##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





---




FORM 10-Q





[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





For the quarterly period ended June 30, 2002





OR





[    ] TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from  to





Commission file number 0-23946





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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 of incorporation or organization)

(I.R.S. Employer Identification
No.)





310 Technology Parkway, Norcross GA 30092-2929


(Address of principal executive offices, including zip code)





(770) 441-1580


(Registrants telephone number, including area code)





Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ̈





As of July 31, 2002, the Registrant had 6,837,622 shares of Common Stock, $0.01 Par Value, outstanding.





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Page 1 of 19






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##### Table of Contents




FORM 10-Q





PEDIATRIC SERVICES OF AMERICA, INC.





INDEX





Page NumberPART I

FINANCIAL INFORMATIONITEM 1:

Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2002 and September 30, 2001

3Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2002 and 2001

5Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2002 and 2001

6Notes to Condensed Consolidated Financial Statements

7ITEM 2:

Managements Discussion and Analysis of Financial Condition and Results of Operations

10ITEM 3:

Quantitative and Qualitative Disclosures about Market Risk

17PART II

OTHER INFORMATIONITEM 1:

Legal Proceedings

17ITEM 6:

Exhibits and Reports on Form 8-K

18Signatures

19






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##### Table of Contents

PART I
FINANCIAL INFORMATION





Item 1.    
Financial Statements





PEDIATRIC SERVICES OF AMERICA, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS


(In thousands)





June 30, 2002


September 30, 2001(Unaudited)AssetsCurrent Assets:Cash and cash equivalents

$
7,151


$
15,259Accounts receivable, less allowance for doubtful accounts of $5,379 and $5,520, respectively


34,671



31,456Prepaid expenses


1,612



893Deferred income taxes


1,666



1,778Income taxes receivable


199



Inventory


3,725



4,708Other current assets


347



236Total current assets


49,371



54,330Property and equipment:Home care equipment held for rental


30,541



28,752Furniture and fixtures


11,202



10,572Vehicles


725



725Leasehold improvements


1,642



1,22244,110



41,271Accumulated depreciation and amortization


(34,941
)


(32,315
)9,169



8,956Other assets:Goodwill, less accumulated amortization of $9,613


32,893



31,706Certificates of need, less accumulated amortization of $575 and $505, respectively


97



167Deferred financing fees, less accumulated amortization of $676 and $701, respectively


515



787Non-compete agreements, less accumulated amortization of $1,129 and $1,110, respectively


41



50Deferred income taxes


623



1,049Workers compensation bond collateral


1,843



Other


338



25336,350



34,012Total assets

$
94,890


$
97,298





See accompanying notes.




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##### Table of Contents




PEDIATRIC SERVICES OF AMERICA, INC.


CONDENSED CONSOLIDATED BALANCE SHEETS(Continued)


(In thousands)





June 30,


September 30,2002


2001(Unaudited)Liabilities and stockholders equityCurrent liabilities:Accounts payable

$
6,293


$
5,611Accrued compensation


5,280



5,757Income tax






498Accrued insurance


6,475



6,086Other accrued liabilities


4,582



5,162Deferred revenue


632



621Current maturities of long-term obligations to related parties


25



25Current maturities of long-term obligations


171



11Total current liabilities


23,458



23,771Long-term obligations to related parties, net of current maturities






25Long-term obligations, net of current maturities


24,683



32,352Stockholders equity:Preferred stock, $.01 par value, 2,000 shares authorized, no shares issued and outstanding






Common stock, $.01 par value, 80,000 shares authorized, 6,837 and 6,711 shares issued and outstanding at June 30, 2002
and September 30, 2001, respectively


68



67Additional paid-in capital


48,908



48,493Accumulated deficit


(2,227
)


(7,410
)Total stockholders equity


46,749



41,150Total liabilities and stockholders equity

$
94,890


$
97,298











See accompanying notes.




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##### Table of Contents




PEDIATRIC SERVICES OF AMERICA, INC.


CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


(In thousands, except per share data)





Three Months Ended June
30,


Nine Months Ended June
30,2002


2001


2002


2001(Unaudited)


(Unaudited)


(Unaudited)


(Unaudited)Net Revenue

$
49,220


$
46,258


$
146,425


$
137,527Costs and expenses:Operating salaries, wages and employee benefits


22,844



20,861



67,956



61,992Other operating costs


18,691



17,204



53,930



50,905Corporate, general and administrative


4,551



4,600



13,691



13,696Provision for doubtful accounts


322



353



987



1,793Depreciation and amortization


980



1,867



3,068



5,626Total costs and expenses


47,388



44,885



139,632



134,012Operating income


1,832



1,373



6,793



3,515Other income






32







32Interest income


46



119



128



507Interest expense


(693
)


(898
)


(2,126
)


(3,121
)Income before extraordinary item


1,185



626



4,795



933Extraordinary item


30







417



3,263Net income

$
1,215


$
626


$
5,212


$
4,196Basic net income per share data:Income before extraordinary item

$
0.17


$
0.09


$
0.71


$
0.14Extraordinary item


0.01







0.06



0.49Net income

$
0.18


$
0.09


$
0.77


$
0.63Diluted net income per share data:Income before extraordinary item

$
0.16


$
0.09


$
0.67


$
0.14Extraordinary item


0.01







0.06



0.47Net income

$
0.17


$
0.09


$
0.73


$
0.61Weighted average shares outstanding:Basic


6,835



6,696



6,775



6,674Diluted


7,193



6,934



7,180



6,923








See accompanying notes.




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##### Table of Contents

PEDIATRIC SERVICES OF AMERICA, INC.


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


(In thousands)





Nine Months Ended June
302002


2001(Unaudited)


(Unaudited)Operating activities:Income before extraordinary item

$
4,795


$
933Adjustments to reconcile income before extraordinary item to net cash provided by operating activities:Depreciation and amortization


3,068



5,626Provision for doubtful accounts


987



1,793Amortization of deferred financing fees


88



220Deferred income taxes


538



(1,693
)Changes in operating assets and liabilities net of business acquired:Accounts receivable


(3,493
)


3,070Prepaid expenses


(719
)


(567
)Inventory


983



(1,399
)Other assets


(215
)


192Workers compensation bond collateral


(1,843
)


Accounts payable


672



1,369Income taxes


(697
)


795Accrued liabilities


(667
)


(1,342
)Net cash provided by operating activities


3,497



8,997Investing activities:Purchases of property and equipment


(3,161
)


(1,349
)Acquisition of a business


(1,398
)


Net cash used in investing activities


(4,559
)


(1,349
)Financing activities:Principal payments on long-term debt


(7,433
)


(8,849
)Proceeds from exercise of stock options


387



90Net cash used in financing activities


(7,046
)


(8,759
)Decrease in cash and cash equivalents


(8,108
)


(1,111
)Cash and cash equivalents at beginning of period


15,259



14,912Cash and cash equivalents at end of period

$
7,151


$
13,801Supplemental disclosure of cash flow information:Cash paid for interest

$
3,119


$
4,504Cash paid for taxes

$
269


$
965





See accompanying notes.




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##### Table of Contents

PEDIATRIC SERVICES OF AMERICA, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSUnaudited





1.    Basis of
Presentation





The accompanying unaudited condensed consolidated financial statements of Pediatric Services of
America, Inc. (the Company) and its majority-owned subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all information and notes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments
(consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Results of operations for the three months and nine months ended June 30, 2002 are not necessarily indicative of the results to be
expected for the entire fiscal year ending September 30, 2002. These condensed consolidated financial statements should be read in conjunction with the Companys audited consolidated financial statements for the year ended September 30, 2001
included in the Companys Annual Report on Form 10-K for such year filed with the Securities and Exchange Commission. Principal accounting policies are set forth in the Companys 2001 Annual Report.





2.    Description of Business





The Company provides a broad range of pediatric health care services and equipment including nursing, respiratory therapy, rental and sale of durable medical equipment, pharmaceutical services and
infusion therapy services. In addition, the Company provides pediatric rehabilitation services, day treatment centers for medically fragile children, pediatric well care services and special needs educational services for pediatric patients. The
Company also provides case management services in order to assist the family and patient by coordinating the provision of services between the insurer or other payor, the physician, the hospital and other health care providers. The Companys
services are designed to provide a high quality, lower cost alternative to prolonged hospitalization for medically fragile children. As a complement to its pediatric respiratory and infusion therapy services, the Company also provides respiratory
and infusion therapy and related services for adults.





3.    Use of Estimates





The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of
net revenue and expenses during the reporting period. Actual results could differ from those estimates and the differences could be material. Due to the nature of the industry and the reimbursement environment in which the Company operates, certain
estimates are required in recording net revenue and determining the provision for doubtful accounts. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available to management.





4.    Accounts Receivable





Accounts receivable include approximately $7.9 million and $7.3 million for which services have been rendered but the amounts were unbilled as of June 30, 2002 and
September 30, 2001, respectively. Such unbilled amounts are primarily a result of the time required to process bills for services rendered.




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##### Table of Contents



PEDIATRIC SERVICES OF AMERICA, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSUnaudited(Continued)







5.    Goodwill





The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets,
effective October 1, 2001. SFAS No. 142 prohibits the amortization of goodwill and intangibles with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed by the Company for impairment at least annually and values reduced as
appropriate. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. The Company has completed the initial step of a transitional impairment test and, at June 30, 2002, there was no impairment resulting
from the transitional impairment test. Subsequent impairment losses will be reflected in operating income in the income statement. Had the Company been accounting for its goodwill under SFAS No. 142 for all periods presented, the Companys net
income (in thousands) and earnings per share would have been as follows:





Three Months Ended June 30, 2001

Nine Months Ended June 30, 2001Reported net income

$
626

$
4,196Add back goodwill amortization


557


1,671Adjusted net income

$
1,183

$
5,867Basic earnings per share:Reported net income

$
0.09

$
0.63Goodwill amortization


0.08


0.25Adjusted net income

$
0.17

$
0.88Diluted earnings per share:Reported net income

$
0.09

$
0.61Goodwill amortization


0.08


0.24Adjusted net income

$
0.17

$
0.85





Amortization expense on intangible assets was approximately $23,000
and $649,000 for the three months ended June 30, 2002 and 2001, respectively, and approximately $108,000 and $1,874,000 for the nine months ended June 30, 2002 and 2001, respectively.





6.    Concentration of Credit Risk





The
Companys principal financial instruments subject to potential concentrations of credit risk are cash and cash equivalents and accounts receivable. Cash and cash equivalents are held primarily in one financial institution. The Company performs
periodic evaluations of the relative credit standing of this financial institution. The concentration of credit risk with respect to accounts receivable, which are primarily health care industry related, represent a risk to the Company given the
current health care environment. The health care industry is experiencing the effects of the federal and state governments trend toward cost containment as government and other third-party payors seek to impose lower reimbursement and
utilization rates as well as negotiate reduced payment schedules with providers. The credit risk associated with the Companys accounts receivable is somewhat mitigated due to the large number of payors including Medicare, Medicaid, insurance
companies and individuals, and the diversity of geographic locations in which the Company operates.




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##### Table of Contents



PEDIATRIC SERVICES OF AMERICA, INC.





NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSUnaudited(Continued)







7.    Reclassifications





Certain amounts for prior periods have been reclassified to conform to the current year presentation.





8.    Income Taxes





The Company has recorded a partial valuation allowance against the net deferred tax assets as of June 30, 2002 and September 30, 2001. In recording the valuation allowance, management considered whether it is more likely
than not that some or all of the deferred tax assets will be realized. This analysis includes considering scheduled reversal of deferred tax liabilities, projected future taxable income, carryback potential and tax planning strategies.





In the three months and nine months ended June 30, 2002, the Company had a current income tax benefit of $0.4 million and a
current income tax expense of $0.1 million, respectively, which was offset by the reduction of the valuation allowance related to the net deferred tax asset resulting in zero income tax expense.





9.    Long-Term Borrowing Arrangements





In the first quarter of fiscal year 2002, the Company completed a transaction to repurchase a total of $5.0 million of the 10% Senior Subordinated Notes due 2008 (the Notes) for $4.5 million cash plus accrued interest. In
the third quarter of fiscal year 2002, the Company completed two transactions to repurchase a total of $3.0 million of the notes for $2.9 million cash plus accrued interest. The gain (net of the write-off of the related deferred financing fees) of
$0.03 million and $0.4 million is reflected as an extraordinary item in the condensed consolidated statements of operations for the three and nine months ended June 30, 2002, respectively.





10.    Basic and Diluted Net Income Per Share





Basic net income per share is computed using the weighted average number of shares of common stock outstanding during the period. Diluted net income per share is computed using the weighted average number of shares of common
stock outstanding and the dilutive effect of common equivalent shares (calculated using the treasury stock method). The dilutive effect of the weighted average options included in the diluted earnings per share is 358,235 and 238,826 for the three
months ended June 30, 2002, and 2001, respectively, and 405,212 and 249,795 for the nine months ended June 30, 2002 and 2001, respectively.





11.    Workers Compensation Bond Collateral





The Company has
secured surety bonds of $4.0 million to satisfy its workers compensation program requirements. The surety bonds are collateralized by $1.8 million cash posted to a third party escrow account and an existing irrevocable letter of credit in the
amount of $1.0 million whose beneficiary is the surety company.





12.    Acquisition of a Business





On May 31, 2002, the Company acquired the assets of the South Florida skilled pediatric nursing home health
division of the MedLink Group, Inc. (MedLink) for a purchase price of approximately $1.9 million in the form of $1.4 million in cash and $0.5 million in a note payable. The acquisition included certain of MedLinks skilled pediatric
facilities in Miami, Plantation, Stuart and West Palm Beach, Florida.




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##### Table of Contents




ITEM 2.    
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Forward-Looking
Statements





This Form 10-Q contains certain forward-looking statements (as such term is defined in the Private
Securities Litigation Reform Act of 1995) relating to future financial performance of Pediatric Services of America, Inc. (the Company ). When used in this Form 10-Q, the words may, could, should,
would, believe, feel, expects, anticipate, estimate,  intend, plan, potential and similar expressions may be indicative of forward-looking
statements. These statements by their nature involve substantial risks and uncertainties, certain of which are beyond the Companys control. The Company cautions that various factors, including the factors described hereunder and those
discussed in the Companys other filings with the Securities and Exchange Commission, as well as general economic conditions, industry trends, the Companys ability to collect for equipment sold or rented, assimilate and manage previously
acquired field operations, collect accounts receivable, including receivables related to acquired businesses and receivables under appeal, hire and retain qualified personnel and comply with and respond to billing requirements issues, including
those related to the Companys billing and collection system, nurse shortages, competitive bidding, HIPAA regulations, Average Wholesale Price (AWP) reductions and reduced state funding levels of Medicaid programs, could cause
actual results or outcomes to differ materially from those expressed in any forward-looking statements of the Company made by or on behalf of the Company. Any forward-looking statement speaks only as of the date on which such statement is made, and
the Company undertakes no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which such statement is made or to reflect the occurrence of an unanticipated event. New factors emerge
from time to time, and it is not possible for management to predict all of such factors. Further, management cannot assess the impact of each such factor on the business or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking statements.





The following discussion
should be read in conjunction with the unaudited condensed consolidated financial statements of the Company included in this quarterly report.





Recent Developments





As the Company continues to experience downward pressure on operating
margins from previously noted factors including; nurse shortages, selected reductions in pharmacy reimbursements, risk loss experience, and selected state Medicaid program funding reductions, senior management has determined that a re-prioritization
of near term tasks is necessary to achieve the stated goals of the Strategic Plan (the Plan). The Company intends to emphasize improved nurse scheduling efficiencies, improving location back office operations, accelerating opening of
start up locations, and reducing disposable and supply usage and pharmacy acquisition costs. Operations management has the responsibility to implement the necessary process changes in the upcoming quarters.





During the quarter ended June 30, 2002, the Company experienced a slight increase in total hours ordered and hours staffed; however,
unstaffed hours remained at approximately 10%. To date, management has seen inconsistent results in a number of markets and will continue to evaluate wage and benefit levels in each local market and respond accordingly. Management anticipates that
as implementation of the new nurse scheduling system continues, improvements in both unstaffed hours and gross margin levels should occur.





The following table represents the approximate total hours for the time periods indicated:





Total hours ordered

Total hours declined

Total case hours staffed

Total case hours unstaffedRolling 13 weeks ended March 28, 2002

962,435

101,332

768,468

92,635Rolling 13 weeks ended June 27, 2002

963,430

92,603

774,028

96,799




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##### Table of Contents




The Company is aware of ongoing changes in the infusion drug delivery
alternatives available to various payors. If some of these alternatives are selected by various payors, there could be significant reductions to the Companys future pharmacy revenues. As previously disclosed, during March 2002, the Company
finalized a contract amendment with Aetna which resulted in reduced reimbursement to the Company for certain specialty products. The Company is expanding its capability to distribute medications nationally and continues to assess opportunities for
injectables in the Aetna patient base as well as other payors. The Companys marketing strategy is to capitalize on potential core product opportunities within these patient bases, as well as to expand potential product offerings. In addition,
the Company is exposed to significant revenue fluctuations as a result of change in service or usage levels by a limited number of hemophilia factor patients.





As the Company evaluates the renewal of its risk management program, it is being advised by its broker to anticipate significant increases in premiums, retention limits and collateral requirements
across all major lines of insurance. The Company will evaluate potential carrier changes where it is advisable.





During the quarter ended June 30, 2002, the Company finalized plans to open a Prescribed Pediatric Extended Care (PPEC ) Center located in Augusta, Georgia. This eighth PPEC Center is scheduled to open in the first
quarter of fiscal year 2003.





On May 31, 2002, the Company acquired the assets of the South Florida skilled
pediatric home health division of the MedLink Group, Inc. (MedLink) for a purchase price of approximately $1.9 million in the form of $1.4 million in cash and $0.5 million in a note payable. The acquisition included certain of
MedLinks skilled pediatric facilities in Miami, Plantation, Stuart and West Palm Beach, Florida.





The
Companys management will continue to assess its various growth opportunities, ranging from evaluation of acquisition alternatives in key markets, geographical expansion through the use of start-up branch offices and the marketing impact on
existing branch office growth, in order to ration capital available from operations.





In the third quarter of
fiscal year 2002, the Company completed two transactions to repurchase a total of $3.0 million of the Notes for $2.9 million cash plus accrued interest. The gain (net of the write-off of the related deferred financing fees) of $0.03 million is
reflected as an extraordinary item in the condensed consolidated statements of operations for the three months ended June 30, 2002.





The Company operates in the healthcare industry which is subject to a variety of ever evolving sets of risks and challenges. These include but are not limited to: nurse shortages, competitive bidding, HIPAA regulations,
potential AWP reductions, adverse litigation, workers compensation losses and reduced state funding levels of Medicaid programs. Any changes to these risks and challenges could potentially have a material adverse effect on the Companys
operating results.





Significant Accounting Policies





Net Revenue





Due to the
nature of the healthcare industry and the reimbursement environment in which the Company operates, certain estimates are required to record net revenues and accounts receivable at their realizable values. Inherent in these estimates is the risk that
they will need to be revised or updated with the changes recorded in subsequent periods as additional information becomes available to management. Specifically, the complexity of many third-party billing arrangements and the uncertainty of
reimbursement amounts for certain services from certain payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review. As of
June 30, 2002, the Company had no material claims, disputes or unsettled matters with third-party payors, nor were there any material settlements with third-party payors.




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##### Table of Contents

Net revenue represents the estimated net realizable amounts from patients, third-party payors and others for patient
services and products rendered. Such revenue is recognized as the treatment plan is administered to the patient and recorded at amounts estimated to be received under reimbursement arrangements with payors. Net revenues to be reimbursed by contracts
with third-party payors are recorded at an amount to be realized under these contractual arrangements. Revenues from Medicaid and Medicare are generally based on reimbursement of the reasonable direct and indirect costs of providing services to
program participants. In certain situations, the services and products are recorded separately. In other situations, the services and products are billed and reimbursed on a per diem or contract basis whereby the insurance carrier pays the Company
one combined amount for treatment. Because the reimbursement arrangements in these situations are based on a per diem or contract amount, the Company does not maintain records that provide a breakdown between the service and product components.





The Company has developed a methodology to quantify the impact to net revenue of the inherent time lag between
certain patient treatment and input of the related information into its billing and collection system. This methodology measures relative changes in the time and overall activity level at each branch office location and aggregates these measurements
to estimate the impact to consolidated net revenue. Any unforeseen volatility to either the time or activity level at specific branch offices has the potential to significantly impact the estimate.





In other select cases, patient treatment may cease for a number of reasons including; re-hospitalizations, change in treatment needs, or
death, and a time lag may exist before this information is reflected in the Companys billing and collection system. The Company has developed a methodology which measures the relative magnitude of these events over recent time periods and
applies this methodology to reduce net revenues recognized in the current period.





Allowance for Doubtful
Accounts





In determining the adequacy of the allowance and related provision for doubtful
accounts, the Company has developed a process which combines statistical analysis of historical collection and write-off activity with a detailed review of existing account balances meeting certain criteria and their likelihood of being collected at
the amounts recorded. This detailed review involves both the assigned corporate reimbursement department personnel and the respective branch office location personnel assessing each patient claim that falls within prescribed age and amount criteria.
These assessments are aggregated and compared to the results of the statistical analysis to provide additional support to management in making the estimate of the allowance for doubtful accounts. Inherent in this estimate is the risk that it will
need to be revised or updated, with the changes recorded in subsequent periods, as additional information becomes available to management.





Accrued Insurance





The Companys insurance broker
retained the services of an independent actuary to prepare an actuarial analysis of the Companys development of reported and incurred but not reported claims. These estimates are updated quarterly and are used in the valuation of the accrued
insurance liability. Inherent in these estimates is the risk that they will need to be revised or updated, with the changes recorded in subsequent periods, as additional information becomes available to management.




12




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##### Table of Contents

Results of Operations





The following table is derived from the Companys unaudited condensed consolidated statements of operations for the periods indicated and presents results of operations as a percentage of net revenue and the
percentage change in the dollar of each item from the comparative prior period:





Percentage of Net Revenue


Period-to-Period Percentage Increase (Decrease)Three Months ended June 30,


Nine Months ended June 30,


Three Months ended
June 30,


Nine Months ended
June 30,2002


2001


2002


2001


2002


2002Net revenue

100.0
%

100.0
%

100.0
%

100.0
%

6
%

7
%Operating salaries, wages and employee benefits

46.4


45.1


46.4


45.1


10


10Other operating costs

38.0


37.2


36.8


37.0


9


6Corporate, general and administrative

9.2


9.9


9.4


10.0


(1
)

0Provision for doubtful accounts

0.7


0.8


0.7


1.3


(9
)

(45
)Depreciation and amortization

1.9


4.0


2.1


4.1


(48
)

(45
)Operating income

3.8


3.0


4.6


2.5


33


93Other income




0.1





0.0


(100
)

(100
)Interest income

0.1


0.3


0.1


0.4


(61
)

(75
)Interest expense

(1.4
)

(1.9
)

(1.5
)

(2.3
)

(23
)

(32
)Income before extraordinary item

2.5
%

1.5
%

3.2
%

0.6
%

89
%

414
%





The following tables set forth for the periods indicated the net
revenue breakdown based on current period billings allocated across service lines (in thousands):





Three Months Ended June 30,

Nine Months Ended June 30,2002

2001

2002

2001Pediatric Home Health CareNursing

$
21,710

$
21,352

$
65,469

$
63,808Respiratory Therapy Equipment


4,406


3,803


12,587


11,179Home Medical Equipment


365


377


1,032


1,045Pharmacy and Other


11,504


9,945


33,764


30,004Total Pediatric Home Health Care


37,985


35,477


112,852


106,036Adult Home Health Care:Nursing


2,927


2,945


8,674


8,430Respiratory Therapy Equipment


4,633


4,042


13,652


12,033Home Medical Equipment


606


632


1,850


2,103Pharmacy and Other


3,069


3,162


9,397


8,925Total Adult Home Health Care


11,235


10,781


33,573


31,491Total Net Revenue

$
49,220

$
46,258

$
146,425

$
137,527




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Three Months Ended June 30, 2002 Compared to Three Months Ended June 30, 2001





Net revenue increased $3.0 million, or 6%, to $49.2 million in the three months ended June 30, 2002 from $46.3 million in the
three months ended June 30, 2001. Pediatric home health care net revenue increased by $2.5 million for the three months ended June 30, 2002, due to a number of factors, including increased reimbursement rates from select pediatric nursing
payors, increased pharmacy deliveries and increased provision of core respiratory products and services as compared to the three months ended June 30, 2001. Adult health care net revenue increased $0.5 million for the three months ended June 30,
2002, primarily as a result of an increase in the provision of core products and services to respiratory therapy patients. In the three months ended June 30, 2002, the Company derived approximately 49% of its net revenue from commercial insurers and
other private payors, 44% from Medicaid and 7% from Medicare.





Operating salaries, wages and employee benefits
consist primarily of branch office employee costs. Operating salaries, wages and employee benefits increased $2.0 million, or 10%, to $22.8 million in the three months ended June 30, 2002 from $20.9 million in the three months ended June 30, 2001.
The Company experienced increases in its labor costs due to increased levels of nurses eligible for benefits and selected wage rate increases to both nurses and branch office employees. The Company incurred increased labor costs for new start-up
branches in the three months ended June 30, 2002 as compared to the three months ended June 30, 2001. As a percentage of net revenue, operating salaries, wages and employee benefits for the three months ended June 30, 2002 increased to 46% from
45% for the three months ended June 30, 2001.





Other operating costs include medical supplies, branch office rent,
utilities, vehicle expenses, allocated insurance costs and cost of sales. Cost of sales consists primarily of the costs of pharmaceuticals and related services. Other operating costs increased $1.5 million, or 9%, to $18.7 million in the three
months ended June 30, 2002 from $17.2 million in the three months ended June 30, 2001. The increase in other operating costs relates primarily to increased pharmacy deliveries, increased medical supply usage and increased business insurance costs.
As a percentage of net revenue, other operating costs for the three months ended June 30, 2002 increased to 38% from 37% for the three months ended June 30, 2001.





Corporate, general and administrative costs remained relatively unchanged at $4.6 million in the three months ended June 30, 2002 as compared to the three months ended June
30, 2001. As a percentage of net revenue, corporate, general and administrative costs for the three months ended June 30, 2002, decreased to 9% from 10% for the three months ended June 30, 2001.





Provision for doubtful accounts remained relatively unchanged at $0.3 million in the three months ended June 30, 2002 as compared to the three months ended June 30,
2001. Cash collections as a percentage of net revenue were 98% and 105% for the three months ended June 30, 2002 and 2001, respectively. Management remains pleased with cash collections and the accounts receivable aging.





Depreciation and amortization decreased $0.9 million, or 48%, to $1.0 million in the three months ended June 30, 2002 from $1.9 million in
the three months ended June 30, 2001. The Company adopted Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, effective October 1, 2001. SFAS No. 142 prohibits the amortization of goodwill
and intangibles with indefinite useful lives. SFAS No. 142 requires that these assets be reviewed for impairment at least annually. Intangible assets with finite lives will continue to be amortized over their estimated useful lives. Amortization
expense on intangible assets was $0.02 million and $0.6 million for the three months ended June 30, 2002 and 2001, respectively. The three month period ended June 30, 2001 included $0.6 million related to the amortization of goodwill.





Interest expense decreased $0.2 million, or 23%, to $0.7 million in the three months ended June 30, 2002 from $0.9 million in
the three months ended June 30, 2001. The Companys average debt outstanding decreased $6.5 million as the Company completed several transactions to repurchase a portion of the Notes.





Interest income decreased $0.1 million in the three months ended June 30, 2002. The Company invested its excess cash balances in highly liquid investments.




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Nine Months Ended June 30, 2002 Compared to Nine Months Ended June 30, 2001





Net revenue increased $8.9 million, or 7%, to $146.4 million in the nine months ended June 30, 2002 from $137.5 million in the
nine months ended June 30, 2001. Pediatric home health care net revenue increased by $6.8 million for the nine months ended June 30, 2002 due to a number of factors, including increased pharmacy deliveries, reimbursement rates from select
pediatric nursing payors, and increased provision of core respiratory products and services as compared to the nine months ended June 30, 2001. Adult health care net revenue increased $2.1 million for the nine months ended June 30, 2002, primarily
as a result of an increase in core products and services to pharmacy and respiratory therapy patients. In the nine months ended June 30, 2002, 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 increased $6.0
million, or 10%, to $68.0 million in the nine months ended June 30, 2002 from $62.0 million in the nine months ended June 30, 2001. The Company experienced increases in its labor costs due to increased levels of nurses eligible for benefits and
select wage rate increases to both nurses and branch office employees. In addition, the Company incurred increased labor costs for new start-up branches in the nine months ended June 30, 2002. As a percentage of net revenue, operating salaries,
wages and employee benefits for the nine months ended June 30, 2002 increased to 46% from 45% for the nine months ended June 30, 2001.





Other operating costs increased $3.0 million, or 6%, to $53.9 million in the nine months ended June 30, 2002 from $50.9 million in the nine months ended June 30, 2001. The increase in other operating costs relates primarily
to increased pharmacy deliveries, increased medical supply usage and increased business insurance costs. As a percentage of net revenue, other operating costs for the nine months ended June 30, 2002 remained unchanged at 37% as compared to the nine
months ended June 30, 2001.





Corporate, general and administrative costs remained essentially unchanged at $13.7
million in the nine months ended June 30, 2002 as compared to the nine months ended June 30, 2001. As a percentage of net revenue, corporate, general and administrative costs for the nine months ended June 30, 2002 decreased to 9% from 10% for the
nine months ended June 30, 2001.





Provision for doubtful accounts decreased $0.8 million, or 45%, to $1.0 million
in the nine months ended June 30, 2002 from $1.8 million in the nine months ended June 30, 2001. Cash collections as a percentage of net revenue were 99% and 103% for the nine months ended June 30, 2002 and 2001, respectively. Management remains
pleased with cash collections and the accounts receivable aging.





Depreciation and amortization decreased $2.6
million, or 45%, to $3.1 million in the nine months ended June 30, 2002 from $5.6 million in the nine months ended June 30, 2001. Amortization expense on intangible assets was $0.1 million and $1.9 million for the nine months ended June 30, 2002 and
2001, respectively. The nine month period ended June 30, 2001 included $1.7 million related to the amortization of goodwill.





Interest expense decreased $1.0 million, or 32%, to $2.1 million in the nine months ended June 30, 2002 from $3.1 million in the nine months ended June 30, 2001. The Companys average debt outstanding decreased $11.5 million as
the Company completed several transactions to repurchase a portion of the Notes.





Interest income decreased $0.4
million in the nine months ended June 30, 2002. The Company invested its excess cash balances in highly liquid investments.





Liquidity
and Capital Resources





In the first quarter of fiscal year 2002, the Company completed a transaction to
repurchase a total of $5.0 million of the Notes for $4.5 million cash plus accrued interest. In the third quarter of fiscal year 2002, the Company completed two transactions to repurchase a total of $3.0 million of the notes for $2.9 million
cash plus accrued interest. The gain (net of the write-off of the related deferred financing fees) of $0.03 million and $0.4




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million is reflected as an extraordinary item in the condensed consolidated statements of operations for the three and nine months ended June 30, 2002. At June 30, 2002, total borrowings under
the Notes were approximately $24.4 million.





The Indenture under which the Notes were issued permits the Company
to repurchase the Notes at its discretion. All bids to repurchase have been based upon a number of factors including: cash availability, interest rates on invested cash, other capital investment alternatives, and relative ask prices quoted by the
market maker. Each decision by the Company to repurchase has been arrived at independently using the above criteria and the Company does not have a formal plan in place to repurchase the Notes.





On May 31, 2002, the Company acquired the assets of the South Florida skilled pediatric nursing home health division for the MedLink Group, Inc. (MedLink)
for a purchase price of approximately $1.9 million in the form of $1.4 million in cash and $0.5 million in a note payable.





Cash collections as a percentage of net revenue for the three months ended June 30, 2002 and 2001 were 98% and 105%, respectively. Ongoing refinements to the Companys reimbursement process continues and indications of progress
to date are positive. While management anticipates that continued implementation of the Plan will achieve the desired results, there can be no assurance that this will result in the Company realizing operating improvements and improved cash flow.





The Companys investments in property and equipment are attributable largely to purchases of medical
equipment rented to patients and computer equipment. For the nine months ended June 30, 2002, the Company purchased medical equipment with technology upgrades to service existing patients and completed leasehold improvements for new start-up
locations. The Company anticipates future capital expenditures for maintenance, support and enhancements of existing technology, as well as continued investments in new start up locations. The Company anticipates funding these capital expenditures
with cash flow from operations.





As a result of operating in the health care industry, the Companys business
entails an inherent risk of lawsuits alleging malpractice, product liability or related legal theories, which can involve large claims and significant defense costs. The Company is, from time to time, subject to such suits arising in the ordinary
course of business. The Company currently maintains professional and commercial liability insurance intended to cover such claims. As of June 30, 2002, this insurance coverage is provided under a claims-made policy which provides,
subject to the terms and conditions of the policy, coverage for certain types of claims made against the Company during the term of the policy and does not provide coverage for losses occurring during the terms of the policy for which a claim is
made subsequent to the termination of the policy. Should the policy not be renewed or replaced with equivalent insurance, claims based on occurrences during its term but asserted subsequently would be uninsured. There can be no assurance that the
coverage limits of the Companys insurance policy will be adequate. In addition, the Companys medical malpractice insurance carrier has announced its intention to exit the marketplace. Since the date of the announcement, management
believes the carrier has used unusually aggressive strategies for resolving open cases which has negatively impacted the Companys loss history and cash funding requirements, and could potentially increase future premiums with subsequent
carriers. In addition, while the Company has been able to obtain various forms of insurance in the past, such insurance varies in coverage, cost and collateral requirements and may or may not be available in the future on acceptable terms. As the
Company enters its annual risk program renewal period, the possibility exists that changes will be made to selected insurance carriers. This may result in a demand for increased collateral for existing claims as well as additional collateral
requirements with the new carriers. While the Company expects to negotiate both the amount and form of these collateral requirements, the possibility exists that the Companys liquidity position will be materially impacted.





In addition, the Company is subject to accident claims arising out of the normal operation of its fleet of vans and small
trucks, and maintains insurance intended to cover such claims. A successful claim against the Company in excess of the Companys insurance coverage could have an adverse effect upon the Companys business. Claims against the Company,
regardless of their merits or eventual outcome also may have an adverse effect upon the Companys reputation and business.




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Management currently believes that its liquidity position will be adequate to satisfy the Companys working capital
requirements, professional and commercial liability insurance loss funding, selected potential acquisitions, funding of start up locations, workers compensation collateral requirements, and income tax payments. The Companys current
source of liquidity is cash on hand and cash flow from operations and as a result, the Company is exposed to fluctuations in cash collection results. However, the Company has evaluated several senior debt proposals and believes that it could secure
such financing if needed.





Variation in Quarterly Operating Results





The Companys quarterly results may vary significantly depending primarily on factors such as re-hospitalizations of patients, the timing of new branch office openings
and pricing pressures due to legislative and regulatory initiatives to contain health care costs. Because of these factors, the Companys operating results for any particular quarter may not be indicative of the results for the full fiscal
year.





ITEM 3.    
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





The Company faces a number
of market risk exposures including risks related to cash and cash equivalents, accounts receivable and interest rates. Cash and cash equivalents are held primarily in one financial institution. The Company performs periodic evaluations of the
relative credit standing of this financial institution. The concentration of credit risk with respect to accounts receivable, which are primarily health care industry related, represent a risk to the Company given the current environment in the
health care industry. The risk is somewhat mitigated due to the large number of payors including Medicare and Medicaid, insurance companies, individuals and the diversity of geographic locations in which the Company operates.





The Companys Notes, issued in 1998, have a fixed coupon rate of 10%. The fair value of the Companys Notes is
subject to change as a result of changes in market prices or interest rates. The Company estimates potential changes in the fair value of interest rate sensitive financial instruments based on the hypothetical increase (or decrease) in interest
rates. The Companys use of this methodology to quantify the market risk of such instruments should not be construed as an endorsement of its accuracy or the accuracy of the related assumptions. The quantitative information about market risk is
necessarily limited because it does not take into account other factors such as the Companys financial performance and credit ratings.





Based on a hypothetical immediate 150 basis point increase in interest rates at June 30, 2002, the market value of the Companys Notes would be reduced by approximately $1.5 million. Conversely, a
150 basis point decrease in interest rates would result in a net increase in the market value of the Companys Notes outstanding at June 30, 2002 of approximately $1.6 million.





PART II
OTHER INFORMATION





ITEM 1.    
LEGAL PROCEEDINGS.





On March 11, 1999, a putative class action complaint was filed
against the Company in the United States District Court for the Northern District of Georgia. The Company and certain of its then current officers and directors were among the named defendants. To the Companys knowledge, no other putative
class action complaints were filed within the 60-day time period provided for in the Private Securities Litigation Reform Act. The plaintiffs and their counsel were appointed lead plaintiffs and lead counsel, and an amended complaint was filed on or
about July 22, 1999. The amended complaint did not specify an amount or range of damages that the plaintiffs were seeking. In general, the plaintiffs alleged that prior to the decline in the price of the Companys Common Stock on July 28, 1998,
there were violations of the Federal Securities Laws arising from misstatements of material information in and/or omissions of material information from certain of the Companys securities filings and other public disclosures principally
related to its reporting of accounts receivable and the allowance for doubtful accounts. The amended complaint purported to expand the class to include all persons who purchased the Companys Common Stock during the period from July 29, 1997
through and including July 29, 1998. On October 8, 1999, the




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Company and the individuals named as defendants moved to dismiss the amended complaint on both substantive and procedural grounds. On March 30, 2000, the Court denied the motions to dismiss. On
May 15, 2000, the Company and the individuals named as defendants filed their answer, denying liability.





On
February 27, 2001, Plaintiffs Motion for Class Certification was granted by the Court. Fact discovery in the case closed on July 31, 2001. On September 5, 2001, Plaintiffs moved for leave to file a Second Amended Complaint and to expand
the class period. The proposed Second Amended Complaint purported to expand the class to include all persons who purchased the Companys stock between November 11, 1996 and July 28, 1998. The Court denied Plaintiffs Motion on October 12,
2001.





In January, 2002, the parties entered into a Stipulation of Settlement settling all claims asserted in the
lawsuit against all parties for a total of $3.2 million, subject to court approval. On March 14, 2002, following a hearing on the fairness, reasonableness and adequacy of the proposed settlement, the Court entered an Order approving the settlement.
The time for appeal of the Settlement Order has expired and no appeal has been taken. Under the terms of the settlement, the $3.0 million contribution of the Company to the settlement will be fully funded by its insurance carrier under its Directors
and Officers insurance policy.





On July 28, 1999, a civil action was filed against the Company and certain of its
current and former officers and directors in the United States District Court for the Middle District of Tennessee. The action was filed by Phyllis T. Craighead and Healthmark Partners, LLC, as well as a liquidating trust apparently established to
wind up the business affairs of their corporation, Kids & Nurses, Inc. In the original complaint, in general, the plaintiffs alleged that the defendants violated Federal and Tennessee Securities Laws and committed common law fraud in connection
with the Companys purchase of Kids & Nurses, Inc. in November, 1997. The plaintiffs seek actual damages in an amount between $2.5 million and $3.5 million, plus punitive damages and the costs of litigation, including reasonable
attorneys fees. On September 24, 1999, the defendants filed a motion to dismiss the complaint on both substantive and procedural grounds. On December 20, 1999, the plaintiffs filed an amended complaint in which they withdrew their claims under
the Federal Securities Laws, and added claims under Georgias securities laws. The plaintiffs also filed a brief in response to the Companys motion to dismiss. On February 1, 2000, the defendants filed an amended motion to dismiss
addressing the allegations of the amended complaint. On March 29, 2001, the motion to dismiss was denied without prejudice pending a ruling by the Tennessee Supreme Court on an unrelated case. On May 2, 2001, the Company and the individuals named as
defendants, filed their answer, denying liability. On May 8, 2002, the case was dismissed with prejudice, subject only to the Plaintiffs reservation of their rights to participate in the Class Settlement.





In the opinion of the Companys management, the ultimate disposition of these two lawsuits should not have a material adverse effect
on the Companys financial condition or results of operations, however, there can be no assurance that the Company will not sustain material liability as a result of or related to these lawsuits.





ITEM 6.    
EXHIBITS AND REPORTS ON FORM 8-K.





(a)  Exhibits





No exhibits are filed as part of this report.





(b)  Reports on Form 8-K





The Company did not file a
Current Report on Form 8-K during the quarter ended June 30, 2002.




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SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





PEDIATRIC SERVICES OF AMERICA, INC. (Registrant)By:

/s/    JAMES M.
MCNEILLJames M. McNeill Senior
Vice President, Chief Financial Officer, Treasurer and Secretary (Duly authorized officer and Principal Financial Officer)


Date: August 7, 2002.




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