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