10-Q 1 d10q.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 EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2001 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 4, 2001, the Registrant had 6,688,132 shares of Common Stock, $0.01 Par Value, outstanding. -------------------------------------------------------------------------------- Page 1 of 17 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 March 31, 2001 and September 30, 2000....................................... 3 Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2001 and 2000....... 5 Condensed Consolidated Statements of Cash Flows for the three and six months ended March 31, 2001 and 2000................. 6 Notes to Condensed Consolidated Financial Statements............ 7 ITEM 2: Management's Discussion and Analysis of Financial Condition and Results of Operations.................................... 10 ITEM 3: Quantitative and Qualitative Disclosures about Market Risk...... 14 PART II OTHER INFORMATION ITEM 1: Legal Proceedings............................................... 15 ITEM 4: Submission of Matters to a Vote of Security Holders............. 16 ITEM 6: Exhibits and Reports on Form 8-K................................ 16 Signatures...................................................... 17 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements PEDIATRIC SERVICES OF AMERICA, INC CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
March 31, September 30, 2001 2000 --------- ------------- (Unaudited) Assets Current assets: Cash and cash equivalents............................... $ 10,721 $ 14,912 Accounts receivable, less allowances for doubtful accounts of $ 6,353 and $7,628, respectively.......... 32,518 35,389 Prepaid expenses........................................ 962 656 Deferred income taxes................................... 1,558 3,792 Other current assets.................................... 3,380 3,057 -------- -------- Total current assets...................................... 49,139 57,806 Property and equipment: Home care equipment held for rental..................... 27,961 27,831 Furniture and fixtures.................................. 10,407 10,226 Vehicles................................................ 732 751 Leasehold improvements.................................. 1,103 1,039 -------- -------- 40,203 39,847 Accumulated depreciation and amortization............... (30,147) (27,999) -------- -------- 10,056 11,848 Other assets: Goodwill, less accumulated amortization of $8,500 and $7,386, respectively....................... 32,819 33,933 Certificates of need, less accumulated amortization of $455 and $404, respectively........................... 218 269 Deferred financing fees, less accumulated amortization of $574 and $549, respectively........... 940 1,419 Non-compete agreements, less accumulated amortization of $1,097 and $1,084, respectively....................... 63 76 Deferred income taxes................................... 2,207 - Other................................................... 291 242 -------- -------- 36,538 35,939 -------- -------- Total assets.............................................. $ 95,733 $105,593 ======== ========
See accompanying notes. 3 PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS--(Continued) (In thousands)
March 31, September 30, 2001 2000 --------- ------------- (Unaudited) Liabilities and stockholders' equity Current liabilities: Accounts payable............................................................ $ 5,276 $ 5,477 Accrued compensation........................................................ 5,571 5,513 Income taxes................................................................ 1,075 610 Accrued insurance........................................................... 5,394 5,002 Other accrued liabilities................................................... 5,633 6,179 Deferred revenue............................................................ 513 618 Current maturities of long-term obligations to related parties.............. 25 50 Current maturities of long-term obligations................................. 15 18 ------- -------- Total current liabilities....................................................... 23,502 23,467 Long-term obligations to related parties, net of current maturities.................................................................. 25 50 Long-term obligations, net of current maturities................................ 33,057 45,439 Deferred income taxes........................................................... - 1,106 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, 6,687 and 6,658 shares issued and outstanding at March 31, 2001 and September 30, 2000, respectively....................................................... 67 67 Additional paid-in capital.................................................. 48,410 48,362 Accumulated deficit......................................................... (9,328) (12,898) ------- -------- Total stockholders' equity...................................................... 39,149 35,531 ------- -------- Total liabilities and stockholders' equity...................................... $95,733 $105,593 ======= ========
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, 2001 2000 2001 2000 ------- ------- ------- ------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net revenue..................................... $45,707 $47,401 $91,269 $95,505 Costs and expenses: Operating salaries, wages and employee benefits..................................... 20,308 22,036 40,958 44,694 Other operating costs.......................... 17,460 16,848 33,874 34,499 Corporate, general and administrative.......... 4,644 5,064 9,097 9,816 Provision for doubtful accounts................ 481 1,948 1,439 4,292 Depreciation and amortization.................. 1,860 2,041 3,759 4,105 ------- ------- ------- ------- Total costs and expenses............... 44,753 47,937 89,127 97,406 ------- ------- ------- ------- Operating income (loss)......................... 954 (536) 2,142 (1,901) Interest income................................. (168) (227) (388) (227) Interest expense................................ 1,002 1,935 2,223 4,902 ------- ------- ------- ------- Income (loss) from continuing operations........ 120 (2,244) 307 (6,576) Discontinued operations Gain on disposal of discontinued operations..... - - - 24,314 ------- ------- ------- ------- Income (loss) before extraordinary item......... 120 (2,244) 307 17,738 Extraordinary item.............................. 3,263 - 3,263 - ------- ------- ------- ------- Net income (loss)............................... $ 3,383 $(2,244) $ 3,570 $17,738 ======= ======= ======= ======= Basic net income (loss) per share data: Income (loss) from continuing operations........ $ 0.02 $ (0.34) $ 0.05 $ (0.99) Gain on disposal of discontinued operations..... - - - 3.66 ------- ------- ------- ------- Income (loss) before extraordinary item......... 0.02 (0.34) 0.05 2.67 Extraordinary item.............................. 0.49 - 0.49 - ------- ------- ------- ------- Net income (loss)............................... $ 0.51 $ (0.34) $ 0.54 $ 2.67 ======= ======= ======= ======= Diluted net income (loss) per share data: Income (loss) from continuing operations........ $ 0.02 $ (0.34) $ 0.05 $ (0.99) Gain on disposal of discontinued operations..... - - - 3.66 ------- ------- ------- ------- Income (loss) before extraordinary item......... 0.02 (0.34) 0.05 2.67 Extraordinary item.............................. 0.47 - 0.47 - ------- ------- ------- ------- Net income (loss)............................... $ 0.49 $ (0.34) $ 0.52 $ 2.67 ======= ======= ======= ======= Weighted average shares outstanding: Basic........................................... 6,666 6,653 6,663 6,652 ======= ======= ======= ======= Diluted......................................... 6,944 6,653 6,918 6,652 ======= ======= ======= =======
See accompanying notes. 5 PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended March 31, 2001 2000 ------- -------- (Unaudited) (Unaudited) Operating activities Income (loss) from continuing operations.............................. $ 307 $ (6,576) Adjustments to reconcile income (loss) from continuing operations to net cash provided by operating activities: Depreciation and amortization....................................... 3,759 4,105 Provision for doubtful accounts..................................... 1,439 4,292 Amortization of deferred financing fees............................. 152 515 Deferred income taxes............................................... (1,079) - Changes in operating assets and liabilities: Accounts receivable............................................... 1,430 5,201 Prepaid expenses.................................................. (306) (45) Other assets...................................................... (418) (147) Accounts payable.................................................. (201) (2,368) Income taxes...................................................... 465 (342) Accrued liabilities............................................... (201) (2,108) ------- -------- Net cash provided by operating activities of continuing operations........................................................... 5,347 2,527 Net cash used in operating activities of discontinued operations........................................................... - (1,087) ------- -------- Net cash provided by operating activities............................. 5,347 1,440 Investing activities Purchases of property and equipment................................... (742) (535) Proceeds from sale of division........................................ - 77,869 Other, net............................................................ - 70 ------- -------- Net cash (used in) provided by investing activities of continuing operations........................................................... (742) 77,404 Net cash used in investing activities of discontinued operations...... - (24) ------- -------- Net cash (used in) provided by investing activities................... (742) 77,380 Financing activities Principal payments on long-term debt.................................. (8,844) (63,281) Deferred financing fees............................................... - (242) Proceeds from exercise of stock options............................... 48 - ------- -------- Net cash used in financing activities................................. (8,796) (63,523) ------- -------- (Decrease) increase in cash and cash equivalents...................... (4,191) 15,297 Cash and cash equivalents at beginning of period...................... 14,912 8,361 ------- -------- Cash and cash equivalents at end of period............................ $10,721 $ 23,658 ======= ======== Supplemental disclosure of cash flow information Cash paid for interest................................................ 2,404 $ 4,388 ======= ======== Cash paid for taxes................................................... 673 $ - ======= ========
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 six months ended March 31, 2001 are not necessarily indicative of the results to be expected for the entire fiscal year ending September 30, 2001. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended September 30, 2000 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 2000 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 $7.7 million for which services have been rendered but the amounts were unbilled as of March 31, 2001 and September 30, 2000. 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 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. 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 $0.8 million at March 31, 2001. 8. Income Taxes The Company has recorded a partial valuation allowance against the net deferred tax assets as of March 31, 2001 and September 30, 2000. 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. In the three and six months ended March 31, 2001, the Company had a current income tax expense of $0.9 million and $1.0 million, respectively, which was offset by the reduction of the valuation allowance related to the net deferred tax asset resulting in zero income tax expense. 8 PEDIATRIC SERVICES OF AMERICA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - (Continued) 9. Long-Term Borrowing Arrangements 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. At March 31, 2001, the calculated availability was $24.0 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 March 31, 2001, the Company had no outstanding borrowings under the Amended and Restated Loan Security Agreement. During the three months ended March 31, 2001, the Company completed a series of transactions to repurchase a total of $12.4 million of the Senior Subordinated Notes (the "Notes") for $8.8 million cash plus accrued interest. The pre-tax gain (net of the write-off of the related deferred financing fees) of $3.3 million is reflected as an extraordinary item in the condensed consolidated statements of operations for the three and six months ended March 31, 2001. 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). The dilutive effect of the weighted average options included in the diluted earnings per share is 277,687 and 255,279 for the three and six months ended March 31, 2001, respectively. For the three and six months ended March 31, 2000, 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. 9 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," "expects," "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 During the second quarter of fiscal year 2001, the Company continued its strategic plan (the "Plan") of leveraging its opportunities in its core competencies. To date, the Company's investments in sales and marketing resources have not realized the anticipated revenue growth in its core respiratory programs. Despite these delays, the Company remains optimistic that we will achieve the anticipated growth. During the three months ended March 31, 2001, the Company successfully met its cash collection targets which enabled it to repurchase through a series of transactions a total of $12.4 million of its Senior Subordinated Notes for approximately $8.8 million, plus accrued interest. The Company feels that the resulting capital structure provides a strong foundation for future internal and acquired growth. As such, the Company is evaluating acquisition opportunities for continued growth in its core competencies. During the three months ended March 31, 2001, the Company continued its efforts to aggressively manage its portfolio of payor contracts with the objective of maximizing reimbursement for core services. In addition, the Company's lobbying efforts have positively impacted private duty nurse reimbursement rates in selected state Medicaid programs. A portion of the respective rate increases have been passed on to select nurses in the form of additional benefits and/or wage increases. Additionally, the Company has increased select nursing wages and benefits in other markets where local market conditions dictate. The select wage and benefit increases along with the hiring of a full time nurse recruiting specialist are integral to the Company's efforts to reduce the level of unstaffed nursing hours that continue to impact us. During the second quarter of fiscal 2001, the Company entered negotiations with its key pharmaceutical suppliers in an effort to consolidate its purchasing volume. The Company anticipates improved pricing upon completion of the negotiations. The Company experienced negative volatility in its workers compensation liability during the quarter ended March 31, 2001. The Company and its risk brokers continue to proactively monitor the carriers claim settlement 10 process. In addition, the Company has engaged a loss control specialist to assist in identifying and minimizing future exposure. As part of its annual policy renewal, the Company decided to absorb a higher percentage of the total cost of its medical benefit plan which is reflected in the quarter ended March 31, 2001. The Company believes continued investments in its various benefit plans are necessary to address labor market conditions. Although the Company has delivered positive results to date, there can be no assurance that the Company will be able to achieve the expected future results from the Plan without negatively impacting operations. Results of Operations Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required in recording net revenue. Inherent in these estimates is the risk that net revenue will have to be revised or updated, with the changes recorded in subsequent periods as additional information becomes available to management. 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 of Percentage Net Revenue Increase (Decrease) ------------------------------ -------------------------- Three Months Six Months Three Months Six Months Ended Ended Ended Ended March 31, March 31, March 31, March 31, -------------- -------------- ------------- ----------- 2001 2000 2001 2000 2001 2001 ----- ----- ----- ----- ---- ---- Net revenue.............................. 100.0% 100.0% 100.0% 100.0% (4)% (4)% Operating salaries, wages and employee benefits.............................. 44.4 46.5 44.9 46.8 (8) (8) Other operating costs.................... 38.2 35.5 37.1 36.1 4 (2) Corporate, general and administrative.... 10.2 10.7 10.0 10.3 (8) (7) Provision for doubtful accounts.......... 1.1 4.1 1.6 4.5 (75) (67) Depreciation and amortization............ 4.0 4.3 4.1 4.3 (9) (8) ----- ----- ----- ----- ---- ---- Operating income (loss).................. 2.1 (1.1) 2.3 (2.0) 278 212 Interest income.......................... (0.4) (0.5) (0.4) (0.2) (26) 71 Interest expense......................... 2.2 4.1 2.4 5.1 (48) (55) ----- ----- ----- ----- ---- ---- Net income (loss) from continuing operations.............................. 0.3% (4.7)% 0.3% (6.9)% 108% 102% ===== ===== ===== ===== ==== ====
11 The following table sets forth for the periods indicated the net revenue breakdown by service: (in thousands)
Three Months Six Months Ended Ended March 31, March 31, 2001 2000 2001 2000 ------- ------- ------- ------- Pediatric Home Health Care Nursing...................................................... $21,251 $21,231 $42,455 $42,203 Respiratory Therapy Equipment................................ 3,666 4,436 7,376 9,217 Home Medical Equipment....................................... 336 515 668 1,029 Pharmacy and Other........................................... 10,135 8,931 20,059 17,457 ------- ------- ------- ------- Total Pediatric Home Health Care..................... 35,388 35,113 70,558 69,906 ------- ------- ------- ------- Adult Home Health Care: Nursing...................................................... 2,665 3,039 5,485 5,986 Respiratory Therapy Equipment................................ 4,011 4,295 7,991 9,160 Home Medical Equipment....................................... 763 1,147 1,472 2,371 Pharmacy and Other........................................... 2,880 3,807 5,763 8,082 ------- ------- ------- ------- Total Adult Home Health Care......................... 10,319 12,288 20,711 25,599 ------- ------- ------- ------- Total Net Revenue.................................... $45,707 $47,401 $91,269 $95,505 ======= ======= ======= =======
Three Months Ended March 31, 2001 Compared to Three Months Ended March 31, 2000 Net revenue decreased $1.7 million, or 4%, to $45.7 million in the three months ended March 31, 2001 from $47.4 million in the three months ended March 31, 2000. In part, the reduction in net revenue reflects the continued efforts to reduce non-core and/or non-profitable products and services consistent with the Plan. In addition, the Company's investment in sales and marketing resources in the core respiratory programs failed to contribute significantly to the net revenues for the three months ended March 31, 2001. Pediatric health care net revenue increased by $0.3 million. Adult health care net revenue decreased $2.0 million for the three months ended March 31, 2001, primarily as a result of the reduction in non-core services to the pharmacy and respiratory therapy/home medical equipment patients. In the three months ended March 31, 2001, 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 $1.7 million, or 8%, to $20.3 million in the three months ended March 31, 2001 from $22.0 million in the three months ended March 31, 2000. Labor costs have decreased across all services primarily as a result of headcount reductions. As a percentage of net revenue, operating salaries, wages and employee benefits for the three months ended March 31, 2001 decreased to 44% from 47% for the three months ended March 31, 2000. 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 increased $0.7 million, or 4%, to $17.5 million in the three months ended March 31, 2001, from $16.8 million in the three months ended March 31, 2000. The increase in other operating costs relates primarily to increased workers compensation losses as well as increased equipment distribution costs in the three months ended March 31, 2001. As a percentage of net revenue, other operating costs for the three months ended March 31, 2001 increased to 38% from 36% for the three months ended March 31, 2000. Corporate, general and administrative costs decreased $0.5 million, or 8%, to $4.6 million in the three months ended March 31, 2001, from $5.1 million in the three months ended March 31, 2000. This decrease was primarily attributable to the reduction in the use of outside labor. As a percentage of net revenue, corporate, general and administrative costs for the three months ended March 31, 2001, decreased slightly compared to the three months ended March 31, 2000. Provision for doubtful accounts decreased $1.4 million, or 75%, to $0.5 million in the three months ended 12 March 31, 2001, from $1.9 million in the three months ended March 31, 2000. Cash collections as a percentage of net revenue were 103% and 104% for the three months ended March 31, 2001 and 2000, respectively. The Company continues to experience strong cash collections and improvements in the reimbursement processes contributing to a lower provision for doubtful accounts. Depreciation and amortization decreased $0.1 million, or 9%, to $1.9 million in the three months ended March 31, 2001 from $2.0 million in the three months ended March 31, 2000. As a percentage of the Company's net revenue, depreciation and amortization costs for the three months ended March 31, 2001 decreased slightly compared to the three months ended March 31, 2000. Interest expense decreased $0.9 million, or 48%, to $1.0 million in the three months ended March 31, 2001, from $1.9 million in the three months ended March 31, 2000. The Company's average debt outstanding decreased $37.2 million as the Company completed a series of transactions to repurchase a portion of the Notes. Interest income decreased $0.1 million in the three months ended March 31, 2001. The Company invested its excess cash balances in highly liquid investments. Six Months Ended March 31, 2001 Compared to Six Months Ended March 31, 2000 Net revenue decreased $4.2 million, or 4%, to $91.3 million in the six months ended March 31, 2001 from $95.5 million in the six months ended March 31, 2000. In part, the reduction in net revenue reflects the continued efforts to reduce non-core and/or non-profitable products and services consistent with the Plan. In addition, the Company's investment in sales and marketing resources in the core respiratory programs failed to contribute significantly to the net revenues for the six months ended March 31, 2001. Pediatric health care net revenue increased $0.7 million. Adult health care net revenue decreased $4.9 million for the six months ended March 31, 2001, primarily as a result of the reduction in non-core services to the pharmacy and respiratory therapy/home medical equipment patients. In the six months ended March 31, 2001, the Company derived approximately 49% of its net revenue from commercial insurers and other private payors, 44% 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 $3.7 million, or 8%, to $41.0 million in the six months ended March 31, 2001 from $44.7 million in the six months ended March 31, 2000. Labor costs have decreased across all services primarily as a result of headcount reductions. As a percentage of net revenue, operating salaries, wages and employee benefits for the six months ended March 31, 2001 decreased to 45% from 47% for the six months ended March 31, 2000. Other operating costs include medical supplies, branch office rent, utilities, vehicle expenses, allocated insurance costs and cost of sales. Cost of sales consists primarily of the costs of pharmaceuticals and related services. Other operating costs decreased $0.6 million, or 2%, to $33.9 million in the six months ended March 31, 2001, from $34.5 million in the six months ended March 31, 2000. As a percentage of net revenue, other operating costs for the six months ended March 31, 2001 increased to 37% from 36% for the six months ended March 31, 2000. Corporate, general and administrative costs decreased $0.7 million, or 7%, to $9.1 million in the six months ended March 31, 2001, from $9.8 million in the six months ended March 31, 2000. This decrease was primarily attributable to the reduction in the use of outside labor. As a percentage of net revenue, corporate, general and administrative costs for the six months ended March 31, 2001, decreased slightly compared to the six months ended March 31, 2000. Provision for doubtful accounts decreased $2.9 million, or 67%, to $1.4 million in the six months ended March 31, 2001, from $4.3 million in the six months ended March 31, 2000. Cash collections as a percentage of net revenue were 102% and 104% for the six months ended March 31, 2001 and 2000, respectively. The Company continues to experience strong cash collections and improvements in the reimbursement processes contributing to a lower provision for doubtful accounts. 13 Depreciation and amortization decreased $0.3 million, or 8%, to $3.8 million in the six months ended March 31, 2001 from $4.1 million in the six months ended March 31, 2000. As a percentage of the Company's net revenue, depreciation and amortization costs for the six months ended March 31, 2001 decreased slightly compared to the six months ended March 31, 2000. Interest expense decreased $2.7 million, or 55%, to $2.2 million in the six months ended March 31, 2001, from $4.9 million in the six months ended March 31, 2000. The Company's average debt outstanding decreased $44.5 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 a portion of the Notes. Interest income increased $0.2 million in the six months ended March 31, 2001. The Company invested its excess cash balances in highly liquid investments. Liquidity and Capital Resources 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. At March 31, 2001, the calculated availability was $24.0 million. The total credit facility shall be comprised of a revolving line of credit up to the available limit, consisting of Loans and Letters of Credit. As of the date of this Report, the Company has no outstanding borrowings under the Amended and Restated Loan Security Agreement. At March 31, 2001, total borrowings under the Notes were approximately $33.1 million. During the three months ended March 31, 2001, the Company completed a series of transactions to repurchase a total of $12.4 million of the Notes for $8.8 million cash plus accrued interest. The pre-tax gain (net of the write-off of the related deferred financing fees) of $3.3 million is reflected as an extraordinary item in the condensed consolidated statements of operations for the three and six months ended March 31, 2001. Cash collections as a percentage of net revenue for the three months ended March 31, 2001 and 2000 were 103% and 104%, 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 operating improvements and improved cash flow. The Company's investments in property and equipment are attributable largely to purchases of medical equipment rented to patients and computer equipment. Capital expenditures for computer equipment and software development, have been substantially completed. The Company anticipates future capital expenditures for enhancements of existing technology. However, the Company does not anticipate these to be significant. Management currently believes that its liquidity position will be adequate to satisfy the Company's working capital requirements and potential acquisitions. 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 14 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. On February 27, 2001, Plaintiffs' Motion for Class Certification was granted by the court. 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. 15 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. On March 29, 2001 the motion to dismiss was denied without prejudice pending a ruling by the Tennessee Supreme Court on an unrelated case. The Company and the individuals named as defendants deny that they have violated any of the requirements or obligations of any applicable Federal or State securities laws, or any other applicable law. In the opinion of the Company's management, the ultimate disposition of these two lawsuits should not have a material adverse effect on the Company's financial condition or results of operations, however, there can be no assurance that the Company will not sustain material liability as a result of or related to these lawsuits. ITEM 4. Submission of Matters to a Vote of Security Holders The 2001 Annual Meeting of Shareholders of the Company was held on February 21, 2001. 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 Robert P. Pinkas and Edward K. Wissing as directors for a term of three years expiring at the 2004 Annual Meeting of Shareholders. There was no solicitation in opposition to the nominees listed in the proxy statement, and the nominees were elected. Votes Broker ------------------- ---------------------- Nominees For Withheld Abstentions Non-votes -------- --------- -------- ----------- --------- Robert P. Pinkas 6,320,662 17,007 - - Edward K. Wissing 6,320,662 17,007 - - (b) Ratification of the appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending September 30, 2001. The Shareholders approved the proposal. Votes --------------------------------------------------------------------------- For Against Abstentions --- ------- ----------- 6,308,339 10,972 18,358 ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits -------- No exhibits are filed as part of this Report. (b) Reports on Form 8-K ------------------- The Company did not file a Current Report on Form 8-K during the quarter ended March 31, 2001. 16 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 11, 2001 By: /s/ James M. McNeill ---------------------- James M. McNeill Senior Vice President, Chief Financial Officer, Treasurer and Secretary (Duly authorized officer and Principal Financial Officer) 17