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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended September 30, 2000
[_]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
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PEDIATRIC SERVICES OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-1873345
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
310 Technology Parkway Norcross, Georgia 30092-2929
(Address of principal executive offices) (Zip Code)
(770) 441-1580
Registrant's telephone number, including area code
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
Common Stock Purchase Rights
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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 reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Annual Report on Form
10-K or any amendment to this Form 10-K. [X]
The aggregate market value of voting stock held by non-affiliates of the
registrant on December 1, 2000, based on a closing price of $4.625 per share,
was $28,545,824. As of December 1, 2000 the number of shares of the
registrant's Common Stock outstanding was 6,658,680 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the registrant's Proxy Statement for the
2001 Annual Meeting of Stockholders to be held on February 21, 2001
incorporated herein by reference in Part III of this Annual Report on Form 10-
K.
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PEDIATRIC SERVICES OF AMERICA, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended September 30, 2000
TABLE OF CONTENTS
Item Page
Number Number
------ ------
PART I
1. Business...................................................... 3
2. Properties.................................................... 17
3. Legal Proceedings............................................. 17
4. Submission of Matters to a Vote of Security Holders........... 18
4(A). Executive Officers of the Registrant.......................... 18
PART II
Market for the Registrant's Common Stock and Related
5. Stockholder Matters.......................................... 19
6. Selected Financial Data....................................... 20
Management's Discussion and Analysis of Financial Condition
7. and Results of Operations.................................... 21
7(A). Quantitative and Qualitative Disclosures about Market Risk.... 26
8. Financial Statements and Supplementary Data................... 26
Changes in and Disagreements with Accountants on Accounting
9. and Financial Disclosure..................................... 26
PART III
10. Directors and Executive Officers of the Registrant............ 27
11. Executive Compensation........................................ 27
Security Ownership of Certain Beneficial Owners and
12. Management................................................... 27
13. Certain Relationships and Related Transactions................ 27
PART IV
Exhibits, Financial Statement Schedules, and Reports on Form
14. 8-K.......................................................... 28
SIGNATURES............................................................ 31
INDEX TO FINANCIAL STATEMENTS......................................... 33
INDEX TO FINANCIAL STATEMENT SCHEDULE................................. 54
INDEX TO EXHIBITS
2
PART I
ITEM 1. BUSINESS
Forward-Looking Statements
This Annual Report on Form 10-K 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 Annual Report on Form 10-K,
the words "may," "could," "should," "would," "believe," "feel," "anticipate,"
"estimate," "intend," "plan" and similar expressions may be indicative of
forward-looking statements. These statements by their nature involve
substantial risks and uncertainties, certain of which are beyond the Company's
control. The Company cautions that various factors, including the factors
described under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this Annual Report on Form 10-K 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.
General
The Company is a leading provider of children's health care and related
services. Management believes the Company is the nation's largest focused
pediatric home health care provider. The Company provides children's health
care services through 100 branch offices located in 22 states.
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.
Industry Overview
Health Care Services
The pediatric home health care market is distinct in a number of respects.
Pediatric patients tend to require a higher acuity of care due to their age
and the severity of their medical conditions, and consequently generally have
a relatively long length of treatment, often measured in years rather than
weeks or months. Pediatric illness and conditions include bronchopulmonary
dysplasia, digestive and absorptive diseases, congenital heart defects and
other cardiovascular disorders, cancer, cerebral palsy, cystic fibrosis,
chronic obstructive pulmonary disease, endocrinology disorders, hemophilia,
orthopedic conditions and post surgical needs. In many instances, pediatric
patients have multiple disorders.
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Home care for pediatric patients, like home care generally, is preferred
over institutional care by patients and their parents or other care givers as
well as by payors. Patients and parents prefer home care due to the ability to
care for the child in a nurturing environment with family involvement. Home
care also minimizes the risk of cross-infection, eliminates privacy and safety
concerns and permits a more gradual, and consequently more event-free
transition of care-giving from the health care professional to the family.
Payors prefer home care because it is generally more cost effective than
institutional care.
Third-party reimbursement for pediatric home care is provided predominantly
by private health insurance, with a significant portion provided by Medicaid.
Because of the special needs of pediatric patients, the acuity of care and the
skill levels of the individual nurses or therapists providing the care, the
rates charged for health care services, particularly nursing services for
pediatric patients are generally higher than adult rates. In addition, due to
the high medical acuity of pediatric patients and the large variations in
patient conditions and treatment protocols, pediatric home health care is
typically not reimbursed on a capitated basis.
Unlike geriatric home care patients, who typically receive maintenance care,
pediatric home care patients are often treated interventionally, using
technologically advanced medical equipment such as ventilators, oxygen
delivery systems, feeding pumps, nebulizers, sleep apnea monitors and other
respiratory equipment. Pediatric patients often also require home infusion
therapy for the delivery of pharmaceuticals, especially for the treatment of
hemophilia, cystic fibrosis and endocrinology disorders.
Due to the specialized care required to treat pediatric illnesses and
conditions, home nursing care is most effectively delivered to pediatric
patients by nurses with neonatal intensive care unit ("NICU") and pediatric
intensive care unit ("PICU") experience. These specialized health care
professionals are experienced in treating medically fragile children, and
administering required medications and other therapies. Pediatric patients
typically require home nursing in shifts, in which nursing care is delivered
eight to twenty-four hours per day, in contrast to home nursing care for
geriatric patients, in which nursing care is typically provided on a short
"visiting nurse" basis.
Like pediatric patients, young adult home care patients, who range in age
from 18 to 64 years, often require long-term care from private duty nurses.
Young adult patients suffer from such disorders as muscular dystrophy, cystic
fibrosis, hemophilia, cardiovascular disorders and cancer. Many young adult
patients suffer injury and significant disabilities from near drowning
incidents and accidents or other forms of trauma. Many of these disorders and
illnesses require lifelong treatment. Frequently, a young adult patient
receives home care as a continuation of a pediatric home care treatment
regimen. A large percentage of young adult patients are covered by private
health insurance, with the remainder covered by Medicaid.
Geriatric patients (those patients age 65 years old and older) generally
have shorter periods of service and shorter periods of daily care. Many
geriatric patients suffer from emphysema or other pulmonary disorders
requiring oxygen therapy on a continuous basis. Geriatric patients with more
acute conditions are more likely to receive care in an institutional setting.
Most geriatric patients are covered by Medicare for all or part of their
health care needs.
The pediatric home health care services market currently is heavily
fragmented. This market is served by a large number of small entities that
operate on a local or regional basis and typically provide a limited range of
health care services. This market is also served by a small number of national
home health care companies that service the pediatric market as part of a
broader product offering. Because of the high degree of specialization
required for effective treatment of pediatric patients and the broad scope of
services required due to pediatric patients' generally high medical acuity
levels, the Company believes that there are significant growth opportunities
for a national provider offering a broad range of health care products focused
on the home pediatric patient.
4
Recent Developments
Throughout fiscal 2000, the Company's senior management continued
implementation of its strategic plan (the "Plan") to improve the Company's
performance. The primary focus of the Plan is to redirect the Company to its
core businesses, the pediatric home health care and adult respiratory
businesses.
For a more detailed status of the Plan, see information set forth under the
caption "Results of Operations" included in Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations" beginning on
page 21 of this Annual Report on Form 10-K.
Acquisitions
The Company did not acquire any new businesses during fiscal 2000.
Class Action and Other Litigation
A description of certain litigation involving the Company is described in
Item 3, "Legal Proceedings" on page 17 of this Annual Report on Form 10-K.
Revenue and Collection Initiatives
As a result of slower payment by commercial insurance companies under
managed care initiatives, directed changes to documentation and filing
requirements by State Medicaid programs, and the impact of the Interim Payment
System ("IPS") for home care reimbursement under Medicare, the Company has
continued to experience increasingly complex billing and documentation
requirements, slower reimbursement by payors, and lower profit margins. In
response to these conditions the Company incorporated a number of revenue and
collection initiatives into its Plan. For further information relating to
these initiatives please refer to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 21 of this
Annual Report on Form 10-K.
Business Strategy
Focus on Pediatric Services. Pediatric health care services are generally
recognized as a distinct specialty within the health care industry. The
Company has significant experience and expertise in children's health care,
particularly with respect to medically fragile children who are dependent on
sophisticated medical technology and nursing care. The Company believes that
its pediatric focus and expertise provide it with significant sales and
marketing advantages. The Company intends to continue to focus on providing
relatively high acuity health care services for children. However, there can
be no assurance that the Company's efforts will be successful.
Provide High Quality, Cost-Effective Care. The Company emphasizes quality
throughout its organization with respect to both the provision of services and
the hiring and training of clinical personnel. Moreover, the Company believes
that its ability to coordinate and deliver a wide range of services within our
core competencies in a non-institutional setting and its experience and
expertise in caring for medically fragile children result in superior and
cost-effective medical outcomes. The Company intends to continue to emphasize
and enhance the quality and cost-effectiveness of its services. The Company's
goal is to be the nation's leading provider of children's health care services
in the home.
Realization of Operating Efficiencies and Internal Growth. The Company
currently has 100 pediatric health care branch offices in 22 states. In the
past, the Company extended its geographic presence by acquisition to enable
the Company to obtain more referrals from large insurance companies and other
third party payors and to provide operating efficiencies. While the Company
believes that it has realized more referrals because of its national presence,
the Company intends to aggressively pursue referrals in its more profitable
product lines by increased emphasis on strengthening its infrastructure, new
managed care contracts and sales and marketing. The Company will continue to
focus on the realization of operating efficiencies, improving billing and
collection activities, internal profitability growth, and seeking any
potential opportunities in the marketplace.
5
Focus on Cash Collections. The Company also intends to continue aggressive
collection efforts. Specifically, the Company has hired and expects to
continue to hire experienced reimbursement personnel. In addition, the legal
and managed care departments are working closely with the reimbursement
department to more quickly identify and resolve collection problems. A Company
task force has been formed to resolve large dollar collection problems as they
occur and implement new procedures for corporate and field personnel to
correct identified problem areas.
Services and Operations
General
The Company provides a broad range of health care services principally for
children and, to a lesser extent, young adults and geriatric patients. The
following table summarizes the estimated percentages of net revenue to total
net revenue of each major category of service from continuing operations
offered by the Company for the periods indicated:
Year Ended September 30,
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2000 1999 1998
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Revenue % Total Revenue % Total Revenue % Total
-------- ------- -------- ------- -------- -------
(In thousands)
Pediatric Home Health Care
Nursing..................... $ 83,014 44.6% $ 91,217 42.6% $ 93,248 42.0%
Respiratory Therapy
Equipment.................. 17,158 9.2 23,705 11.1 24,299 10.9
Home Medical Equipment...... 1,921 1.0 2,983 1.4 3,293 1.5
Pharmacy and Other.......... 36,608 19.6 35,911 16.7 34,563 15.6
-------- ----- -------- ----- -------- -----
Total Pediatric Home
Health Care.............. 138,701 74.4 153,816 71.8 155,403 70.0
Adult Home Health Care
Nursing..................... 11,422 6.1 18,207 8.5 18,254 8.2
Respiratory Therapy
Equipment.................. 17,656 9.5 22,071 10.3 22,614 10.2
Home Medical Equipment...... 4,474 2.4 6,378 3.0 6,309 2.8
Pharmacy and Other.......... 14,113 7.6 13,881 6.4 19,602 8.8
-------- ----- -------- ----- -------- -----
Total Adult Home Health
Care..................... 47,665 25.6 60,537 28.2 66,779 30.0
-------- ----- -------- ----- -------- -----
Total................... $186,366 100.0% $214,353 100.0% $222,182 100.0%
======== ===== ======== ===== ======== =====
Pediatric Health Care Services
Pediatric Nursing Services. The Company's pediatric nursing services consist
primarily of private duty home nursing care for pediatric patients with
illnesses and conditions such as bronchopulmonary dysplasia, digestive and
absorptive diseases, congenital heart defects and other cardiovascular
disorders, cancer, cerebral palsy, cystic fibrosis, chronic pulmonary disease
(e.g., bronchitis and asthma), endocrinology disorders, hemophilia, orthopedic
conditions and post surgical needs. Pediatric home nursing care typically
begins upon the patient's discharge from the hospital. Under a prescription or
care plan developed by the patient's physician, the Company's personnel
monitor the condition of the child, administer medications and treatment
regimens, provide enteral and other forms of tube feeding, monitor and
maintain ventilators, oxygen and other home medical equipment, monitor and
administer pain management, provide daily care, including baths, hygiene and
skin care, conduct physical, occupational and other forms of prescribed
therapy, and coordinate other forms of medical care necessary for the child.
Home nursing care is often provided up to 24 hours per day for extended
periods of time. The Company estimates that its pediatric patients require
private duty nursing care for an average of eight months with length of daily
care averaging 10 or 11 hours. The Company's nurses emphasize education of the
care givers of the child in order to maximize the independence of the child
and the family. Through this educational process, the
6
length of daily private duty care can be modified as the child's condition
improves or stabilizes and the parents or care givers assume a more active
role in the care of the child. Depending on the condition of the child and the
orders of the attending physician, the Company may continue to provide nursing
visits, respiratory therapy and other medical equipment services and
pharmaceutical services after it discontinues private duty nursing care.
The Company has approximately 3,336 registered or licensed pediatric nurses
on its active nursing registries. Due to the special needs and acuity of care
of pediatric patients generally, the Company requires that its nurses have
training with pediatric patients. Most of the Company's nurses have expanded
pediatric experience.
Referral sources generally make arrangements for nursing services before
making arrangements for other health care services such as equipment or
infusion, prior to the discharge of a medically fragile child from the
hospital. Consequently, a high quality nursing service can facilitate
marketing of the Company's other pediatric product lines.
Pediatric Respiratory Therapy Equipment and Services. The Company provides
respiratory therapy equipment services to pediatric patients in the home. The
services include (i) the rental, sale, delivery and setup in accordance with
physician prescriptions of equipment, such as ventilators, oxygen
concentrators, liquid oxygen systems, high pressure oxygen cylinders, apnea
monitors and nebulizers, (ii) periodic evaluation and maintenance of the
equipment and (iii) delivery and setup of disposable supplies necessary for
the operation of the equipment. The Company currently has 42 locations that
provide rental of home medical equipment as well as mail order programs for
the provision of a broad range of home health care equipment. The Company
provides these services to patients with a variety of conditions, including
chronic pulmonary diseases, neurologically related respiratory problems,
cystic fibrosis, congenital heart defects and cancer. The Company utilizes
skilled registered respiratory therapists, certified respiratory therapy
technicians, and other qualified health professionals to provide these
services. The Company also provides training to patients and the families in
equipment use and service through emergency on-call technicians.
Pharmacy and Infusion Therapy. The Company provides pharmaceutical products
and specialty infusion therapy services for its patients. Infusion therapy
involves the administration of nutrients, antibiotics and other medications
intravenously. The number of therapies that can be administered safely in the
home has increased significantly in recent years because of technological
innovations in infusion equipment and advances in drug therapy. Consequently,
a broad range of infections and diseases which would otherwise have required
patients to be hospitalized are considered treatable in the home. These in-
home therapies reduce the need for emergency room visits for infusion therapy,
decrease the number of days patients stay in the hospital, and are generally
preferred by patients, their families, referring physicians and payors.
The Company provides a range of pharmacy and infusion therapies, including
antibiotic and other anti-infective therapies, total parenteral nutrition
therapy, pain management therapy, hemophilia therapy, immunomodular therapy
and chemotherapy. The Company also provides specialty infusion therapies
intended to meet the needs of patients with a variety of serious infections
such as osteomyelitis, bacterial endocarditis, cellulitis, septic arthritis,
wound infections and recurrent infections associated with the kidney and
urinary tract and AIDS. The Company also provides specialty infusion therapy
to terminally or chronically ill patients suffering from acute or chronic
pain, patients with impaired or altered digestive tracts due to
gastrointestinal illness, patients suffering from various types of cancer,
patients requiring treatment for congestive heart failure and patients with
chronic conditions such as hemophilia, cystic fibrosis, juvenile rheumatoid
arthritis, multiple sclerosis, and endocrinology disorders. The Company's
specialty infusion therapy services are provided by its staff of licensed
pharmacists and administered by its nursing staff. The Company currently
supports the home infusion therapy market through seven pharmacy locations.
The Company also operates a mail order medication service that provides
physician-prescribed unit dose medications to respiratory therapy patients.
The Company offers its patients medication in a premixed unit dose form as
well as professional clinical support and claims processing. The Company
employs licensed pharmacists to assist with its unit dose medication services
business.
7
Pediatric Home Medical Equipment and Services. The Company provides rental,
sale and service of home medical equipment and respiratory therapy services to
adult and pediatric patients with a focus on high-tech products including
ventilators, oxygen concentrators, liquid oxygen systems, continuous positive
airway pressure devices (CPAP), bi-level respiratory assist devices (Bi-PAP),
oximetry and apnea monitors. These services are provided to patients upon
their discharge from the hospital as well as after the Company's nursing
services are no longer required.
Prescribed Pediatric Extended Care ("PPEC"). The Company currently has six
PPEC centers in Florida and Georgia. These centers provide, among other
services, daily medical care and physical, occupational and other forms of
therapy for medically fragile children. The children receive nursing
supervision and/or physical and other therapies in a setting which allows for
socialization and education of the children. The Company utilizes skilled
registered therapists to perform these services in the home or through the
Company's pediatric day treatment centers.
Young Adult and Geriatric Health Care Services
The Company generally offers young adult patients similar health care
equipment and pharmacy services provided to pediatric patients. The Company's
young adult patients are being treated for disorders such as muscular
dystrophy, cystic fibrosis, hemophilia, cardiovascular disorders and cancer,
as well as serious disabilities from near drowning incidents and accidents and
other forms of trauma involving spinal cord or other injuries. Few of these
patients require private duty nursing services. Frequently, the Company's
young adult patients receive home care as a continuation of a pediatric home
care treatment regimen.
The Company's geriatric home care patients generally require the lowest
acuity of care and have shorter periods of service and shorter periods of
daily care than either the Company's pediatric or young adult patients. Few of
these patients receive private duty nursing services. Most of these patients
receive maintenance care for end-of-life conditions such as emphysema or other
pulmonary disorders, cardiac diseases and renal diseases. Services are
provided during short home visits by respiratory therapists or technicians.
Although some of the Company's geriatric home care patients receive higher
acuity intervention care, these services are more likely to be provided in an
institutional setting.
Recruiting, Training and Retention of Professional Staff
The Company's pediatric services are provided by skilled pediatric nurses
and skilled respiratory therapists. Nurses generally have a minimum of one
year prior NICU or PICU experience, a nursing license and current CPR
certification. Each nurse must pass a written pediatric and medication exam
and provide employment references. Therapists generally have a minimum of one
year prior experience and current CPR certification, and must provide
employment references as well. Under the Company's pediatric nursing training
program, nurses are required to attend an orientation program where they are
trained in aspects of home health care, such as equipment use, which differ
from institutionally provided health care. If qualified, nurses receive
additional training in the use of ventilators and other home respiratory
equipment. The Company requires its nurses to attend continuing education
sessions on safety and techniques in home health care. Further, the Company
offers its nurses periodic continuing education courses and professional
seminars on various topics in home health care to assist in the retention of
qualified personnel. As of September 30, 2000, the Company had approximately
3,895 licensed or credentialed nurses, therapists, and pharmacists on its
staff and active registries.
To provide a qualified, reliable nursing and therapy services staff, the
Company continuously recruits professional nurses and technical specialists,
and trains and offers benefits and other programs to encourage retention of
these professionals. The Company recruits primarily through advertising,
employment fairs, direct contact with community groups and employment programs
and uses bonuses and other benefit programs to encourage new employee
referrals by existing employees. The Company has in the past recruited
pediatric nurses who have cared for a patient in the hospital to continue to
provide care for such patient in the home through
8
part-time or full-time employment with the Company. However, the home health
industry has been experiencing difficulties in recruiting qualified nurses due
primarily to skills shortages and cutbacks in the number of student nurses and
training. The Company is currently centralizing support services to its nurse
recruiting efforts to maximize their effectiveness. Furthermore, current
indications suggest that the supply of licensed nurses will continue to
decline in the foreseeable future.
Quality Assurance
The Company has an established quality assurance program for the
implementation and monitoring of service standards. The Company's quality
assurance program includes audits, surveys, assessments and evaluations as
well as other measures designed to ensure compliance with the documentation
and operating procedures required by federal, state and local law as well as
Company internal standards. The Company's officers oversee the results of
these quality assurance audits and implement changes where necessary.
The Company's quality assurance program also emphasizes accreditation by the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"). JCAHO
is a nationally recognized not-for-profit organization that develops standards
for various health care providers and monitors compliance with such standards.
Substantially all of the Company's branch offices have received accreditation
from JCAHO. JCAHO's objective standards are one of the few methods by which
referring health care professionals may assess the quality of services of a
home health care provider.
Internal Audit
The Company maintains an internal audit function which reports directly to
the Audit Committee of the Board of Directors.
Case Administration
Prior to providing services to a patient, the Company coordinates with the
patient's physicians, third-party payors, case managers and other referral
sources. In order to accomplish this coordination, the Company has developed
and implemented case management and clinical coordination functions.
Case Management. The Company maintains a case management service department
designed to assure the cost-effective delivery of high quality care to many of
the Company's highest acuity patients. This department acts as the central
point for coordination of services and benefits for many of the patients
referred by insurance companies. The Company assigns a case manager to review
the patient's insurance status to determine coverage and relevant
reimbursement criteria. The case manager contacts the relevant third-party
payors to negotiate the services that will be covered and the applicable
rates. The case manager then communicates with the Company's billing and
collection department to assist in accurate billing. The case manager also
assists in resolving disputes that may arise between the Company and third-
party payors.
Clinical Coordination. The Company assigns a clinical coordinator to higher
acuity patients, typically before the patient is discharged from the hospital.
The clinical coordinator works with the physician, case manager or other
referral source to arrange all home health care services needed by the
patient.
Sales and Marketing
The Company obtains patient referrals primarily from neonatologists,
pediatricians, pulmonologists, internists and other physicians, hospital
discharge planners, case managers, community-based health care institutions
and social service agencies. The Company markets its services to these
referral sources primarily through its branch office personnel and various
media formats. The branch office directors conduct the sales and marketing
activities at the branch office level. Branch office directors generally have
a clinical background as registered nurses and/or therapists and, as such,
they are able to describe and promote the Company's services to
9
referral sources. The branch office directors attempt to cultivate
relationships with their local referral sources through quality service,
personal contacts and education about the appropriate role and benefits of the
Company's services in the treatment of patients. In addition, the Company's
case management department plays a role in maintaining favorable relationships
between the Company and large insurance companies.
The Company also promotes referrals by seeking to arrange preferred provider
contracts with managed care companies. The Company has established preferred
provider arrangements that are both national and regional in scope. The
contracts typically designate the Company as a preferred provider of certain
services in select areas but do not establish an exclusive relationship. The
preferred provider contracts typically set forth a range of services that the
Company may provide and the applicable rates for such services. The contracts
also specify required billing and claims procedures, record maintenance
policies and other requirements. The Company has not entered into any
contracts with health maintenance organizations or other third-party payors
that require services to be rendered on a risk-sharing or capitated basis.
The Company believes that JCAHO accreditation of its branch offices is an
important factor in its sales and marketing efforts. The Company also believes
that its focus on pediatric health care services combined with management's
experience in rendering these services provides the Company with a significant
sales and marketing advantage.
Billing and Collection
The Company derives substantially all of its health care net revenue from
commercial insurance, other private third-party payors, Medicare and Medicaid.
The current reimbursement environment is complex, involving multiple payors
with differing coverage and reimbursement policies. Management of accounts
receivable, through effective billing, collection and reimbursement
procedures, is critical to the financial success of health care service
providers due to lengthy reimbursement periods. A delay in reimbursement could
have a material adverse effect on the Company's financial condition. The
Company's reimbursement specialists work closely with the branch offices and
third-party payors. Each specialist is responsible for ensuring the adequacy
of the documentation, submitting the documentation and claims to third-party
payors and expediting payment.
Branch Office Network
The Company currently provides its health care services through a network of
100 branch offices located in 22 states. The Company seeks to address local
market needs through its branch office network. Each branch office conducts
local marketing efforts, coordinates contract negotiations with local referral
sources, recruits personnel and coordinates patient care. The Company believes
that the business of providing health care services is most effective if each
branch office reacts to and meets the needs, as defined by the Company's core
competencies, of the local community. The Company provides its branch office
managers with training, comprehensive policies and procedures and standardized
operating systems, while allowing them sufficient autonomy to address local
needs.
Corporate Compliance Program
The Company's corporate compliance program has continued to focus its
efforts in the areas of fraud and abuse, auditing and monitoring of regulatory
compliance, training of Company employees and providing support and guidance
for employees as they strive to be compliant with the rules, regulations and
policies governing the Company. The Compliance Officer reports directly to the
Company's Board of Directors. The Compliance Officer has conducted audits in
the areas of billing, payroll, and medical documentation at selected field
locations throughout the Company. Additionally, the Compliance Officer has
restructured the enrollment and provider number verification process. The
compliance program has been active in establishing several training programs
relating to proper documentation, and has provided inservice education
regarding corporate compliance to substantially all employees. The compliance
program has also been instrumental in the development and implementation of
the Company's compliance efforts at the field level. In addition, the Company
has established
10
a toll-free Compliance Hotline to assist in its commitment to ethical conduct
throughout the Company. The telephone number is (800) 408-4442. All employees,
vendors, contractors and agents are encouraged to use this confidential means
of communication to report any compliance issues.
Management Information Systems
The business of the Company is dependent in part upon its ability to input,
store, retrieve, process and manage billing and collection information for
each patient. The Encore system provides substantially all of the Company's
locations with immediate access to patient, contract, and payor information
and supports substantially all necessary billing, cash posting, and collection
services.
During fiscal 2000, the Company's information systems department focused its
priorities on supporting the Plan. Significant resources were expended to
insure compliance with Year 2000 related issues. The Company's frame relay
network, long distance services, Encore's programs, procedures and databases
and development language were upgraded for Year 2000.
The Company has continued to make improvements in billing functionality to
comply with payor contract requirements. During fiscal 2000, the Company also
implemented improvements in electronic billing and funds transfer
capabilities. The Company plans to extend electronic billing to more payors
and product lines as part of the Plan.
There can be no assurance that the Company's information systems will
continue to perform as expected, or that further development will not be
required. Failure of such systems to perform as expected, could have a
material adverse effect on the Company's business, financial condition and
results of operations.
Year 2000 Compliance
Specific information relating to the Company's Year 2000 compliance efforts
is set forth under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 21 of this
Annual Report on Form 10-K.
Reimbursement
The Company focuses its health care marketing efforts on patients with
private insurance; however, the Company has experienced a trend in recent
years toward a higher percentage of government payor revenues over private
payor revenues. Due to the nature of the Company's business, many of its
patients rely on Medicare and Medicaid for health coverage.
The following are the estimated percentages of the Company's net revenue
from continuing operations attributable to reimbursement from various payors
of the health care services the Company currently provides, for the periods
presented:
Year Ended Year Ended
September 30, September 30,
2000 1999
------------- -------------
Payor
-----
Commercial Insurance and
Other Private Payors....... 50% 57%
Medicaid and Other State
Programs................... 43% 36%
Medicare and Other Federal
Programs................... 7% 7%
--- ---
Total................... 100% 100%
=== ===
During the past decade, federal and state governments and private payors
have taken extensive steps intended to contain or reduce the costs of health
care. These steps have included, among others, reduced
11
reimbursement rates, changes in services covered, increased utilization review
of services, negotiated prospective or discounted contract pricing and
adoption of a competitive bid approach to service contracts. Cost containment
efforts are expected to continue in the future. Home health care, which is
usually less costly than hospital-based care, generally has benefited from
certain of these cost containment efforts. As expenditures on home health care
services grew, however, initiatives aimed at reducing the cost of health care
delivery in non-institutional settings have increased. Many state Medicaid
programs in an effort to contain the cost of health care and in light of state
budgetary constraints, have reduced their payment rates and have narrowed the
scope of covered services. Likewise, the federal government through
legislation and regulation has acted repeatedly to limit expenditures for
health care, including home health services and home medical equipment. More
recently, this trend has begun to reverse itself due to increased funding of
state Medicaid programs including additional funding to qualifying states for
health coverage of uninsured children. This has translated into price
increases in select Medicaid programs. However, a significant change in
coverage or a reduction in payment rates for the types of services provided by
the Company could have a material adverse effect upon the Company's business.
Legislation
The 1997 Balanced Budget Act (BBA 1997) contained provisions intended to
significantly reduce Medicare reimbursement to the home health industry by
converting the Medicare home health payment methodology to a case-mix adjusted
prospective payment system (PPS). PPS is intended to end cost-based
reimbursement, which was considered to create undesirable incentives to
increase utilization. As a transition to PPS, BBA 1997 mandated an interim
payment system (IPS) initially to be in effect for two years, designed to
constrain substantially the growth in Medicare home health expenditures. In
addition, BBA 1997 required that home health and home medical equipment
companies post surety bonds in specified amounts and that billing for durable
medical equipment and medical supplies be consolidated. BBA 1997 also mandated
reductions in oxygen equipment reimbursements. These requirements are
administered and regulated by the Health Care Financing Administration (HCFA).
According to the Congressional Budget Office (CBO) in 1997, the BBA 1997
changes in Medicare's home health reimbursement were designed to achieve
savings of $16.2 billion over five years. More recent CBO projections,
however, indicated that the resulting spending savings would be $47.9 billion
over the same period. As a result, Congress acted quickly to modify somewhat,
the IPS payment methodology.
Additional federal legislation further ameliorating the impact of BBA 1997
was signed into law by President Clinton on November 29, 1999 (the Medicare
Balanced Budget Refinement Act of 1999). According to its provisions, a home
health agency will be paid an additional $10.00 for each Medicare beneficiary
to whom it provides services in cost reporting periods beginning in year 2000,
to defray the cost of collecting and electronically reporting Outcome and
Assessment Information Set (OASIS) data. OASIS requirements do not apply to
pediatric home health. Further, the General Accounting Office will be required
to report to Congress on the cost to home health agencies of compliance with
OASIS data gathering requirements and the effect of those requirements on the
privacy interests of patients. An additional 15% reduction in home health
reimbursement that had been scheduled to go into effect October 1, 2000 if PPS
was not implemented, was repealed. Second, a 15% cut in PPS reimbursement
(originally scheduled for October 1, 2000) was postponed until after the first
twelve months of PPS, which was implemented in October 2000. Additionally, the
Department of Health and Human Services (HHS) is required to report to
Congress six months after the implementation of PPS on the need for this 15%
reduction or any reduction. A temporary increase in the consumer price index
for durable medical equipment and oxygen supplies was implemented and
consolidated billing was eliminated for durable medical equipment but retained
for medical supplies. Per-beneficiary limits were increased for some agencies.
In addition, surety bonds were limited to four years, with additional
discretion granted, and set at the lower of $50,000 or 10% of aggregate annual
payments under Medicare and Medicaid.
Additional Medicare reform legislation is currently being decided by
Congress. The Company believes that health care reform initiatives are likely
to continue in the future. There can be no assurance that such future reform
initiatives will not materially and adversely affect the business and
financial condition of the Company.
12
The effect that these changes ultimately will have on the home health
industry cannot be quantified at this time, and there can be no assurance that
these and other changes mandated by BBA 1997 and the Congressional reform
package of November 1999 will not materially and adversely affect the business
and financial condition of the Company.
Commercial Insurance. The Company provides its services on a fee-for-service
basis to patients covered by commercial insurance as well as self-funded
employer plans. In some instances, services are rendered pursuant to fees
negotiated with insurance companies under preferred provider contracts. The
Company has not entered into any contracts with health maintenance
organizations or other insurance companies that require services to be
rendered on a risk-sharing or capitated basis.
Medicaid Programs. Medicaid (Title XIX of the Social Security Act), enacted
in 1965, authorizes Federal grants to States for medical assistance to low-
income persons who are age 65 or over, blind, disabled, or members of families
with dependent children or qualified pregnant women or children. The program
is jointly financed by the Federal and State governments and administered by
the States. Within broad Federal rules, each State decides eligible groups,
types and range of services, payment levels for services, and administrative
and operating procedures. Payments for services are made directly by the
States to the individuals or the entities that furnish the services.
Medicare Program. Medicare is a federally funded health insurance program
that provides health insurance coverage for persons age 65 and older, certain
disabled persons under age 65, and persons of any age with chronic end-stage
renal disease. The United States Congress enacted the Medicare program in 1965
as Title XVIII of the Social Security Act. The program consists of two
separate insurance programs: (i) "Hospital Insurance," established in Part A
of the Social Security Act, provides certain benefits covering inpatient
hospital, skilled nursing facility, home health and hospice services, and (ii)
"Supplementary Medical Insurance," established in Part B of the Social
Security Act, provides benefits in the areas of outpatient hospital visits,
physician services, outpatient services, surgical supplies, braces, ambulance
services, pneumococcal and hepatitis B vaccine, and blood clotting factors for
hemophiliac patients, home medical equipment and prosthetic devices.
Individuals age 65 and older who qualify for Social Security or Railroad
Retirement Benefits automatically qualify for Medicare Part A. Medicare Part B
is a voluntary program and all individuals who are eligible for Part A
coverage may elect to enroll in Part B. The Company is an authorized provider
eligible to receive direct reimbursement under Medicare Part A and B in
certain geographic locations. Health care providers such as the Company must
meet "conditions of participation" to receive Medicare payments. The
conditions of participation are federal requirements intended to ensure the
quality of the medically necessary services provided.
Part A providers are required to sign provider agreements to participate in
Medicare.
Under Medicare Part B, the beneficiary must pay an annual deductible amount
before Medicare will make any payments. After the Medicare Part B deductible
is satisfied, Medicare ordinarily will pay 80% of the Medicare approved
payment amount, and the beneficiary is responsible for paying the remaining
20%. Medicare has developed approved forms for submission of bills and claims.
Regulation
General. The Company's health care services business is subject to extensive
and frequently changing state and federal regulation. The Company is subject
to state laws governing and regulating several aspects of its business,
including home health care, durable medical equipment and home infusion
therapy services (including certificates of need and licensure requirements in
certain states) and dispensing, distributing and compounding of prescription
products. The Company also is subject to certain state laws prohibiting the
payment of remuneration for patient or business referrals and the provision of
services where a financial relationship exists between a referring physician
and the entity providing the service. Federal laws governing the Company's
activities include regulations of pharmacy operations and regulations under
the Medicare and Medicaid programs relating to,
13
among other things, certification of home health agencies and reimbursement.
In addition, federal fraud and abuse laws prohibit or restrict, among other
things, the payment of remuneration to parties in a position to influence or
cause the referral of patients or business, as well as the filing of false
claims.
New laws and regulations are enacted from time to time to regulate new and
existing services and products in the home health care industry. Changes in
the law or new interpretations of existing laws also could have an adverse
effect on the Company's methods and costs of doing business. Further, failure
of the Company to comply with such laws could adversely affect the Company's
ability to continue to provide, or receive reimbursement for, its equipment
and services, and also could subject the Company and its officers and
employees to civil and criminal penalties. There can be no assurance that the
Company will not encounter regulatory impediments that could adversely affect
its ability to open new branch offices and to expand the services currently
provided at its existing branch offices.
Set forth below is a more detailed discussion of certain factors related to
federal and state regulation of the Company and its business.
Medicare and Medicaid Regulations. As a provider of services to the Medicare
and Medicaid programs, the Company is subject to federal and state laws and
regulations governing reimbursement procedure and practices. These laws
include the Medicare and Medicaid fraud and abuse statutes and regulations,
which prohibit the payment or receipt of any form of remuneration in return
for referring business or patients to providers of services for which payments
are made by a government health care program. Violation of these laws may
result in civil and criminal penalties, including substantial fines, loss of
the right to participate in the Medicare and Medicaid programs and
imprisonment. In addition, the Government enacted the Health Insurance
Portability and Accountability Act of 1996 ("HIPAA"), expanding the
government's fraud and abuse enforcement powers. HIPPA, among other
provisions, expands the Government's efforts for prosecuting fraud and abuse
beyond Medicare and Medicaid to all payors; makes exclusion from the Medicare
and Medicaid programs mandatory for a minimum of five years for any felony
conviction relating to fraud; requires that organizations contracting with
another organization or individual take steps to be informed as to whether the
organization or individual is excluded from Medicare and Medicaid
participation; and enhances civil penalties by increasing the amount of fines
permitted. These laws also include a prohibition on referrals contained in the
Omnibus Budget Reconciliation Act of 1989 (Stark I), which prohibits referrals
by physicians to clinical laboratories where the physician has a financial
interest and further prohibitions contained in the Omnibus Budget
Reconciliation Act of 1993 (Stark II), which prohibits such referrals for a
more extensive range of services, including home health and the supply of
durable medical equipment. While regulations interpreting Stark I have been
issued, regulations interpreting Stark II remain in proposed form to date. In
addition, various federal and state laws impose civil and criminal penalties
against participants in the Medicare or Medicaid programs who make false
claims for payment for services or otherwise engage in false billing
practices.
Many states also have statutes prohibiting the payment or receipt (or the
offer of) anything of value in return for, or to induce, a referral for health
care goods or services. In addition, there are several other statutes that,
although they do not explicitly address payments for referrals, could be
interpreted as prohibiting the practice. While similar in many respects to the
federal laws, these state laws vary from state to state, are often vague and
have sometimes been interpreted inconsistently by courts and regulatory
agencies. Private insurers and various state enforcement agencies also have
increased their scrutiny of health care providers' practices and claims,
particularly in the home health and home medical equipment sectors.
In recent years, enforcement of federal fraud and abuse laws, and regulatory
scrutiny generally, have increasingly focused on the home health care
industry. For example, the government has implemented Operation Restore Trust,
a federal investigatory initiative focused on home health, home medical
equipment and skilled nursing facility providers. It has also implemented
"wedge" audits, which involve a review of a small sample of patient records to
identify non-compliance and project an error rate for all claims in a discrete
period. Periodic and random audits by intermediaries or by State Medicaid
Agencies may result in delays in receipt or adjustments to the amounts of
reimbursement received under the Medicare, Medicaid or Medicaid Waiver
Programs. There
14
can be no assurance that the Company will not become the subject of a
regulatory or other investigation or proceeding or that its interpretations of
applicable health care laws and regulations will not be challenged. The
defense of any such challenge could result in substantial cost to the Company,
diversion of management's time and attention, and could have a material
adverse effect on the Company.
Medicare Certification. Federal regulations governing the Medicare program
are also applicable to the Company. Regulations for Medicare reimbursement
include an annual review of health care facilities and personnel and provide
criteria for coverage and reimbursement. The Company is Medicare certified to
provide nursing services in 13 states.
Permits and Licensure. Many states require licensure of companies providing
pharmacy services, home health care services, home infusion therapy products
and services and other products and services of the type offered by the
Company. The Company currently is licensed as a home health agency in 13
states, is licensed as a home care agency in 13 states and is licensed as a
pharmacy in seven states. The Company provides unit dose medications by mail
order to various states. The Company has obtained or, in certain cases, is in
the process of obtaining, licenses for its mail order services from such
states.
Certificates of Need. A number of states require companies providing home
health care services, home infusion therapy and other services of the type
offered by the Company to have a certificate of need issued by the state's
health planning agency. Certificates of need are often difficult to obtain and
in many instances are not obtainable at all (because an area is determined to
be adequately served by existing providers or for other reasons). If the
Company commences operations in a state, or expands its operations in a state
where it is currently operating, and those operations require a certificate of
need, the Company will be required to obtain such certificates of need with
respect to those operations. The Company currently has certificates of need in
6 states. There can be no assurance that the Company will be able to obtain
other required certificates of need, and, if so required, the Company will
incur expenses in connection with attempting to obtain a certificate of need.
Other Proposed Regulations
Certain other regulations which may increase the cost to the Company of
service delivery have been proposed. The Occupational Safety and Health
Administration (OSHA) in 1999 revised its directives on inspection and
enforcement of the bloodborne pathogen standards. OSHA also issued a proposed
rule for an ergonomics program standard in November 1999. The rule is specific
to work-related injuries and establishes new workplace requirements, which, if
enacted, will impact home health agencies and their employees. The proposed
rule estimates the yearly cost per home health agency at $8,643. The final
ergonomics rules were published on or about November 14, 2000. Industry trade
groups have filed extensive comments urging an exemption for home care and
home medical equipment providers based on the lack of control such employers
have on the home work environment.
HIPAA mandates, for all healthcare providers, standardization in the use,
storage and transfer of electronically transmitted health care data. HIPAA
additionally requires that healthcare providers, payors and clearing houses
adopt detailed new procedures for insuring the privacy and security of
electronically transmitted healthcare information. While the transaction
standards and data-set regulations have been finalized, the privacy and
security regulations are not yet final, and a delay in the latter may postpone
the effective date of the transaction standards and data-set rules. As
currently proposed, the regulations give healthcare providers a period of two
years from the effective date of the final rules to achieve compliance with
the rules' requirements. The effect of HIPAA's regulation of electronically
transmitted healthcare information is not yet fully known, since a large
portion of the regulations remain in proposed form only. However, there can be
no assurance that these and other changes will not materially and adversely
affect the business and financial condition of the Company.
15
Health Care Reform
In recent years, the health care industry has undergone significant changes
driven by various efforts to reduce costs, including efforts at national
health care reform, trends toward managed care, limits in Medicare coverage
and reimbursement levels, consolidation of health care distribution companies
and collective purchasing arrangements by office-based health care
practitioners. The impact of third-party pricing pressures and low barriers to
entry have dramatically reduced profit margins for health care providers.
Continued growth in managed care and capitated plans have pressured health
care providers to find ways of becoming more cost competitive. This has also
led to consolidation of health care providers in the Company's market areas.
The Company's potential inability to react effectively to these and other
changes in the health care industry could adversely affect its operating
results. The Company cannot predict whether any health care reform efforts
will be enacted and what effect any such reforms may have on the Company or
its customers and suppliers.
In addition, political, economic and regulatory influences are subjecting
the health care industry in the United States to extensive and dynamic change,
and many competing proposals have been introduced in Congress and various
state legislatures to reform the present health care system. It is possible
that health care reform at the federal or state level, whether implemented
through legislation or through action by federal or state administrative
agencies, would require the Company to make significant changes in the way it
conducts business. Certain aspects of health care reform such as proposed
reductions in Medicare and Medicaid payments, if successfully developed and
adopted, could have a material effect upon the Company's business. The Company
anticipates that Congress and state legislatures will continue to review and
assess alternatives to health care delivery and payment methodologies, and
public debate of these issues will likely continue in the future. It is not
possible at this time to predict what, if any, further reforms will be
adopted, or when such reforms will be adopted and implemented. No assurance
can be given that any such reforms will not have a material adverse effect
upon the Company's business, results of operations, and financial condition.
These and any further changes in laws impacting oxygen services and supplies
could have an impact on the Company's business. In addition, the effect that
these changes ultimately will have on the home health industry cannot be
quantified at this time. There can be no assurance that these and other
changes mandated by BBA 1997, even in view of the November 1999 Medicare
Balanced Budget Refinement Act, will not adversely affect the business and
financial condition of the Company.
Competition
Pediatric and Other Health Care. The markets for the Company's health care
services are highly competitive and are divided among a large number of
providers, some of which are national providers, but most of which are either
regional or local providers. In addition to competing with other home health
care companies focusing on providing services to pediatric patients, the
Company competes with several large national home health care companies that,
while not focusing primarily on the pediatric patient, provide pediatric home
health care services as part of a broader service offering. Certain of the
Company's competitors and potential competitors have significantly greater
financial, technical sales and marketing resources than the Company and may,
in certain locations, possess licenses or certificates that permit them to
provide services that the Company cannot currently provide. There can be no
assurance that the Company will not encounter increased competition in the
future that could limit the Company's ability to maintain or increase its
business and could adversely affect the Company's operating results.
In addition to its traditional competitors, other types of health care
providers, including hospitals, physician groups and home health agencies,
have entered, and may continue to enter, the Company's business. Relatively
few barriers to entry exist in the home health care industry in states that do
not require a certificate of need.
The Company competes for referrals primarily based on quality of care and
service, reputation with referring health care professionals, ability to
develop and maintain contacts with referral sources and price of services. The
Company believes that its specialization in pediatric home health care, as
well as its coordinated
16
care approach to home health care services, broadens its appeal to local
health care professionals and to managed care organizations. There can be no
assurance that the Company will not encounter increased competition in the
future that could limit the Company's ability to maintain or increase its
business and could adversely affect the Company's operating results.
Employees
As of September 30, 2000, the Company's health care and related services
operations employed, or had on registry approximately 3,895 licensed or
credentialed nurses, therapists and pharmacists, and approximately 913 full-
time employees and 278 part-time employees. The Company believes that its
relationship with its employees is good.
Environmental Matters
Medical facilities are subject to a wide variety of federal, state and local
environmental and occupational health and safety laws and regulations, such as
air and water quality control requirements, waste management requirements and
requirements for training employees in the proper handling and management of
hazardous materials and wastes. The typical branch office facility operations
include, but are not limited to, the handling, use, storage, transportation,
disposal and/or discharge of hazardous, toxic, infectious, flammable and other
hazardous materials, waste, pollutants or contaminants. These activities may
result in injury to individuals or damage to property or the environment and
may result in legal liability damages, injunctions, fines, penalties or other
governmental agency actions. The Company is not aware of any pending or
threatened claim, investigation or enforcement action regarding environmental
issues which, if determined adversely to the Company, would have a material
adverse effect upon the capital expenditures, earnings, or competitive
position of the Company.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in Norcross, Georgia
and consist of approximately 60,000 square feet of office space. The lease
term on the facility expires in 2008. The Company's health care operations
include 100 branch offices in 22 states. Branch offices typically are located
in office parks or complexes and average approximately 2,500 square feet.
Generally, each health care facility is a combination warehouse and office.
Lease terms on branch offices are generally three years or less. The Company
believes that its current facilities are suitable for and adequate to support
the level of its present operations.
ITEM 3. LEGAL PROCEEDINGS
On March 11, 1999, a putative class action complaint was filed against the
Company in the United States District Court for the Northern District of
Georgia. The Company and certain of its then current officers and directors
were named as defendants. To the Company's knowledge, no other putative class
action complaints were filed within the 60 day time period provided for in the
Private Securities Litigation Reform Act. The plaintiffs and their counsel
were appointed lead plaintiffs and lead counsel, and an amended complaint was
filed on or about July 22, 1999. In the amended complaint, the Company's
auditors, Ernst & Young LLP, were also named as a defendant.
In general, the plaintiffs allege that prior to the decline in the price of
the Company's Common Stock on July 28, 1998, there were violations of the
Federal Securities Laws arising from misstatements of material information in
and/or omissions of material information from certain of the Company's
securities filings and other public disclosures principally related to its
reporting of accounts receivable and the allowance for doubtful accounts. The
amended complaint purports to expand the class to include all persons who
purchased the Company's Common Stock during the period from July 29, 1997
through and including July 29, 1998. On October 8, 1999, the Company and the
individuals named as defendants moved to dismiss the amended complaint on both
substantive and procedural grounds. On March 30, 2000, the Court denied the
Company's motion to dismiss. On May 15, 2000, the Company and the individuals
named as defendants filed their answer to the complaint, denying liability.
17
On October 15, 2000, the Company and the individuals named as Defendants filed
a Brief in Opposition to Plaintiffs' Motion for Class Certification, which was
filed in June, 2000. The Court has not yet ruled on that Motion. Discovery in
the case is proceeding. The Company and the individuals named as defendants
deny that they have violated any of the requirements or obligations of the
Federal Securities Laws.
On July 28, 1999, a civil action was filed against the Company and certain
of its current and former officers and directors in the United States District
Court for the Middle District of Tennessee. The action was filed by Phyllis T.
Craighead and Healthmark Partners, LLC, as well as a liquidating trust
apparently established to wind up the business affairs of their corporation,
Kids and Nurses, Inc. In the original complaint, in general, the plaintiffs
allege 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 attorney's fees. On September 24,
1999, the defendants filed a motion to dismiss the complaint on both
substantive and procedural grounds. On December 20, 1999, the plaintiffs filed
an amended complaint in which they withdrew their claims under the Federal
securities laws, and added claims under Georgia's securities laws. The
plaintiffs also filed a brief in response to the Company's motion to dismiss.
On February 1, 2000, the defendants filed an amended motion to dismiss
addressing the allegations of the amended complaint. The motion to dismiss is
currently pending before the Court. The Company and the individuals named as
defendants deny that they have violated any of the requirements or obligations
of any applicable Federal or State Securities Laws, or any other applicable
law.
In the opinion of the Company's management, the ultimate disposition of
these two lawsuits should not have a material adverse effect on the Company's
financial condition or results of operations, however, there can be no
assurance that the Company will not sustain material liability as a result of
or related to these lawsuits.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the Company's fiscal year ended September 30,
2000, no matter was submitted to a vote of the Company's stockholders through
the solicitation of proxies or otherwise.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below, in accordance with General Instruction G(3) of Form 10-K
and Instruction 3 to Item 401(b) of Regulation S-K, is certain information
regarding the executive officers of the Company including their ages as of
December 1, 2000, their principal occupations for at least the past five
years, the year in which each was elected and any directorships held by them
in other public companies.
Joseph D. Sansone (57) has been Chairman of the Board of Directors,
President and Chief Executive Officer of the Company since its formation in
1989. From 1987 until the formation of the Company, Mr. Sansone was President
of Ambulatory Services of America, Inc. ("ASA"), a wholly-owned subsidiary of
Charter Medical, the Company's former parent. Prior to joining Charter
Medical, Mr. Sansone was employed by American Medical International, Inc.
("AMI"). From 1985 to 1987, Mr. Sansone also served as Vice President of AMI
Home Health Equipment Centers, a division of AMI specializing in durable
medical equipment sales and rentals.
James M. McNeill (42) joined the Company in 1996. Mr. McNeill has been
Senior Vice President, Chief Financial Officer, Secretary and Treasurer of the
Company since April, 1999. Mr. McNeill served as Chief Accounting Officer of
the Company from July, 1997 to April, 1999. Prior to joining the Company, Mr.
McNeill was employed in a senior financial management position in the
agribusiness industry from 1991 to 1995.
John M. Harrington (49) joined the Company in July, 2000 as Chief Operating
Officer. Prior to joining the Company, Mr. Harrington served as Area Vice
President for Coram Healthcare from October, 1996 to July, 2000 and Region
Manager for Apria Healthcare from January, 1993 to October, 1996.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
At December 1, 2000, there were approximately 97 shareholders of record and
an estimated 1600 beneficial owners holding stock in nominee or "street" name.
The Company has paid no dividends on its Common Stock. The Company intends to
retain any future earnings to finance the growth and development of its
business and, therefore, does not anticipate paying any cash dividends in the
foreseeable future.
Price Range of Common Stock
The Company's Common Stock trades on the Over-the-Counter Bulletin Board
under the Symbol "PSAI". The following table sets forth the quarterly high and
low closing sale prices for the Common Stock for the periods indicated through
September 30, 2000.
High Low
----- -----
2000
First Quarter............................................... $1.47 $0.72
Second Quarter.............................................. $2.00 $0.75
Third Quarter............................................... $2.75 $1.25
Fourth Quarter.............................................. $4.81 $1.63
1999
First Quarter............................................... $5.44 $2.13
Second Quarter.............................................. $3.69 $1.13
Third Quarter............................................... $2.25 $1.25
Fourth Quarter.............................................. $1.88 $1.00
19
ITEM 6. SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA
Year ended September 30,
------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(in thousands, except per share data)
Statement of operations
data(1)(2):
Net revenue.................. $186,366 $214,353 $222,182 $177,979 $144,798
Operating salaries, wages and
employee benefits........... 85,661 103,687 109,720 86,903 71,270
Other operating costs........ 68,205 74,785 73,339 52,613 43,752
Corporate, general and
administrative.............. 18,551 18,509 16,370 12,885 10,784
Provision for doubtful
accounts.................... 6,382 21,587 22,963 6,239 4,708
Depreciation and
amortization................ 8,050 8,826 7,824 5,924 4,720
Impairment of intangible
assets...................... -- 29,464 -- -- --
Business combination costs... -- -- -- -- 1,166
-------- -------- -------- -------- --------
Operating (loss) income...... (483) (42,505) (8,034) 13,415 8,398
Interest income.............. 575 -- -- -- --
Interest expense............. (7,609) (14,912) (8,956) (3,534) (1,761)
Loss on sale of business..... -- (1,041) -- -- --
Other income................. 61 581 -- -- --
-------- -------- -------- -------- --------
Income (loss) from continuing
operations, before minority
interest and income tax
expense (benefit)........... (7,456) (57,877) (16,990) 9,881 6,637
Minority interest in loss of
subsidiary.................. -- 174 68 119 64
-------- -------- -------- -------- --------
Income (loss) from continuing
operations, before income
tax expense (benefit)....... (7,456) (57,703) (16,922) 10,000 6,701
Income tax expense
(benefit)................... -- -- (7,205) 4,014 2,739
-------- -------- -------- -------- --------
Income (loss) from continuing
operations.................. (7,456) (57,703) (9,717) 5,986 3,962
Income from discontinued
operations, net of tax...... -- 2,581 3,425 1,269 1,084
Gain on disposal of
discontinued operations..... 25,802 -- -- -- --
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item.......... 18,346 (55,122) (6,292) 7,255 5,046
Extraordinary item, gain on
early extinguishment of
debt........................ 10,299 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)............ $ 28,645 $(55,122) $ (6,292) $ 7,255 $ 5,046
======== ======== ======== ======== ========
Net income (loss)
attributable to common and
common equivalent shares:
Income (loss) before
extraordinary item.......... $ 18,346 $(55,122) $ (6,292) $ 7,255 $ 5,046
Less accretion on redeemable
preferred stock............. -- -- -- -- (10)
Less preferred stock
dividends................... -- -- -- -- (86)
-------- -------- -------- -------- --------
Income (loss) before
extraordinary item
attributable to common and
common equivalent shares.... 18,346 (55,122) (6,292) 7,255 4,950
Extraordinary item........... 10,299 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)
attributable to common and
common equivalent shares.... $ 28,645 $(55,122) $ (6,292) $ 7,255 $ 4,950
======== ======== ======== ======== ========
Denominator share data(2):
Denominator for basic income
(loss) per share-weighted
average shares.............. 6,655 6,652 6,911 6,257 6,057
Effect of dilutive
securities:
Warrants and options......... -- -- -- 189 243
Redeemable convertible
preferred stock............. -- -- -- -- 137
-------- -------- -------- -------- --------
Denominator for diluted
income (loss) per share-
adjusted weighted average
shares...................... 6,655 6,652 6,911 6,446 6,437
======== ======== ======== ======== ========
Income (loss) per share
data(3):
Basic net income (loss) per
share data:
Income (loss) from
continuing operations...... $ (1.12) $ (8.67) $ (1.41) $ 0.96 $ 0.64
Income from discontinued
operations, net of tax..... -- 0.38 0.50 0.20 0.18
Gain on disposal of
discontinued operations.... 3.87 -- -- -- --
Extraordinary item.......... 1.55 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)........... $ 4.30 $ (8.29) $ (0.91) $ 1.16 $ 0.82
======== ======== ======== ======== ========
Diluted net income (loss) per
share data:
Income (loss) from
continuing operations...... $ (1.12) $ (8.67) $ (1.41) $ 0.93 $ 0.60
Income from discontinued
operations, net of tax..... -- 0.38 0.50 0.20 0.17
Gain on disposal of
discontinued operations.... 3.87 -- -- -- --
Extraordinary item.......... 1.55 -- -- -- --
-------- -------- -------- -------- --------
Net income (loss)........... $ 4.30 $ (8.29) $ (0.91) $ 1.13 $ 0.77
======== ======== ======== ======== ========
Balance sheet data:
Working capital.............. $ 34,339 $ 60,609 $ 75,381 $ 62,193 $ 35,673
Total assets................. 105,593 177,631 234,072 153,834 98,736
Long-term obligations, net of
current portion............. 45,489 137,297 127,787 65,012 23,638
Total stockholders' equity... 35,531 6,886 63,683 61,680 54,193
- -------
(1) All amounts have been restated to reflect the Company's paramedical
testing business, Paramedical Services of America, Inc., as a discontinued
operation.
(2) The consolidated financial information has been restated for the effect of
the business combination on February 29, 1996 of the Company and Premier
Medical Services, Inc. accounted for using the pooling-of-interests
method.
(3) All earnings per share information has been restated to conform with
Financial Accounting Standards Board ("FASB") Statement No. 128.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Selected
Consolidated Financial Data and the audited Consolidated Financial Statements
of the Company included in this report.
Recent Developments
Throughout fiscal 2000, the Company's senior management continued
implementation of its strategic plan (the "Plan") to improve the Company's
performance. The primary focus of the Plan is to redirect the Company to its
core businesses, the pediatric home health care and adult respiratory
businesses.
The Company made progress on multiple operating initiatives contained within
the Plan. The Company continued to evaluate its portfolio of managed care
contracts with the intent to cancel or renegotiate those with minimal
profitability and cash flow performance. The Company has met with multiple
payors in key markets to strengthen relationships and to focus contracting
objectives upon the Company's profitability and cash flow criteria. As
contracts reach their respective renewal dates, the Company intends to base
its decision to renew such contracts upon the previously mentioned criteria.
The possibility exists that certain contracts will, nevertheless, not be
renewed resulting in future revenue reductions. The Company continues to focus
its marketing efforts on its core competencies on a local market basis to
facilitate future internal revenue growth. While there will continue to be
revenue from non-core services previously marketed, the Company anticipates
these amounts will continue to decline and hopes to offset this decline with
internally generated revenue growth within the core services from the results
of its investment in additional marketing staff, geographic expansion of
nursing services and related programs. The Company continues to refine its
best practices methodology for assessing and improving branch office
performance. In response to best practices findings to date, ongoing
organizational changes are occurring. Additionally, the Company has invested
significantly in its reimbursement organization by, among other things, hiring
more experienced senior managers, increasing incentive compensation for
billing and collection teams and improving its reporting and analysis
capabilities.
Although the Plan has delivered positive results to date and is expected to
reduce future operating costs, stimulate future revenue growth and improve
cash flow, there can be no assurance that the Company will be able to achieve
the expected future results from the Plan without negatively impacting
operations.
Results of Operations
Due to the nature of the industry and the reimbursement environment in which
the Company operates, certain estimates are required in recording net revenue.
Inherent in these estimates is the risk that net revenue will have to be
revised or updated, with the changes recorded in subsequent periods as
additional information becomes available to management.
21
The following table sets forth, for the periods indicated, the percentage of
net revenue for continuing operations represented by the following items:
Year Ended
September 30,
---------------------
2000 1999 1998
----- ----- -----
Net revenue........................................ 100.0% 100.0% 100.0%
Operating salaries, wages and employee benefits.... 46.0 48.4 49.4
Other operating costs.............................. 36.6 34.9 33.0
Corporate, general and administrative.............. 9.9 8.6 7.4
Provision for doubtful accounts.................... 3.4 10.1 10.3
Depreciation and amortization...................... 4.3 4.1 3.5
Impairment of intangible assets.................... -- 13.7 --
----- ----- -----
Operating loss..................................... (0.2) (19.8) (3.6)
Interest income.................................... 0.3 -- --
Interest expense................................... (4.1) (7.0) (4.0)
Loss on sale of business........................... -- (0.5) --
Other income....................................... -- 0.3 --
----- ----- -----
Loss from continuing operations, before minority
interest and income tax benefit................... (4.0) (27.0) (7.6)
Minority interest in loss of subsidiary............ -- (0.1) (0.0)
----- ----- -----
Loss from continuing operations, before income tax
benefit........................................... (4.0) (26.9) (7.6)
Income tax benefit................................. -- -- (3.2)
----- ----- -----
Loss from continuing operations.................... (4.0)% (26.9)% (4.4)%
===== ===== =====
Fiscal 2000 Compared to Fiscal 1999
Net revenue decreased $28.0 million, or 13%, to $186.4 million in fiscal
2000 from $214.4 million in fiscal 1999. The reduction in revenue reflects the
continued efforts to reduce non-core and/or non-profitable products and
services consistent with the Plan. Of the $28.0 million decrease in net
revenue for fiscal 2000, pediatric health care net revenue accounted for $15.1
million, primarily attributable to the closure of select locations. Adult
health care net revenue accounted for a decrease of $12.9 million for fiscal
2000, primarily as a result of the sale of the medical staffing business and
the Company's continued shift away from adult nursing services. In fiscal
2000, the Company derived approximately 50% of its net revenue from commercial
insurers and other private payors, 43% from Medicaid and 7% from Medicare.
Operating salaries, wages and employee benefits consist primarily of branch
office employee costs. Operating salaries, wages and employee benefits
decreased $18.0 million, or 17%, to $85.7 million in fiscal 2000 from $103.7
million in fiscal 1999. Labor costs have decreased across all services as a
result of headcount reductions and reduced nursing services primarily
attributable to the closure and sale of select nursing locations and an
increase in unstaffed hours due to the nursing shortage in selected markets.
However, due to the impact of the nursing shortage in selected markets,
location scheduling efficiencies have declined resulting in higher overtime
costs. As a percentage of net revenue, operating salaries, wages and employee
benefits for fiscal 2000 decreased to 46% from 48% in fiscal 1999.
Other operating costs include medical supplies, branch office rent,
utilities, vehicle expenses, allocated insurance costs and cost of sales. Cost
of sales consists primarily of the costs of pharmaceuticals and related
services. Other operating costs decreased $6.6 million, or 9%, to $68.2
million in fiscal 2000, from $74.8 million in fiscal 1999. As a percentage of
net revenue, other operating costs for fiscal 2000, increased to 37% from 35%
in fiscal 1999. The increase primarily relates to increased costs for infusion
services and the impact of branch office fixed costs relative to the decline
in net revenue in fiscal 2000 as compared to fiscal 1999.
22
Corporate, general and administrative costs were essentially unchanged at
$18.6 million in fiscal 2000, as compared to $18.5 million in fiscal 1999. As
a percentage of net revenue, corporate, general and administrative costs for
fiscal 2000, increased to 10% from 9% in fiscal 1999. The Company has chosen
to selectively invest in key areas where improvements have a tangible impact
on cash flow from operations. In addition, there are certain non-labor fixed
costs necessary to sustain the Company's infrastructure. As the Company's Plan
impacts future periods, certain of these costs have the potential to be
reduced, though there can be no guarantees.
Provision for doubtful accounts decreased $15.2 million, or 70%, to $6.4
million in fiscal 2000, from $21.6 million in fiscal 1999. The decrease was
caused by improved cash collections throughout fiscal 2000 as a result of the
Plan.
Depreciation and amortization decreased $0.8 million, or 9%, to $8.0 million
in fiscal 2000 from $8.8 million in fiscal 1999. As a percentage of the
Company's net revenue, depreciation and amortization costs for fiscal 2000
increased slightly compared to fiscal 1999.
Interest expense decreased $7.3 million, or 49%, to $7.6 million in fiscal
2000, from $14.9 million in fiscal 1999. The Company's average debt
outstanding decreased $67.8 million as the amount outstanding under the Credit
Agreement was paid down to zero on November 1, 1999 and the Company completed
a series of transactions to repurchase $29.6 million of the $75.0 million
Notes during fiscal 2000.
Interest income increased $0.6 million in fiscal 2000. The Company invested
its excess cash balances in highly liquid investments.
For fiscal 2000, the Company had a current income tax expense of $2.7
million which was offset by the reduction of the valuation allowance related
to the deferred tax asset resulting in zero income tax expense. The Company
recorded a partial valuation allowance against the net deferred tax assets as
of September 30, 2000. In recording the valuation allowance, management
considered whether it is more likely than not that some or all of the deferred
tax assets will be realized. This analysis includes considering scheduled
reversal of deferred tax liabilities, projected future taxable income,
carryback potential and tax planning strategies. Management concluded that the
net deferred tax asset required a partial valuation allowance as of September
30, 2000.
Fiscal 1999 Compared to Fiscal 1998
Net revenue decreased $7.8 million, or 4%, to $214.4 million in fiscal 1999
from $222.2 million in fiscal 1998. The reduction in revenue reflects the
continued efforts to reduce non-core and/or non-profitable products and
services consistent with the Plan. Of the $7.8 million decrease in net revenue
for fiscal 1999, pediatric health care net revenue accounted for $1.6 million,
primarily attributable to the closure of select locations. Adult health care
net revenue accounted for a decrease of $6.2 million for fiscal 1999. The
decline in net revenue was primarily the result of the Company's efforts in
terminating unprofitable adult infusion services contracts during fiscal 1999
and the sale of the medical staffing business. In fiscal 1999, the Company
derived approximately 57% of its net revenue from commercial insurers and
other private payors, 36% from Medicaid and 7% from Medicare.
Operating salaries, wages and employee benefits consist primarily of branch
office employee costs. Operating salaries, wages and employee benefits
decreased $6.0 million, or 6%, to $103.7 million in fiscal 1999 from $109.7
million in fiscal 1998. Labor costs have decreased across all services as a
result of headcount reductions and reduced nursing services primarily
attributable to the closure and sale of select nursing locations. As a
percentage of net revenue, operating salaries, wages and employee benefits for
fiscal 1999 decreased to 48% from 49% in fiscal 1998.
Other operating costs include medical supplies, branch office rent,
utilities, vehicle expenses and cost of sales. Cost of sales consists
primarily of the costs of pharmaceutical and related services sold. Other
operating costs increased $1.5 million, or 2%, to $74.8 million in fiscal
1999, from $73.3 million in fiscal 1998. As a
23
percentage of net revenue, other operating costs for fiscal 1999, increased to
35% from 33% in fiscal 1998. The increase primarily relates to increased costs
for infusion services and the remaining fixed costs incurred during the
closure of select locations.
Corporate, general and administrative costs increased $2.1 million, or 13%,
to $18.5 million in fiscal 1999, from $16.4 million in fiscal 1998. As a
percentage of net revenue, corporate, general and administrative costs for
fiscal 1999, increased to 9% from 7% in fiscal 1998. The Company continues to
experience turnover within the reimbursement department and management
anticipates further turnover in the short term. This turnover has resulted in
increased recruiting, overtime and temporary labor costs. In addition, the
Company incurred costs to improve the functionality of and to respond to due
diligence inquiries about the paramedical testing division's case management
and billing system.
Provision for doubtful accounts decreased $1.4 million, or 6%, to $21.6
million in fiscal 1999, from $23.0 million in fiscal 1998. During fiscal 1999,
the Company recorded provision levels consistent with current industry
reimbursement conditions. Although the Company has experienced improved cash
collections throughout fiscal 1999, these provision levels were deemed to be
appropriate.
Depreciation and amortization increased $1.0 million, or 13%, to $8.8
million in fiscal 1999 from $7.8 million in fiscal 1998. As a percentage of
the Company's net revenue, depreciation and amortization costs for fiscal 1999
increased slightly compared to fiscal 1998. The increase in amortization costs
is due to the decrease in the amortization period for intangible assets from
30 and 25 years to 20 years.
Impairment of intangible assets was recorded during fiscal 1999. The
impairment resulted in part from an assessment of the impact of disposing of
certain non-core business locations and activities as defined in the Company's
Plan formulated in the second quarter of fiscal 1999. Additionally, certain
locations were negatively impacted by the cancellation of certain large
contracts which impacted the future profitability of the locations. Finally,
certain market conditions of fiscal 1999, as well as ongoing failure of the
Company to meet management projections, declining gross margins, recurring
location operating losses and slower than expected progress in improving
certain locations' collections were identified by management as indications of
potential intangible asset impairment. Management conducted an evaluation of
the carrying value of the Company's recorded intangible assets based on an
estimate of future cash flows at each location. Management considered current
and anticipated industry conditions and recent changes in its business
strategies and concluded that an impairment charge of $29.5 million was
appropriate. The charge includes a write-off of $7.9 million in goodwill and
$2.2 million in certificates of need associated with the specific locations
closed in fiscal 1999 and an additional $19.4 million in goodwill related to
changes within certain locations arising from the cancellation of certain
contracts which impacted location profitability, the termination of certain
non-core activities and the competitive conditions of certain local markets.
Interest expense increased $6.0 million, or 67%, to $14.9 million in fiscal
1999, from $9.0 million in fiscal 1998. The Company's average debt outstanding
increased $35.6 million to finance the Company's working capital needs
compared to the prior fiscal year. The increase in interest expense was also
due to an increase in interest rates related to the Company's issuance of its
10% Senior Subordinated Notes due 2008 and the increase in the interest rates
under Amendment No. 5 of the Credit Agreement.
During fiscal 1999, the Company recorded a loss on the sale of the Company's
medical staffing business in the Mid-Atlantic Region to Medical Staffing
Network, Inc. As part of the implementation of the Plan, this business was
defined as part of the non-core activities of the Company. The assets were
sold for a total cash price of $1.8 million and the Company recorded a loss of
$1.0 million. In addition, the Company sold the assets of one of its Texas
equipment locations for a total cash price of $0.2 million.
Income tax benefit decreased $3.3 million to zero in fiscal 1999, from $3.3
million in fiscal 1998. The Company recorded an $18.3 million valuation
allowance against the $18.3 million net deferred tax assets as of September
30, 1999, generated primarily as a result of net operating losses. In
recording the valuation allowance,
24
management considered whether it is more likely than not that some or all of
the deferred tax assets will be realized. This analysis includes considering
scheduled reversal of deferred tax liabilities, projected future taxable
income, carryback potential, and tax planning strategies. Management concluded
that the net deferral tax asset required a full valuation allowance.
Liquidity and Capital Resources
On November 1, 1999, the Company concluded the sale of the assets of its
paramedical testing division to Hooper Holmes, Inc. A portion of the proceeds
were used to pay down to zero all outstanding amounts under the Company's
existing Credit Agreement. Simultaneous with the pay down, the Credit
Agreement was further amended and restated (the "Amended and Restated Loan
Security Agreement").
Subject to the terms and conditions of the Amended and Restated Loan
Security Agreement, the Lender shall make available a total credit facility of
up to $30.0 million. At September 30, 2000, the calculated availability was
$23.6 million. The total credit facility shall be comprised of a revolving
line of credit up to the available limit, consisting of Loans and Letters of
Credit. As of the date of this Report, the Company has no outstanding
borrowings under the Amended and Restated Loan Security Agreement and given
its current cash position does not anticipate making any such borrowings in
the near term.
In connection with the Amended and Restated Loan Security Agreement, the
Company incurred loan costs of approximately $0.3 million. These costs include
amendment fees, legal and professional fees.
During fiscal 2000, the Company completed a series of transactions to
repurchase a total of $29.6 million of the $75.0 million Notes for $18.4
million cash plus accrued interest. The gain (net of the write-off of the
related deferred financing fees) of $10.3 million is reflected as an
extraordinary item in the consolidated statements of operations.
At September 30, 2000, total borrowings under the Notes were approximately
$45.4 million.
Overall cash collections from continuing operations decreased approximately
$0.9 million or 2% during the three months ended September 30, 2000 as
compared to the three months ended September 30, 1999. Cash collections as a
percentage of net revenue for the same three month periods were 109% and 101%,
respectively. The organizational restructuring of the Company's reimbursement
process continues and indications of progress to date are positive. While
management anticipates that continued implementation of the Plan will achieve
the desired results, there can be no assurance that this will result in the
Company realizing operating improvements and improved cash flow.
The Company's investments in property and equipment are attributable largely
to purchases of medical equipment rented to patients and computer equipment.
Capital expenditures for computer equipment and software development, have
been substantially completed. The Company's investment in the acquisition of
businesses was $15.2 million in fiscal 1998. No acquisitions were made in
fiscal 2000 and fiscal 1999.
Management currently believes that its cash on hand, internally generated
funds and current availability under the Amended and Restated Loan Security
Agreement will be more than adequate to satisfy the Company's working capital
requirements for the foreseeable future.
Year 2000 Compliance
Status of Year 2000 Performance
The Company completed its Year 2000 preparations on time and there are no
reportable significant problems as of the date of this Annual Report on Form
10-K. While it appears the Company's information systems correctly
accommodated the Year 2000 date change, computer analysts have indicated that
further Year 2000 problems may linger due to such factors as pay and billing
cycle variations that may occur throughout the year.
25
Importance of Third Party Exposure to the Year 2000
Certain of the Company's systems interface directly with significant third
party vendors and payors including federal Medicare and state Medicaid
agencies. The Company also conducts business electronically with certain
external parties, including some payors and vendors. To date no problems have
arisen related to Year 2000; however, there can be no assurance that future
problems will not arise. Management does not know at this time what impact
Year 2000 compliance had or may continue to have on its payor and vendor
sources and the impact, if any, on the Company.
Risks
Management believes that it has an effective Year 2000 Plan in place to
resolve any further Year 2000 issues in a timely manner. However, the Company
has no means of ensuring that payors, including federal and state Medicare and
Medicaid agencies will not incur additional Year 2000 problems. The inability
of these payors to be Year 2000 compliant could have a material adverse effect
on the Company. In addition, disruptions in the economy resulting from Year
2000 issues could also materially adversely affect the Company, and the
Company could be subject to litigation for systems or equipment failure or
malfunctions relating to Year 2000 problems. The amount of potential liability
and lost revenue cannot be reasonably estimated at this time. However, no
reportable significant problems have been reported as of the date of this
Report.
Quarterly Operating Results and Seasonality
The Company's quarterly results may vary significantly depending primarily
on factors such as rehospitalizations of patients, the timing of new branch
office openings and pricing pressures due to legislative and regulatory
initiatives to contain health care costs. The Company's operating results for
any particular quarter may not be indicative of the results for the full
fiscal year.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's principal financial instruments subject to potential
concentration of credit risk are cash and cash equivalents and accounts
receivable. Cash and cash equivalents are held primarily in one financial
institution. The Company performs periodic evaluations of the relative credit
standing of this financial institution. The 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and supplemental schedule of the
Company and the notes thereto as of September 30, 2000 and 1999, and for each
of the three years in the period ended September 30, 2000, together with the
independent auditors' report thereon are set forth on pages 33-55 of this
Annual Report on Form 10-K and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During the past two fiscal years and the period from October 1, 2000 to the
date hereof, the Company has not changed its independent auditors, and there
have been no reportable disagreements with the Company's auditors regarding
accounting principles or practices or financial disclosure matters.
26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to the directors of the Company set forth under the
captions "Proposal 1--Election of Directors--Nominees for Election as
Directors at the 2001 Annual Meeting" and "Proposal 1--Election of Directors--
Continuing Directors of the Company" in the Company's Proxy Statement for its
2001 Annual Meeting of Stockholders ("2001 Proxy Statement") is incorporated
herein by reference. Information relating to the executive officers of the
Company is, pursuant to Instruction 3 of Item 401(b) of Regulation S-K and
General Instruction G(3) of Form 10-K, set forth at Part I, Item 4(A) of this
Annual Report on Form 10-K under the caption "Executive Officers of the
Registrant." Information regarding compliance by the directors and executive
officers of the Company and owners of more than ten percent of the Company's
Common Stock with the reporting requirements of Section 16(a) of the
Securities Exchange Act of 1934, as amended, set forth under the caption
"Section 16(a) of the Securities Exchange Act Beneficial Ownership Reporting
Compliance" in the 2001 Proxy Statement is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information relating to management compensation set forth under the captions
"Proposal 1--Election of Directors--Directors' Compensation and Attendance",
"Executive Compensation" and "Stock Performance Graph" in the Company's 2001
Proxy Statement is incorporated herein by reference, except for the
information set forth in the section entitled "Executive Compensation--Report
of the Compensation Committee of the Board of Directors on Executive
Compensation" which specifically is not so incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information regarding ownership of the Company's $0.01 par value Common
Stock by certain persons set forth under the caption "Stock Ownership" in the
Company's 2001 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and transactions between the
Company and certain of its affiliates set forth under the caption "Certain
Relationships and Related Transactions" in the Company's 2001 Proxy Statement
is incorporated herein by reference.
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents Filed as Part of this Report.
(1) Financial Statements
The consolidated financial statements of the Company and the related
report of independent auditors thereon which are required to be
filed as part of this Report are included in this Annual Report on
Form 10-K. These consolidated financial statements are as follows:
. Consolidated Balance Sheets as of September 30, 2000 and 1999.
. Consolidated Statements of Operations for the years ended
September 30, 2000, 1999 and 1998.
. Consolidated Statements of Stockholders' Equity for the years
ended September 30, 2000, 1999 and 1998.
. Consolidated Statements of Cash Flows for the years ended
September 30, 2000, 1999 and 1998.
. Notes to Consolidated Financial Statements.
(2) Financial Statement Schedules
The financial statement schedule referred to in Item 8 is described
in the "Index to Financial Statement Schedules" included in this
Report on page 54. All other schedules for which provision is made
in the applicable accounting regulations of the Securities and
Exchange Commission are not required under the related instructions
or are inapplicable and therefore have been omitted.
(3) Exhibits
The following exhibits are filed with this Report. The Company will
furnish any exhibit upon request to Pediatric Services of America,
Inc., 310 Technology Parkway, Norcross, Georgia 30092-2929. There is
a charge of $.50 per page to cover expenses for copying and mailing.
10.9(o) Employment Agreement, dated September 27, 2000, between the Company
and John M. Harrington, filed herewith.
21 Subsidiaries of the Company, filed herewith.
23.1 Consent of Independent Auditors, Ernst & Young LLP, filed herewith.
25 Powers of Attorney, filed herewith.
27 Financial Data Schedule, filed herewith.
(b) Reports on Form 8-K
On July 10, 2000, the Company filed a Current Report on Form 8-K
announcing the appointment of John M. Harrington to the position of
Chief Operating Officer.
28
(c) Exhibits
The following exhibits are filed with or incorporated by reference
in this report. Where such filing is made by incorporation by
reference to a previously filed registration statement or report,
such registration statement or report is identified in parentheses.
2.0 Shareholder Rights Plan dated September 22, 1998 (incorporated by
reference to the Company's Registration Statement on Form 8-A filed
October 13, 1998).
2.1 Rights Agreement dated September 22, 1998, by and between Chase Mellon
Shareholder Services and the Company (incorporated by reference to
Exhibit 2.1 to the Company's Current Report on Form 8-K, dated
September 22, 1998).
2.2 Asset Purchase Agreement, dated August 30, 1999, by among the Company,
its wholly-owned subsidiary, Paramedical Services of America, Inc. and
Hooper Holmes, Inc. (incorporated by reference to Exhibit 2.2 to the
Company's Report on Form 8-K, dated September 2, 1999).
2.3 Amendment to Asset Purchase Agreement, dated November 1, 1999
(incorporated by reference to Exhibit 2.2 to the Company's Report on
Form 8-K, dated November 1, 1999).
3.1 Amended and Restated Certificate of Incorporation of the Company
(incorporated by reference to Exhibit 3.1 to the Company's
Registration Statement on Form S-1 (Registration No. 33-77880) filed
on May 31, 1994).
3.2 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of the Company (incorporated by reference to Exhibit 3.1
to the Company's Quarterly Report on Form 10-Q for the quarter ended
December 31, 1996).
3.3 Bylaws of the Company, as amended and restated (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement on
Form S-1 filed on May 31, 1994).
3.4 Certificate of Correction to Certificate of Amendment of the Amended
and Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended December 31, 1997).
3.5 Amended and Restated Bylaws of the Company, adopted September 22, 1998
(incorporated by reference to Exhibit 3.2 to the Company's Current
Report on Form 8-K dated September 22, 1998).
10.9 Executive Compensation Plans and Arrangements:
(a) Pediatric Services of America, Inc. Amended and Restated Stock
Option Plan, as amended (incorporated by reference to Exhibit
10.7 of the Company's Registration Statement on Form S-1 filed
on May 31, 1994).
(b) Amendment to the Pediatric Services of America, Inc. Amended and
Restated Stock Option Plan, as amended (incorporated by
reference to Exhibit 10.7 of the Company's Registration
Statement on Form S-1 filed on May 31, 1994).
(c) Pediatric Services of America, Inc. Directors' Stock Option
Plan, (incorporated by reference to Exhibit 10.12 of the
Company's Registration Statement on Form S-1 filed on May 31,
1994).
(d) Amendment to the Pediatric Services of America, Inc. Directors'
Stock Option Plan, (incorporated by reference to Exhibit 10.8(d)
of the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1995).
(e) Pediatric Services of America, Inc. 401(k) Savings Plan
(incorporated by reference to Exhibit 10.8 of the Company's
Registration Statement of Form S-1 filed on May 31, 1994).
29
(f) Pediatric Services of America, Inc. Employee Stock Purchase Plan
(incorporated by reference to Exhibit 10.8(f) of the Company's
Annual Report Form 10-K for the fiscal year ended September 30,
1995).
(k) Employment Agreement, dated May 1, 1999 between the Company and
James M. McNeill, (incorporated by reference to Exhibit 10.9(k)
to the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 1999).
(m) Employment Agreement, dated October 1, 1999 between the Company
and Joseph D. Sansone (incorporated by reference to Exhibit
10.9(m) to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1999).
(n) Non-Qualified Deferred Compensation Plan, dated January 1, 2000,
(incorporated by reference to Exhibit 10.9(n) to the Company's
Annual Report of Form 10-K for the fiscal year ended September
30, 1999).
(o) Employment Agreement, dated September 27, 2000 between the
Company and John M. Harrington, filed herewith.
10.14 Credit Agreement, by and among Pediatric Services of America, Inc., a
Georgia corporation, as Borrower, Pediatric Services of America, Inc.,
a Delaware corporation, and Nationsbank, N.A., dated as of August 13,
1997 (incorporated by reference to Exhibit 10.14 to the Company's
Annual Report on Form 10-K for the fiscal year ended September 30,
1997).
10.15 Amendment No. 1 to the Credit Agreement, dated April 16, 1998
(incorporated by reference to Exhibit 10.15 to the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998).
10.16 Amendment No. 2 to the Credit Agreement, dated August 13, 1998
(incorporated by reference to Exhibit 10.16 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
10.17 Security Agreement, dated August 13, 1998 (incorporated by reference
to Exhibit 10.17 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998).
10.18 Amendment No. 3 to the Credit Agreement, dated December 24, 1998
(incorporated by reference to Exhibit 10.18 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998).
10.19 Amendment No. 4 to the Credit Agreement, dated January 8, 1999
(incorporated by reference to Exhibit 10.19 to the Company's Annual
Report on Form 10-K for the fiscal year ended September 30, 1998).
10.20 Amendment No. 5 to the Credit Agreement, dated May 13, 1999
(incorporated by reference to Exhibit 10.20 to the Company's Quarterly
Report on Form 10-Q for the quarter year ended March 31, 1999).
10.21 Amended and Restated Loan and Security Agreement, dated November 1,
1999, by and between the Company and Banc of America Commercial
Finance Corporation, as Lender (incorporated by reference to Exhibit
10.21 to the Company's Current Report on Form 8-K, dated November 1,
1999).
21 Subsidiaries of the Company, filed herewith.
23.1 Consent of Independent Auditors, Ernst & Young LLP, filed herewith.
25 Powers of Attorney, filed herewith.
27 Financial Data Schedule, filed herewith.
30
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Pediatric Services of America, Inc.
(Registrant)
/s/ Joseph D. Sansone
By: _________________________________
Joseph D. Sansone
Chairman of the Board of
Directors,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities set forth on December 15, 2000.
Signature Title Date
--------- ----- ----
/s/ Joseph D. Sansone Chairman of the Board of December 15, 2000
____________________________________ Directors, President and
Joseph D. Sansone Chief Executive Officer
(Principal Executive
Officer)
/s/ James M. McNeill Senior Vice President, Chief December 15, 2000
____________________________________ Financial Officer,
James M. McNeill Secretary and Treasurer
(Principal Financial and
Accounting Officer)
* Director December 15, 2000
____________________________________
Michael J. Finn
* Director December 15, 2000
____________________________________
Adam O. Holzhauer
* Director December 15, 2000
____________________________________
Robert P. Pinkas
* Director December 15, 2000
____________________________________
Richard S. Smith
/s/ James M. McNeill
*By: __________________________
James M. McNeill
(Attorney in Fact)
31
[THIS PAGE INTENTIONALLY LEFT BLANK]
32
PEDIATRIC SERVICES OF AMERICA, INC.
INDEX TO FINANCIAL STATEMENTS
Consolidated Balance Sheets................................................. 34
Consolidated Statements of Operations....................................... 36
Consolidated Statements of Stockholders' Equity............................. 37
Consolidated Statements of Cash Flows....................................... 38
Notes to Consolidated Financial Statements.................................. 39
Report of Independent Auditors.............................................. 53
33
PEDIATRIC SERVICES OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
September 30,
--------------------------
2000 1999
------------ ------------
ASSETS
------
Current assets:
Cash and cash equivalents........................ $ 14,911,637 $ 8,361,480
Accounts receivable, less allowances for doubtful
accounts of $7,628,000 and $14,649,000,
respectively.................................... 35,388,737 55,482,088
Prepaid expenses................................. 656,163 666,497
Income taxes receivable.......................... -- 345,121
Deferred income taxes............................ 3,791,927 --
Other current assets............................. 3,056,984 4,011,177
Net current assets of discontinued operations.... -- 25,191,638
------------ ------------
Total current assets............................... 57,805,448 94,058,001
Property and equipment:
Home care equipment held for rental.............. 27,831,087 30,095,816
Furniture and fixtures........................... 10,226,324 9,813,252
Vehicles......................................... 750,480 804,773
Leasehold improvements........................... 1,039,058 1,031,770
------------ ------------
39,846,949 41,745,611
Accumulated depreciation and amortization........ (27,998,818) (25,070,830)
------------ ------------
11,848,131 16,674,781
Other assets:
Goodwill, less accumulated amortization of
$7,386,000 and $5,159,000, respectively......... 33,932,965 36,160,122
Certificates of need, less accumulated
amortization of $404,000 and $302,000,
respectively.................................... 268,856 370,520
Deferred financing fees, less accumulated
amortization of $549,000 and $1,119,000,
respectively.................................... 1,419,264 2,719,460
Noncompete agreements, less accumulated
amortization of $1,084,000 and $1,032,000,
respectively.................................... 76,111 28,333
Other............................................ 241,976 367,083
Non-current assets of discontinued operations.... -- 27,252,843
------------ ------------
35,939,172 66,898,361
------------ ------------
Total assets....................................... $105,592,751 $177,631,143
============ ============
See accompanying notes.
34
PEDIATRIC SERVICES OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS--(Continued)
September 30,
--------------------------
2000 1999
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................. $ 5,476,809 $ 9,126,255
Accrued compensation............................. 5,513,140 9,116,023
Income taxes..................................... 610,239 --
Accrued insurance................................ 5,001,839 4,601,629
Other accrued liabilities........................ 6,178,733 8,717,825
Deferred revenue................................. 618,086 714,381
Current maturities of long-term obligations to
related parties................................. 50,000 1,141,479
Current maturities of long-term obligations...... 17,673 31,029
------------ ------------
Total current liabilities.......................... 23,466,519 33,448,621
Long-term obligations to related parties, net of
current maturities................................ 50,000 25,000
Long-term obligations, net of current maturities... 45,438,601 137,271,548
Deferred income taxes.............................. 1,106,451 --
Stockholders' equity:
Preferred stock, $.01 par value, 2,000,000 shares
authorized, no shares issued and outstanding.... -- --
Common stock, $.01 par value, 80,000,000 shares
authorized, 6,658,305 and 6,652,005 shares
issued and outstanding in 2000 and 1999,
respectively.................................... 66,583 66,520
Additional paid-in capital....................... 48,362,619 48,362,234
Retained deficit................................. (12,898,022) (41,542,780)
------------ ------------
Total stockholders' equity......................... 35,531,180 6,885,974
------------ ------------
Total liabilities and stockholders' equity......... $105,592,751 $177,631,143
============ ============
See accompanying notes.
35
PEDIATRIC SERVICES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year ended September 30,
----------------------------------------
2000 1999 1998
------------ ------------ ------------
Net revenue ........................ $186,366,015 $214,352,919 $222,182,337
Costs and expenses:
Operating salaries, wages and
employee benefits................ 85,661,494 103,687,280 109,720,240
Other operating costs............. 68,205,250 74,785,239 73,338,718
Corporate, general and
administrative................... 18,550,647 18,508,667 16,369,904
Provision for doubtful accounts... 6,381,840 21,587,031 22,963,191
Depreciation and amortization..... 8,049,951 8,825,715 7,824,274
Impairment of intangible assets... -- 29,464,420 --
------------ ------------ ------------
Total costs and expenses........ 186,849,182 256,858,352 230,216,327
------------ ------------ ------------
Operating loss...................... (483,167) (42,505,433) (8,033,990)
Interest income..................... 574,526 -- --
Interest expense.................... (7,608,516) (14,912,330) (8,955,976)
Loss on sale of business............ -- (1,040,852) --
Other income........................ 60,984 581,424 --
------------ ------------ ------------
Loss from continuing operations,
before minority interest and income
tax benefit........................ (7,456,173) (57,877,191) (16,989,966)
Minority interest in loss of
subsidiary......................... -- 174,333 68,356
------------ ------------ ------------
Loss from continuing operations,
before income tax benefit.......... (7,456,173) (57,702,858) (16,921,610)
Income tax benefit.................. -- -- (7,204,631)
------------ ------------ ------------
Loss from continuing operations..... (7,456,173) (57,702,858) (9,716,979)
Discontinued operations:
Income from discontinued operations,
net of tax......................... -- 2,580,818 3,424,779
Gain on disposal of discontinued
operations......................... 25,801,833 -- --
------------ ------------ ------------
Income (loss) before extraordinary
item............................... 18,345,660 (55,122,040) (6,292,200)
Extraordinary item:
Gain on early extinguishment of
debt............................. 10,299,098 -- --
------------ ------------ ------------
Net income (loss)................... $ 28,644,758 $(55,122,040) $ (6,292,200)
============ ============ ============
Basic and diluted net income (loss)
per share data:
Loss from continuing operations..... $ (1.12) $ (8.67) $ (1.41)
Income from discontinued operations,
net of tax......................... -- 0.38 0.50
Gain on disposal of discontinued
operations......................... 3.87 -- --
------------ ------------ ------------
Income (loss) before extraordinary
item............................... 2.75 (8.29) (0.91)
Extraordinary item:
Gain on early extinguishment of
debt............................. 1.55 -- --
------------ ------------ ------------
Net income (loss)................... $ 4.30 $ (8.29) $ (0.91)
============ ============ ============
Weighted average shares outstanding:
Basic and diluted................. 6,655,330 6,652,212 6,910,760
============ ============ ============
See accompanying notes.
36
PEDIATRIC SERVICES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Retained Total
Common Paid-in Earnings Stockholders'
Stock Capital (Deficit) Equity
------- ----------- ------------ -------------
Balances at October 1,
1997....................... $62,580 $41,746,450 $ 19,871,460 $ 61,680,490
16,899 shares of common
stock issued through
exercise of stock options.. 169 154,577 -- 154,746
872,136 shares of common
stock issued in connection
with the acquisition of
businesses................. 8,721 18,131,284 -- 18,140,005
495,050 shares of common
stock repurchased and
retired in connection with
the acquisition of a
business................... (4,950) (9,995,050) -- (10,000,000)
Net loss(1)................. -- -- (6,292,200) (6,292,200)
------- ----------- ------------ ------------
Balances at September 30,
1998....................... 66,520 50,037,261 13,579,260 63,683,041
1,190 shares of common stock
issued through exercise of
stock options.............. 11 1,089 -- 1,100
1,149 shares of common stock
cancelled from escrow...... (11) 11 -- --
Stock price guarantee
payments related to the
acquisition of businesses.. -- (1,676,127) -- (1,676,127)
Net loss(1)................. -- -- (55,122,040) (55,122,040)
------- ----------- ------------ ------------
Balances at September 30,
1999....................... 66,520 48,362,234 (41,542,780) 6,885,974
6,300 shares of common stock
issued through exercise of
stock options.............. 63 385 -- 448
Net income(1)............... -- -- 28,644,758 28,644,758
------- ----------- ------------ ------------
Balances at September 30,
2000....................... $66,583 $48,362,619 $(12,898,022) $ 35,531,180
======= =========== ============ ============
(1) Comprehensive net income (loss) is the same as reported net income (loss).
See accompanying notes.
37
PEDIATRIC SERVICES OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
--------------------------------------
2000 1999 1998
----------- ------------ -----------
Operating activities
Loss from continuing operations........ $(7,456,173) $(57,702,858) $(9,716,979)
Adjustments to reconcile loss from
continuing operations to net cash
provided by (used in) operating
activities:
Depreciation and amortization........ 8,049,951 8,825,715 7,824,274
Impairment of intangible assets...... -- 29,464,420 --
Provision for doubtful accounts...... 6,381,840 21,587,031 22,963,191
Amortization of deferred financing
fees................................ 685,065 598,107 329,193
Deferred income taxes................ (2,685,476) (612,197) 359,362
Minority interest in loss of
subsidiary.......................... -- (174,333) (68,356)
Loss on sale of business............. -- 1,040,852 --
Other loss (income).................. 602,906 (581,424) --
Changes in operating assets and
liabilities, net of effects from
acquisitions of and dispositions of
businesses:
Accounts receivable................ 13,711,502 (7,521,222) (21,192,933)
Prepaid expenses................... 10,334 (83,902) (73,747)
Other assets....................... 934,420 490,482 (799,622)
Accounts payable................... (3,649,446) (2,474,027) 4,627,938
Income taxes....................... 955,360 2,553,353 (4,018,000)
Accrued liabilities................ (5,838,060) 280,519 9,203,670
----------- ------------ -----------
Net cash provided by (used in)
operating activities of continuing
operations............................ 11,702,223 (4,309,484) 9,437,991
Net cash provided by (used in)
operating activities of discontinued
operations............................ (1,260,636) 7,982,521 (19,781,954)
----------- ------------ -----------
Net cash provided by (used in)
operating activities.................. 10,441,587 3,673,037 (10,343,963)
Investing activities
Purchases of property and equipment.... (1,348,413) (2,810,695) (7,710,232)
Acquisitions of businesses............. -- -- (15,229,930)
Stock price guarantee.................. -- (1,676,127) --
Proceeds from sale of discontinued
operations............................ 79,530,932 -- --
Proceeds from sale of business......... -- 1,972,083 --
Other, net............................. 48,136 30,194 (52,190)
----------- ------------ -----------
Net cash provided by (used in)
investing activities of continuing
operations............................ 78,230,655 (2,484,545) (22,992,352)
Net cash used in investing activities
of discontinued operations............ (23,982) (1,148,045) (26,729,433)
----------- ------------ -----------
Net cash provided by (used in)
investing activities.................. 78,206,673 (3,632,590) (49,721,785)
Financing activities
Principal payments on long-term debt... (81,847,906) (9,557,103) (90,697,029)
Borrowings on long-term debt........... -- 16,500,000 154,500,000
Deferred financing fees................ (250,645) (66,493) (2,947,818)
Proceeds from exercise of stock
options............................... 448 1,100 154,746
----------- ------------ -----------
Net cash provided by (used in)
financing activities.................. (82,098,103) 6,877,504 61,009,899
----------- ------------ -----------
Increase in cash and cash equivalents.. 6,550,157 6,917,951 944,151
Cash and cash equivalents at beginning
of year............................... 8,361,480 1,443,529 499,378
----------- ------------ -----------
Cash and cash equivalents at end of
year.................................. $14,911,637 $ 8,361,480 $ 1,443,529
=========== ============ ===========
Supplemental disclosure of cash flow
information
Cash paid for interest................. $ 8,365,494 $ 15,263,695 $ 5,186,805
=========== ============ ===========
See accompanying notes.
38
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
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.
Discontinued Operations
During the third quarter of fiscal 1999, the Company's Board of Directors
approved management's plan to sell the Company's paramedical testing
operations (see Note 2). As a result, the paramedical testing operations are
reflected as a discontinued operation. The consolidated financial statements
of the Company for all periods presented have been restated to reflect the
discontinued operations.
Consolidation
The consolidated financial statements include the accounts of Pediatric
Services of America, Inc. ("PSA" or the "Company") and its majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles 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 revenues and determining provisions 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.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Deposits with banks are
federally insured in limited amounts.
Accounts Receivable
Accounts receivable include approximately $7.7 million and $10.5 million for
which services have been rendered but the amounts were unbilled as of
September 30, 2000 and September 30, 1999, respectively. Such unbilled amounts
are primarily a result of the time required to obtain and reconcile
information from field locations in order to process bills for services
rendered.
39
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summary of Significant Accounting Policies--continued
Property and Equipment
Property and equipment are stated at cost and are depreciated on the
straight-line method over the related asset's estimated useful life, generally
three to ten years.
Other Assets
Goodwill represents the excess of the purchase price of acquired businesses
over the fair value of net assets acquired and is being amortized using the
straight-line method over twenty years. The carrying value of goodwill is
reviewed when facts and circumstances suggest that it may be impaired. If this
review indicates that goodwill will not be recoverable, as determined based on
the undiscounted cash flows of the entity acquired over the remaining
amortization period, the Company's carrying value of the goodwill and related
assets are reduced to their fair value.
Certificates of need are certificates which allow the Company to provide
home care services in the states of Maryland, the District of Columbia, North
Carolina, New Jersey, Tennessee, Washington and Georgia. The certificates of
need are being amortized over their useful lives which is generally twenty
years.
Financing fees incurred in connection with the Credit Agreement (see Note
4), and the issuance of the Senior Subordinated Notes, are being amortized
using the straight-line method over their respective terms.
The cost of non-compete agreements with former owners of acquired businesses
are being amortized over the respective lives of each agreement which range
from three to five years.
Impairment of intangible assets was recorded during fiscal 1999. The
impairment resulted in part from an assessment of the impact of disposing of
certain non-core business locations and activities as defined in the Company's
strategic plan formulated in the second quarter of fiscal 1999. Additionally,
certain locations were negatively impacted by the cancellation of certain
large contracts which impacted the future profitability of the locations.
Finally, certain market conditions of fiscal 1999, as well as ongoing failure
of the Company to meet management projections, declining gross margins,
recurring location operating losses and slower than expected progress in
improving certain locations' collections were identified by management as
indicators of potential intangible asset impairment. Management conducted an
evaluation of the carrying value of the Company's recorded intangible assets
based on an estimate of future cash flows at each location. Management
considered current and anticipated cash flows, industry conditions and recent
changes in its business strategies and concluded that an impairment charge of
$29.5 million, was appropriate. The charges include a write-off of $7.9
million in goodwill and $2.2 million in certificates of need associated with
the specific locations closed in fiscal 1999 and an additional $19.4 million
in goodwill related to changes within certain locations arising from the
cancellation of certain contracts which impacted location profitability, the
termination of certain non-core activities and the competitive conditions of
certain local markets.
For purposes of assessing impairment, assets were grouped at the location
level, which is the lowest level for which there are identifiable cash flows
that are largely independent. Asset impairment was deemed to exist if the
Company's estimate of undiscounted cash flows was less than the carrying
amount of the long-lived assets and goodwill at the location. In estimating
future cash flows, management used its best estimates of anticipated operating
results over the remaining useful life of the assets. For those locations
where asset impairment was identified, the amount of impairment was measured
by comparing the carrying amount of the long-lived assets and goodwill to the
estimated fair value for each location. Fair value was estimated using a
valuation technique based on the present value of the expected future cash
flows.
40
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summary of Significant Accounting Policies--continued
Net Revenue
Net revenue represents the estimated net realizable amounts from patients,
third-party payors and others for patient services rendered. Such revenue is
recognized as the related services are performed. Approximately 50%, 43% and
41% of the Company's continuing operations net revenue for the years ended
September 30, 2000, 1999 and 1998, respectively, were reimbursed under
arrangements with Medicare and Medicaid. Certain equipment rentals are billed
in advance of the Company rendering the related services. Such amounts are
deferred in the balance sheet until the related services are performed.
Advertising Costs
Advertising costs are charged to expense in the period the costs are
incurred. Advertising expense for continuing operations was approximately
$601,000, $565,000 and $641,000 for the years ended September 30, 2000, 1999
and 1998, respectively. Advertising expense for discontinued operations was
approximately $32,000, $195,000 and $155,000 for the years ended September 30,
2000, 1999 and 1998, respectively.
Concentration of Credit Risk
The Company's principal financial instruments subject to potential
concentration of credit risk are cash and cash equivalents and accounts
receivable. Cash and cash equivalents are held primarily in one financial
institution. The Company performs periodic evaluations of the relative credit
standing of this financial institution. The concentration of credit risk with
respect to accounts receivable, which are primarily health care industry
related, represent a risk to the Company given the current health care
environment. The risk is somewhat limited due to the large number of payors
including Medicare and Medicaid, insurance companies, and individuals and the
diversity of geographic locations in which the Company operates.
Income Taxes
The liability method is used in accounting for income taxes. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect when the differences are expected to reverse.
Impact of Recently Issued Accounting Standards
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements" ("SAB 101"), which clarifies certain existing accounting
principles for the timing of revenue recognition and its classification in the
financial statements. The SEC delayed the required implementation date of SAB
101 by issuing Staff Accounting Bulletins No. 101A, "Amendment: Revenue
Recognition in Financial Statements" and 101B, "Second Amendment: Revenue
Recognition in Financial Statements" in March and June 2000, respectively. As
a result, SAB 101 is not effective for the Company until fiscal 2001. The
Company believes the adoption of SAB 101 will not be material to the
operations and financial position of the Company.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," which is required to be adopted in years beginning
after June 15, 2000. Because of the Company's minimal use of derivatives,
management does not anticipate that the adoption of the new Statement will
have a significant effect on the financial position or results of operations
of the Company.
41
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Summary of Significant Accounting Policies--continued
Reclassifications
Certain amounts for prior periods have been reclassified to conform to the
current year presentation.
2. Discontinued Operations
During the third quarter of fiscal 1999, the Company's Board of Directors
approved management's plan to sell the Company's paramedical testing
operations. On November 1, 1999, the Company concluded the sale of the assets
of its paramedical testing division to Hooper Holmes, Inc. During the first
quarter of fiscal 2000, the Company recorded a gain of $24.3 million on the
sale of this division, including the deferred operating losses of $10.6
million incurred between the measurement date and disposal date. During the
third and fourth quarter of fiscal 2000 certain retained lease obligations,
retention bonuses, salary accruals and estimated underwriter obligations were
resolved at less than originally estimated amounts resulting in an additional
gain of $1.5 million. The paramedical testing operations are reflected as a
discontinued operation and the consolidated financial statements of the
Company for all periods presented have been restated to reflect the
discontinued operations. The operating results of the discontinued operations
are summarized as follows:
Year Ended September 30,
----------------------------------
2000 1999 1998
---------- ----------- -----------
Net revenue.............................. $6,415,401 $79,006,452 $80,309,272
Income before income tax expense......... -- 2,580,818 7,318,818
Income tax expense....................... -- -- 3,894,039
---------- ----------- -----------
Net income............................... $ -- $ 2,580,818 $ 3,424,779
========== =========== ===========
Net income per share:
Basic.................................. $ -- $ 0.38 $ 0.50
========== =========== ===========
Diluted................................ $ -- $ 0.38 $ 0.50
========== =========== ===========
Assets and liabilities of the discontinued operations have been reflected in
the consolidated balance sheets as current or non-current based on the
original classification of the accounts, except certain current liabilities
are netted against current assets. The following is a summary of assets and
liabilities of discontinued operations:
September
30, 1999
-----------
Cash............................................................ $ 540,891
Accounts receivable, net........................................ 12,690,712
Prepaid expenses................................................ 29,004
Other current assets............................................ 12,471,031
-----------
Total current assets............................................ 25,731,638
Accrued compensation............................................ 540,000
-----------
Net current assets of discontinued operations................... $25,191,638
===========
Property, net................................................... $ 5,024,710
Goodwill, net................................................... 22,173,319
Other........................................................... 54,814
-----------
Non-current assets of discontinued operations................... $27,252,843
===========
42
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Discontinued Operations--continued
Accounts receivable for discontinued operations include approximately $9.4
million for which services have been rendered but the amounts were unbilled as
of September 30, 1999. Primarily such unbilled amounts result from the
paramedical testing division's practice of billing one month in arrears.
Certain liabilities were not assumed by Hooper Holmes, Inc. in the sale of the
paramedical testing division. These include accounts payable and other accrued
liabilities which totaled approximately $1.1 million at September 30, 2000.
3. Preferred Stock and Common Stock
As of September 30, 2000, a total of 1,795,899 shares of Common Stock have
been reserved for future issuance under the Company's stock option plans.
Shares of Common Stock outstanding and related changes for the three years
ended September 30, 2000 are as follows:
Balances at October 1, 1997..................................... 6,257,979
Exercise of stock options..................................... 16,899
Shares issued in connection with the acquisition of
businesses................................................... 872,136
Shares repurchased and retired in connection with the
acquisition of a business ................................... (495,050)
---------
Balances at September 30, 1998.................................. 6,651,964
Exercise of stock options..................................... 1,190
Shares cancelled from escrow.................................. (1,149)
---------
Balances at September 30, 1999.................................. 6,652,005
Exercise of stock options..................................... 6,300
---------
Balances at September 30, 2000.................................. 6,658,305
=========
4. Long-Term Borrowing Arrangements
The Company's long-term obligations as of September 30, 2000 and 1999,
consist of the following:
2000 1999
----------- ------------
Subordinated notes................................ $45,425,000 $ 75,000,000
Note payable to bank.............................. -- 62,240,000
Related party notes payable....................... 100,000 1,166,479
Other notes payable............................... 31,274 62,577
----------- ------------
45,556,274 138,469,056
Less current maturities of related party notes
payable.......................................... 50,000 1,141,479
Less current maturities........................... 17,673 31,029
----------- ------------
Total long-term borrowing....................... $45,488,601 $137,296,548
=========== ============
43
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Term Borrowing Arrangements--continued
On April 16, 1998, the Company issued, in a private placement, $75 million
aggregate principal amount of 10% Senior Subordinated Notes due 2008, which
were subsequently replaced on May 12, 1998, with $75 million aggregate
principal amount of 10% Senior Subordinated Notes due 2008, Series A,
registered with the Securities and Exchange Commission (the "Notes"). After
paying issuance costs of approximately $2.7 million, the Company received
proceeds of $72.3 million, which were used to repay a portion of the
indebtedness outstanding under its Credit Agreement. Interest on the Notes
accrues from the date of issuance, and is payable semi-annually on April 15
and October 15 of each year, commencing October 15, 1998. The Notes are
redeemable for cash at any time on or after April 15, 2003, at the option of
the Company, in whole or in part, at redemption prices set forth in the
indenture. The Notes place certain restrictions on incurring additional
indebtedness, the creation of liens, sales of assets, mergers and
consolidations and payment of dividends, among other things. A default
provision defines acceleration of any indebtedness and failure to pay any
indebtedness of the Company at maturity results in a default under the Notes.
During fiscal 2000, the Company completed a series of transactions to
repurchase a total of $29.6 million of the $75.0 million Notes for $18.4
million cash plus accrued interest. The gain (net of the write-off of the
related deferred financing fees) of $10.3 million is reflected as an
extraordinary item in the consolidated statements of operations.
At September 30, 2000, total borrowings under the Notes were approximately
$45.4 million.
Note payable to bank represents a revolving credit agreement ("Credit
Agreement"). At September 30, 1999, the interest rate on borrowings under the
Credit Agreement was 10.75% and outstanding borrowings were approximately
$62.2 million. On November 1, 1999, a portion of the proceeds from the sale of
the Company's paramedical testing division were used to pay down to zero all
outstanding amounts under the Company's Credit Agreement.
Simultaneous with the pay down of the existing Credit Agreement, the Company
amended and restated the Credit Agreement (the "Amended and Restated Loan
Security Agreement"). Subject to the terms and conditions of the Amended and
Restated Loan Security Agreement, the Lender made available a total credit
facility of up to $30.0 million for use by the Company and its subsidiaries
from time to time during the term of the Amended and Restated Loan and
Security Agreement. At September 30, 2000, the calculated availability was
$23.6 million. The total credit facility is comprised of a revolving line of
credit up to the available limit, consisting of Loans and Letters of Credit
(as defined therein). As of September 30, 2000, the Company had no outstanding
borrowings under the Amended and Restated Loan Security Agreement.
In connection with the Amended and Restated Loan Security Agreement, the
Company incurred loan costs of approximately $0.3 million. These costs include
amendment fees, legal and professional fees.
The Company has entered into several related party notes payable and non-
compete agreements with individuals in connection with the acquisition of
businesses. These notes are payable in quarterly and annual installments and
bear interest at 6.0%. The maturity dates vary but do not extend beyond
October 2002.
44
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Long-Term Borrowing Arrangements--continued
The aggregate amount of required principal payments during each of the next
five fiscal years and thereafter on all long-term obligations as of September
30, 2000, is as follows:
Year ending September 30,
2001....................................................... $ 67,673
2002....................................................... 36,339
2003....................................................... 27,262
2004....................................................... --
2005 and thereafter........................................ 45,425,000
-----------
$45,556,274
===========
5. Acquisitions and Dispositions
The Company did not acquire any new businesses during fiscal 2000 and fiscal
1999.
During fiscal 1999, the Company sold the assets of its medical staffing
business in the Mid-Atlantic Region to Medical Staffing Network, Inc., a
medical staffing company. This business was defined as part of the non-core
activities of the Company. The assets were sold for a total cash price of $1.8
million and the Company recorded a loss of $1.0 million. In addition, the
Company sold the assets of one of its Texas equipment locations for a total
cash price of $0.2 million.
The Company acquired ten companies during fiscal 1998. Pro forma net loss
and net loss per share would not be materially different than reported in the
Statements of Operations. The aggregate fiscal year net revenue for these
acquisitions was approximately $17.9 million and total net assets were $5.1
million. The aggregate purchase price of these companies was approximately
$23.5 million.
For three of the fiscal 1998 acquisitions, the Company granted price
protection to the sellers for the Company's Common Stock. On August 19, 1998,
ChoicePoint tendered to the Company all of its 495,050 shares of the Company's
Common Stock. The Company paid a total of $10.0 million, the contractual
protection price under the terms of the agreement between ChoicePoint and the
Company, and immediately retired the Common Stock. For the remaining two
acquisitions, the Company paid a total of $1.7 million to satisfy the
contractual price protection under the terms of the agreement.
The purchase method of accounting was used to record each of the above
acquisitions. Accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on estimated fair values at the
purchase dates. Operating results for the acquired companies have been
included in the Company's consolidated results of operations from the
respective purchase dates.
45
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Leases
The Company leases office space as well as certain automobiles and medical
equipment under operating leases that expire at various dates through 2008.
Rent expense for continuing operations approximated $5.4 million, $7.0 million
and $4.1 million under these leases for the years ended September 30, 2000,
1999 and 1998, respectively. Rent expense for discontinued operations
approximated $0.3 million, $2.9 million and $2.4 million for the years ended
September 30, 2000, 1999 and 1998, respectively.
At September 30, 2000, the future minimum lease payments under non-
cancelable operating leases with initial or remaining terms equal to or
exceeding one year were as follows:
Year ending September 30,
2001...................................................... $ 3,547,000
2002...................................................... 2,493,000
2003...................................................... 1,482,000
2004...................................................... 826,000
2005 and thereafter....................................... 2,409,000
------------
$ 10,757,000
============
7. Stock Option Plans
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25), and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
The Company's Stock Option Plan (the "Option Plan") provides for the
granting of stock options covering up to 1,750,000 shares of Common Stock, of
which 850,791 options have been granted to eligible participants as of
September 30, 2000. Options may be issued as either incentive stock options or
as nonqualified stock options. Options may be granted only to those persons
who are officers or employees of the Company or to certain outside
consultants.
The terms and conditions of options granted under the Option Plan, including
the number of shares, the exercise price and the time at which such options
become exercisable are determined by the Board of Directors. Upon the
occurrence of certain events, the vesting period of the options accelerate.
The term of options granted under the Option Plan are typically 3 to 5 years
but may not exceed 10 years. The Company has the right to repurchase the
Common Stock issued upon the exercise of these options at the then fair market
value of such shares, if the Company or the holders of such shares terminate
their employment with the Company.
Under the Company's Directors' Stock Option Plan, directors of the Company
who are not officers or employees of the Company may receive stock options
each year to purchase up to 6,000 shares of Common Stock, at an exercise price
equal to the fair market value on the date of grant and expiring 10 years
after issuance. The options vest on the first anniversary of their issuance,
provided that the grantee is then a director of the Company. The Board of
Directors' Compensation Committee has the authority and sole discretion to
make grants of options under the Plan in addition to the annual grants
described above. A total of 300,000 shares of Common Stock have been reserved
for issuance pursuant to options granted under the Directors' Stock Option
Plan of which 192,000 options have been granted to eligible participants as of
September 30, 2000.
46
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Plans--continued
Pro forma information regarding net income and earnings per share is
required by Statement 123, determined as if the Company had accounted for its
employee stock options granted subsequent to December 31, 1994 under the fair
value method. The fair value of these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following weighted-
average assumptions for 2000, 1999 and 1998, respectively: risk-free interest
rates of 5.84%, 5.92% and 4.18%, a dividend yield of 0.0%; volatility factors
of the expected market price of the Company's Common Stock of 100%, 100% and
49.41% and a weighted-average expected life of the option of 4 years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
For purposes of the pro forma disclosures, the estimated fair value of the
options is amortized over the options' vesting period. The Company's pro forma
information follows (in thousands, except for net income (loss) per share
information):
2000 1999 1998
------- -------- -------
Pro forma net income (loss)...................... $28,497 $(55,299) $(7,194)
Pro forma net income (loss) per share
Basic.......................................... $ 4.28 $ (8.31) $ (1.04)
Diluted........................................ $ 4.28 $ (8.31) $ (1.04)
A summary of stock option activity is as follows:
Weighted
Average
Exercise Price
Shares per Share
--------- --------------
Outstanding at October 1, 1997..................... 711,863 $15.02
Granted.......................................... 384,000 20.52
Exercised........................................ (16,899) 9.16
Cancelled........................................ (304,972) 20.26
--------- ------
Outstanding at September 30, 1998.................. 773,992 15.82
Granted.......................................... 342,500 2.44
Exercised........................................ (1,190) 0.92
Cancelled........................................ (69,505) 14.46
--------- ------
Outstanding at September 30, 1999.................. 1,045,797 11.54
Granted.......................................... 296,600 2.07
Exercised........................................ (6,300) 0.07
Cancelled........................................ (293,306) 9.96
--------- ------
Outstanding at September 30, 2000.................. 1,042,791 $ 9.36
========= ======
47
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Option Plans--continued
At September 30, 2000, 1999 and 1998, options to acquire 609,439, 585,797
and 476,742 shares, respectively, were exercisable. The weighted average fair
value of options granted in 2000, 1999 and 1998 was $1.48, $1.75 and $8.84,
respectively.
The following table summarizes the ranges of exercise prices and weighted
average contractual lives for options outstanding and the weighted average
exercise price for options exercisable as of September 30, 2000.
Options Outstanding Options Exercisable
-----------------------------Weighted Average ----------------------------
Remaining Options Weighted Average
Exercise Price Outstanding Contractual Life Exercisable Exercise Price
-------------- ----------- ---------------- ----------- ----------------
$0.071 - 0.714 9,334 0.5 9,334 $ 0.714
0.715 - 1.625 151,492 8.6 70,867 1.615
1.626 - 5.70 424,340 8.1 105,363 3.968
5.71 - 10.26 40,000 3.8 40,000 8.928
10.27 - 19.87 386,125 6.1 352,625 18.744
19.88 - 25.00 31,500 6.3 31,250 22.858
--------- --- ------- -------
1,042,791 7.1 609,439 $13.488
========= === ======= =======
8. Income Taxes
The income tax expense (benefit) for the years ended September 30, 2000,
1999 and 1998 are summarized below:
2000 1999 1998
------------ ------------ -----------
Current:
Federal......................... $ 1,182,955 $ (890,457) $(2,621,000)
State........................... 1,502,521 (166,961) (491,000)
------------ ------------ -----------
2,685,476 (1,057,418) (3,112,000)
Deferred:
Federal......................... (2,261,453) 890,457 (167,165)
State........................... (424,023) 166,961 (31,427)
------------ ------------ -----------
(2,685,476) 1,057,418 (198,592)
------------ ------------ -----------
Net tax benefit................... $ -- $ -- $(3,310,592)
============ ============ ===========
Discontinued operations........... $ -- $ -- $ 3,894,039
============ ============ ===========
Continuing operations............. $ -- $ -- $(7,204,631)
============ ============ ===========
A reconciliation of the income tax benefit related to the statutory federal
income tax rate is as follows:
2000 1999 1998
------------ ------------ -----------
Statutory rate of 34% applied to
pre-tax income................... $ 9,739,218 $(18,741,432) $(3,264,949)
State income taxes, net of federal
tax benefit...................... 1,117,146 (2,182,826) (344,802)
Amortization and impairment of
intangible....................... 495,583 2,199,516 234,203
Valuation allowance............... (11,060,357) 18,346,172 --
Discontinued operations........... -- -- (3,894,039)
Other, net........................ (291,590) 378,570 64,956
------------ ------------ -----------
$ -- $ -- $(7,204,631)
============ ============ ===========
48
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes--continued
Deferred income taxes reflect the net effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities are as follows:
2000 1999
---------- -----------
Allowance for doubtful accounts................... $2,898,742 $ 6,933,566
Deferred losses on discontinued operations........ -- (3,918,349)
Mark to market accounting for accounts
receivable....................................... (1,889,066) (3,542,667)
Net operating loss carryforward and alternative
minimum tax...................................... 798,840 11,575,581
Payroll related accruals.......................... 542,000 768,602
Insurance related accruals........................ 1,900,699 1,748,619
Property and equipment and intangibles............ 5,380,525 4,179,755
Other, net........................................ 339,551 601,065
---------- -----------
Net deferred tax asset before valuation
allowance........................................ 9,971,291 18,346,172
Valuation allowance............................... (7,285,815) (18,346,172)
---------- -----------
Net deferred tax asset............................ $2,685,476 $ --
========== ===========
The Company recorded a partial valuation allowance against the net deferred
tax assets as of September 30, 2000 and a full valuation against net deferred
tax assets as of September 30, 1999. In recording the valuation allowance,
management considered whether it is more likely than not that some or all of
the deferred tax assets will be realized. This analysis includes considering
scheduled reversal of deferred tax liabilities, projected future taxable
income, carryback potential and tax planning strategies. Management concluded
that the net deferred tax asset required a partial valuation allowance as of
September 30, 2000.
For fiscal 2000, the Company had a current income tax expense of $2.7
million which was offset by the reduction of the valuation allowance related
to the deferred tax asset resulting in zero income tax expense.
Under guidance issued by the Internal Revenue Service in December 1996, the
Company made an election entitling it to mark its accounts receivable to
market value for tax purposes. In fiscal 1998, the mark to market election for
accounts receivable was repealed requiring the Company to recognize the
related deferred tax liabilities evenly over the next four years.
The Company has approximately $0.8 million of alternative minimum tax
credits for income tax purposes available to offset future taxes due. Such
credits do not expire and thus carryforward indefinitely.
For the year ended September 30, 1999, the Company realized approximately
$0.6 million of a net operating loss relating to a business acquired through a
stock acquisition. This resulted in a reduction to the intangible asset and an
increase in the deferred income taxes recorded at the date of the acquisition.
Refunds from income taxes exceeded net taxes paid in the year ended
September 30, 1999 and 1998. The Company received approximately $1.4 million
in refunds during fiscal 2000. Taxes paid for the year ended September 30,
2000 was approximately $3.2 million.
9. Fair Values of Financial Instruments
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and cash equivalents--The carrying amounts reported in the balance
sheets for cash approximate their fair value.
49
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fair Values of Financial Instruments--continued
Long and short-term debt--The carrying amounts of the Company's
borrowings under its revolving credit agreements approximate their fair
value. The fair values of the Company's long-term debt are estimated using
discounted cash flow analysis, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements. The fair value
of the Company's Notes as determined by quotations on the applicable
exchange was approximately $31.8 million and $35.3 million at September 30,
2000 and 1999, respectively.
10. Employee Savings Plan
The Company has a contributory savings plan (the "Plan"), which qualifies
under Section 401(k) of the Internal Revenue Code, covering all employees of
the Company (except, among others, highly compensated employees as defined in
the Plan, certain employees designated as part-time employees and employees
deemed to be leased employees within the meaning of certain provisions of the
Code). The Company, at its discretion, may match 33% of employee contributions
to a maximum of 6% of employee earnings each Plan year. Company contributions
to the Plan were approximately $374,000, $387,000 and $320,000 for the years
ended September 30, 2000, 1999 and 1998 respectively.
In October 1997, the Company adopted the Pediatric Services of America, Inc.
Non-Qualified Deferred Compensation Plan (the "Non-Qualified Plan") for
certain employees of the Company. The purpose of this plan is to provide the
selected management or highly compensated personnel of the Company with the
opportunity to defer amounts of their compensation which might not otherwise
be deferrable under other Company plans, including the 401(k) Plan, and to
receive the benefit of additions to their deferral, in the absence of certain
restrictions and limitations in the Code. Participants elect the amount of pay
they wish to defer up to the maximum percentage of compensation for the tier
to which the employee is a member. Maximum deferrals range from 10% to 100% of
compensation. The Company may contribute to the Plan an amount equal to a
percentage of the amount each Participant contributes to the Plan. The Non-
Qualified Plan is intended to be an un-funded plan for purposes of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). Company
contributions and voluntary compensation deferrals are held in a "Rabbi Trust"
as that term is defined in Revenue Procedure 92-64, 1992-2 C.B. 422.
Distributions of Plan contributions and earnings will be made upon termination
of employment, disability, retirement or the financial hardship of the
participant. In-service benefits are also available to participants. On March
22, 1999, the Company terminated the Plan and distributed Plan contributions
to those employees who participated in the plan. As of January 1, 2000, the
Company adopted a new Non-Qualified Deferred Compensation Plan with the same
benefits as the Prior Plan. Company contributions to the Plans were
approximately $72,000, $28,000 and $55,000 for the years ended September 30,
2000, 1999 and 1998, respectively.
11. Commitments and Contingencies
As of September 30, 2000, the Company's professional liability policy is on
a claims-made basis. Should this claims-made policy not be renewed or replaced
with equivalent insurance, claims based on occurrences during its term but
asserted subsequently would be uninsured.
The Company is subject to claims and suits arising in the ordinary course of
business. In the opinion of management, the ultimate resolution of such
pending legal proceedings should not have a material adverse effect on the
Company's consolidated financial position.
Shareholder Litigation
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
50
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Commitments and Contingencies--continued
directors were named as defendants. To the Company's knowledge, no other
putative class action complaints were filed within the 60-day time period
provided for in the Private Securities Litigation Reform Act. The plaintiffs
and their counsel were appointed lead plaintiffs and lead counsel, and an
amended complaint was filed on or about July 22, 1999. In general, the
plaintiffs allege that prior to the decline in the price of the Company's
Common Stock on July 28, 1998, there were violations of the Federal Securities
Laws arising from misstatements of material information in and/or omissions of
material information from certain of the Company's securities filings and
other public disclosures principally related to its reporting of accounts
receivable and the allowance for doubtful accounts. The amended complaint
purports to expand the class to include all persons who purchased the
Company's Common Stock during the period from July 29, 1997 through and
including July 29, 1998. On October 8, 1999, the Company and the individuals
named as defendants moved to dismiss the amended complaint on both substantive
and procedural grounds. On March 30, 2000, the Court denied the Company's
motion to dismiss. On May 15, 2000, the Company and the individuals named as
defendants filed their answer, denying liability.
On October 15, 2000, the Company and the individuals named as Defendants
filed a Brief in Opposition to Plaintiffs' Motion for Class Certification,
which was filed in June, 2000. The Court has not yet ruled on that Motion.
Discovery in the case is proceeding. The Company and the individuals named as
defendants deny that they have violated any of the requirements or obligations
of the Federal Securities Laws.
On July 28, 1999, a civil action was filed against the Company and certain
of its current and former officers and directors in the United States District
Court for the Middle District of Tennessee. The action was filed by Phyllis T.
Craighead and Healthmark Partners, LLC, as well as a liquidating trust
apparently established to wind up the business affairs of their corporation,
Kids & Nurses, Inc. In the original complaint, in general, the plaintiffs
alleged that the defendants violated Federal and Tennessee Securities Laws and
committed common law fraud in connection with the Company's purchase of Kids
and Nurses, Inc. in November, 1997. The plaintiffs seek actual damages in an
amount between $2.5 million and $3.5 million, plus punitive damages and the
costs of litigation, including reasonable attorneys' fees. On September 24,
1999, the defendants filed a motion to dismiss the complaint on both
substantive and procedural grounds. On December 20, 1999, the plaintiffs filed
an amended complaint in which they withdrew their claims under the Federal
securities laws, and added claims under Georgia's securities laws. The
plaintiffs also filed a brief in response to the Company's motion to dismiss.
On February 1, 2000, the defendants filed an amended motion to dismiss
addressing the allegations of the amended complaint. The motion to dismiss is
currently pending before the Court. The Company and the individuals named as
defendants deny that they have violated any of the requirements or obligations
of any applicable Federal or State securities laws, or any other applicable
law.
In the opinion of the Company's management, the ultimate disposition of
these two lawsuits should not have a material adverse effect on the Company's
financial condition or results of operations, however, there can be no
assurance that the Company will not sustain material liability as a result of
or related to these lawsuits.
12. Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per share is computed using the weighted average
number of shares of common stock outstanding during the period. Diluted net
income (loss) per share is computed using the weighted average number of
shares of common stock outstanding and the dilutive effect of common
equivalent shares (calculated using the treasury stock method). For fiscal
2000, 1999 and 1998, weighted average shares outstanding for continuing
operations for basic and diluted computations are the same as the impact of
common equivalent shares on earnings per share is anti-dilutive.
51
PEDIATRIC SERVICES OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for 2000 and 1999 is as follows (in
thousands, except per share data):
Quarter
------------------------------------
First Second Third Fourth
------- -------- ------- --------
Fiscal 2000
Net revenue.......................... $48,104 $ 47,401 $45,397 $ 45,464
Operating income (loss).............. (1,365) (536) 333 1,085
Loss from continuing operations
before income tax expense
(benefit)........................... (4,332) (2,244) (974) 94
Loss from continuing operations...... (4,332) (2,244) (974) 94
Gain on disposal of discontinued
operations.......................... 24,314 -- 407 1,081
Gain on early extinguishment of
debt................................ -- -- 10,299 --
Net income (loss).................... 19,982 (2,244) 9,732 1,175
Net income (loss) per share:
Basic.............................. $ 3.00 $ (0.34) $ 1.46 $ 0.18
Diluted............................ $ 3.00 $ (0.34) $ 1.46 $ 0.17
Quarter
------------------------------------
First Second Third Fourth
------- -------- ------- --------
Fiscal 1999(1)
Net revenue.......................... $56,741 $ 54,870 $53,134 $ 49,608
Operating income (loss).............. 1,577 (26,866) (3,197) (14,019)
Income (loss) from continuing
operations before income tax expense
(benefit)........................... (1,473) (30,613) (8,372) (17,245)
Income (loss) from continuing
operations.......................... (999) (29,428) (8,372) (18,904)
Income (loss) from discontinued
operations net of taxes............. 1,107 628 (260) 1,106
Net income (loss).................... 108 (28,800) (8,632) (17,798)
Net income (loss) per share:
Basic.............................. $ 0.02 $ (4.33) $ (1.30) $ (2.68)
Diluted............................ $ 0.02 $ (4.33) $ (1.30) $ (2.68)
(1) Results of Operations in the second and fourth quarters include charges
related to impairment of goodwill of $21.0 million and $8.5 million,
respectively.
52
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Pediatric Services of America, Inc.
We have audited the accompanying consolidated balance sheets of Pediatric
Services of America, Inc. ("PSA") as of September 30, 2000 and 1999, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years in the period ended September 30, 2000. Our
audits also included the financial statement schedule listed in the index at
Item 14. These financial statements and schedule are the responsibility of
PSA's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of PSA at
September 30, 2000 and 1999, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended September
30, 2000, in conformity with accounting principles generally accepted in the
United States.
Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
/s/ Ernst & Young LLP
Atlanta, Georgia
November 17, 2000
53
PEDIATRIC SERVICES OF AMERICA, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedules
Schedules numbered in accordance with Rule 5.04 of Regulation S-X
II Valuation and Qualifying Accounts.......................... 55
All schedules except Schedule II have been omitted because the required
information is shown in the consolidated financial statements, or notes
thereto, or the amounts involved are not significant, or the schedules are not
applicable.
54
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
PEDIATRIC SERVICES OF AMERICA, INC. AND SUBSIDIARY
COL. A COL. B COL. C COL. D COL. E
------ ----------- -------------------------- ----------- -----------
Additions
--------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End of
Descriptions of Period Expenses Accounts Deductions Period
------------ ----------- ----------- ----------- ----------- -----------
Year ended September 30,
1998:
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $10,036,000 $22,963,000 $ 2,114,000(2) $21,105,000(1) $14,008,000
=========== =========== =========== =========== ===========
Year ended September 30,
1999:
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $14,008,000 $21,587,000 $(1,215,000)(3) $19,731,000(1) $14,649,000
Valuation allowance
for net deferred tax
assets............... $ -- $18,346,000(4) $ -- $ -- $18,346,000
=========== =========== =========== =========== ===========
Year ended September 30,
2000:
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $14,649,000 $ 6,382,000 $ -- $13,403,000(1) $ 7,628,000
Valuation allowance
for net deferred tax
assets............... $18,346,000 $ -- $ -- $11,060,000(5) $ 7,286,000
=========== =========== =========== =========== ===========
(1) Uncollectible accounts written off, net of recoveries.
(2) Allowance for doubtful accounts acquired in connection with the purchases
of Pediatric Physical Therapy, Inc., Intra-Care, Inc., Cyber Home Medical
Equipment Corp., Inc., Texas Air Supply Home Medical Equipment, Inc.,
Pediatric Nursing Services, Inc., Strictly Pediatrics, L.L.C., Transworld
Home Health Care--Nursing Division, Inc., Kid's Nurses, Inc., Kid's
Nurses, Inc, and Medical Equipment and Supply, Inc.
(3) Allowance for doubtful accounts charged off in connection with the sale of
the Company's medical staffing business and an equipment location.
(4) Valuation allowance was recorded against the $18,346,000 net deferred tax
asset.
(5) Decrease in the valuation allowance was due to the reduction in net
deferred tax assets and a partial valuation allowance recorded as of
September 30, 2000.
55
INDEX TO EXHIBITS
Exhibits
--------
The following exhibits are filed with this report. The Company will
furnish any exhibit upon request to Pediatric Services of America,
Inc., 310 Technology Parkway, Norcross, Georgia 30092-2929. There is
a charge of $.50 per page to cover expenses for copying and mailing.
10.9(o) Employment Agreement, dated September 27, 2000 between the Company
and John M. Harrington
21 Subsidiaries of the Company
23.1 Consent of Independent Auditors, Ernst & Young LLP
25 Powers of Attorney
27 Financial Data Schedule