-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wgff7iWrRUo9n+6bYwQGiX95pIm/M4hQuh3kVM+nQlU5v1c1OqMcFY9hZfjzT6N2 BsnwaaMJFLBDquPxfTwp2g== 0000931763-02-000198.txt : 20020414 0000931763-02-000198.hdr.sgml : 20020414 ACCESSION NUMBER: 0000931763-02-000198 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEDIATRIC SERVICES OF AMERICA INC CENTRAL INDEX KEY: 0000893430 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 581873345 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23946 FILM NUMBER: 02524641 BUSINESS ADDRESS: STREET 1: 31O TECHNOLOGY PKWY CITY: NORCROSS STATE: GA ZIP: 30092-2929 BUSINESS PHONE: 7704411580 MAIL ADDRESS: STREET 1: 310 TECHNOLOGY PKWY CITY: NORCROSS STATE: GA ZIP: 30092-2929 10-Q 1 d10q.txt FORM 10-Q - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 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 January 29, 2002, the Registrant had 6,713,456 shares of Common Stock, $0.01 Par Value, outstanding. - -------------------------------------------------------------------------------- Page 1 of 19 Index of Exhibits on page 19 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 December 31, 2001 and September 30, 2001 ................................................ 3 Condensed Consolidated Statements of Operations for the three months ended December 31, 2001 and 2000 ....................................... 5 Condensed Consolidated Statements of Cash Flows for the three months ended December 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 ....................................... 15 PART II OTHER INFORMATION ITEM 1: Legal Proceedings ................................................................................ 16 ITEM 6: Exhibits and Reports on Form 8-K ................................................................. 17 Signatures ....................................................................................... 18 Index to Exhibits ................................................................................ 19
2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements PEDIATRIC SERVICES OF AMERICA, INC CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
December 31, September 30, 2001 2001 ------------ ------------- (Unaudited) Assets Current assets: Cash and cash equivalents ................................................. $ 8,186 $ 15,259 Accounts receivable, less allowances for doubtful accounts of $5,660 and $5,520, respectively. ........................... 32,012 31,456 Prepaid expenses .......................................................... 1,090 893 Deferred income taxes ..................................................... 1,775 1,778 Inventory ................................................................. 6,827 4,708 Other current assets ...................................................... 156 236 -------- -------- Total current assets ........................................................... 50,046 54,330 Property and equipment: Home care equipment held for rental. ...................................... 29,226 28,752 Furniture and fixtures .................................................... 10,709 10,572 Vehicles .................................................................. 725 725 Leasehold improvements .................................................... 1,309 1,222 -------- -------- 41,969 41,271 Accumulated depreciation and amortization ................................. (33,301) (32,315) -------- -------- 8,668 8,956 Other assets: Goodwill, less accumulated amortization of $9,613 at September 30, 2001 ........................................... 31,706 31,706 Certificates of need, less accumulated amortization of $535 and $505, respectively ..................................................... 137 167 Deferred financing fees, less accumulated amortization of $671 and $701, respectively ............................ 630 787 Non-compete agreements, less accumulated amortization of $1,116 and $1,110, respectively ........................................ 44 50 Deferred income taxes ..................................................... 1,051 1,049 Workers' compensation bond collateral ..................................... 1,825 - Other ..................................................................... 254 253 -------- -------- 35,647 34,012 -------- -------- Total assets ................................................................... $ 94,361 $ 97,298 ======== ========
See accompanying notes. 3 PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS--(Continued) (In thousands)
December 31, September 30, 2001 2001 ------------ ------------- (Unaudited) Liabilities and stockholders' equity Current liabilities: Accounts payable .................................................................................. $ 6,480 $ 5,611 Accrued compensation .............................................................................. 4,658 5,757 Income taxes ...................................................................................... 570 498 Accrued insurance ................................................................................. 6,167 6,086 Other accrued liabilities ......................................................................... 4,493 5,162 Deferred revenue .................................................................................. 597 621 Current maturities of long-term obligations to related parties .................................... 25 25 Current maturities of long-term obligations ....................................................... 11 11 -------- -------- Total current liabilities ............................................................................ 23,001 23,771 Long-term obligations to related parties, net of current maturities ....................................................................................... -- 25 Long-term obligations, net of current maturities ..................................................... 27,350 32,352 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, 6,713 and 6,711 shares issued and outstanding at December 31, 2001 and September 30, 2001, respectively ............................................................ 67 67 Additional paid-in capital ........................................................................ 48,496 48,493 Accumulated deficit ............................................................................... (4,553) (7,410) -------- -------- Total stockholders' equity ........................................................................... 44,010 41,150 -------- -------- Total liabilities and stockholders' equity ........................................................... $ 94,361 $ 97,298 ======== ========
See accompanying notes. 4 PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data)
Three Months Ended December 31, 2001 2000 ----------- ----------- (Unaudited) (Unaudited) Net revenue................................................................. $ 49,140 $ 45,561 Costs and expenses: Operating salaries, wages and employee benefits.......................... 22,637 20,650 Other operating costs.................................................... 17,257 16,414 Corporate, general and administrative.................................... 4,716 4,453 Provision for doubtful accounts.......................................... 305 958 Depreciation and amortization............................................ 1,094 1,899 ---------- ---------- Total costs and expenses........................................... 46,009 44,374 ---------- ---------- Operating income............................................................ 3,131 1,187 Interest income............................................................. 58 220 Interest expense............................................................ (719) (1,221) ---------- ---------- Income before extraordinary item............................................ 2,470 186 Extraordinary item.......................................................... 387 -- ---------- ---------- Net income.................................................................. $ 2,857 $ 186 ========== ========== Basic net income per share data: Income before extraordinary item............................................ $ 0.37 $ 0.03 Extraordinary item.......................................................... 0.06 -- ---------- ---------- Net income.................................................................. $ 0.43 $ 0.03 ========== ========== Diluted net income per share data: Income before extraordinary item............................................ $ 0.35 $ 0.03 Extraordinary item.......................................................... 0.05 -- ---------- ---------- Net income.................................................................. $ 0.40 $ 0.03 ========== ========== Weighted average shares outstanding: Basic....................................................................... 6,713 6,659 ========== ========== Diluted..................................................................... 7,101 6,892 ========== ==========
See accompanying notes. 5 PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Three Months Ended December 31, 2001 2000 ----------- ----------- Operating activities (Unaudited) (Unaudited) Net income......................................................................... $ 2,857 $ 186 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization................................................. 1,094 1,899 Provision for doubtful accounts............................................... 305 958 Amortization of deferred financing fees....................................... 38 79 Deferred income taxes......................................................... 1 (130) Extraordinary gain on extinguishment of debt.................................. (387) -- Changes in operating assets and liabilities: Accounts receivable........................................................ (861) 169 Prepaid expenses........................................................... (197) (178) Inventory.................................................................. (2,119) (357) Other assets............................................................... 72 (12) Workers' compensation bond collateral...................................... (1,825) -- Accounts payable........................................................... 869 (731) Income taxes............................................................... 72 (176) Accrued liabilities........................................................ (1,711) (2,623) --------- --------- Net cash used in operating activities.............................................. (1,792) (916) Investing activities Purchases of property and equipment................................................ (762) (249) --------- --------- Net cash used in investing activities.............................................. (762) (249) Financing activities Principal payments on long-term debt............................................... (4,522) (54) Proceeds from exercise of stock options............................................ 3 1 --------- --------- Net cash used in financing activities.............................................. (4,519) (53) --------- --------- Decrease in cash and cash equivalents.............................................. (7,073) (1,218) Cash and cash equivalents at beginning of period................................... 15,259 14,912 --------- --------- Cash and cash equivalents at end of period......................................... $ 8,186 $ 13,694 ========= ========= Supplemental disclosure of cash flow information Cash paid for interest............................................................. $ 1,642 $ 2,350 ========= ========= Cash paid for taxes................................................................ $ 52 $ 358 ========= =========
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 accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for the three months ended December 31, 2001 are not necessarily indicative of the results to be expected for the entire fiscal year ending September 30, 2002. These condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements for the year ended September 30, 2001 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 2001 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 $7.8 million and $7.3 million for which services have been rendered but the amounts were unbilled as of December 31, 2001 and September 30, 2001, respectively. Such unbilled amounts are primarily a result of the time required to process bills for services rendered. 7 PEDIATRIC SERVICES OF AMERICA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - (Continued) 5. Goodwill The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, effective October 1, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangibles with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. The Company is required to complete the initial step of a transitional impairment test within six months of adoption of SFAS No. 142 and to complete the final step of the transitional impairment test by the end of the fiscal year. Any impairment loss resulting from the transitional impairment test will be recorded as a cumulative effect of a change in accounting principle for the quarter ended March 31, 2002. Subsequent impairment losses will be reflected in operating income in the income statement. The Company has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. Had the Company been accounting for its goodwill under SFAS No. 142 for all periods presented, the Company's net income (in thousands) and earnings per share would have been as follows: Three Months Ended December 31, 2000 ---- Reported net income ................................ $ 186 Add back goodwill amortization ..................... 557 ------ Adjusted net income ................................ $ 743 ====== Basic earnings per share: Reported net income ....................... $ 0.03 Goodwill amortization ..................... 0.08 ------ Adjusted net income ....................... $ 0.11 ====== Diluted earnings per share: Reported net income ....................... $ 0.03 Goodwill amortization ..................... 0.08 ------ Adjusted net income ....................... $ 0.11 ====== Amortization expense on intangible assets was $42,722 and $611,772 for the quarter ended December 31, 2001 and 2000, respectively. In addition, the three month period ended December 31, 2000 included $556,789 related to the amortization of goodwill. 6. Concentration of Credit Risk The Company's principal financial instruments subject to potential concentrations 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. 8 PEDIATRIC SERVICES OF AMERICA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited - (Continued) 7. Reclassifications Certain amounts for prior periods have been reclassified to conform to the current year presentation. 8. Income Taxes The Company has recorded a partial valuation allowance against the net deferred tax assets as of December 31, 2001 and September 30, 2001. 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 months ended December 31, 2001, the Company had a current income tax expense of $0.7 million which was offset by the reduction of the valuation allowance related to the net deferred tax asset resulting in zero income tax expense. 9. Long-Term Borrowing Arrangements In the first quarter of fiscal year 2002, the Company completed a transaction to repurchase a total of $5.0 million of the Senior Subordinated Notes (the "Notes") for $4.5 million cash plus accrued interest. The gain (net of the write-off of the related deferred financing fees) of $0.4 million is reflected as an extraordinary item in the condensed consolidated statements of operations for the three months ended December 31, 2001. 10. Basic and Diluted Net Income Per Share Basic net income per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed using the weighted average 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 387,582 and 232,872 for the three months ended December 31, 2001, and 2000, respectively. 11. Workers' Compensation Bond Collateral The Company has agreed to post $2.2 million cash collateral in a third party escrow account to secure a surety bond to satisfy its workers' compensation program requirements. As of December 31, 2001, the Company had posted $1.8 million of the $2.2 million cash collateral. 9 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 first quarter of fiscal year 2002, the Company and its senior management continued to realize substantial progress in achieving the goals of the Strategic Plan (the "Plan"). The Company addressed issues involving significant elements of the Plan including: revenue growth, cash flow, risk management and payor contract pricing. The recent changes to the sales and marketing program appear to be improving its effectiveness. The addition of regional managed care sales personnel coupled with the branch office directors' initiatives have demonstrated improvements in select markets. Management continues to focus on select key markets with unfulfilled market share potential. The Company continues to experience improvement in unstaffed nursing private duty hours and visits in certain markets. However, on a consolidated basis the Company did not see sequential improvement in unstaffed nursing hours. In an effort to maximize total hours staffed, the Company has implemented a management reporting tool that includes self reporting of branch office activity. The tool provides information regarding total hours ordered by payors, total hours declined and case hours staffed and unstaffed. The total hours declined category measures nursing hours that, although ordered, were declined by the intended recipient due to various reasons including rehospitalizations, family vacations and doctor's appointments. Branch office directors are responsible for reporting these activities and the related explanations to the Company's senior management. 10 The following table represents the approximate total hours for the time periods indicated:
Total hours Total hours Total case Total case ordered declined hours staffed hours unstaffed ------- -------- ------------- --------------- Rolling 13 weeks ended September 27, 2001 .......... 934,573 100,425 749,901 84,247 Rolling 13 weeks ended December 27, 2001 ........... 910,777 103,406 722,115 85,256
During the first quarter of fiscal year 2002, the Company took advantage of an opportunity to purchase large quantities of product for hemophilia patients at a discount to the upcoming contracted rates. This resulted in a higher than normal inventory level at the end of the first quarter of fiscal year 2002. While the Company expects to turn the inventory in a timely manner, management concluded it was appropriate to record a reserve of approximately $0.2 million. The Company remains aware of ongoing changes in the infusion drug delivery alternatives available to various payors. If some of these alternatives are selected by various payors, there could be significant reductions to the Company's future pharmacy revenues. In addition, the Company is exposed to significant revenue fluctuations as a result of change in service or usage levels by a limited number of hemophilia factor patients. Such changes occurred during the first quarter of fiscal 2002, and the Company experienced an increase in episodic pharmacy revenues. In addition, seasonal deliveries of Synagis products used to treat flu-like symptoms increased in the first quarter of fiscal year 2002 and are expected to continue through the majority of the second quarter. During the first quarter of fiscal year 2002, the Company repurchased a total of $5.0 million of the Notes for $4.5 million cash plus accrued interest. The gain of $0.4 million is reflected as an extraordinary item in the condensed consolidated statements of operations. The Company's existing Amended and Restated Loan Security Agreement expired November 1, 2001. The Company is currently assessing alternatives for senior debt financing. Such financing will be pursued as needed. As the Company was finalizing the renewal of its Risk Insurance Program, the impact of the events of September 11, 2001 was evident in the pricing by a number of insurance carriers. The Company received from a number of insurance carriers rate quotes which were substantially higher than the rates the Company had previously paid. Faced with declining coverage and increased pricing for all property and casualty lines of insurance, the Company determined it was necessary to select insurance coverage with higher deductibles and premiums than previously maintained. In addition, the Company's workers' compensation program's collateral requirements were significantly increased in both form and amount. As a result, the Company has agreed to post $2.2 million cash collateral in a third party escrow account to secure a surety bond to satisfy these requirements. To date the Company has posted $1.8 million of the cash collateral, which is included in other assets in the accompanying condensed consolidated financial statements for the period ended December 31, 2001. The Company's management assesses its various growth opportunities, ranging from evaluation of acquisition alternatives in key markets, geographical expansion through the use of start-up branch offices and the marketing impact on existing branch office growth, in order to ration capital available from operations. Results of Operations Significant Accounting Policies Net Revenue Due to the nature of the industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenues and accounts receivable at their realizable values. Inherent in these estimates is the risk that they will need to be revised or updated with the changes recorded in subsequent periods as additional information becomes available to management. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review. As of December 31, 2001, the Company had no 11 material claims, disputes or unsettled matters with third-party payors nor were there any material settlements with third-party payors. Net revenue represents the estimated net realizable amounts from patients, third-party payors and others for patient services and products rendered. Such revenue is recognized as the treatment plan is administered to the patient and recorded at amounts estimated to be received under reimbursement arrangements with payors. Net revenues to be reimbursed by contracts with third-party payors are recorded at an amount to be realized under these contractual arrangements. Revenues from Medicaid and Medicare are generally based on reimbursement of the reasonable direct and indirect costs of providing services to program participants. In certain situations the services and products are recorded separately. In other situations, the service and products are billed and reimbursed on a per diem or contract basis whereby the insurance carrier pays the Company one combined amount for treatment. Because the reimbursement arrangements in these situations are based on a per diem or contract amount, the Company does not maintain records that provide a breakdown between the service and product components. The Company has developed a methodology to quantify the impact to net revenue of the inherent time lag between certain patient treatment and input of the related information into its billing and collection system. This methodology measures relative changes in the time and overall activity level at each branch office location and aggregates these measurements to estimate the impact to consolidated net revenue. Any unforeseen volatility to either the time or activity level at specific branch offices has the potential to significantly impact the estimate. In other select cases patient treatment may cease for a number of reasons including; rehospitalizations, change in treatment needs, or death, and a time lag may exist before this information is reflected in the Company's billing and collection system. The Company has developed a methodology which measures the relative magnitude of these events over recent time periods and applies this methodology to reduce net revenues recognized in the current period. Allowance for Doubtful Accounts In determining the adequacy of the allowance and related provision for doubtful accounts, the Company has developed a process which combines statistical analysis of historical collection and write-off activity with a detailed review of existing account balances meeting certain criteria and their likelihood of being collected at the amounts recorded. This detailed review involves both the assigned corporate reimbursement department personnel and the respective branch office location personnel assessing each patient claim that falls within prescribed age and amount criteria. These assessments are aggregated and compared to the results of the statistical analysis to provide to management guidance in making the estimate regarding the allowance balance. Inherent in this estimate is the risk that it will need to be revised or updated with the changes recorded in subsequent periods as additional information becomes available to management. Accrued Insurance The Company's insurance broker retained the services of an independent actuary to prepare an actuarial analysis of the Company's development of reported and incurred but not reported claims. These estimates are updated quarterly and are used in the valuation of the accrued insurance liability. Inherent in these estimates is the risk that they will need to be revised or updated with the changes recorded in subsequent periods as additional information becomes available to management. 12 The following table is derived from the Company's unaudited condensed consolidated statements of operations for the periods indicated and presents results of operations as a percentage of net revenue and the percentage change in the dollar amounts of each item from the comparative prior period:
Period-to-Period Percentage of Percentage Net Revenue Increase (Decrease) ----------- ------------------- Three Months Three Months Ended Ended December 31, December 31, ------------ ------------ 2001 2000 2001 ---- ---- ---- Net revenue ................................................... 100.0% 100.0% 8% Operating salaries, wages and employee benefits ................................................... 46.1 45.3 10 Other operating costs ......................................... 35.1 36.0 5 Corporate, general and administrative ......................... 9.6 9.8 6 Provision for doubtful accounts ............................... 0.6 2.1 (68) Depreciation and amortization ................................. 2.2 4.1 (42) ----- ----- Operating income .............................................. 6.4 2.7 164 Interest income ............................................... 0.1 0.5 (73) Interest expense .............................................. (1.5) (2.7) (41) ----- ----- Income before extraordinary item .............................. 5.0% 0.5% 1,227% ===== =====
The following table sets forth for the periods indicated the net revenue breakdown by service: (in thousands)
Three Months Ended December 31, 2001 2000 ---- ---- Pediatric Home Health Care Nursing ...................................................... $ 22,128 $ 21,204 Respiratory Therapy Equipment ................................ 4,183 3,711 Home Medical Equipment ....................................... 328 332 Pharmacy and Other ........................................... 11,123 9,924 -------- -------- Total Pediatric Home Health Care ...................... 37,762 35,171 -------- -------- Adult Home Health Care: Nursing ...................................................... 2,974 2,820 Respiratory Therapy Equipment ................................ 4,620 3,980 Home Medical Equipment ....................................... 633 708 Pharmacy and Other ........................................... 3,151 2,882 -------- -------- Total Adult Home Health Care .......................... 11,378 10,390 -------- -------- Total Net Revenue ..................................... $ 49,140 $ 45,561 ======== ========
Three Months Ended December 31, 2001 Compared to Three Months Ended December 31, 2000 Net revenue increased $3.6 million, or 8%, to $49.1 million in the three months ended December 31, 2001 from $45.6 million in the three months ended December 31, 2000. Pediatric home health care net revenue increased by $2.6 million for the three months ended December 31, 2001, due to a number of factors, including, increased reimbursement rates for select pediatric nursing payors, increased episodic pharmacy deliveries and increased core respiratory products and services as compared to the three months ended December 31, 2000. Adult health care net revenue increased $1.0 million for the three months ended December 31, 2001, primarily as a result of an increase in core products and services to pharmacy and respiratory therapy patients. In the three months ended December 31, 2001, the Company derived approximately 50% of its net revenue from commercial insurers and other private payors, 43% 13 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 increased $2.0 million, or 10%, to $22.6 million in the three months ended December 31, 2001 from $20.7 million in the three months ended December 31, 2000. The Company experienced seasonal increases in its nursing labor costs due to increased levels of nurses eligible for benefits. In addition, the Company incurred labor costs for new start-up branches in the three months ended December 31, 2001. As a percentage of net revenue, operating salaries, wages and employee benefits for the three months ended December 31, 2001 increased to 46% from 45% for the three months ended December 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 $0.8 million, or 5%, to $17.3 million in the three months ended December 31, 2001, from $16.4 million in the three months ended December 31, 2000. The increase in other operating costs relates primarily to increased business insurance costs. As a percentage of net revenue, other operating costs for the three months ended December 31, 2001 decreased to 35% from 36% for the three months ended December 31, 2000. Corporate, general and administrative costs increased $0.3 million, or 6%, to $4.7 million in the three months ended December 31, 2001, from $4.4 million in the three months ended December 31, 2000. The increase relates primarily to an increase in the Company's portion of benefits costs and estimates for professional fees in the three months ended December 31, 2001 as compared to December 31, 2000. As a percentage of net revenue, corporate, general and administrative costs for the three months ended December 31, 2001, decreased slightly compared to the three months ended December 31, 2000. Provision for doubtful accounts decreased $0.7 million, or 68%, to $0.3 million in the three months ended December 31, 2001, from $1.0 million in the three months ended December 31, 2000. Cash collections as a percentage of net revenue were 99% and 100% for the three months ended December 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 $0.8 million, or 42%, to $1.1 million in the three months ended December 31, 2001 from $1.9 million in the three months ended December 31, 2000. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets, effective October 1, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangibles with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Amortization expense on intangible assets was $0.04 million and $0.6 million for the quarter ended December 31, 2001 and 2000, respectively. In addition, the three month period ended December 31, 2000 included $0.6 million related to the amortization of goodwill. Interest expense decreased $0.5 million, or 41%, to $0.7 million in the three months ended December 31, 2001, from $1.2 million in the three months ended December 31, 2000. The Company's average debt outstanding decreased $17.6 million as the Company completed a series of transactions to repurchase a portion of the Notes. Interest income decreased $0.2 million in the three months ended December 31, 2001. The Company invested its excess cash balances in highly liquid investments whose yields continue to decline. Liquidity and Capital Resources In the first quarter of fiscal year 2002, the Company completed a transaction to repurchase a total of $5.0 million of the Notes for $4.5 million cash plus accrued interest. The gain (net of the write-off of the related deferred financing fees) of $0.4 million is reflected as an extraordinary item in the condensed consolidated statements of operations for the three months ended December 31, 2001. At December 31, 2001, total borrowings under the Notes were approximately $27.4 million. The Indenture under which the Notes were issued allows the Company to repurchase the Notes at its discretion. All bids to repurchase have been based upon a number of factors including: cash availability, interest 14 rates on invested cash, other capital investment alternatives, and relative ask prices quoted by the market maker. Each decision by the Company to repurchase has been arrived at independently using the above criteria and the Company does not have a formal plan in place to repurchase the Notes. Further, the fair market value of the Notes has increased, making future repurchases of the Notes less likely. Cash collections as a percentage of net revenue for the three months ended December 31, 2001 and 2000 were 99% and 100%, 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. For the three months ended December 31, 2001 the Company has purchased medical equipment with technology upgrades to service existing patients. 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 that these capital expenditures will be significant. As a result of operating in the health care industry, the Company's business entails an inherent risk of lawsuits alleging malpractice, product liability or related legal theories, which can involve large claims and significant defense costs. The Company is, from time to time, subject to such suits arising in the ordinary course of business. The Company currently maintains professional and commercial liability insurance intended to cover such claims. As of December 31, 2001, this insurance coverage is provided under a "claims-made" policy which provides, subject to the terms and conditions of the policy, coverage for certain types of claims made against the Company during the term of the policy and does not provide coverage for losses occurring during the terms of the policy for which a claim is made subsequent to the termination of the policy. Should the policy not be renewed or replaced with equivalent insurance, claims based on occurrences during its term but asserted subsequently would be uninsured. There can be no assurance that the coverage limits of the Company's insurance policy will be adequate. In addition, while the Company has been able to obtain various forms of insurance in the past, such insurance varies in coverage, cost and collateral requirements, and is difficult to obtain and may or may not be available in the future on acceptable terms. In addition, the Company is subject to accident claims arising out of the normal operation of its fleet of vans and small trucks, and maintains insurance intended to cover such claims. A successful claim against the Company in excess of the Company's insurance coverage could have an adverse effect upon the Company's business. Claims against the Company, regardless of their merits or eventual outcome also may have an adverse effect upon the Company's reputation and business. Management currently believes that its liquidity position will be adequate to satisfy the Company's working capital requirements, selected potential acquisitions, workers' compensation collateral requirements, and income tax payments. The primary source of liquidity is cash flow from operations. To this extent, the Company is exposed to fluctuations in cash collection results. However, the Company has evaluated several senior debt proposals and believes that it could secure such financing if needed. Variation in Quarterly Operating Results 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. Because of these factors, 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 faces a number of market risk exposures including risks related to cash and cash equivalents, accounts receivable and interest rates. Cash and cash equivalents are held primarily in one financial institution. The 15 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 environment in the health care industry. The risk is somewhat limited due to the large number of payors including Medicare and Medicaid, insurance companies, individuals and the diversity of geographic locations in which the Company operates. The Company's Notes, issued in 1998, have a fixed coupon rate of 10%. The fair value of the Company's Notes is subject to change as a result of changes in market prices or interest rates. The Company estimates potential changes in the fair value of interest rate sensitive financial instruments based on the hypothetical increase (or decrease) in interest rates. The Company's use of this methodology to quantify the market risk of such instruments should not be construed as an endorsement of its accuracy or the accuracy of the related assumptions. The quantitative information about market risk is necessarily limited because it does not take into account other factors such as the Company's financial performance and credit ratings. Based on a hypothetical immediate 150 basis point increase in interest rates at December 31, 2001 the market value of the Company's Notes would be reduced by approximately $1.8 million. Conversely, a 150 basis point decrease in interest rates would result in a net increase in the market value of the Company's Notes outstanding at December 31, 2001 of approximately $2.0 million. 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 among the named 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. The amended complaint did not specify an amount or range of damages that the plaintiffs were seeking. In general, the plaintiffs alleged 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 purported 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 motions 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. Fact discovery in the case closed on July 31, 2001, with a period of expert discovery to follow. On September 5, 2001, Plaintiffs' moved for leave to file a Second Amended Complaint and to expand the class period. The proposed Second Amended Complaint purported to expand the class to include all persons who purchased the Company's stock between November 11, 1996 and July 28, 1998. The Court denied Plaintiffs' Motion on October 12, 2001. In January, 2002, the parties entered into a Stipulation of Settlement settling all claims asserted in the lawsuit against all parties for a total of $3.2 million, subject to court approval. Notice has been sent to all members of the plaintiff class for a settlement hearing, which the court will conduct on March 15, 2002, to consider the fairness, reasonableness and adequacy of the proposed settlement. Under the terms of the settlement, the $3.0 million contribution of the Company to the settlement will be fully funded by its insurance carrier under its Directors and Officers insurance policy. 16 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. On May 2, 2001, the Company and the individuals named as defendants, filed their answer, denying liability. 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 6. Exhibits and Reports on Form 8-K. (a) Exhibits -------- The following exhibits are filed with this Report. 10.9(t) Amended and Restated Stock Option Plan, effective as of November 28, 2001, filed herewith. 10.9(u) Amended and Restated Directors' Stock Option Plan, effective as of November 28, 2001, filed herewith. 10.9(v) Amendment No. 3 to the Employee Stock Purchase Plan, effective as of February 1, 2002, filed herewith. (b) Reports on Form 8-K ------------------- The Company did not file a Current Report on Form 8-K during the quarter ended December 31, 2001. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PEDIATRIC SERVICES OF AMERICA, INC. (Registrant) Date: February 1, 2002 By: /s/ James M. McNeill -------------------------------------- James M. McNeill Senior Vice President, Chief Financial Officer, Treasurer and Secretary (Duly authorized officer and Principal Financial Officer) 18 INDEX TO EXHIBITS The following exhibits are filed with this Report. Exhibit 10.9(t) Amended and Restated Stock Option Plan Exhibit 10.9(u) Amended and Restated Directors' Stock Option Plan Exhibit 10.9(v) Amendment No. 3 to the Employee Stock Purchase Plan 19 EX-10.9(T) 3 dex109t.txt AMENDED AND RESTATED STOCK OPTION PLAN EXHIBIT 10.9(t) PEDIATRIC SERVICES OF AMERICA, INC. STOCK OPTION PLAN (As Amended and Restated Effective November 28, 2001) PEDIATRIC SERVICES OF AMERICA, INC. STOCK OPTION PLAN (As Amended and Restated Effective November 28, 2001) ARTICLE 1 Background and Purpose 1.1 Background. On July 16, 1990, the Company adopted the Home Health Acquisition Corp. 1990 Stock Option Plan, which was subsequently amended on April 18, 1991. As of March 20, 1992, the Company amended and restated the originally adopted plan to reflect changes in the requirements of Rule 16b-3 under the 1934 Act and to consolidate the existing plan and all previous amendments into a single document. On May 27, 1994, the Company again amended and restated the plan and consolidated all previous amendments into a single document. This document further amends and restates the Plan as specified below and also reflects Amendment No. 1 to this Plan. 1.2 General Purpose. The purpose of this Plan is to further the growth and development of the Company by encouraging key employees, directors, consultants and advisors to obtain a proprietary interest in the Company by owning its stock. The Company intends that the Plan will provide such persons with an added incentive to continue in the service of the Company and will stimulate their efforts in promoting the growth, efficiency and profitability of the Company. The Company also intends that the Plan will afford the Company a means of attracting to its service persons of outstanding quality. 1.3 Intended Tax Effects of Options. It is intended that part of the Plan qualify as an ISO (as hereinafter defined) plan and that any option granted in accordance with such portion of the Plan qualify as an ISO (as hereinafter defined), all within the meaning of Code (S)422. The tax effects of any NQSO granted hereunder should be determined under Code (S)83. ARTICLE 2 Definitions The following words and phrases as used in this Plan shall have the meanings set forth in this Article unless a different meaning is clearly required by the context: 2.1 1933 Act shall mean the Securities Act of 1933, as amended. 2.2 1934 Act shall mean the Securities Exchange Act of 1934, as amended. 2.3 Affiliate shall mean any parent corporation or subsidiary corporation, as those terms are defined in Code Sections 424(e) and (f), respectively. 2.4 Beneficiary shall mean, with respect to an Optionee, the Person or Persons who acquire the Options of such Optionee by bequest or inheritance. To the extent that an Option has not yet been distributed to such Person or Persons from a deceased Optionee's estate, an Option may be exercised by the executor or administrator (as applicable) of the deceased Optionee's estate. 2.5 Board shall mean the Board of Directors of the Company. 2.6 Cause shall mean an act or acts by an individual involving personal dishonesty, incompetence, willful misconduct, moral turpitude, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses), the use for profit or disclosure to unauthorized persons of confidential information or trade secrets of the Company, the breach of any contract with the Company, the unlawful trading in the securities of the Company or of another corporation based on information gained as a result of the performance of services for the Company, a felony conviction or the failure to contest prosecution for a felony, embezzlement, fraud, deceit or civil rights violations, any of which acts causing the Company or any subsidiary liability or loss, as determined 2 by the Committee in its sole discretion. 2.7 Change of Control shall mean the occurrence of any one of the following events: (a) Dissolution of the Company. The dissolution of the Company or the Company's Subsidiary; (b) Liquidation. The liquidation of more than fifty percent in value of the Company or the Subsidiary: (c) Sale of Assets. A sale of assets involving fifty percent or more in value of the assets of the Company or of the Subsidiary; (d) Merger of Company. Any merger or reorganization or consolidation of the Company in which the Company is not the surviving entity; (e) Merger of Subsidiary. Any merger or reorganization or consolidation of the Subsidiary in which the Subsidiary is not the surviving entity (other than a merger or reorganization or consolidation with the Company or any entity controlled by the Company); (f) Subsidiary Stock Sale. Any sale or other disposition of more than fifty percent of the combined voting securities of the Subsidiary; or (g) Transfer of Company Interest. Any transaction pursuant to which the holders, as a group, of all of the securities of the Company outstanding prior to the transaction hold, as a group, less than fifty percent of the combined voting power of the Company or any successor company outstanding after the transaction. 2.8 Code shall mean the Internal Revenue Code of 1986, as amended. 2.9 Committee shall mean the Compensation Committee of the Board of Directors, or such other committee appointed by the Board to administer and interpret the Plan in accordance with Article 3 below. 2.10 Common Stock shall mean the common stock of the Company. 2.11 Company shall mean Pediatric Services of America, Inc., a Delaware corporation. 2.12 Director shall mean an individual who is serving as a member of the Board (i.e., a director of the Company) or who are serving as a member of the board of directors of a parent or subsidiary corporation of the Company. 2.13 Disability shall mean, with respect to an individual, the total and permanent disability of such individual as determined by the Committee in its sole discretion. 2.14 Effective Date shall mean the date on which the amended and restated Plan evidenced by this plan document was adopted by the Board, subject to shareholder approval. See Article 9 herein. 2.15 Fair Market Value of the Common Stock as of a date of determination shall mean the following: (a) Stock Listed and Shares Traded. If the Common Stock is listed and traded on a national securities exchange (as such term is defined by the 1934 Act), on the Nasdaq National Market or other quotation service on the date of determination, the Fair Market Value per share shall be the closing price of a share of the Common Stock on said national securities exchange, the Nasdaq National Market or other quotation service on the date of determination. Notwithstanding the foregoing, if the Common Stock is traded in the over-the-counter market, the Fair Market Value per share shall be the average of the closing bid and asked prices on the date of determination. 3 (b) Stock Listed But No Shares Traded. If the Common Stock is listed on a national securities exchange or on The Nasdaq National Market but no shares of the Common Stock are traded on the date of determination but there were shares traded on dates within a reasonable period before the date of determination, the Fair Market Value shall be the closing price of the Common Stock on the most recent date before the date of determination. If the Common Stock is regularly traded in the over-the-counter market but no shares of the Common Stock are traded on the date of determination (or if records of such trades are unavailable or burdensome to obtain) but there were shares traded on dates within a reasonable period before the date of determination, the Fair Market Value shall be the average of the closing bid and asked prices of the Common Stock on the most recent date before the date of determination. (c) Stock Not Listed. If the Common Stock is not listed on a national securities exchange or on The Nasdaq National Market and is not regularly traded in the over-the-counter market, then the Committee shall determine the Fair Market Value of the Common Stock from all relevant available facts, which may include the average of the closing bid and ask prices reflected in the over-the-counter market on a date within a reasonable period either before or after the date of determination or opinions of independent experts as to value and may take into account any recent sales and purchases of such Common Stock to the extent they are representative. The Committee's determination of Fair Market Value, which shall be made pursuant to the foregoing provisions, shall be final and binding for all purposes of this Plan. 2.16 ISO shall mean an incentive stock option within the meaning of Code (S)422(b). 2.17 NQSO shall mean an option to which Code (S)421 (relating generally to certain ISO and other options) does not apply. 2.18 Option shall mean ISO's or NQSO's, as applicable, granted to individuals pursuant to the terms and provisions of this Plan. 2.19 Option Agreement shall mean a written agreement, executed and dated by the Company and an Optionee, evidencing an Option granted under the terms and provisions of this Plan, setting forth the terms and conditions of such Option, and specifying the name of the Optionee and the number of shares of stock subject to such Option. 2.20 Option Price shall mean the purchase price of the shares of Common Stock underlying an Option. 2.21 Optionee shall mean an individual who is granted an Option pursuant to the terms and provisions of this Plan. 2.22 Person shall mean any individual, organization, corporation, partnership or other entity. 2.23 Plan shall mean this Pediatric Services of America, Inc. Stock Option Plan, as amended and restated as of the Effective Date. 2.24 Subsidiary shall mean Pediatric Services of America, Inc., a Georgia corporation. ARTICLE 3 Administration 3.1 General Administration. The Plan shall be administered and interpreted by the Committee. Subject to the express provisions of the Plan, the Committee shall have discretionary authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the Option Agreements by which Options shall be evidenced (which shall not be 4 inconsistent with the terms of the Plan), and to make all other determinations necessary or advisable for the administration of the Plan, all of which determinations shall be final, binding and conclusive. 3.2 Appointment. The Board shall appoint the Committee from among its members to serve at the pleasure of the Board. The Board from time to time may remove members from, or add members to, the Committee and shall fill all vacancies thereon. The Committee at all times shall be composed of two or more directors. No director serving on the Committee may be a current employee of the Company or a former employee of the Company (or any corporation affiliated with the Company under Code (S)1504) receiving compensation for prior services (other than benefits under a tax-qualified retirement plan) during each taxable year during which the director serves on the Committee. Furthermore, no director serving on the Committee shall be or have ever been an officer of the Company (or any Code (S)1504 affiliated corporation), or shall be receiving remuneration (directly or indirectly) from such a corporation in any capacity other than as a director. The requirements of this section are intended to comply with the "outside director" requirements of Treas. Reg. (S)1.162-27(e)(3) or any successor regulation, and shall be interpreted and construed in a manner which assures compliance with the "outside" director requirement of Code (S)162(m)(4)(C)(i). 3.3 Organization. The Committee may select one of its members as its chairman and shall hold its meetings at such times, in such manner, and at such places as it shall deem advisable. A majority of the Committee shall constitute a quorum, and such majority shall determine its actions. The Committee shall keep minutes of its proceedings and shall report the same to the Board at the meeting next succeeding. 3.4 Indemnification. In addition to such other rights of indemnification as they have as directors or as members of the Committee, the members of the Committee, to the extent permitted by applicable law, shall be indemnified by the Company against reasonable expenses (including, without limitation, attorneys' fees) actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Options granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved to the extent required by and in the manner provided by the articles or certificate of incorporation or the bylaws of the Company relating to indemnification of directors) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member or members did not act in good faith and in a manner he or they reasonably believed to be in or not opposed to the best interest of the Company. ARTICLE 4 Stock The stock subject to the Options and other provisions of the Plan shall be shares of Common Stock, authorized but unissued or reacquired, whether on the market or otherwise. Subject to readjustment in accordance with the provisions of Article 7, the total number of shares of Common Stock for which Options may be granted to persons participating in the Plan shall not exceed in the aggregate 1,750,000 shares of Common Stock, any of which may be granted in the form of ISOs. Notwithstanding the foregoing, shares of Common Stock allocable to the unexercised portion of any expired or terminated Option returned to the Company by forfeiture again may become subject to Options under the Plan. ARTICLE 5 Eligibility to Receive and Grant of Options 5.1 Individuals Eligible for Grants of Options. The individuals eligible to receive Options hereunder shall be key employees, consultants and advisors of the Company or its Affiliates, including such employees who are also members of the Board or of the board of directors of any parent or subsidiary corporation of the Company; provided, no non-employee director shall be eligible to receive any Options 5 pursuant to this Plan, and provided further, that only employees of the Company and its "parent" or "subsidiary" corporations within the meaning of subsections (e) and (f) of Code (S)424 shall be eligible to receive ISO's. 5.2 Grants of Options. Subject to the provisions of the Plan, the Committee shall have the authority and sole discretion to determine and designate, from time to time, those individuals (from among the individuals eligible for a grant of Options under the Plan pursuant to Section 5.1 above) to whom Options will actually be granted, the Option Price of the shares covered by any Options granted, the manner in and conditions under which Options are exercisable (including, without limitation, any limitations or restrictions thereon) and the time or times at which Options shall be granted. In making such determinations, the Committee may take into account the nature of the services rendered by the respective employees, consultants or advisors to whom Options may be granted, their present and potential contributions to the Company's success and such other factors as the Committee, in its sole discretion, shall deem relevant. In its authorization of the granting of an Option hereunder, the Committee shall specify the name of the Optionee, the number of shares of stock subject to such Option and whether such Option is an ISO or a NQSO. The Committee may grant, at any time, new Options to an Optionee who previously has received Options, whether such Options include prior Options that still are outstanding, previously have been exercised in whole or in part, have expired or are canceled in connection with the issuance of new Options. No individual shall have any claim or right to be granted Options under the Plan. 5.3 Limitation on Exercisability of ISO's. Notwithstanding anything herein to the contrary, the aggregate Fair Market Value of ISO's which are granted to any employee under the Plan or any other stock option plan adopted by the Company that are first exercisable in any one calendar year shall not exceed $100,000. The Committee shall interpret and administer the limitations set forth in this Section in accordance with Code (S)422(d). 5.4 Restriction on Grant of Stock Options. No more than 1,000,000 shares of Common Stock may be made subject to Options granted during a calendar year to any one individual. ARTICLE 6 Terms and Conditions of Options Options granted hereunder and Option Agreements shall comply with and be subject to the following terms and conditions: 6.1 Requirement of Option Agreement. Upon the grant of an Option hereunder, the Committee shall prepare (or cause to be prepared) an Option Agreement. The Committee shall present such Option Agreement to the Optionee. Upon execution of such Option Agreement by the Optionee, such Option shall be deemed to have been granted effective as of the date of grant. The failure of the Optionee to execute the Option Agreement within 90 days after the date of the receipt of same shall render the Option Agreement and the underlying Option null and void ab initio. 6.2 Optionee and Number of Shares. Each Option Agreement shall state the name of the Optionee and the total number of shares of the Common Stock to which it pertains, the Option Price, and the date as of which the Option was granted under this Plan. 6.3 Vesting. Unless otherwise specified by the Committee in an Optionee's Option Agreement, each Option shall first become exercisable (i.e., vested) with respect to such portions of the shares subject to such Option as are specified in the schedule set forth herein below: (a) Commencing as of the first anniversary of the date the Option is granted, the Optionee shall have the right to exercise the Option with respect to, and to thereby purchase, 25% of the shares subject to such Option. Prior to said date, the Option shall be unexercisable in its entirety. 6 (b) Commencing as of each subsequent anniversary of the date the Option is granted thereafter, the Optionee shall have the right to exercise the Option with respect to, and to thereby purchase, an additional 25% of the shares subject to the Option, until such time as 100% of the shares subject to the Option are exercisable. (c) Notwithstanding subsections (a) and (b) above, any Options previously granted to an Optionee shall become immediately vested and exercisable for 100% of the number of shares subject to the Options upon the Optionee's becoming Disabled or upon his death or upon a Change in Control. Other than as provided above, if an Optionee ceases to be an employee, consultant or advisor of the Company, his rights with regard to all non-vested Options shall cease immediately. 6.4 Option Price. The Option Price of the shares of Common Stock underlying each Option shall be the Fair Market Value of the Common Stock on the date the Option is granted, unless otherwise determined by the Committee; provided, in no event shall the Option Price of any ISO be less than 100% (110% in the case of ISO's of Optionees who own more than ten percent of the voting power of all classes of stock of either the Company or any "parent" or "subsidiary" corporation of the Company (within the meaning of subsections (e) and (f) of Code (S)424)) of the Fair Market Value of the Common Stock on the date the Option is granted; and provided, further, in no event shall the Option Price of any NQSO be less than 85% of the Fair Market Value of the Common Stock on the date the Option is granted, unless otherwise expressly approved by the Board or the Committee. Upon execution of an Option Agreement by both the Company and Optionee, the date as of which the Committee granted the Option as specified in the Option Agreement shall be considered the date on which such Option is granted. 6.5 Terms of Options. Terms of Options granted under the Plan shall commence on the date of grant and shall expire on such date as the Committee may determine for each Option; provided, in no event shall any Option be exercisable after ten years (five years in the case of ISO's granted to Optionees who own more than ten percent of the voting power of all classes of stock of either the Company or any parent or subsidiary) from the date the Option is granted. No Option shall be granted hereunder after ten years from the earlier of (a) the date this Plan is approved by the shareholders, or (b) the date the Plan is adopted by the Board. 6.6 Terms of Exercise. The exercise of an Option may be for less than the full number of shares of Common Stock subject to such Option, but such exercise shall not be made for less than (i) 100 shares or (ii) the total remaining shares subject to the Option, if such total is less than 100 shares. Subject to the other restrictions on exercise set forth herein, the unexercised portion of an Option may be exercised at a later date by the Optionee. 6.7 Method of Exercise. All Options granted hereunder shall be exercised by written notice directed to the Secretary of the Company at its principal place of business or to such other person as the Committee may direct. Each notice of exercise shall identify the Option which the Optionee is exercising (in whole or in part) and shall be accompanied by payment of the Option Price for the number of shares specified in such notice and by any documents required by Section 9.1. The Company shall make delivery of such shares within a reasonable period of time; provided, if any law or regulation requires the Company to take any action (including, but not limited to, the filing of a registration statement under the 1933 Act and causing such registration statement to become effective) with respect to the shares specified in such notice before the issuance thereof, then the date of delivery of such shares shall be extended for the period necessary to take such action. For Options which are ISO's, written statements on Form 3921 shall be furnished to the Optionee in accordance with Code (S)6039 on or before January 31 of the year following the year in which the Option was exercised. See Treas. Reg. (S)(S)1.6039-1 and -2, and 301.6039-1. 7 6.8 Medium and Time of Payment. (a) The Option Price shall be payable upon the exercise of the Option in an amount equal to the number of shares then being purchased times the per share Option Price. To the extent permitted by applicable statutes and regulations, payment shall be (A) in cash; (B) by delivery to the Company of a certificate or certificates for shares of the Common Stock duly endorsed for transfer to the Company with signature guaranteed by a member firm of a national stock exchange or by a national or state bank or a federally chartered thrift institution (or guaranteed or notarized in such other manner as the Committee may require); (C) by delivery to the Company of such other property or by the performance for the Company of such services as may be acceptable to the Committee and allowed under applicable law; (D) in any other form of legal consideration (which may include a deferred payment arrangement); or (E) by a combination of (A), (B), (C) and (D), provided however that the Committee, in its sole discretion, may from time to time place limits on the availability of (or deny approval to) any proposed method of payment described in (B) through (E). In the case of a deferred payment arrangement, interest shall be payable at least annually and shall be charged the minimum rate of interest necessary to avoid the treatment as interest, under any applicable provisions of the Code, of any amounts other than amounts stated to be interest under the deferred payment arrangement. (b) If all or part of the Option Price is paid by delivery of shares of the Common Stock, on the date of such payment, the Optionee must have held such shares for at least six months from (i) the date of acquisition, in the case of shares acquired other than through a stock option or other stock award plan, or (ii) the date of grant or award in the case of shares acquired through such a plan; and the value of such Common Stock (which shall be the Fair Market Value of such Common Stock on the date of exercise) shall be less than or equal to the total Option Price payment. If the Optionee delivers Common Stock with a value that is less than the total Option Price, then such Optionee shall pay the balance of the total Option Price in cash, other property or services, as provided in subsection (a) above. (c) In addition to the payment of the purchase price of the shares then being purchased, an Optionee also shall pay in cash (or have withheld from his normal pay) an amount equal to, or by instructing the Company to retain Common Stock upon the exercise of the Option with a Fair Market Value equal to, the amount, if any, which the Company at the time of exercise is required to withhold under the income tax or Federal Insurance Contribution Act tax withholding provisions of the Code, of the income tax laws of the state of the Optionee's residence, and of any other applicable law. The Optionee may also satisfy his withholding tax obligation by delivering to the Company owned and unencumbered shares of the Common Stock having a Fair Market Value less than or equal to the amount of the withholding tax obligation, provided however that such shares meet the holding requirements of subsection (b) of this Section 6.8. 6.9 Effect of Termination of Employment, Disability or Death. Except as provided in subsections (a), (b) and (c) below, no Option shall be exercisable unless the Optionee thereof shall have been an employee of the Company or an Affiliate from the date of the granting of the Option until the date of exercise; provided, the Committee, in its sole discretion, may waive the application of this Section with respect to any Options granted hereunder and, instead, may provide a different expiration date or dates in an Option Agreement. (a) Termination of Employment. In the event an Optionee ceases to be an employee, consultant, advisor or director of the Company or an Affiliate for any reason other than death or Disability, any Option granted to him shall terminate on and shall not be exercisable after the earliest to occur of (i) the expiration date of the Option or (ii) 30 days after termination of the Optionee's employment or relationship as a consultant, advisor or director. Without limitation, an Option Agreement may also provide, in the discretion of the Committee, that (i) an Option will terminate on and shall not be exercisable after the date on which the Company or an Affiliate gives 8 notice to such Optionee of termination of employment if employment is terminated by the Company or an Affiliate or Cause (an Optionee's resignation in anticipation of termination of employment by the Company or an Affiliate for Cause shall constitute a notice of termination by the Company or an Affiliate) and/or (ii) in the event that an Optionee's employment terminates for a reason other than death or Disability at any time after a Change of Control, the term of all Options of that Optionee shall be extended through the end of the three-month period immediately following the date of such termination. Prior to the earlier of the dates specified in the preceding sentences of this subsection (a), the Option shall be exercisable only in accordance with its terms and only for the number of shares exercisable on the date of termination of employment. The question of whether an authorized leave of absence or absence for military or government service or for any other reason shall constitute a termination of employment for purposes of the Plan shall be determined by the Committee, which determination shall be final and conclusive. (b) Disability. Upon the termination of an Optionee's employment or other relationship with the Company or its Affiliates due to Disability, any Option or unexercised portion thereof granted to him which is otherwise exercisable shall terminate on and shall not be exercisable after the earlier to occur of (i) the expiration date of such Option, or (ii) 6 months after the date on which such Optionee ceases to be an employee, consultant, advisor or director of the Company or its Affiliates due to Disability; provided, the Committee may provide in the Option Agreement that such Option or any unexercised portion thereof shall terminate sooner. Prior to the earlier of such date, such Option shall be exercisable only in accordance with its terms and only for the number of shares exercisable on the date such Optionee's employment ceases due to Disability. (c) Death. In the event of the death of the Optionee (i) while he is an employee, consultant, advisor or director of the Company or an Affiliate or (ii) within 30 days after the date on which such Optionee's employment (or other relationship with the Company or its Affiliate, as the case may be) terminated (for a reason other than Cause), any Option or unexercised portion thereof granted to him which is otherwise exercisable may be exercised by his Beneficiary at any time prior to the expiration of 6 months from the date of death of such Optionee, but in no event later than the date of expiration of the option period; provided, the Committee may provide in the Option Agreement that such Option or any unexercised portion thereof shall terminate sooner. Such exercise shall be effected pursuant to the terms of this Section as if such Beneficiary is the named Optionee. 6.10 Restrictions on Transfer and Exercise of Options. No Option shall be assignable or transferable by the Optionee except by will or by the laws of descent and distribution, and any purported transfer shall be null and void. During the lifetime of an Optionee, the Option shall be exercisable only by him; provided, however, that in the event the Optionee is incapacitated and unable to exercise Options, such Options may be exercised by such Optionee's legal guardian, legal representative, fiduciary or other representative whom the Committee deems appropriate based on applicable facts and circumstances. 6.11 Rights as a Shareholder. An Optionee shall have no rights as a shareholder with respect to shares covered by his Option until date of the issuance of the shares to him and only after the Option Price of such shares is fully paid. Unless specified in Article 7, no adjustment will be made for dividends or other rights for which the record date is prior to the date of such issuance. 6.12 No Obligation to Exercise Option. The granting of an Option shall impose no obligation upon the Optionee to exercise such Option. 6.13 Acceleration. The Committee shall at all times have the power to accelerate the vesting date of Options previously granted under this Plan. 6.14 Holding Period. Shares underlying any Option granted hereunder to an Optionee who is an "affiliate" of the Company subject to the "short-swing profit provisions" of Section 16(b) of the 1934 Act are subject to a six-month holding period. Such holding period will be satisfied if, with respect to any vested (i.e., exercisable) Option that is exercised within six months of the date of grant, the shares acquired upon 9 exercise are not disposed of until a minimum of six months have elapsed from the date of grant of the Option. Notwithstanding the foregoing, the Committee may, in its sole discretion, waive the preceding required holding period with respect to any Optionee. 6.15 Designation of Option as ISO or NQSO. Subject to the provisions of this Article, each Option granted under the Plan shall be designated either as an ISO or a NQSO. An Option Agreement evidencing both an ISO and a NQSO shall identify clearly the status and terms of each Option. 6.16 ISO's Converted to NQSO's. In the event any part or all of an Option granted under the Plan which is intended to be an ISO at any time fails to satisfy all of the requirements of an ISO, then such ISO shall be split into an ISO and NQSO so that the portion of the Option, if any, that still qualifies as an ISO shall remain an ISO and the portion that does not qualify as an ISO shall become a NQSO. Such split of an Option into an ISO portion and a NQSO portion shall be evidenced by one or more Option Agreements, as long as each Option is identified clearly as to its status as an ISO or NQSO. ARTICLE 7 Adjustments Upon Changes in Capitalization 7.1 Recapitalization. In the event that the outstanding shares of the Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of a recapitalization, reclassification, stock split, combination of shares or dividend payable in shares of the Common Stock, the following rules shall apply: (a) The Committee shall make an appropriate adjustment in the number and kind of shares available for the granting of Options under the Plan. (b) The Committee also shall make an appropriate adjustment in the number and kind of shares as to which outstanding Options, or portions thereof then unexercised, shall be exercisable; any such adjustment in any outstanding Options shall be made without change in the total price applicable to the unexercised portion of such Option and with a corresponding adjustment in the Option Price per share. No fractional shares shall be issued or optioned in making the foregoing adjustments, and the number of shares available under the Plan or the number of shares subject to any outstanding Options shall be the next lower number of shares, rounding all fractions downward. (c) Any adjustment to or assumption of ISO's under this Section shall be made in accordance with Code (S)424(a) and the regulations promulgated thereunder so as to preserve the status of such Options as ISO's under Code (S)422. (d) If any rights or warrants to subscribe for additional shares are given pro rata to holders of outstanding shares of the class or classes of stock then set aside for the Plan, each Optionee shall be entitled to the same rights or warrants on the same basis as holders of the outstanding shares with respect to such portion of his Option as is exercised on or prior to the record date for determining shareholders entitled to receive or exercise such rights or warrants. 7.2 Reorganization. Subject to any required action by the shareholders, if the Company shall be a party to any reorganization involving merger, consolidation, acquisition of the stock or acquisition of the assets of the Company which does not constitute a Change of Control, the Committee, in its discretion, may declare that: (a) any Option granted but not yet exercised shall pertain to and apply, with appropriate adjustment as determined by the Committee, to the securities of the resulting corporation to which a holder of the number of shares of the Common Stock subject to such Option would have been entitled; (b) any or all outstanding Options granted hereunder shall become immediately nonforfeitable and fully exercisable or vested (to the extent permitted under federal or state 10 securities laws); and/or (c) any or all Options granted hereunder shall become immediately nonforfeitable and fully exercisable or vested (to the extent permitted under federal or state securities laws) and are to be terminated after giving at least 30 days' notice to the Optionees to whom such Options have been granted. 7.3 Dissolution and Liquidation. If the Board adopts a plan of dissolution and liquidation that is approved by the shareholders of the Company, the Committee shall give each Optionee notice of such event at least ten days prior to its effective date, and the rights of all Optionees shall become immediately nonforfeitable and fully exercisable or vested (to the extent permitted under federal or state securities laws). 7.4 Limits on Adjustments. Any issuance by the Company of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of the Common Stock subject to any Option, except as specifically provided otherwise in this Article. The grant of Options pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate or dissolve, or to liquidate, sell or transfer all or any part of its business or assets. All adjustments the Committee makes under this Article shall be conclusive. ARTICLE 8 Agreement by Optionee and Securities Registration 8.1 Agreement. If, in the opinion of counsel to the Company, such action is necessary or desirable, no Options shall be granted to any Optionee, and no Option shall be exercisable, unless, at the time of grant or exercise, as applicable, such Optionee (i) represents and warrants that he will acquire the Common Stock for investment only and not for purposes of resale or distribution, and (ii) makes such further representations and warranties as are deemed necessary or desirable by counsel to the Company with regard to holding and resale of the Common Stock. The Optionee shall, upon the request of the Committee, execute and deliver to the Company an agreement or affidavit to such effect. Should the Committee have reasonable cause to believe that such Optionee did not execute such agreement or affidavit in good faith, the Company shall not be bound by the grant of the Option or by the exercise of the Option. All certificates representing shares of Common Stock issued pursuant to the Plan may be marked with a restrictive legend, if such marking, in the opinion of counsel to the Company, is necessary or desirable. 8.2 Registration. In the event that the Company in its sole discretion shall deem it necessary or advisable to register, under the 1933 Act or any state securities laws or regulations, any shares with respect to which Options have been granted hereunder, then the Company shall take such action at its own expense before delivery of the certificates representing such shares to an Optionee. In such event, and if the shares of Common Stock of the Company shall be listed on any national securities exchange or on The Nasdaq National Market at the time of the exercise of any Option, the Company shall make prompt application at its own expense for the listing on such stock exchange or The Nasdaq National Market of the shares of Common Stock to be issued. ARTICLE 9 Effective Date The Plan shall be effective as of the Effective Date, and no Options shall be granted hereunder prior to said date. Adoption of the Plan shall be approved by the shareholders of the Company at the earlier of (i) the annual meeting of the shareholders of the Company which immediately follows the date of the first grant or award of Options hereunder, or (ii) 12 months after the adoption of the Plan by the Board, but in no event earlier than 12 months prior to the adoption of the Plan by the Board. Shareholder approval shall be made by a majority of the votes cast at a duly held meeting at which a quorum representing a majority of all 11 outstanding voting stock is, either in person or by proxy, present and voting on the Plan, or by the written consent in lieu of a meeting of the holders of a majority of the outstanding voting stock or such greater number of shares of voting stock as may be required by the Company's articles or certificate of incorporation and bylaws and by applicable law; provided, however, such shareholder approval, whether by vote or by written consent in lieu of a meeting, must be solicited substantially in accordance with the rules and regulations in effect under Section 14(a) of the 1934 Act. Failure to obtain such approval shall render the Plan and any Options granted hereunder null and void ab initio. ARTICLE 10 Amendment and Termination 10.1 Amendment and Termination By the Board. Subject to Section 10.2 below, the Board shall have the power at any time to add to, amend, modify or repeal any of the provisions of the Plan, to suspend the operation of the entire Plan or any of its provisions for any period or periods or to terminate the Plan in whole or in part. In the event of any such action, the Committee shall prepare written procedures which, when approved by the Board, shall govern the administration of the Plan resulting from such addition, amendment, modification, repeal, suspension or termination. 10.2 Restrictions on Amendment and Termination. Notwithstanding the provisions of Section 10.1 above, the following restrictions shall apply to the Board's authority under Section 10.1 above: (a) Prohibition Against Adverse Affects on Outstanding Options. No addition, amendment, modification, repeal, suspension or termination shall adversely affect, in any way, the rights of the Optionees who have outstanding Options without the consent of such Optionees; and (b) Shareholder Approval Required for Certain Modifications. No modification or amendment of the Plan may be made without the prior approval of the shareholders of the Company if (i) such modification or amendment would cause the applicable portions of the Plan to fail to qualify as an ISO plan pursuant to Code (S)422, (ii) such modification or amendment would materially increase the benefits accruing to participants under the Plan, (iii) such modification or amendment would materially increase the number of securities which may be issued under the Plan, (iv) such modification or amendment would materially modify the requirements as to eligibility for participation in the Plan or (v) such modification or amendment would modify the material terms of the Plan within the meaning of Prop. Treas. Reg. (S)1.162-27(e)(4). Shareholder approval shall be made by a majority of the votes cast at a duly held meeting at which a quorum representing a majority of all outstanding voting stock is, either in person or by proxy, present and voting, or by the written consent in lieu of a meeting of the holders of a majority of the outstanding voting stock or such greater number of shares of voting stock as may be required by the Company's articles or certificate of incorporation and bylaws and by applicable law; provided, however, that for modifications described in clauses (ii), (iii) and (iv) above, such shareholder approval, whether by vote or by written consent in lieu of a meeting, must be solicited substantially in accordance with the rules and regulations in effect under Section 14(a) of the 1934 Act. ARTICLE 11 Miscellaneous Provisions 11.1 Application of Funds. The proceeds received by the Company from the sale of the Common Stock subject to the Options granted hereunder will be used for general corporate purposes. 11.2 Notices. All notices or other communications by an Optionee to the Committee pursuant to 12 or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Committee at the location, or by the person, designated by the Committee for the receipt thereof. 11.3 Term of Plan. Subject to the terms of Article 10, the Plan shall terminate upon the later of (i) the complete exercise or lapse of the last outstanding Option, or (ii) the last date upon which Options may be granted hereunder under Section 6.5. 11.4 Compliance with Rule 16b-3. This Plan is intended to be in compliance with the requirements of Rule 16b-3 as promulgated under Section 16 of the 1934 Act. 11.5 Governing Law. The Plan shall be governed by and construed in accordance with the laws of the State of Delaware. 11.6 Additional Provisions By Committee. The Option Agreements authorized under the Plan may contain such other provisions, including, without limitation, restrictions upon the exercise of an Option, as the Committee shall deem advisable. 11.7 Plan Document Controls. In the event of any conflict between the provisions of an Option Agreement and the Plan, or between a Restriction Agreement and the Plan, the Plan shall control. 11.8 Gender and Number. Wherever applicable, the masculine pronoun shall include the feminine pronoun, and the singular shall include the plural. 11.9 Headings. The titles in this Plan are inserted for convenience of reference; they constitute no part of the Plan and are not to be considered in the construction hereof. 11.10 Legal References. Any references in this Plan to a provision of law which is, subsequent to the Effective Date of this Plan, revised, modified, finalized or redesignated, shall automatically be deemed a reference to such revised, modified, finalized or redesignated provision of law. 11.11 No Rights to Employment. Nothing contained in the Plan, or any modification thereof, shall be construed to give any individual any rights to employment with the Company or any Affiliate. 11.12 Unfunded Arrangement. The Plan shall not be funded, and except for reserving a sufficient number of authorized shares to the extent required by law to meet the requirements of the Plan, the Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any grant under the Plan. * * * * * ADOPTED BY BOARD OF DIRECTORS ON NOVEMBER 28, 2001 APPROVED BY SHAREHOLDERS AT ANNUAL MEETING ON JANUARY 29, 2002 13 EX-10.9(U) 4 dex109u.txt AMENDED AND RESTATED DIRECTORS STOCK OPTION PLAN EXHIBIT 10.9(u) PEDIATRIC SERVICES OF AMERICA, INC. DIRECTORS STOCK OPTION PLAN (As Amended and Restated Effective November 28, 2001) PEDIATRIC SERVICES OF AMERICA, INC. DIRECTORS STOCK OPTION PLAN (As Amended and Restated Effective November 28, 2001) ARTICLE 1 Purpose 1.1 General Purpose. Pediatric Services of America, Inc. hereby amends and restates the Pediatric Services of America, Inc. Directors Stock Option Plan originally established effective June 10, 1994. This document also reflects Amendment No. 1 to this Plan (effective November 28, 2001). This Plan permits the grant of nonqualified stock options for the purpose of promoting the long-term growth and profitability of the Company by providing Directors with incentives to improve stockholder value and to contribute to the success of the Company through ownership of the Company's stock. The Company also intends that the Plan will enable the Company to attract and retain persons of outstanding quality. 1.2 Intended Tax Effects of Options. Any NQSO granted hereunder should be taxed in accordance with Code (S)83. ARTICLE 2 Definitions The following words and phrases as used in this Plan shall have the meanings set forth in this Article unless a different meaning is clearly required by the context: 2.1 1933 Act shall mean the Securities Act of 1933, as amended. 2.2 1934 Act shall mean the Securities Exchange Act of 1934, as amended. 2.3 Beneficiary shall mean, with respect to an Optionee, the Person or Persons who acquire the Options of such Optionee by bequest or inheritance. To the extent that an Option has not yet been distributed to such Person or Persons from a deceased Optionee's estate, an Option may be exercised by the executor or administrator (as applicable) of the deceased Optionee's estate. 2.4 Board shall mean the Board of Directors of the Company. 2.5 Code shall mean the Internal Revenue Code of 1986, as amended. 2.6 Committee shall mean the Compensation Committee of the Board of Directors, or such other committee appointed by the Board to administer and interpret the Plan in accordance with Article 3 below. If the Board does not designate the Compensation Committee or another committee to administer and interpret the Plan, the Board shall act as the Committee. 2.7 Common Stock shall mean the common stock of the Company. 2.8 Company shall mean Pediatric Services of America, Inc., a Delaware corporation. 2.9 Director shall mean individuals who are serving as a member of the Board (i.e., a director of the Company) or who are serving as a member of the board of directors of a parent or subsidiary corporation of the Company. 2.10 Disability shall mean, with respect to an individual, the total and permanent disability of such individual as determined by the Committee in its sole discretion. 2 2.11 Eligible Director shall mean a Director who is not an employee of the Company. 2.12 Effective Date shall mean the date on which the amended and restated Plan evidenced by this document was adopted by the Board, subject to shareholder approval. See Article 9 herein. 2.13 Fair Market Value of the Common Stock as of a date of determination shall mean the following: (a) Stock Listed and Shares Traded. If the Common Stock is listed and traded on a national securities exchange (as such term is defined by the 1934 Act), the Nasdaq National Market or other quotation service on the date of determination, the Fair Market Value per share shall be the closing price of a share of the Common Stock on said national securities exchange, the Nasdaq National Market or other quotation service on the date of determination. If the Common Stock is traded in the over-the-counter market, the Fair Market Value per share shall be the average of the closing bid and asked prices on the date of determination. (b) Stock Listed But No Shares Traded. If the Common Stock is listed on a national securities exchange or on The Nasdaq National Market but no shares of the Common Stock are traded on the date of determination but there were shares traded on dates within a reasonable period before the date of determination, the Fair Market Value shall be the closing price of the Common Stock on the most recent date before the date of determination. If the Common Stock is regularly traded in the over-the-counter market but no shares of the Common Stock are traded on the date of determination (or if records of such trades are unavailable or burdensome to obtain) but there were shares traded on dates within a reasonable period before the date of determination, the Fair Market Value shall be the average of the closing bid and asked prices of the Common Stock on the most recent date before the date of determination. (c) Stock Not Listed. If the Common Stock is not listed on a national securities exchange or on The Nasdaq National Market and is not regularly traded in the over-the-counter market, then the Committee shall determine the Fair Market Value of the Common Stock from all relevant available facts, which may include the average of the closing bid and ask prices reflected in the over-the-counter market on a date within a reasonable period either before or after the date of determination or opinions of independent experts as to value and may take into account any recent sales and purchases of such Common Stock to the extent they are representative. The Committee's determination of Fair Market Value, which shall be made pursuant to the foregoing provisions, shall be final and binding for all purposes of this Plan. 2.14 NQSO shall mean an option to which Code (S)421 does not apply. 2.15 Option shall mean NQSOs, as applicable, granted to individuals pursuant to the terms and provisions of this Plan. 2.16 Option Agreement shall mean a written agreement, executed and dated by the Company and an Optionee, evidencing an Option granted under the terms and provisions of this Plan, setting forth the terms and conditions of such Option, and specifying the name of the Optionee and the number of shares of stock subject to such Option. 2.17 Option Price shall mean the purchase price of the shares of Common Stock underlying an Option. 2.18 Optionee shall mean an individual who is granted an Option pursuant to the terms and provisions of this Plan. 2.19 Person shall mean any individual, organization, corporation, partnership or other entity. 3 2.20 Plan shall mean this Pediatric Services Of America, Inc. Directors Stock Option Plan, as amended and restated as of the Effective Date. ARTICLE 3 Administration 3.1 General Administration. The Plan shall be administered and interpreted by the Committee. Subject to the express provisions of the Plan, the Committee shall have discretionary authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to the Plan, to determine the terms and provisions of the Option Agreements by which Options shall be evidenced (which shall not be inconsistent with the terms of the Plan), and to make all other determinations necessary or advisable for the administration of the Plan, all of which determinations shall be final, binding and conclusive. 3.2 Appointment. The Board may appoint a committee from among its members (which may be the Compensation Committee or some other committee of Board members) to serve at the pleasure of the Board as the Committee under this Plan in lieu of the Board. The Board from time to time may remove members from, or add members to, the Committee and shall fill all vacancies thereon. The Committee at all times shall be composed of two or more Directors. No Director serving on the Committee may be a current employee of the Company or a former employee of the Company (or any corporation affiliated with the Company under Code (S)1504) receiving compensation for prior services (other than benefits under a tax-qualified retirement plan) during each taxable year during which the Director serves on the Committee. Furthermore, no Director serving on the Committee shall be or have ever been an officer of the Company (or any Code (S)1504 affiliated corporation), or shall be receiving remuneration (directly or indirectly) from such a corporation in any capacity other than as a Director. 3.3 Organization. The Committee may select one of its members as its chairman and shall hold its meetings at such times, in such manner, and at such places as it shall deem advisable. A majority of the Committee shall constitute a quorum, and such majority shall determine its actions. The Committee shall keep minutes of its proceedings and shall report the same to the Board at the meeting next succeeding. 3.4 Indemnification. In addition to such other rights of indemnification as they have as Directors or as members of the Committee, the members of the Committee, to the extent permitted by applicable law, shall be indemnified by the Company against reasonable expenses (including, without limitation, attorneys' fees) actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Options granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved to the extent required by and in the manner provided by the articles or certificate of incorporation or the bylaws of the Company relating to indemnification of Directors) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member or members did not act in good faith and in a manner he or they reasonably believed to be in or not opposed to the best interest of the Company. ARTICLE 4 Stock The stock subject to the Options and other provisions of the Plan may be authorized but unissued or reacquired, whether on the market or otherwise, shares of Common Stock. Subject to readjustment in accordance with the provisions of Article 7, the total number of shares of Common Stock for which Options may be granted to persons participating in the Plan shall not exceed in the aggregate 300,000 shares of Common Stock. Notwithstanding the foregoing, shares of Common Stock allocable to the unexercised portion of any expired or terminated Option returned to the Company by forfeiture again may become 4 subject to Options under the Plan. ARTICLE 5 Eligibility to Receive and Grant of Options 5.1 Individuals Eligible for Grants of Options. The individuals eligible to receive Options hereunder shall be the Eligible Directors of the Company. 5.2 Grants of Options. Subject to the provisions of the Plan, the Committee shall have the authority and sole discretion to determine and designate, from time to time, those individuals (from among the individuals eligible for a grant of Options under the Plan pursuant to Section 5.1 above) to whom Options will actually be granted, the Option Price of the shares covered by any Options granted, the manner in and conditions under which Options are exercisable (including, without limitation, any limitations or restrictions thereon) and the time or times at which Options shall be granted. In making such determinations, the Committee may take into account such factors as the Committee, in its sole discretion, shall deem relevant. In its authorization of the granting of an Option hereunder, the Committee shall specify the name of the Optionee, the number of shares of stock subject to such Option and the Option Price. The Committee may grant, at any time, new Options to an Optionee who previously has received Options, whether such Options include prior Options that still are outstanding, previously have been exercised in whole or in part, have expired or are canceled in connection with the issuance of new Options. No individual shall have any claim or right to be granted Options under the Plan. ARTICLE 6 Terms and Conditions of Options Options granted hereunder and Option Agreements shall comply with and be subject to the following terms and conditions: 6.1 Requirement of Option Agreement. Upon the grant of an Option hereunder, the Committee shall prepare (or cause to be prepared) an Option Agreement. The Committee shall present such Option Agreement to the Optionee. Upon execution of such Option Agreement by the Optionee, such Option shall be deemed to have been granted effective as of the date of grant. The failure of the Optionee to execute the Option Agreement within 90 days after the date of the receipt of same shall render the Option Agreement and the underlying Option null and void ab initio. 6.2 Optionee and Number of Shares. Each Option Agreement shall state the name of the Optionee and the total number of shares of the Common Stock to which it pertains, the Option Price, and the date as of which the Option was granted under this Plan. 6.3 Vesting. Unless otherwise specified by the Committee in an Optionee's Option Agreement, each Option granted under this Plan shall become 100% exercisable (i.e., vested) on the first anniversary of the grant date. If an Optionee ceases to be a Director of the Company, his rights with regard to all non-vested Options shall cease immediately. 6.4 Option Price. The Option Price of the shares of Common Stock underlying each Option shall be the Fair Market Value of the Common Stock on the date the Option is granted. Upon execution of an Option Agreement by both the Company and Optionee, the date as of which the Committee granted the Option as specified in the Option Agreement shall be considered the date on which such Option is granted. 6.5 Terms of Options. Terms of Options granted under the Plan shall commence on the date of grant and shall expire on such date as the Committee may determine for each Option, provided however that in no event shall any Option be exercisable after ten years from the date the Option is granted. No Option shall be granted hereunder after ten years from the earlier of (a) the date this Plan is approved by the shareholders, or (b) the date the Plan is adopted by the Board. 5 6.6 Terms of Exercise. The exercise of an Option may be for less than the full number of shares of Common Stock subject to such Option, but such exercise shall not be made for less than (i) 100 shares or (ii) the total remaining shares subject to the Option, if such total is less than 100 shares. Subject to the other restrictions on exercise set forth herein, the unexercised portion of an Option may be exercised at a later date by the Optionee. 6.7 Method of Exercise. All Options granted hereunder shall be exercised by written notice directed to the Secretary of the Company at its principal place of business or to such other person as the Committee may direct. Each notice of exercise shall identify the Option which the Optionee is exercising (in whole or in part) and shall be accompanied by payment of the Option Price for the number of shares specified in such notice and by any documents required by Section 8.1. The Company shall make delivery of such shares within a reasonable period of time; provided, if any law or regulation requires the Company to take any action (including, but not limited to, the filing of a registration statement under the 1933 Act and causing such registration statement to become effective) with respect to the shares specified in such notice before the issuance thereof, then the date of delivery of such shares shall be extended for the period necessary to take such action. 6.8 Medium and Time of Payment. (a) The Option Price shall be payable upon the exercise of the Option in an amount equal to the number of shares then being purchased times the per share Option Price. To the extent permitted by applicable statutes and regulations, payment shall be (A) in cash; (B) by delivery to the Company of a certificate or certificates for shares of the Common Stock duly endorsed for transfer to the Company with signature guaranteed by a member firm of a national stock exchange or by a national or state bank or a federally chartered thrift institution (or guaranteed or notarized in such other manner as the Committee may require); (C) by delivery to the Company of such other property or by the performance for the Company of such services as may be acceptable to the Committee and allowed under applicable law; (D) in any other form of legal consideration (which may include a deferred payment arrangement); or (E) by a combination of (A), (B), (C) and (D), provided however that the Committee, in its sole discretion, may from time to time place limits on the availability of (or deny approval to) any proposed method of payment described in (B) through (E). (b) If all or part of the Option Price is paid by delivery of shares of the Common Stock, on the date of such payment, the Optionee must have held such shares for at least six months from (i) the date of acquisition, in the case of shares acquired other than through a stock option or other stock award plan, or (ii) the date of grant or award in the case of shares acquired through such a plan; and the value of such Common Stock (which shall be the Fair Market Value of such Common Stock on the date of exercise) shall be less than or equal to the total Option Price payment. If the Optionee delivers Common Stock with a value that is less than the total Option Price, then such Optionee shall pay the balance of the total Option Price in cash, other property or services, as provided in subsection (a) above. (c) In addition to the payment of the purchase price of the shares then being purchased, an Optionee also shall pay in cash (or have withheld from his normal pay) an amount equal to, or by instructing the Company to retain Common Stock upon the exercise of the Option with a Fair Market Value equal to, the amount, if any, which the Company at the time of exercise is required to withhold under the income tax or Federal Insurance Contribution Act tax withholding provisions of the Code, of the income tax laws of the state of the Optionee's residence, and of any other applicable law. The Optionee may also satisfy all or a part of his withholding tax obligation by delivering to the Company owned and unencumbered shares of the Common Stock having a Fair Market Value less than or equal to the amount of the withholding tax obligation, provided however that such shares meet the holding requirements of subsection (b) of this Section 6.8. 6 6.9 Effect of Termination of Service, Disability or Death. Unless otherwise specified by the Committee in the applicable Option Agreement, in the event an Optionee ceases to be a Director of the Company for any reason, including death or Disability, any Option or unexercised portion thereof granted to him shall terminate on and shall not be exercisable after the expiration date of the Option. Prior to the termination date specified in the preceding sentence of this section, the Option shall be exercisable only in accordance with its terms and only for the number of shares exercisable on the date of termination of service. The question of whether a termination of service has occurred for purposes of the Plan shall be determined by the Committee, which determination shall be final and conclusive. In the event the termination of service is a result of the Optionee's death, any Option or unexercised portion thereof granted to him which is otherwise exercisable may be exercised by his Beneficiary as if such Beneficiary is the named Optionee. 6.10 Restrictions on Transfer and Exercise of Options. No Option shall be assignable or transferable by the Optionee except by will or by the laws of descent and distribution, and any purported transfer shall be null and void. During the lifetime of an Optionee, the Option shall be exercisable only by him; provided, however, that in the event the Optionee is incapacitated and unable to exercise Options, such Options may be exercised by such Optionee's legal guardian, legal representative, fiduciary or other representative whom the Committee deems appropriate based on applicable facts and circumstances. 6.11 Rights as a Shareholder. An Optionee shall have no rights as a shareholder with respect to shares covered by his Option until date of the issuance of the shares to him and only after the Option Price of such shares is fully paid. Unless specified in Article 7, no adjustment will be made for dividends or other rights for which the record date is prior to the date of such issuance. 6.12 No Obligation to Exercise Option. The granting of an Option shall impose no obligation upon the Optionee to exercise such Option. 6.13 Acceleration. The Committee shall at all times have the power to accelerate the vesting date of Options previously granted under this Plan. 6.14 Holding Period. Shares underlying any Option granted hereunder to an Optionee who is an "affiliate" of the Company subject to the "short-swing profit provisions" of Section 16(b) of the 1934 Act are subject to a six-month holding period. Such holding period will be satisfied if, with respect to any vested (i.e., exercisable) Option that is exercised within six months of the date of grant, the shares acquired upon exercise are not disposed of until a minimum of six months have elapsed from the date of grant of the Option. Notwithstanding the foregoing, the Committee may, in its sole discretion, waive the preceding required holding period with respect to any Optionee. ARTICLE 7 Adjustments Upon Changes in Capitalization 7.1 Recapitalization. In the event that the outstanding shares of the Common Stock of the Company are hereafter increased or decreased or changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of a recapitalization, reclassification, stock split, combination of shares or dividend payable in shares of the Common Stock, the following rules shall apply: (a) The Committee shall make an appropriate adjustment in the number and kind of shares available for the granting of Options under the Plan. (b) The Committee also shall make an appropriate adjustment in the number and kind of shares as to which outstanding Options, or portions thereof then unexercised, shall be exercisable; any such adjustment in any outstanding Options shall be made without change in the total price applicable to the unexercised portion of such Option and with a corresponding adjustment in the 7 Option Price per share. No fractional shares shall be issued or optioned in making the foregoing adjustments, and the number of shares available under the Plan or the number of shares subject to any outstanding Options shall be the next lower number of shares, rounding all fractions downward. (c) If any rights or warrants to subscribe for additional shares are given pro rata to holders of outstanding shares of the class or classes of stock then set aside for the Plan, each Optionee shall be entitled to the same rights or warrants on the same basis as holders of the outstanding shares with respect to such portion of his Option as is exercised on or prior to the record date for determining shareholders entitled to receive or exercise such rights or warrants. 7.2 Reorganization. Subject to any required action by the shareholders, if the Company shall be a party to any reorganization involving merger, consolidation, acquisition of the stock or acquisition of the assets of the Company, the Committee, in its discretion, may declare that: (a) any Option granted but not yet exercised shall pertain to and apply, with appropriate adjustment as determined by the Committee, to the securities of the resulting corporation to which a holder of the number of shares of the Common Stock subject to such Option would have been entitled; (b) any or all outstanding Options granted hereunder shall become immediately nonforfeitable and fully exercisable or vested (to the extent permitted under federal or state securities laws); and/or (c) any or all Options granted hereunder shall become immediately nonforfeitable and fully exercisable or vested (to the extent permitted under federal or state securities laws) and are to be terminated after giving at least 30 days' notice to the Optionees to whom such Options have been granted. 7.3 Dissolution and Liquidation. If the Board adopts a plan of dissolution and liquidation that is approved by the shareholders of the Company, the Committee shall give each Optionee written notice of such event at least ten days prior to its effective date, and the rights of all Optionees shall become immediately nonforfeitable and fully exercisable or vested (to the extent permitted under federal or state securities laws). 7.4 Limits on Adjustments. Any issuance by the Company of stock of any class, or securities convertible into shares of stock of any class, shall not affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares of the Common Stock subject to any Option, except as specifically provided otherwise in this Article. The grant of Options pursuant to the Plan shall not affect in any way the right or power of the Company to make adjustments, reclassifications, reorganizations or changes of its capital or business structure or to merge, consolidate or dissolve, or to liquidate, sell or transfer all or any part of its business or assets. All adjustments the Committee makes under this Article shall be conclusive. ARTICLE 8 Agreement by Optionee and Securities Registration 8.1 Agreement. If, in the opinion of counsel to the Company, such action is necessary or desirable, no Options shall be granted to any Optionee, and no Option shall be exercisable, unless, at the time of grant or exercise, as applicable, such Optionee (i) represents and warrants that he will acquire the Common Stock for investment only and not for purposes of resale or distribution, and (ii) makes such further representations and warranties as are deemed necessary or desirable by counsel to the Company with regard to holding and resale of the Common Stock. The Optionee shall, upon the request of the Committee, execute and deliver to the Company an agreement or affidavit to such effect. Should the Committee have 8 reasonable cause to believe that such Optionee did not execute such agreement or affidavit in good faith, the Company shall not be bound by the grant of the Option or by the exercise of the Option. All certificates representing shares of Common Stock issued pursuant to the Plan may be marked with a restrictive legend, if such marking, in the opinion of counsel to the Company, is necessary or desirable. 8.2 Registration. In the event that the Company in its sole discretion shall deem it necessary or advisable to register, under the 1933 Act or any state securities laws or regulations, any shares with respect to which Options have been granted hereunder, then the Company shall take such action at its own expense before delivery of the certificates representing such shares to an Optionee. In such event, and if the shares of Common Stock of the Company shall be listed on any national securities exchange or on The Nasdaq National Market at the time of the exercise of any Option, the Company shall make prompt application at its own expense for the listing on such stock exchange or The Nasdaq National Market of the shares of Common Stock to be issued. ARTICLE 9 Effective Date The Plan is effective as of the Effective Date, and no Options shall be granted hereunder prior to said date. Adoption of the Plan shall be approved by the shareholders of the Company at the earlier of (i) the annual meeting of the shareholders of the Company which immediately follows the date of the first grant or award of Options hereunder, or (ii) 12 months after the adoption of the Plan by the Board, but in no event earlier than 12 months prior to the adoption of the Plan by the Board. Shareholder approval shall be made by a majority of the votes cast at a duly held meeting at which a quorum representing a majority of all outstanding voting stock is, either in person or by proxy, present and voting on the Plan, or by the written consent in lieu of a meeting of the holders of a majority of the outstanding voting stock or such greater number of shares of voting stock as may be required by the Company's articles or certificate of incorporation and bylaws and by applicable law; provided, however, such shareholder approval, whether by vote or by written consent in lieu of a meeting, must be solicited substantially in accordance with the rules and regulations in effect under Section 14(a) of the 1934 Act. Failure to obtain such approval shall render the Plan and any Options granted hereunder null and void ab initio. ARTICLE 10 Amendment and Termination 10.1 Amendment and Termination By the Board. Subject to Section 10.2 below, the Board shall have the power at any time to add to, amend, modify or repeal any of the provisions of the Plan, to suspend the operation of the entire Plan or any of its provisions for any period or periods or to terminate the Plan in whole or in part. In the event of any such action, the Committee shall prepare written procedures which, when approved by the Board, shall govern the administration of the Plan resulting from such addition, amendment, modification, repeal, suspension or termination. 10.2 Restrictions on Amendment and Termination. Notwithstanding the provisions of Section 10.1 above, the following restrictions shall apply to the Board's authority under Section 10.1 above: (a) Prohibition Against Adverse Affects on Outstanding Options. No addition, amendment, modification, repeal, suspension or termination shall adversely affect, in any way, the rights of the Optionees who have outstanding Options without the consent of such Optionees; and (b) Shareholder Approval Required for Certain Modifications. No modification or amendment of the Plan may be made without the prior approval of the shareholders of the Company if (i) such modification or amendment would materially increase the benefits accruing to participants under 9 the Plan, (ii) such modification or amendment would materially increase the number of securities which may be issued under the Plan, or (iii) such modification or amendment would modify the material terms of the Plan. Shareholder approval shall be made by a majority of the votes cast at a duly held meeting at which a quorum representing a majority of all outstanding voting stock is, either in person or by proxy, present and voting, or by the written consent in lieu of a meeting of the holders of a majority of the outstanding voting stock or such greater number of shares of voting stock as may be required by the Company's articles or certificate of incorporation and bylaws and by applicable law. ARTICLE 11 Miscellaneous Provisions 11.1 Application of Funds. The proceeds received by the Company from the sale of the Common Stock subject to the Options granted hereunder will be used for general corporate purposes. 11.2 Notices. All notices or other communications by an Optionee to the Committee pursuant to or in connection with the Plan shall be deemed to have been duly given when received in the form specified by the Committee at the location, or by the person, designated by the Committee for the receipt thereof. 11.3 Term of Plan. Subject to the terms of Article 10, the Plan shall terminate upon the later of (i) the complete exercise or lapse of the last outstanding Option, or (ii) the last date upon which Options may be granted hereunder under Section 6.5. 11.4 Compliance with Rule 16b-3. This Plan is intended to be in compliance with the requirements of Rule 16b-3 as promulgated under Section 16 of the 1934 Act. 11.5 Governing Law. The Plan shall be governed by and construed in accordance with the laws of the State of Delaware. 11.6 Additional Provisions By Committee. The Option Agreements authorized under the Plan may contain such other provisions, including, without limitation, restrictions upon the exercise of an Option, as the Committee shall deem advisable. 11.7 Plan Document Controls. In the event of any conflict between the provisions of an Option Agreement and the Plan, or between a Restriction Agreement and the Plan, the Plan shall control. 11.8 Gender and Number. Wherever applicable, the masculine pronoun shall include the feminine pronoun, and the singular shall include the plural. 11.9 Headings. The titles in this Plan are inserted for convenience of reference; they constitute no part of the Plan and are not to be considered in the construction hereof. 11.10 Legal References. Any references in this Plan to a provision of law which is, subsequent to the Effective Date of this Plan, revised, modified, finalized or redesignated, shall automatically be deemed a reference to such revised, modified, finalized or redesignated provision of law. 11.11 No Rights to Employment. Nothing contained in the Plan, or any modification thereof, shall be construed to give any individual any rights to continue as a Director of the Company. 11.12 Unfunded Arrangement. The Plan shall not be funded, and except for reserving a sufficient number of authorized shares to the extent required by law to meet the requirements of the Plan, the 10 Company shall not be required to establish any special or separate fund or to make any other segregation of assets to assure the payment of any grant under the Plan. * * * * * ADOPTED BY BOARD OF DIRECTORS ON NOVEMBER 28, 2001 APPROVED BY SHAREHOLDERS AT ANNUAL MEETING ON JANUARY 29, 2002 11 EX-10.9(V) 5 dex109v.txt AMENDMENT NO. 3 TO THE EMPLOYEE STOCK OPTION PLAN EXHIBIT 10.9(v) AMENDMENT NO. 3 TO THE PEDIATRIC SERVICES OF AMERICA, INC. EMPLOYEE STOCK PURCHASE PLAN This is Amendment No. 3 (the "Amendment") to the Pediatric Services Of America, Inc. Employee Stock Purchase Plan (the "Plan"), which was originally adopted effective January 1, 1996. The provisions of this Amendment shall be effective February 1, 2002 (except as otherwise specified in this Amendment), provided that, within twelve months following the adoption of this Amendment by the Board of Directors, the Amendment is approved by the holders of a majority of the voting shares of the outstanding common stock of the plan sponsor, Pediatric Services of America, Inc. (the "Company"). Recital The Company desires to amend the Plan to require employees to have 90 days of service to be eligible to participate, to allow additional purchases of stock beyond the 75,000 shares originally contemplated for this purpose and to clarify that shares purchased under this Plan are to be purchased solely on the open market, but must nonetheless be registered by the Company pursuant to U. S. Securities and Exchange Commission regulations. Amendment 1. Section 3.2 of the Plan is hereby amended to amend subsections (a) and (d) to read as follows: "(a) any Employee with fewer than 90 days of continuous employment prior to the current Offering Period, as measured from the Employee's most recent employment commencement date." "(d) any Employee who, immediately after an option is granted hereunder, would own shares of Common Stock, or of the stock of a parent or subsidiary corporation of the Company, possessing 5 percent or more of the total combined voting power of value of all classes of such stock, provided however that in determining whether an Employee owns 5 percent of such shares, (A) the attribution of ownership rules of Section 424(d) of the Code shall apply and (B) an Employee shall be deemed to own the shares of stock underlying any outstanding option which he has been granted (whether under this Plan or any other plan or arrangement)." 2. The first full sentence of Section 7.1 of the Plan is hereby amended so, as amended, it reads in its entirety as follows: "7.1 Automatic Purchase. As of each Offering Exercise Date ------------------ and except as provided in Sections 7.2 and 7.3 hereof, the Committee shall purchase solely on the open market, for each Employee having funds credited to his Account, the number of whole shares of the Common Stock which is determined by dividing the amount credited to his Account by the Option Exercise Price (as defined in Section 6.4)." 3. Section VII of the Plan is amended by adding at the end of the present provision the following new Section 7.3: "7.3 Maximum Number of Shares of Common Stock Purchased. -------------------------------------------------- Notwithstanding any provisions to the contrary contained herein, if the purchases of shares of the Common Stock contemplated on a given Offering Exercise Date pursuant to Section 7.1 would, if fully implemented, result in a violation of the limits of Section 9.2, the Committee shall adjust on a pro rata basis the amount credited to each Employee's Account which may be used to purchase shares of the Common Stock for the affected Offering Period so that the aggregate dollar amount available for such purchases will be reduced and the number of shares of the Common Stock that may be still be purchased under Section 7.1 after such reduction, together with the number of all other shares of the Common Stock purchased through this Plan at such time, will not exceed the Section 9.2 limit. For purposes of the calculation described in this Section 7.3, the 15% Company contribution described in Section 6.4 shall apply only to Employee contributions for the affected Offering Period which are available for the purchase of shares of the Common Stock after the pro rata reduction process is complete. In the event such a pro rata reduction is required, the balance of the accumulated payroll deductions credited to Accounts of Employees participating in the Plan not used to purchase shares of the Common Stock will be distributed to such Employees, in cash or its equivalent and without interest, as soon as practicable after the affected Offering Exercise Date. In such event, no further elections under Section 5.1 shall be permitted until the number of shares of the Common Stock registered as described in Section 9.2 has been increased to permit further purchases." 4. Section IX of the Plan is hereby amended so, as amended, it reads in its entirety as follows: "IX. LIMIT ON NUMBER OF SHARES AVAILABLE FOR PURCHASE "9.1 Maximum Number of Shares. Subject to adjustment under ------------------------ Section 12, the maximum aggregate number of shares of the Common Stock available to be purchased by Employees under this Plan shall be 575,000 shares. No shares of the Common Stock have been or may be reserved for issuance or issued by the Company in connection with the Plan, and the Common Stock delivered under the Plan shall consist solely of shares acquired from other shareholders on the open market, as specified in Section 7.1. "9.2 Registration Limit. From and after January 1, 1996, ------------------ subject to adjustment under Section 12, no shares of the Common Stock may be available 2 for purchase through the Plan to the extent that the aggregate number of such shares, together with the aggregate number of shares of the Common Stock theretofore purchased through the Plan, exceeds the number of shares of the Common Stock registered from time to time on Form S-8 pursuant to the Securities Act of 1933, as amended, for such purpose (subject to any corrective action permitted by the U. S. Securities and Exchange Commission in the event that shares of the Common Stock are purchased through this Plan in what would otherwise be a violation of this Section 9.2). "9.3 Availability of Shares. If and to the extent that any right ---------------------- to purchase shares of the Common Stock shall not be exercised by the Employee who is the holder of such right, or if such right shall terminate as provided herein, then the shares subject to such right to purchase (i) shall again become available for purposes of the Plan, unless the Plan shall have been terminated, and (ii) shall not be deemed to increase the aggregate number of shares of the Common Stock which may be purchased through the Plan pursuant to Section 9.1." 5. Except as amended and modified in this Amendment No. 3, the Plan as adopted effective January 1, 1996 shall remain in full force and effect. IN WITNESS WHEREOF, the Company has caused this Amendment No. 3 to be executed on the date set forth below. PEDIATRIC SERVICES OF AMERICA, INC. By /s/ Joseph D. Sansone ------------------------------------ Title: President -------------------------------- Date: February 1, 2002 --------------------------------- Approved by the Board of Directors on November 28, 2001 Approved by Shareholders at Annual Meeting on January 29, 2002 3 -----END PRIVACY-ENHANCED MESSAGE-----