Interest expense....................................... 1,468 3,950 6,370 10,914 Loss on sale of business............................... - 1,258 - 1,258 -------- -------- -------- -------- Loss from continuing operations, before minority interest and income taxes........................ (974) (8,405) (7,550) (40,658) Minority interest in loss of subsidiary................ - 33 - 200 -------- -------- -------- -------- Loss from continuing operations, before income taxes... (974) (8,372) (7,550) (40,458) Income tax benefit..................................... - - - (1,659) -------- -------- -------- -------- Loss from continuing operations........................ (974) (8,372) (7,550) (38,799) Discontinued operations (Loss) income from discontinued operations, net of tax. - (260) - 1,475 Gain on disposal of discontinued operations............ 407 - 24,721 - -------- -------- -------- -------- (Loss) income before extraordinary item................ (567) (8,632) 17,171 (37,324) Extraordinary item Gain on early extinguishment of debt................ 10,299 - 10,299 - -------- -------- -------- -------- Net income (loss)...................................... $ 9,732 $(8,632) $ 27,470 $(37,324) ======== ======== ======== ======== Basic and diluted net income (loss) per share data: Loss from continuing operations........................ $ (0.15) $ (1.26) $ (1.13) $ (5.83) (Loss) income from discontinued operations............. - (0.04) - 0.22 Gain on disposal of discontinued operations............ 0.06 - 3.71 - -------- -------- -------- -------- (Loss) income before extraordinary item................ (0.09) (1.30) 2.58 (5.61) Extraordinary item Gain on early extinguishment of debt................ 1.55 - 1.55 - -------- -------- -------- -------- Net income (loss)...................................... $ 1.46 $ (1.30) $ 4.13 $ (5.61) ======== ======== ======== ======== Weighted average shares outstanding: Basic and diluted...................................... 6,658 6,652 6,654 6,652 ======== ======== ======== ========
See accompanying notes. 5 PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Nine Months Ended June 30, 2000 1999 -------- --------- Operating activities (Unaudited) Loss from continuing operations............................................... $ (7,550) $(38,799) Adjustments to reconcile loss from continuing operations to net cash provided by (used in) operating activities: Depreciation and amortization............................................ 6,113 6,570 Provision for doubtful accounts.......................................... 5,413 14,962 Loss on sale of business................................................. - 1,258 Impairment of intangible assets.......................................... - 20,984 Amortization of deferred financing fees.................................. 599 441 Deferred income taxes.................................................... (3,559) (612) Minority interest in loss of subsidiary.................................. - (200) Changes in operating assets and liabilities: Accounts receivable.................................................... 10,213 (10,717) Prepaid expenses....................................................... (228) 393 Other assets........................................................... 615 105 Accounts payable....................................................... (4,169) (1,169) Income taxes........................................................... 2,807 1,875 Accrued liabilities.................................................... (5,277) (2,345) -------- --------- Net cash provided by (used in) operating activities of continuing operations................................................................. 4,977 (7,254) Net cash (used in) provided by operating activities of discontinued operations................................................................. (842) 8,473 -------- --------- Net cash provided by operating activities..................................... 4,135 1,219 Investing activities Purchases of property and equipment........................................... (1,039) (2,387) Proceeds from sale of division................................................ 78,031 - Proceeds from sale of business................................................ - 1,770 Other, net.................................................................... 41 43 -------- --------- Net cash provided by (used in) investing activities of continuing operations.. 77,033 (574) Net cash used in investing activities of discontinued operations.............. (24) (960) -------- --------- Net cash provided by (used in) investing activities........................... 77,009 (1,534) Financing activities Principal payments on long-term debt.......................................... (81,723) (9,279) Borrowings on long-term debt.................................................. - 16,500 Deferred financing fees....................................................... (251) (16) Proceeds from exercise of stock options....................................... - 1 -------- --------- Net cash (used in) provided by financing activities........................... (81,974) 7,206 -------- --------- (Decrease) increase in cash and cash equivalents.............................. (830) 6,891 Cash and cash equivalents at beginning of period.............................. 8,361 1,444 -------- --------- Cash and cash equivalents at end of period.................................... $ 7,531 $ 8,335 ======== ========= Supplemental disclosure of cash flow information Cash paid for interest........................................................ $ 8,327 $ 13,181 ======== ========= Cash paid for taxes........................................................... $ 667 $ 565 ======== ========= See accompanying notes.
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 accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for the three and nine months ended June 30, 2000 are not necessarily indicative of the results to be expected for the entire fiscal year ending September 30, 2000. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended September 30, 1999 included in the Company's Annual Report on Form 10-K for such year filed with the Securities and Exchange Commission. Principal accounting policies are set forth in the Company's 1999 Annual Report. 2. Description of Business The Company provides a broad range of pediatric health care services and equipment including nursing, respiratory therapy, rental and sale of durable medical equipment, pharmaceutical services and infusion therapy services. In addition, the Company provides pediatric rehabilitation services, day treatment centers for medically fragile children, pediatric well care services and special needs educational services for pediatric patients. The Company also provides case management services in order to assist the family and patient by coordinating the provision of services between the insurer or other payor, the physician, the hospital and other health care providers. The Company's services are designed to provide a high quality, lower cost alternative to prolonged hospitalization for medically fragile children. As a complement to its pediatric respiratory and infusion therapy services, the Company also provides respiratory and infusion therapy and related services for adults. 3. Use of Estimates The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of net revenue and expenses during the reporting period. Actual results could differ from those estimates and the differences could be material. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required in recording net revenue and determining the provision for doubtful accounts. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available to management. 4. Accounts Receivable Accounts receivable include approximately $8.5 million and $10.5 million for which services have been rendered but the amounts were unbilled as of June 30, 2000 and September 30, 1999, respectively. Such unbilled amounts are primarily a result of the time required to obtain and reconcile information from field locations in order to process bills for services rendered. 7 PEDIATRIC SERVICES OF AMERICA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - (Continued) 5. Concentration of Credit Risk The Company's principal financial instruments subject to potential concentration of credit risk are cash and cash equivalents and accounts receivable. Cash and cash equivalents are held primarily in one financial institution. The Company performs periodic evaluations of the relative credit standing of this financial institution. The concentration of credit risk with respect to accounts receivable, which are primarily health care industry related, represent a risk to the Company given the current health care environment. The risk is somewhat limited due to the large number of payors including Medicare and Medicaid, insurance companies, and individuals and the diversity of geographic locations in which the Company operates. 6. Reclassifications Certain amounts for prior periods have been reclassified to conform to the current year presentation. 7. Discontinued Operations During the third quarter of fiscal 1999, the Company's Board of Directors approved management's plan to sell the Company's paramedical testing operations. On November 1, 1999, the Company concluded the sale of the assets of its paramedical testing division to Hooper Holmes, Inc. During the first quarter of fiscal 2000, the Company recorded a gain on the sale of this division of $24.3 million, including the deferred operating losses of $10.6 million incurred between the measurement date and disposal date. During the third quarter of fiscal 2000 certain retained lease obligations and retention bonuses were paid at less than originally estimated amounts resulting in a gain of $0.4 million. The paramedical testing operations are reflected as a discontinued operation and the condensed consolidated financial statements of the Company for all periods presented have been restated to reflect the discontinued operations. The operating results of the discontinued operations are summarized as follows (in thousands):
Three Months Ended Nine Months Ended June 30, June 30, 1999 2000 1999 ------------------ -------- -------- Net revenue............................... $21,296 $6,415 $66,059 (Loss) income before income tax expense... (260) - 2,581 Income tax expense........................ - - 1,106 ------- ------ ------- Net (loss) income $ (260) $ - $ 1,475 ------- ------ -------
8 PEDIATRIC SERVICES OF AMERICA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - (Continued) Discontinued Operations - continued Assets and liabilities of the discontinued operations have been reflected in the condensed consolidated balance sheets as current or non-current based on the original classification of the accounts, except certain current liabilities are netted against current assets. The following is a summary of assets and liabilities of discontinued operations (in thousands): September 30, 1999 -------------- Cash................................................. $ 541 Accounts receivable, net............................. 12,691 Prepaid expenses..................................... 29 Other current assets................................. 12,471 ------- Total current assets................................. 25,732 Accrued compensation................................. 540 ------- Net current assets of discontinued operations........ $25,192 ======= Property, net........................................ $ 5,025 Goodwill, net........................................ 22,173 Other................................................ 55 ------- Non-current assets of discontinued operations........ $27,253 ======= Accounts receivable for discontinued operations include approximately $9.4 million for which services have been rendered but the amounts were unbilled as of September 30, 1999. Primarily such unbilled amounts result from the paramedical testing division's practice of billing one month in arrears. Certain liabilities were not assumed by Hooper Holmes, Inc. in the sale of the paramedical testing division. These liabilities include accounts payable, additional accrued compensation and other accrued liabilities which totaled approximately $2.2 million at June 30, 2000. 8. Income Taxes In the three months ended June 30, 2000, the Company had a current income tax expense of $3.6 million which was offset by the reduction of the valuation allowance related to the deferred tax asset resulting in zero income tax expense. Deferred income taxes reflect the net effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): June 30, September 30, 2000 1999 -------- ------------ Allowance for doubtful accounts.......................................... $ 6,398 $ 6,934 Deferred losses on discontinued operations............................... - (3,918) Mark to market accounting for accounts receivable........................ (2,029) (3,543) Net operating loss carryforward.......................................... - 11,575 Payroll related accruals................................................. 585 769 Insurance related accruals............................................... 1,898 1,748 Property and equipment and intangibles................................... 3,956 4,180 Other, net............................................................... 1,311 601 ------- -------- Net deferred tax asset................................................... 12,119 18,346 Valuation allowance...................................................... (8,560) (18,346) ------- -------- Net deferred tax asset................................................... $ 3,559 $ -- ======= ========
The Company recorded a partial valuation allowance against net deferred tax assets as of June 30, 2000 and a full valuation allowance against net deferred tax assets as of September 30, 1999. In recording the valuation allowance, management considered whether it is more likely than not that some or all of the deferred tax assets will be realized. This analysis includes considering scheduled reversal of deferred tax liabilities, projected future taxable income, carryback potential and tax planning strategies. Management concluded that the net deferred tax asset required a partial valuation allowance as of June 30, 2000. 9. Long-Term Borrowing Arrangements A portion of the proceeds from the sale of the Company's paramedical testing division were used to pay down to zero all outstanding amounts under the Company's existing Credit Agreement. Simultaneous with the pay down of the existing Credit Agreement, the Company amended and restated the Credit Agreement (the "Amended and Restated Loan Security Agreement"). Subject to the terms and conditions of the Amended and Restated Loan Security Agreement, the Lender made available a total credit facility of up to $30.0 million for use by the Company and its subsidiaries from time to time during the term of the Amended and Restated Loan and Security Agreement. The total credit facility is comprised of a revolving line of credit up to the available limit, consisting of Loans and Letters of Credit (as defined therein). As of this report date no amounts were outstanding under the Amended and Restated Loan Security Agreement. 9 During the third quarter of fiscal year 2000, the Company completed a series of transactions to repurchase a total of $29.6 million of the $75.0 million aggregate principal amount of 10% Senior Subordinated Notes due 2008 (the "Notes") for $18.4 million cash plus accrued interest. The pre- tax gain (net of the write-off of deferred financing fees) of $10.3 million is reflected as an extraordinary gain in the condensed consolidated statement of operations. 10. Basic and Diluted Net Income (Loss) Per Share Basic net income (loss) per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per share is computed using the weighted average number of shares of common stock outstanding and the dilutive effect of common equivalent shares (calculated using the treasury stock method). For the three and nine months ended June 30, 2000 and 1999, weighted average shares outstanding for continuing operations for basic and diluted computations are the same since the impact of common equivalent shares on earnings per share is anti-dilutive. 10 PEDIATRIC SERVICES OF AMERICA, INC. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements This Form 10-Q contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995) relating to future financial performance of Pediatric Services of America, Inc. (the "Company"). When used in this Form 10-Q, the words "may," "could," "should," "would," "believe," "feel," "anticipate," "estimate," "intend," "plan" and similar expressions may be indicative of forward-looking statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Company's control. The Company cautions that various factors, including the factors described hereunder and those discussed in the Company's filings with the Securities and Exchange Commission, as well as general economic conditions, industry trends, the Company's ability to collect for equipment sold or rented, assimilate and manage previously acquired field operations, collect accounts receivable, including receivables related to acquired businesses and receivables under appeal, hire and retain qualified personnel and comply with and respond to billing requirements issues, including those related to the Company's billing and collection system could cause actual results or outcomes to differ materially from those expressed in any forward- looking statements of the Company made by or on behalf of the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of an unanticipated event. New factors emerge from time to time, and it is not possible for management to predict all of such factors. Further, management cannot assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements of the Company included in this Quarterly Report. Recent Developments In the third quarter of fiscal 2000, the Company's senior management continued implementation of its strategic plan (the "Plan") to improve the Company's performance. The primary focus of the Plan is to redirect the Company to its core businesses, the pediatric home health care and adult respiratory businesses. The Company made progress on multiple operating initiatives contained within the Plan. The Company continued to evaluate its portfolio of managed care contracts with the intention to cancel or renegotiate those with minimal profitability and cash flow performance. As contracts reach their respective renewal dates the Company intends to base its decision to renew upon profitability and cash flow criteria. Therefore, the possibility exists that certain contracts will not be renewed resulting in future revenue reductions. The Company continues to focus its marketing efforts on its core competencies to facilitate future internal revenue growth and has invested in additional marketing staff and related programs to support this initiative. While there will continue to be revenue from non-core services previously marketed, the Company anticipates these amounts will continue to decline and hopes to offset this decline with internally generated revenue growth within the core services from the results of the aforementioned initiatives. The Company continues to refine its best practices methodology for assessing and improving branch office performance. In response to best practices findings to date, ongoing organizational changes are occurring. Additionally, the Company has invested significantly in its reimbursement organization by, among other things, hiring more experienced senior managers, increasing incentive compensation for billing and collection teams and improving its reporting and analysis capabilities. Although the Plan is expected to reduce operating costs and improve cash flow, there can be no assurance that the Company will be able to achieve the expected cost savings from the Plan or will be able to reduce costs without negatively impacting operations. 11 Results of Operations Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required in recording net revenue. Inherent in these estimates is the risk that net revenue will have to be revised or updated, with the changes recorded in subsequent periods as additional information becomes available to management. The following table is derived from the Company's unaudited condensed consolidated statements of operations for the periods indicated and presents results of continuing operations as a percentage of net revenue and the percentage change in the dollar amounts of each item from the comparative prior period:
Period-to-Period Percentage Percentage of Net Revenue Increase (Decrease) ----------------------------------------- ---------------------------- Three Months Nine Months Three Months Nine Months Ended Ended Ended Ended June 30, June 30, June 30, June 30, ----------------- ------------------ ------------ ----------- 2000 1999 2000 1999 2000 2000 ---- ---- ---- ---- ---- ---- Net revenue........................................... 100.0% 100.0% 100.0% 100.0% (15)% (15)% Operating salaries, wages and employee benefits....... 46.7 49.3 46.8 49.0 (19) (18) Other operating costs................................. 36.2 35.4 36.2 34.5 (13) (11) Corporate, general and administrative................. 9.4 8.6 10.0 7.9 (7) 8 Provision for doubtful accounts....................... 2.5 8.4 3.8 9.1 (75) (64) Depreciation and amortization......................... 4.5 4.2 4.3 4.0 (10) (7) Impairment of intangible assets....................... - - - 12.7 - (100) ----- ---- ---- ----- ---- ---- Operating income (loss)............................... 0.7 (5.9) (1.1) (17.2) (110) (95) Interest income....................................... (0.4) - (0.3) - - - Interest expense...................................... 3.2 7.4 4.5 6.6 (63) (42) Loss on sale of business.............................. - 2.4 - 0.8 (100) (100) ----- ---- ---- ----- ---- ---- Loss from continuing operations, before minority interest and income taxes............................ (2.1) (15.7) (5.3) (24.6) (87) (81) Minority interest in loss of subsidiary............... - 0.1 - 0.1 (100) (100) ----- ---- ---- ----- ---- ---- Loss from continuing operations before income taxes... (2.1) (15.6) (5.3) (24.5) (86) (80) Income tax benefit.................................... - - - (0.9) - (100) ----- ---- ---- ----- ---- ---- Net loss from continuing operations................... (2.1)% (15.6)% (5.3)% (23.6)% (86)% (80)% ===== ===== ==== ===== ==== ====
12 The following table sets forth for the periods indicated the net revenue breakdown by service:
(in thousands) Three Months Nine Months Ended Ended June 30, June 30, 2000 1999 2000 1999 ------- ------- -------- -------- Pediatric Home Health Care Nursing................................. $20,466 $24,048 $ 62,668 $ 70,209 Respiratory Therapy Equipment........... 4,119 5,694 13,336 18,541 Home Medical Equipment.................. 454 683 1,484 2,372 Pharmacy and Other...................... 8,904 8,419 26,361 27,419 ------- ------- -------- -------- Total Pediatric Home Health Care...... 33,943 38,844 103,849 118,541 ------- ------- -------- -------- Adult Home Health Care: Nursing................................. 2,800 4,803 8,787 15,062 Respiratory Therapy Equipment........... 4,384 5,178 13,543 16,885 Home Medical Equipment.................. 1,073 1,395 3,444 5,016 Pharmacy and Other...................... 3,197 2,914 11,279 9,241 ------- ------- -------- -------- Total Adult Home Health Care.......... 11,454 14,290 37,053 46,204 ------- ------- -------- -------- Total Net Revenue..................... $45,397 $53,134 $140,902 $164,745 ======= ======= ======== ========
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999 Net revenue decreased $7.7 million, or 15%, to $45.4 million in the three months ended June 30, 2000 from $53.1 million in the three months ended June 30, 1999. The reduction in revenue reflects the continued efforts to reduce non-core and/or non-profitable products and services consistent with the Plan. Of the $7.7 million decrease in net revenue for the three months ended June 30, 2000, pediatric health care net revenue accounted for $4.9 million, primarily attributable to the closure of select locations. Adult health care net revenue accounted for a decrease of $2.8 million for the three months ended June 30, 2000, primarily as a result of the Company's sale of the medical staffing business and reduction in adult nursing. In the three months ended June 30, 2000, the Company derived approximately 50% of its net revenue from commercial insurers and other private payors, 43% from Medicaid and 7% from Medicare. Operating salaries, wages and employee benefits consist primarily of branch office employee costs. Operating salaries, wages and employee benefits decreased $5.0 million, or 19%, to $21.2 million in the three months ended June 30, 2000 from $26.2 million in the three months ended June 30, 1999. Labor costs have decreased across all services as a result of headcount reductions, reduced nursing services primarily attributable to the closure and sale of select nursing locations and an increase in unstaffed hours due to the nursing shortage in selected markets. However, due to the impact of the nursing shortage in selected markets, location scheduling efficiencies have declined resulting in higher overtime costs. As a percentage of net revenue, operating salaries, wages and employee benefits for the three months ended June 30, 2000 decreased to 47% from 49% for the three months ended June 30, 1999. Other operating costs include medical supplies, branch office rent, utilities, vehicle expenses, allocated insurance costs and cost of sales. Cost of sales consists primarily of the costs of pharmaceuticals and related services. Other operating costs decreased $2.4 million, or 13%, to $16.4 million in the three months ended June 30, 2000, from $18.8 million in the three months ended June 30, 1999. As a percentage of net revenue, other operating costs for the three months ended June 30, 2000 increased to 36% from 35% for the three months ended June 30, 1999. Corporate, general and administrative costs decreased $0.3 million, or 7%, to $4.3 million in the three months ended June 30, 2000, from $4.6 million in the three months ended June 30, 1999. As a percentage of net revenue, corporate, general and administrative costs for the three months ended June 30, 2000, increased slightly compared to the three months ended June 30, 1999. The Company has chosen to selectively invest in key areas where improvements have a tangible impact on cash flow from operations. In addition, there are certain non-labor fixed 13 costs necessary to sustain the Company's infrastructure. As the Company's Plan impacts future periods, certain of these costs should be able to be reduced, though there can be no guarantees. Provision for doubtful accounts decreased $3.3 million, or 75%, to $1.1 million in the three months ended June 30, 2000, from $4.4 million in the three months ended June 30, 1999. Overall cash collections for continuing operations decreased approximately $0.4 million or 0.7% during the three months ended June 30, 2000 as compared to the three months ended June 30, 1999. Cash collections as a percentage of net revenue were 112% and 96%, respectively. Management deemed the provision levels to be appropriate. Depreciation and amortization decreased $0.2 million, or 10%, to $2.0 million in the three months ended June 30, 2000 from $2.2 million in the three months ended June 30, 1999. As a percentage of the Company's net revenue, depreciation and amortization costs for the three months ended June 30, 2000 increased slightly compared to the three months ended June 30, 1999. Interest expense decreased $2.5 million, or 63%, to $1.5 million in the three months ended June 30, 2000, from $4.0 million in the three months ended June 30, 1999. The Company's average debt outstanding decreased $82.5 million as the amount outstanding under the Credit Agreement was paid down to zero on November 1, 1999 and the Company completed a series of transactions to repurchase $29.6 million of the $75.0 million Notes during the three months ended June 30, 2000. Interest income increased $0.2 million in the three months ended June 30, 2000. The Company invested its excess cash balances in highly liquid investments. Nine Months Ended June 30, 2000 Compared to Nine Months Ended June 30, 1999 Net revenue decreased $23.8 million, or 15%, to $140.9 million in the nine months ended June 30, 2000 from $164.7 million in the nine months ended June 30, 1999. The reduction in revenue reflects the continued efforts to reduce non- core and/or non-profitable products and services consistent with the Plan. Of the $23.8 million decrease in net revenue for the nine months ended June 30, 2000, pediatric health care net revenue accounted for $14.7 million, primarily attributable to the closure of select locations. Adult health care net revenue accounted for a decrease of $9.1 million for the nine months ended June 30, 2000, primarily as a result of the Company's sale of the medical staffing business and reduction in adult nursing. In the nine months ended June 30, 2000, the Company derived approximately 51% of its net revenue from commercial insurers and other private payors, 42% from Medicaid and 7% from Medicare. Operating salaries, wages and employee benefits consist primarily of branch office employee costs. Operating salaries, wages and employee benefits decreased $14.9 million, or 18%, to $65.9 million in the nine months ended June 30, 2000 from $80.8 million in the nine months ended June 30, 1999. Labor costs have decreased across all services as a result of headcount reductions, reduced nursing services primarily attributable to the closure and sale of select nursing locations and an increase in unstaffed hours due to the nursing shortage in selected markets. However, due to the impact of the nursing shortage in selected markets, location scheduling efficiencies have declined resulting in higher overtime costs. As a percentage of net revenue, operating salaries, wages and employee benefits for the nine months ended June 30, 2000 decreased to 47% from 49% for the nine months ended June 30, 1999. Other operating costs include medical supplies, branch office rent, utilities, vehicle expenses, allocated insurance costs and cost of sales. Cost of sales consists primarily of the costs of pharmaceuticals and related services. Other operating costs decreased $6.0 million, or 11%, to $50.9 million in the nine months ended June 30, 2000, from $56.9 million in the nine months ended June 30, 1999. As a percentage of net revenue, other operating costs for the nine months ended June 30, 2000 increased to 36% from 35% for the nine months ended June 30, 1999. The increase primarily relates to the impact of location fixed costs relative to the decline in net revenue for the nine months ended June 30, 2000 as compared to the nine months ended June 30, 1999. Corporate, general and administrative costs increased $1.1 million, or 8%, to $14.1 million in the nine months ended 14 June 30, 2000, from $13.0 million in the nine months ended June 30, 1999. As a percentage of net revenue, corporate, general and administrative costs for the nine months ended June 30, 2000, increased to 10% from 8% in the nine months ended June 30, 1999. The Company has chosen to selectively invest in key areas where improvements have a tangible impact on cash flow from operations. In addition, there are certain non-labor fixed costs necessary to sustain the Company's infrastructure. As the Company's Plan impacts future periods, certain of these costs should be able to be reduced, though there can be no guarantees. Provision for doubtful accounts decreased $9.5 million, or 64%, to $5.4 million in the nine months ended June 30, 2000, from $14.9 million in the nine months ended June 30, 1999. Overall cash collections for continuing operations increased approximately $6.7 million or 5% during the nine months ended June 30, 2000 as compared to the nine months ended June 30, 1999. Management deemed the provision levels to be appropriate. Depreciation and amortization decreased $0.5 million, or 7%, to $6.1 million in the nine months ended June 30, 2000 from $6.6 million in the nine months ended June 30, 1999. As a percentage of the Company's net revenue, depreciation and amortization costs for the nine months ended June 30, 2000 increased slightly compared to the nine months ended June 30, 1999. Interest expense decreased $4.5 million, or 42%, to $6.4 million in the nine months ended June 30, 2000, from $10.9 million in the nine months ended June 30, 1999. The Company's average debt outstanding decreased $59.8 million as the amount outstanding under the Credit Agreement was paid down to zero on November 1, 1999 and the Company completed a series of transactions to repurchase $29.6 million of the $75.0 million Notes during the nine months ended June 30, 2000. Interest income increased $0.4 million in the nine months ended June 30, 2000. The Company invested its excess cash balances in highly liquid investments. Income tax benefit decreased $1.7 million to zero in the nine months ended June 30, 2000, from $1.7 million in the nine months ended June 30, 1999. The Company recorded a partial valuation allowance against the net deferred tax assets as of June 30, 2000. Liquidity and Capital Resources At June 30, 2000, total borrowings under the Notes were $45.4 million. The Company recently completed a series of transactions to repurchase a total of $29.6 million of the $75.0 million Notes for $18.4 million cash plus accrued interest. The pre-tax gain (net of the write-off of the related deferred financing fees) of $10.3 million is reflected as an extraordinary item in the condensed consolidated statements of operations. On November 1, 1999, the Company concluded the sale of the assets of its paramedical testing division to Hooper Holmes, Inc. A portion of the proceeds were used to pay down to zero all outstanding amounts under the Company's existing Credit Agreement. Simultaneous with the pay down, the Credit Agreement was further amended and restated with Banc of America Commercial Finance Corporation, successor to NationsBank, N.A., as Lender and sole credit party (the "Amended and Restated Loan Security Agreement"). Subject to the terms and conditions of the Amended and Restated Loan Security Agreement, the Lender shall make available a total credit facility of up to $30.0 million. The total credit facility is comprised of a revolving line of credit up to the available limit, consisting of Loans and Letters of Credit. As of the date of this Report, the Company has no outstanding borrowings under the Amended and Restated Loan Security Agreement. On January 13, 2000, the Company settled and received a final payment of $0.1 million under the Interest Rate Swap Agreement with a commercial bank, having a cumulative notional principle amount of $25 million. Certain liabilities were not assumed by Hooper Holmes, Inc. in the sale of the paramedical testing division. These include accounts payable, additional accrued compensation and other accrued liabilities which totaled approximately $2.2 million at June 30, 2000. The Company has utilized all net operating loss carryforwards that are available. 15 Overall cash collections from continuing operations decreased approximately $0.4 million or 0.7% during the three months ended June 30, 2000 as compared to the three months ended June 30, 1999. Cash collections as a percentage of net revenue were 112% and 96%, respectively. The organizational restructuring of the Company's reimbursement process continues and indications of progress to date are positive. While management anticipates that continued implementation of the Plan will achieve the desired results, there can be no assurance that this will result in the Company realizing sustained operating improvements and improved cash flow. The Company has suspended acquisition plans for the foreseeable future and will be focusing resources on strengthening infrastructure, cash collections and sales and marketing. Management currently believes that its cash on hand, internally generated funds and current availability under the Amended and Restated Loan Security Agreement will be more than adequate to satisfy the Company's working capital requirements for the foreseeable future. Year 2000 Compliance Status of Year 2000 Performance The Company completed it's Y2K preparations on time and there are no reportable significant problems as of the date of this report. While it appears the Company's information systems correctly accommodated the Year 2000 date change, computer analysts have indicated that further Y2K problems may linger due to pay and billing cycle variations that may occur throughout the year. Importance of Third Party Exposure to the Year 2000 Certain of the Company's systems interface directly with significant third party vendors and payors including federal and state Medicare and Medicaid agencies. The Company also conducts business electronically with certain external parties, including some payors and vendors. Management does not know at this time what impact Year 2000 compliance had or may continue to have on its payor and vendor sources. Risks Management believes that it has an effective Year 2000 Plan in place to resolve any further Year 2000 issues in a timely manner. However, the Company has no means of ensuring that payors, including federal and state Medicare and Medicaid agencies will not incur additional Year 2000 problems. The inability of these payors to be Year 2000 compliant could have a material adverse effect on the Company. In addition, disruptions in the economy resulting from Year 2000 issues could also materially adversely affect the Company, and the Company could be subject to litigation for systems or equipment failure or malfunctions relating to Year 2000 problems. The amount of potential liability and lost revenue cannot be reasonably estimated at this time. However, no reportable significant problems have been reported as of the date of this Report. Quarterly Operating Results and Seasonality The Company's quarterly results may vary significantly depending primarily on factors such as rehospitalizations of patients, the timing of new branch office openings and pricing pressures due to legislative and regulatory initiatives to contain health care costs. The Company's operating results for any particular quarter may not be indicative of the results for the full fiscal year. ITEM 3. Quantitative and Qualitative Disclosures about Market Risk The Company's principal financial instruments subject to potential concentration of credit risk are cash and cash equivalents and accounts receivable. Cash and cash equivalents are held primarily in one financial institution. The Company performs periodic evaluations of the relative credit standing of this financial institution. The 16 concentration of credit risk with respect to accounts receivable, which are primarily health care industry related, represent a risk to the Company given the current health care environment. The risk is somewhat limited due to the large number of payors including Medicare and Medicaid, insurance companies, and individuals and the diversity of geographic locations in which the Company operates. PART II - OTHER INFORMATION ITEM 1. Legal Proceedings. On March 11, 1999, a putative class action complaint was filed against the Company in the United States District Court for the Northern District of Georgia. The Company and certain of its then current officers and directors were named as defendants. To the Company's knowledge, no other putative class action complaints were filed within the 60-day time period provided for in the Private Securities Litigation Reform Act. The plaintiffs and their counsel were appointed lead plaintiffs and lead counsel, and an amended complaint was filed on or about July 22, 1999. In general, the plaintiffs allege that prior to the decline in the price of the Company's Common Stock on July 28, 1998, there were violations of the Federal Securities Laws arising from misstatements of material information in and/or omissions of material information from certain of the Company's securities filings and other public disclosures principally related to its reporting of accounts receivable and the allowance for doubtful accounts. The amended complaint purports to expand the class to include all persons who purchased the Company's Common Stock during the period from July 29, 1997 through and including July 29, 1998. On October 8, 1999, the Company and the individuals named as defendants moved to dismiss the amended complaint on both substantive and procedural grounds. On March 30, 2000, the Court denied the Company's motion to dismiss. On May 15, 2000, the Company and the individuals named as defendants filed their answer, denying liability. Discovery in the case is proceeding. The Company and the individuals named as defendants deny that they have violated any of the requirements or obligations of the Federal Securities Laws. On July 28, 1999, a civil action was filed against the Company and certain of its current and former officers and directors in the United States District Court for the Middle District of Tennessee. The action was filed by Phyllis T. Craighead and Healthmark Partners, LLC, as well as a liquidating trust apparently established to wind up the business affairs of their corporation, Kids & Nurses, Inc. In the original complaint, in general, the plaintiffs alleged that the defendants violated Federal and Tennessee Securities Laws and committed common law fraud in connection with the Company's purchase of Kids and Nurses, Inc. in November, 1997. The plaintiffs seek actual damages in an amount between $2.5 million and $3.5 million, plus punitive damages and the costs of litigation, including reasonable attorneys' fees. On September 24, 1999, the defendants filed a motion to dismiss the complaint on both substantive and procedural grounds. On December 20, 1999, the plaintiffs filed an amended complaint in which they withdrew their claims under the Federal securities laws, and added claims under Georgia's securities laws. The plaintiffs also filed a brief in response to the Company's motion to dismiss. On February 1, 2000, the defendants filed an amended motion to dismiss addressing the allegations of the amended complaint. The motion to dismiss is currently pending before the Court. The Company and the individuals named as defendants deny that they have violated any of the requirements or obligations of any applicable Federal or State securities laws, or any other applicable law. In the opinion of the Company's management, the ultimate disposition of these two lawsuits should not have a material adverse effect on the Company's financial condition or results of operations, however, there can be no assurance that the Company will not sustain material liability as a result of or related to these lawsuits. 17 ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits -------- The following exhibits are filed as part of this Report. 27 Financial Data Schedule (b) Reports on Form 8-K ------------------- The Company did not file a Current Report on Form 8-K during the quarter ended June 30, 2000. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PEDIATRIC SERVICES OF AMERICA, INC. (Registrant) Date: August 14, 2000 By: /s/ James M. McNeill ---------------------------- James M. McNeill Senior Vice President, Chief Financial Officer, Treasurer and Secretary (Duly authorized officer and Principal Financial Officer) 19 INDEX OF EXHIBITS Page No. ---- Exhibit 27. Financial Data Schedule ........... 21 20