-----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, DtGqtC28/S71XYr8zWJpAMloFNk3+mrPkWxveqtNF5GtTSe5hACyIzb1KCO6wXiw aW25GsCaZxTwdYTD6mOmjA== 0000931763-02-001512.txt : 20020503 0000931763-02-001512.hdr.sgml : 20020503 ACCESSION NUMBER: 0000931763-02-001512 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020503 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: 02633287 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 March 31, 2002 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 April 30, 2002, the Registrant had 6,832,396 shares of Common Stock, $0.01 Par Value, outstanding. - ------------------------------------------------------------------------------- Page 1 of 20 FORM 10-Q PEDIATRIC SERVICES OF AMERICA, INC. INDEX Page Number ------ PART I FINANCIAL INFORMATION ITEM 1: Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2002 and September 30, 2001 ..................... 3 Condensed Consolidated Statements of Operations for the three and six months ended March 31, 2002 and 2001 .... 5 Condensed Consolidated Statements of Cash Flows for the six months ended March 31, 2002 and 2001 .............. 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 ....... 17 PART II OTHER INFORMATION ITEM 1: Legal Proceedings ................................................ 17 ITEM 4: Submission of Matters to a Vote of Security Holders .............. 18 ITEM 6: Exhibits and Reports on Form 8-K ................................. 19 Signatures ....................................................... 20 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands)
March 31, September 30, 2002 2001 ----------------------------- (Unaudited) Assets Current assets: Cash and cash equivalents ......................................... $10,922 $15,259 Accounts receivable, less allowances for doubtful accounts of $5,211 and $5,520, respectively .................... 32,945 31,456 Prepaid expenses .................................................. 1,103 893 Deferred income taxes ............................................. 1,815 1,778 Inventory ......................................................... 4,062 4,708 Other current assets .............................................. 330 236 -------- -------- Total current assets ................................................... 51,177 54,330 Property and equipment: Home care equipment held for rental ............................... 29,996 28,752 Furniture and fixtures ............................................ 10,943 10,572 Vehicles .......................................................... 725 725 Leasehold improvements ............................................ 1,562 1,222 -------- -------- 43,226 41,271 Accumulated depreciation and amortization ......................... (34,141) (32,315) -------- -------- 9,085 8,956 Other assets: Goodwill, less accumulated amortization of $9,613 ................. 31,706 31,706 Certificates of need, less accumulated amortization of $564 and $505, respectively ............................................. 108 167 Deferred financing fees, less accumulated amortization of $696 and $701, respectively ............................................. 604 787 Non-compete agreements, less accumulated amortization of $1,122 and $1,110, respectively ................................ 38 50 Deferred income taxes ............................................. 885 1,049 Workers' compensation bond collateral ............................. 1,825 - Other ............................................................. 264 253 -------- -------- 35,430 34,012 -------- -------- Total assets ........................................................... $ 95,692 $ 97,298 ======== ========
See accompanying notes. 3 PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED BALANCE SHEETS--(Continued) (In thousands)
March 31, September 30, 2002 2001 ------------ ------------- (Unaudited) Liabilities and stockholders' equity Current liabilities: Accounts payable ........................................................ $ 4,061 $ 5,611 Accrued compensation .................................................... 6,268 5,757 Income taxes ............................................................ 238 498 Accrued insurance........................................................ 6,401 6,086 Other accrued liabilities .............................................. 5,244 5,162 Deferred revenue ........................................................ 589 621 Current maturities of long-term obligations to related parties .......... 25 25 Current maturities of long-term obligations ............................. 8 11 ----------- --------- Total current liabilities................................................... 22,834 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, 6,829 and 6,711 shares issued and outstanding at March 31, 2002 and September 30, 2001, respectively .................................................... 68 67 Additional paid-in capital ............................................. 48,883 48,493 Accumulated deficit ..................................................... (3,443) (7,410) ----------- -------- Total stockholders' equity ................................................. 45,508 41,150 ----------- --------- Total liabilities and stockholders' equity ................................. $ 95,692 $ 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 Six Months Ended March 31, March 31, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net revenue ............................................. $ 48,065 $ 45,707 $ 97,205 $ 91,269 Costs and expenses: Operating salaries, wages and employee benefits ...... 22,475 20,481 45,112 41,131 Other operating costs ................................ 17,982 17,287 35,239 33,701 Corporate, general and administrative ................ 4,424 4,644 9,140 9,097 Provision for doubtful accounts ...................... 360 481 665 1,439 Depreciation and amortization ........................ 994 1,860 2,088 3,759 --------- ---------- ---------- --------- Total costs and expenses ....................... 46,235 44,753 92,244 89,127 --------- ---------- ---------- --------- Operating income ........................................ 1,830 954 4,961 2,142 Interest income ......................................... 23 168 81 388 Interest expense ........................................ (714) (1,002) (1,433) (2,223) --------- ---------- ---------- --------- Income before extraordinary item ........................ 1,139 120 3,609 307 Extraordinary item ...................................... - 3,263 387 3,263 --------- ---------- ---------- --------- Net income .............................................. $ 1,139 $ 3,383 $ 3,996 $ 3,570 ========= ========= ========= ========= Basic net income per share data: Income before extraordinary item ........................ $ 0.17 $ 0.02 $ 0.53 $ 0.05 Extraordinary item ...................................... - 0.49 0.06 0.49 --------- ---------- ---------- --------- Net income .............................................. $ 0.17 $ 0.51 $ 0.59 $ 0.54 ========= ========= ========= ========= Diluted net income per share data: Income before extraordinary item ........................ $ 0.16 $ 0.02 $ 0.51 $ 0.05 Extraordinary item ...................................... - 0.47 0.05 0.47 --------- ---------- ---------- --------- Net income .............................................. $ 0.16 $ 0.49 $ 0.56 $ 0.52 ========= ========= ========= ========= Weighted average shares outstanding: Basic ................................................... 6,778 6,666 6,746 6,663 ========= ========= ========= ========= Diluted ................................................. 7,249 6,944 7,191 6,918 ========= ========= ========= =========
See accompanying notes. 5 PEDIATRIC SERVICES OF AMERICA, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Six Months Ended March 31, 2002 2001 ----------- ------------ (Unaudited) (Unaudited) Operating activities: Income before extraordinary item ...................................... $ 3,609 $ 307 Adjustments to reconcile income before extraordinary item to net cash provided by operating activities: Depreciation and amortization .................................... 2,088 3,759 Provision for doubtful accounts .................................. 665 1,439 Amortization of deferred financing fees .......................... 63 152 Deferred income taxes ............................................ 127 (1,079) Changes in operating assets and liabilities: Accounts receivable ........................................... (2,154) 1,430 Prepaid expenses .............................................. (210) (306) Inventory ..................................................... 646 (526) Other assets .................................................. (116) 108 Workers' compensation bond collateral ......................... (1,825) - Accounts payable .............................................. (1,550) (201) Income taxes .................................................. (260) 465 Accrued liabilities ........................................... 876 (201) ---------- --------- Net cash provided by operating activities ............................. 1,959 5,347 Investing activities: Purchases of property and equipment ................................... (2,133) (742) ----------- --------- Net cash used in investing activities ................................. (2,133) (742) Financing activities: Principal payments on long-term debt .................................. (4,525) (8,844) Proceeds from exercise of stock options ............................... 362 48 ---------- --------- Net cash used in financing activities ................................. (4,163) (8,796) ---------- --------- Decrease in cash and cash equivalents ................................. (4,337) (4,191) Cash and cash equivalents at beginning of period ...................... 15,259 14,912 ---------- --------- Cash and cash equivalents at end of period ............................ $ 10,922 $ 10,721 ========== ========= Supplemental disclosure of cash flow information: Cash paid for interest ................................................ $ 1,682 $ 2,404 ========== ========= Cash paid for taxes ................................................... $ 196 $ 673 ========== =========
See accompanying notes. 6 PEDIATRIC SERVICES OF AMERICA, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Unaudited 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements of Pediatric Services of America, Inc. (the "Company") and its majority-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and notes required by 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 and six months ended March 31, 2002 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 March 31, 2002 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 and values reduced as appropriate. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. The Company has completed the initial step of a transitional impairment test and, at March 31, 2002, there was no impairment resulting from the transitional impairment test. Subsequent impairment losses will be reflected in operating income in the income statement. 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 Six Months Ended March 31, 2001 March 31, 2001 ------------------ ---------------- Reported net income ............................ $3,383 $3,570 Add back goodwill amortization ................. 557 1,114 ------ ------ Adjusted net income ............................ $3,940 $4,684 ====== ====== Basic earnings per share: Reported net income ................... $ 0.51 $ 0.54 Goodwill amortization ................. 0.08 0.16 ------ ------ Adjusted net income ................... $ 0.59 $ 0.70 ====== ====== Diluted earnings per share: Reported net income ................... $ 0.49 $ 0.52 Goodwill amortization ................. 0.08 0.16 ------ ------ Adjusted net income ................... $ 0.57 $ 0.68 ====== ======
Amortization expense on intangible assets was approximately $42,000 and $613,000 for the three months ended March 31, 2002 and 2001, respectively, and approximately $85,000 and $1,225,000 for the six months ended March 31, 2002 and 2001, respectively. In addition, the three and six month periods ended March 31, 2001 included $557,000 and $1,114,000, respectively, 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 health care industry is experiencing the effects of the federal and state governments' trend toward cost containment as government and other third-party payors seek to impose lower reimbursement and utilization rates as well as negotiate reduced payment schedules with providers. The credit risk associated with the Company's accounts receivable is somewhat mitigated due to the large number of payors including Medicare, 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 March 31, 2002 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 and six months ended March 31, 2002, the Company had a current income tax benefit of $0.1 million and a current income tax expense of $0.5 million, respectively, which was offset by the reduction of the valuation allowance related to the net deferred tax asset resulting in zero income tax expense. 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 six months ended March 31, 2002. 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 470,987 and 277,687 for the three months ended March 31, 2002, and 2001, respectively, and 445,006 and 255,279 for the six months ended March 31, 2002 and 2001, 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 March 31, 2002, the Company had posted $1.8 million of the $2.2 million cash collateral. 12. Subsequent Events On April 16, 2002, the Company signed an agreement to acquire the assets of the South Florida skilled pediatric home health division of the MedLink Group, Inc. ("MedLink") for a purchase price of approximately $1.9 million in the form of $1.4 million in cash and $0.5 million in a note payable. The acquisition will include certain of MedLink's skilled pediatric facilities in Miami, Plantation, Stuart and West Palm Beach, Florida. The Company anticipates completing the acquisition within sixty days, pending approvals by the State of Florida's agencies responsible for licensure and change of ownership. 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," "potential" 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, nurse shortages, competitive bidding, HIPAA regulations, AWP reductions and reduced state funding levels of Medicaid programs, could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements of the Company made by or on behalf of the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of an unanticipated event. New factors emerge from time to time, and it is not possible for management to predict all of such factors. Further, management cannot assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements of the Company included in this quarterly report. Recent Developments During the second quarter of fiscal year 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 Company's continued investment in additional regional managed care sales personnel, coupled with the branch office directors' initiatives, have begun to realize market share increases in select markets. The Company has experienced market share erosion in select branch offices. The Company has developed turnaround plans for regional operations management to implement in response to the underperformance of these branch offices. These plans contain goals to be achieved by fiscal year end. During the quarter ended March 31, 2002, the Company experienced an increase in total hours ordered and hours staffed; however, unstaffed hours increased as well to approximately 10%. To date, management has seen inconsistent results in a number of markets and will continue to evaluate wage and benefit levels in each local market and respond accordingly. 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 December 27, 2001 ..... 910,777 103,406 722,115 85,256 Rolling 13 weeks ended March 28, 2002 ........ 962,435 101,332 768,468 92,635
10 The Company is 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. During March 2002, the Company finalized a contract amendment with Aetna which resulted in a reduction in reimbursement to the Company for certain specialty products. Based on historical sales data for the products involved, the Company estimates that, on a trailing twelve month billing cycle, the reduction to the Company's revenue and operating income is estimated to be $2.1 million. The Company is expanding its capability to distribute injectable medication nationally and is currently assessing opportunities for these injectables in the Aetna patient base as well as other payors. The Company's marketing strategy is to capitalize on potential core product opportunities within these patient bases. 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. With the reduction in the hemophilia factor inventory levels during the second quarter of fiscal 2002, management concluded it was appropriate to reverse the reserve of approximately $0.2 million. During the quarter ended March 31, 2002, the Company offset the reduction of episodic pharmacy revenues with increased Synagis revenue as well as new patient starts with undetermined volume and duration. As the Company evaluates the renewal of its risk program, it is being advised by its broker to anticipate significant increases in both premiums, retention limits and collateral requirements across all major lines of insurance. The Company will evaluate potential carrier changes where it is advisable. During the quarter ended March 31, 2002, the Company announced the opening of its second Atlanta, Georgia PPEC Center, its seventh overall. On April 16, 2002, the Company signed an agreement to acquire the assets of the South Florida skilled pediatric home health division of the MedLink Group, Inc. ("MedLink") for a purchase price of approximately $1.9 million in the form of $1.4 million in cash and $0.5 million in a note payable. The acquisition will include certain of MedLink's skilled pediatric facilities in Miami, Plantation, Stuart and West Palm Beach, Florida. The Company anticipates completing the acquisition within sixty days, pending approvals by the State of Florida's agencies responsible for licensure and change of ownership. 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. The Company operates in the healthcare industry which is subject to a variety and ever evolving set of risks and challenges. These include but are not limited to: nurse shortages, competitive bidding, HIPAA regulations, potential AWP reductions and reduced state funding levels of Medicaid programs. Any changes to these risks and challenges could potentially have a material adverse effect on the Company's operating results. 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 March 31, 2002, the Company had no 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 11 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 services 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 additional support to management in making the estimate of the allowance for doubtful accounts. 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 Percentage of Net Revenue Increase (Decrease) ------------------------------------------------- ------------------------------- Three Months Six Months Three Months Six Months Ended Ended Ended Ended March 31, March 31, March 31, ----------------------- ---------------------- ------------------------------- 2002 2001 2002 2001 2002 2002 --------- ---------- --------- --------- --------------- ------------ Net revenue ........................... 100.0% 100.0% 100.0% 100.0% 5% 7% Operating salaries, wages and employee benefits .................. 46.8 44.8 46.4 45.1 10 10 Other operating costs ................. 37.4 37.8 36.3 36.9 4 5 Corporate, general and administrative . 9.2 10.2 9.4 10.0 (5) 0.5 Provision for doubtful accounts ....... 0.7 1.1 0.7 1.6 (25) (54) Depreciation and amortization ......... 2.1 4.0 2.2 4.1 (47) (44) ------ ------ ------ ------ ------ ------ Operating income ...................... 3.8 2.1 5.0 2.3 92 132 Interest income ....................... 0.0 0.4 0.1 0.4 (86) (79) Interest expense ...................... (1.5) (2.2) (1.5) (2.4) (29) (36) ------ ------ ------ ------ ------ ------ Income before extraordinary item ...... 2.3% 0.3% 3.6% 0.3% 847% 1,078% ====== ====== ====== ====== ====== ======
The following table sets forth for the periods indicated the net revenue breakdown by service (in thousands):
Three Months Six Months Ended Ended March 31, March 31, ---------------------- ------------------------ 2002 2001 2002 2001 --------- --------- ---------- --------- Pediatric Home Health Care Nursing ...................................... $ 21,631 $ 21,251 $ 43,759 $ 42,455 Respiratory Therapy Equipment ................ 3,999 3,666 8,181 7,376 Home Medical Equipment ....................... 339 336 667 668 Pharmacy and Other ........................... 11,136 10,135 22,260 20,059 -------- -------- -------- -------- Total Pediatric Home Health Care ...... 37,105 35,388 74,867 70,558 -------- -------- -------- -------- Adult Home Health Care: Nursing ...................................... 2,773 2,665 5,747 5,485 Respiratory Therapy Equipment ................ 4,399 4,011 9,019 7,991 Home Medical Equipment ....................... 611 763 1,244 1,472 Pharmacy and Other ........................... 3,177 2,880 6,328 5,763 --------- -------- -------- -------- Total Adult Home Health Care .......... 10,960 10,319 22,338 20,711 --------- -------- -------- -------- Total Net Revenue ................ $ 48,065 $ 45,707 $ 97,205 $ 91,269 ========= ======== ======== ========
Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001 Net revenue increased $2.4 million, or 5%, to $48.1 million in the three months ended March 31, 2002 from $45.7 million in the three months ended March 31, 2001. Pediatric home health care net revenue increased by $1.7 million for the three months ended March 31, 2002, due to a number of factors, including, increased reimbursement rates from select pediatric nursing payors, increased pharmacy deliveries and increased provision of core respiratory products and services as compared to the three months ended March 31, 2001. Adult health care net revenue increased $0.6 million for the three months ended March 31, 2002, primarily as a result of an increase in the provision of core products and services to pharmacy and respiratory therapy patients. In the three months ended March 31, 2002, the Company derived approximately 50% of its net revenue from commercial insurers and other 13 private payors, 43% from Medicaid and 7% from Medicare. Operating salaries, wages and employee benefits consist primarily of branch office employee costs. Operating salaries, wages and employee benefits increased $2.0 million, or 10%, to $22.5 million in the three months ended March 31, 2002 from $20.5 million in the three months ended March 31, 2001. The Company experienced increases in its nursing labor costs due to increased levels of nurses eligible for benefits. The Company incurred labor costs for new start-up branches in the three months ended March 31, 2002. As a percentage of net revenue, operating salaries, wages and employee benefits for the three months ended March 31, 2002 increased to 47% from 45% for the three months ended March 31, 2001. Other operating costs include medical supplies, branch office rent, utilities, vehicle expenses, allocated insurance costs and cost of sales. Cost of sales consists primarily of the costs of pharmaceuticals and related services. Other operating costs increased $0.7 million, or 4%, to $18.0 million in the three months ended March 31, 2002, from $17.3 million in the three months ended March 31, 2001. The increase in other operating costs relates primarily to increased business insurance costs, increased pharmacy deliveries and increased medical supply usage. As a percentage of net revenue, other operating costs for the three months ended March 31, 2002 decreased to 37% from 38% for the three months ended March 31, 2001. Corporate, general and administrative costs decreased $0.2 million, or 5%, to $4.4 million in the three months ended March 31, 2002, from $4.6 million in the three months ended March 31, 2001. The decrease relates primarily to a combination of corporate turnover and changes in the billing function staffing levels in the three months ended March 31, 2002, as compared to the three months ended March 31, 2001. As a percentage of net revenue, corporate, general and administrative costs for the three months ended March 31, 2002, decreased to 9% from 10% for the three months ended March 31, 2001 Provision for doubtful accounts decreased $0.1 million, or 25%, to $0.4 million in the three months ended March 31, 2002, from $0.5 million in the three months ended March 31, 2001. Cash collections as a percentage of net revenue were 98% and 103% for the three months ended March 31, 2002 and 2001, respectively. The Company continues to experience strong cash collections due to improvements in the reimbursement processes, resulting in a lower provision for doubtful accounts. Depreciation and amortization decreased $0.9 million, or 47%, to $1.0 million in the three months ended March 31, 2002 from $1.9 million in the three months ended March 31, 2001. 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 three months ended March 31, 2002 and 2001, respectively. The three month period ended March 31, 2001 included $0.6 million related to the amortization of goodwill. Interest expense decreased $0.3 million, or 29%, to $0.7 million in the three months ended March 31, 2002, from $1.0 million in the three months ended March 31, 2001. The Company's average debt outstanding decreased $10.5 million as the Company completed several transactions to repurchase a portion of the Notes. Interest income decreased $0.1 million in the three months ended March 31, 2002. The Company invested its excess cash balances in highly liquid investments whose yields continue to decline. Six Months Ended March 31, 2002 Compared to Six Months Ended March 31, 2001 Net revenue increased $5.9 million, or 7%, to $97.2 million in the six months ended March 31, 2002 from $91.3 million in the six months ended March 31, 2001. Pediatric home health care net revenue increased by $4.3 million for the six months ended March 31, 2002, due to a number of factors, including, increased reimbursement rates from select pediatric nursing payors, increased pharmacy deliveries and increased provision of core respiratory products and services as compared to the six months ended March 31, 2001. Adult health care net revenue increased $1.6 million for the six months ended March 31, 2002, primarily as a result of an increase in core products and services to pharmacy and respiratory therapy patients. In the six months ended March 31, 2002, the 14 Company derived approximately 50% of its net revenue from commercial insurers and other private payors, 43% from Medicaid and 7% from Medicare. Operating salaries, wages and employee benefits increased $4.0 million, or 10%, to $45.1 million in the six months ended March 31, 2002 from $41.1 million in the six months ended March 31, 2001. The Company experienced 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 six months ended March 31, 2002. As a percentage of net revenue, operating salaries, wages and employee benefits for the six months ended March 31, 2002 increased to 46% from 45% for the six months ended March 31, 2001. Other operating costs increased $1.5 million, or 5%, to $35.2 million in the six months ended March 31, 2002, from $33.7 million in the six months ended March 31, 2001. The increase in other operating costs relates primarily to increased business insurance costs, increased pharmacy deliveries and increased medical supply usage. As a percentage of net revenue, other operating costs for the six months ended March 31, 2002 decreased to 36% from 37% for the six months ended March 31, 2001. Corporate, general and administrative costs remained essentially unchanged at $9.1 million in the six months ended March 31, 2002 as compared to the six months ended March 31, 2001. The slight increase relates primarily to an increase in the Company's portion of benefits costs offset by corporate turnover and changes in the billing function staffing levels in the six months ended March 31, 2002 as compared to March 31, 2001. As a percentage of net revenue, corporate, general and administrative costs for the six months ended March 31, 2002, decreased slightly compared to the six months ended March 31, 2001. Provision for doubtful accounts decreased $0.8 million, or 54%, to $0.7 million in the six months ended March 31, 2002, from $1.4 million in the six months ended March 31, 2001. Cash collections as a percentage of net revenue were 99% and 102% for the six months ended March 31, 2002 and 2001, respectively. The Company continues to experience strong cash collections due to improvements in the reimbursement processes, resulting in a lower provision for doubtful accounts. Depreciation and amortization decreased $1.7 million, or 44%, to $2.1 million in the six months ended March 31, 2002 from $3.8 million in the six months ended March 31, 2001. Amortization expense on intangible assets was $0.08 million and $1.2 million for the six months ended March 31, 2002 and 2001, respectively. The six month period ended March 31, 2001 included $1.1 million related to the amortization of goodwill. Interest expense decreased $0.8 million, or 36%, to $1.4 million in the six months ended March 31, 2002, from $2.2 million in the six months ended March 31, 2001. The Company's average debt outstanding decreased $14.1 million as the Company completed several transactions to repurchase a portion of the Notes. Interest income decreased $0.3 million in the six months ended March 31, 2002. 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 six months ended March 31, 2002. At March 31, 2002, 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 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 15 has increased, making future repurchases of the Notes less likely. Cash collections as a percentage of net revenue for the three months ended March 31, 2002 and 2001 were 98% and 103%, 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 six months ended March 31, 2002, the Company has purchased medical equipment with technology upgrades to service existing patients and completed leasehold improvements for new start-up locations. The Company anticipates future capital expenditures for maintenance, support and 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 March 31, 2002, 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. 16 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 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 mitigated 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 March 31, 2002, 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 March 31, 2002 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. 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 17 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. On March 14, 2002, following a hearing on the fairness, reasonableness and adequacy of the proposed settlement, the Court entered an Order approving the settlement. The time for appeal of the Settlement Order has expired and no appeal has been taken. 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. 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 & 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 Plaintiffs in this case are included within the defined Class in the Class Action discussed above and did not opt-out of the Class Settlement. The time for appeal of the Settlement Order has expired and no appeal has been taken. In the opinion of the Company's management, the ultimate disposition of these two lawsuits should not have a material adverse effect on the Company's financial condition or results of operations, however, there can be no assurance that the Company will not sustain material liability as a result of or related to these lawsuits. ITEM 4. Submission of Matters to a Vote of Security Holders The 2002 Annual Meeting of Shareholders of the Company was held on January 29, 2002. Proxies with regard to the matters to be voted upon at the Annual Meeting were solicited under Regulation 14A of the Securities Exchange Act of 1934, as amended. Set forth below is a brief description of each matter voted upon at the Annual Meeting and the results of the voting on each matter. (1) Election of Michael E. Axelrod and Michael J. Finn as directors for a term of three years expiring at the 2005 Annual Meeting of Shareholders. There was no solicitation in opposition to the nominees listed in the proxy statement, and the nominees were elected.
Votes Broker ---------------------- --------------------------- Nominees For Withheld Abstentions Non-Votes -------- --- -------- ----------- --------- Michael E. Axelrod 6,679,376 30,219 - - Michael J. Finn 6,679,376 30,219 - -
18 (2) The approval of the amendment and restatement of the Company's Stock Option Plan. The Shareholders approved the proposal. Votes --------------------------------------------------------------------- For Against Abstentions --- ------- ----------- 3,835,320 84,147 65,302 (3) The approval of the amendment and restatement of the Company's Directors' Stock Option Plan. The Shareholders approved the proposal. Votes --------------------------------------------------------------------- For Against Abstentions --- ------- ----------- 3,831,215 87,952 65,602 (4) The approval of the amendment to the Company's Employee Stock Purchase Plan. The Shareholders approved the proposal. Votes --------------------------------------------------------------------- For Against Abstentions --- ------- ----------- 6,214,068 433,173 62,354 (5) Ratification of the appointment of Ernst & Young LLP as independent auditors of the Company for the fiscal year ending September 30, 2002. The Shareholders approved the proposal. Votes Votes --------------------------------------------------------------------- For Against Abstentions --- ------- ----------- 6,675,383 28,405 5,807 ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits No exhibits are filed as part of this report. (b) Reports on Form 8-K The Company did not file a Current Report on Form 8-K during the quarter ended March 31, 2002. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PEDIATRIC SERVICES OF AMERICA, INC. (Registrant) Date: May 3, 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) 20 -----END PRIVACY-ENHANCED MESSAGE-----