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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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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 0-26762
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PEDIATRIX MEDICAL GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0271219
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1455 NORTH PARK DRIVE, FT. LAUDERDALE, FLORIDA 33326
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) (954) 384-0175
Securities registered pursuant to Section 12(b) of the Act:
Name of each
Title of each class exchange on which registered
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COMMON STOCK, NEW YORK STOCK EXCHANGE
$.01 PAR VALUE PER SHARE
Securities registered pursuant to Section 12(g) of the Act: NONE
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. |X|
The aggregate market value of shares of Common Stock held by non-affiliates
of the registrant as of February 28, 1996, was approximately $518,335,518 based
on a $37.50 closing sales price for the Common Stock on the New York Stock
Exchange on such date. For purposes of this computation, all executive officers,
directors and 5% beneficial owners of the common stock of the registrant have
been deemed to be affiliates. Such determination should not be deemed to be an
admission that such directors, officers or 5% beneficial owners are, in fact,
affiliates of the registrant.
The number of shares of Common Stock, $.01 par value, of the registrant
outstanding as of February 28, 1997 were 14,911,482.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the following documents have been incorporated by reference
into the parts indicated: The registrant's definitive Proxy Statement to be
filed with the Securities and Exchange Commission not later than 120 days after
the end of the fiscal year covered by this report-Part III.
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Page 1 of 49
Exhibit Index at page 46
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INDEX TO ITEMS
Page
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PART I.........................................................................3
Item 1. Business.................................................... 3
Item 2. Properties..................................................11
Item 3. Legal Proceedings...........................................11
Item 4. Submission of Matters to a Vote of Security Holders.........11
PART II.......................................................................11
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters.........................................11
Item 6. Selected Financial Data.....................................12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................13
Item 8. Financial Statements and Supplementary Data.................18
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................39
PART III......................................................................39
Item 10. Directors and Executive Officers of the Registrant.........39
Item 11. Executive Compensation.....................................39
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................39
Item 13. Certain Relationships and Related
Transactions...............................................39
PART IV.......................................................................40
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................40
Schedules.....................................................................41
Exhibits......................................................................42
Signatures....................................................................45
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PART I
ITEM 1. BUSINESS
Pediatrix Medical Group, Inc. ("PMG") includes its subsidiaries and the
professional associations and partnerships (the "PA Contractors") which are
separate legal entities that contract with PMG to provide physician services in
certain states and Puerto Rico. PMG and the PA Contractors are collectively
referred to herein as the "Company" or "Pediatrix".
GENERAL
Pediatrix is the nation's leading provider of physician management services
to hospital-based neonatal intensive care units ("NICUs"). NICUs provide medical
care to newborn infants with low birth weight and other medical complications,
and are staffed with specialized pediatric physicians, known as neonatologists.
Based upon its own market research, knowledge of the healthcare industry and
experience in neonatology, the Company believes that it is the only provider of
NICU physician management services that markets its services on a national
basis. The Company also provides physician management services to (i)
hospital-based pediatric intensive care units ("PICUs"), units which provide
medical care to critically ill children and are staffed with specially-trained
pediatricians, and (ii) pediatrics departments in hospitals. As of December 31,
1996, the Company provided services to 68 NICUs, 8 PICUs and 3 pediatrics
departments in 17 states and Puerto Rico and employed or contracted with
approximately 195 physicians.
The Company staffs and manages NICUs and PICUs in hospitals, providing the
physicians, professional management and administrative support, including
physician billing and reimbursement expertise and services. The Company's policy
is to provide 24-hour coverage at its NICUs and PICUs with on-site or on-call
physicians. As a result of this policy, physicians are available to provide
continuous pediatric support to other areas of the hospital on an as-needed
basis, particularly in the obstetrics, nursery and pediatrics departments, where
immediate accessibility to specialized care is critical.
Pediatrix established its leading position in physician management services
to NICUs by developing a comprehensive care model and management and systems
infrastructure that address the needs of patients, hospitals, payor groups and
physicians. Pediatrix addresses the needs of (i) patients by providing
continuous, comprehensive, professional quality care, (ii) hospitals by
recruiting, credentialing, and retaining neonatologists and hiring related staff
to operate NICUs in a cost-effective manner thereby relieving hospitals of the
financial and administrative burdens of operating the NICUs, (iii) payor groups
by providing cost-effective care to patients and (iv) physicians by providing
administrative support, including physician billing and reimbursement expertise
and services, to enable them to focus on providing care to patients, and by
offering an opportunity for career advancement within Pediatrix.
RECENT DEVELOPMENTS
During 1996, the Company completed ten acquisitions, which added 33 NICUs,
4 PICUs and 2 pediatrics departments. Additionally, 3 NICUs were added through
the Company's internal marketing activities. In the aggregate, the number of
NICU patient days attributable to these units was approximately 78,000 during
1996. The Company has developed regional networks in Denver, Phoenix and
Southern California and intends to develop additional regional and state-wide
networks. The Company believes these networks, augmented by ongoing marketing
and acquisition efforts, will strengthen its position with third party payors,
such as Medicaid and managed care organizations.
In August 1996 the Company completed a secondary offering of 1,755,000
shares of Common Stock resulting in net cash proceeds to the Company of
approximately $59.1 million.
During the period of January 1 through March 20, 1997, the Company
completed 3 acquisitions, adding a total of 6 NICUs. In addition, 3 NICUs were
added through internal marketing efforts.
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INDUSTRY OVERVIEW
The evolving managed care environment has created substantial cost
containment pressures for all constituents of the healthcare industry. The
increasing use of fixed-payment systems that shift financial risk from payors to
providers has forced hospitals, in particular, to be more cost-effective in all
aspects of their operations. A trend among hospitals is to utilize third party
contract management companies to manage specialized functions in an effort to
contain costs, improve utilization management, and reduce administrative
burdens. Physician management organizations provide hospitals with professional
management of staff, including recruiting, staffing and scheduling of
physicians.
Physicians are responding to cost containment pressures by joining group
practices through which they have greater leverage to negotiate and contract
with hospitals and managed care payors. Physician management organizations
provide a physician group practice an alternative to self management that
enables physicians to maintain their clinical autonomy while creating greater
negotiating power with payors and hospitals, and providing administrative
support to deal with the increasing complexity of billing and reimbursement.
Physician group practices are becoming larger and more prevalent. The Company
believes that as cost pressures continue to influence the medical industry, the
trend of physicians joining group practices will continue. Although the Company
continues to market its services to hospitals to obtain new contracts, the
Company has shifted its strategy to growth through acquisitions as physicians
become more receptive to being acquired.
The Company believes that hospitals will continue to outsource certain
units, such as NICUs and PICUs, on a contract management basis. NICUs and PICUs
present significant operational challenges for hospitals, including complex
billing procedures, highly variable admissions rates, and difficulties in
recruiting and retaining qualified physicians. These operational challenges
generally make it difficult for hospitals to operate these units profitably.
Traditionally, hospitals have staffed their NICUs internally, through
affiliations with small, local physician groups or with independent
practitioners. These small practices typically lack the necessary expertise and
support services in billing and reimbursement, recruiting and effective medical
management to operate NICUs on a cost-effective basis. Hospitals are
increasingly seeking to contract with physician management services
organizations that have the capital resources, information and reimbursement
systems and practice management expertise that NICUs require to accept and
manage risk in the evolving managed care environment.
Of the approximately four million babies born in the United States
annually, approximately 10% to 15% require neonatal treatment. Demand for
neonatal services is primarily due to premature births, and to infants having
difficulty making the transition to extrauterine life. A majority of high-risk
mothers whose births require neonatal treatment are not identified until the
time of delivery, thus heightening the need for continuous coverage by
neonatologists. Across the United States, NICUs are concentrated primarily among
hospitals located in metropolitan areas with a higher volume of births. NICUs
are important to hospitals since obstetrics generates one of the highest volumes
of admissions and obstetricians generally prefer to perform deliveries at
hospitals with NICUs. Hospitals must maintain cost-effective care and service in
these units to enhance the hospital's desirability to the community, physicians
and managed care payors.
STRATEGY
The Company's objective is to enhance its position as the nation's leading
provider of physician management services to NICUs by adding new units and
increasing same unit growth. The key elements of the Company's strategy are as
follows:
Focus on Neonatology, Perinatology and Pediatrics. Since its founding in
1979, the Company has focused exclusively on neonatology and pediatrics. As a
result of this focus the Company believes it has (i) developed significant
expertise in the complexities of billing and reimbursement for neonatology
physician services and (ii) a competitive advantage in recruiting and retaining
neonatologists seeking to join a group practice. The Company believes its
continued focus will allow it to enhance its position as the nation's leading
provider of physician management services to NICUs. Pediatrix has begun to
explore the integration of perinatology and, in the future, will investigate
obstetrics and other areas of pediatrics beyond neonatology.
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Acquire Neonatal Physician Group Practices. The Company intends to further
increase the number of units at which it provides physician management services
by acquiring well-established neonatal physician group practices. The Company
believes that it will continue to benefit from physicians joining larger
practice groups in an effort to increase negotiating power with managed care
organizations and eliminate administrative burdens, while maintaining clinical
autonomy. The Company completed its first acquisition of a neonatology physician
group practice in California in July 1995 and completed acquisitions of ten
neonatology physician group practices during 1996. The Company is actively
pursuing acquisitions of other neonatal physician group practices. No assurance
can be given that future acquisition candidates will be identified or that any
future acquisitions will be consummated. See "Recent Developments."
Develop Regional Networks. The Company intends to develop regional and
state-wide networks of NICUs in geographic areas with high concentrations of
births. The Company operates regional networks in Denver, Phoenix and Southern
California. The Company believes that the development of regional and state-wide
networks will strengthen its position with third party payors, such as Medicaid
and managed care organizations, since such networks will offer more choice to
the patients of third party payors.
Increase Same Unit Growth. The Company seeks to provide its services to
hospitals where the Company can benefit from increased admissions and intends to
increase revenues at existing units by providing support to areas of the
hospital outside the NICU and PICU, particularly in the obstetrics, nursery and
pediatrics departments, where immediate accessibility to specialized care is
critical. These services generate incremental revenue to the Company, contribute
to the Company's overall profitability, enhance the hospital's profitability,
strengthen the Company's relationship with the hospital, and assist the hospital
in attracting more admissions by enhancing the hospital's reputation in the
community as a full-service critical care provider.
Assist Hospitals to Control Costs. The Company intends to continue
assisting hospitals to control costs. The Company's comprehensive care model,
which promotes early intervention by neonatologists in emergency situations, as
well as the retention of qualified neonatologists, improves the overall
cost-effectiveness of care. The Company believes that its ability to assist
hospitals to control costs will allow it to continue to be successful in adding
new units at which the Company provides physician management services.
Address Challenges of Managed Care Environment. The Company intends to
continue to develop new methods of doing business with managed care and third
party payors, which will allow it to develop relationships among payors,
hospitals and the Company. The Company is also prepared to enter into flexible
arrangements with third party payors, including capitation arrangements. As the
nation's leading provider of physician management services to NICUs, the Company
believes that it is well-positioned to address the needs of managed care
organizations and other third party payors which seek to contract with
cost-effective, quality providers of medical services.
PHYSICIAN MANAGEMENT SERVICES
The Company provides physician management services to NICUs and PICUs,
providing (i) a medical director to manage the unit, (ii) recruiting, staffing
and scheduling of physicians and certain other medical staff, (iii) neonatology
and pediatric support to other hospital departments, (iv) pediatric subspecialty
services and (v) billing and reimbursement expertise and services. These
physician management services include:
Unit Management. The Company staffs each NICU and PICU it manages with a
medical director who reports to the Chief Medical Officer ("CMO") of the
Company. The CMO and all medical directors at these units are board certified or
board eligible in neonatology, pediatrics, pediatric critical care or pediatric
cardiology. In addition to providing medical care and physician management in
the unit, the medical director is responsible for (i) the overall management of
the unit, including quality of care, professional discipline, utilization
review, physician recruitment, staffing and scheduling, (ii) serving as a
liaison to the hospital administration, (iii) maintaining professional and
public relations in the hospital and the community and (iv) monitoring the
Company's financial success within the unit.
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Recruiting, Staffing and Scheduling. The Company is responsible for
recruiting, staffing and scheduling the neonatologists, pediatricians and
advanced registered nurse practitioners ("ARNPs") within the NICU and PICU of
the hospital. The Company's recruiting department maintains an extensive
database of neonatologists and pediatricians nationwide from which to draw for
recruiting purposes. All candidates are pre-screened and their credentials,
licensure and references are checked and verified by the Company. The CMO and
the medical directors play a key role in the recruiting and interviewing process
before candidates are introduced to hospital administrators. The NICUs and PICUs
managed by the Company are staffed with at least one neonatologist or
pediatrician on-site or available on-call. All of these physicians are board
certified or board eligible in neonatology, pediatrics, pediatric critical care
or pediatric cardiology. The Company also employs or contracts with ARNPs, who
assist medical directors and other physicians in operating the NICUs and PICUs.
All ARNPs have either a certificate as a neonatal nurse practitioner or
pediatric nurse practitioner or a masters degree in nursing, and have previous
neonatal or pediatric experience. With respect to the physicians that are
employed by or under contract with the Company, the Company assumes
responsibility for salaries, benefits, bonuses, group health insurance and
physician malpractice insurance. See "-Contractual Relationships."
Support to Other Hospital Departments. As part of the Company's
comprehensive care model, physicians provide pediatric support services to other
areas of hospitals, particularly in the obstetrics, nursery and pediatrics
departments, where immediate accessibility to specialized care is critical. The
Company believes this support (i) improves its relations with hospital staff and
referring physicians, (ii) enhances the hospital's reputation in the community
as a full-service critical care provider, (iii) increases admissions from
referring obstetricians and pediatricians, (iv) integrates the physicians into a
hospital's medical community, (v) generates incremental revenue which
contributes to the Company's overall profitability and (vi) increases the
likelihood of renewing and adding new hospital contracts.
Pediatric Subspecialties. The Company has developed a pediatric
subspecialty program to complement and enhance its comprehensive care model. The
program consists of several pediatric cardiologists and nephrologists (kidney
specialists). These physicians provide out-patient services in offices outside
contracting hospitals and assist attending physicians at certain hospitals. The
Company is exploring the possibility of expanding the existing program in
pediatric cardiology in line with the Company's other strategic objectives in
neonatology and pediatric intensive care. Expansion of the program will depend
in part on the demand for such critical care services at hospitals and by payor
groups.
Billing and Reimbursement. The Company assumes responsibility for all
aspects of the billing, reimbursement and collection process relating to
physician services. Patients and/or third party payors receive a bill from the
Company for physician services, and the hospital bills and collects separately
for all other services. To address the increasingly complex and time-consuming
process for obtaining reimbursement for medical services, the Company has
invested in both the technical and human resources necessary to create an
efficient billing and reimbursement process, including specific claim forms and
software systems. The Company begins this process by providing training to
physicians that emphasizes a detailed review of and proper coding protocol for
all procedures performed and services provided to achieve appropriate collection
of revenues for physician services. Historically, the Company's billing and
collection operations were conducted from its corporate headquarters in Fort
Lauderdale, Florida. In June 1996, the Company opened a business office in
Orange, California to support its operations in California.
MARKETING
Historically, most of the Company's growth was generated internally through
marketing efforts and referrals. Beginning in the latter part of 1995, the
Company significantly increased its acquisition activities to capitalize on the
opportunities created by the trend toward consolidation in the healthcare
industry. The Company's marketing program to neonatal physician groups consists
of (i) market research to identify established physician groups, (ii)
telemarketing to identify and contact acquisition candidates, as well as
hospitals with high demand for NICU services, and (iii) other sales and business
development personnel that conduct on-site visits along with senior management.
The Company also advertises its services in hospital and healthcare trade
journals, participates at hospital and physician trade conferences, and markets
its services directly to hospital administrators
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and medical staff. In addition, the Company intends to focus on developing
additional regional networks and state-wide networks to strengthen its position
with third party payors, such as Medicaid and managed care organizations.
MANAGEMENT INFORMATION SYSTEMS
The Company maintains several systems to support day-to-day operations,
business development and ongoing clinical and business analysis, including (i) a
Company-wide electronic mail system to assist intracompany communications and
conferencing, including interaction among physicians regarding clinical matters
on a real-time basis, (ii) electronic interchange with payors utilizing
electronic benefits verification and claims submission, (iii) a database used by
the business development and marketing departments in recruiting individual
physicians and identifying potential neonatal and perinatal physician group
acquisition candidates, which is updated through telemarketing activities,
personal contacts, professional journals and mail solicitation, (iv) electronic
imaging to streamline accessibility to operational documents, and (v) a clinical
tracking system used by the physicians to assist in the creation of their
respective paperwork and establish the basis for the consolidated clinical
information database used to support the Company's education, research and
quality assurance programs. Ongoing development will provide even greater
streamlining of information from the clinical systems through the reimbursement
process allowing the overall process to be expedited further.
The Company's management information system is an integral component of the
billing and reimbursement process. The Company's system enables it to track
numerous and diverse third party payor relationships and payment methods and
provides for electronic interchange in support of insurance benefits
verification and claims processing to payors accepting electronic submission.
The Company's system was designed to meet its requirements by providing maximum
flexibility as payor groups upgrade their payment and reimbursement systems.
CONTRACTUAL RELATIONSHIPS
Hospital Relationships. Many of the Company's contracts with hospitals
grant the Company the exclusive right and responsibility to manage the provision
of physician management services to the NICUs and PICUs. The contracts typically
have terms of three to five years and renew automatically for additional terms
of one to five years unless otherwise terminated by either party. The contracts
typically provide that the hospital may terminate the agreement prior to the
expiration of the initial term upon 30 days written notice in the event any
physician (i) loses medical staff membership privileges, (ii) is convicted of a
felony, (iii) is unable to perform duties due to disability or (iv) commits a
grossly negligent act that jeopardizes the health or safety of a patient.
The Company bills for the physicians' services on a fee-for-service basis
separately from other charges billed by the hospital. Certain contracting
hospitals that do not generate sufficient patient volume agree to pay the
Company administrative fees to assure a minimum revenue level. Administrative
fees include guaranteed payments to the Company, as well as fees paid to the
Company by certain hospitals for administrative services performed by the
Company's medical directors at such hospitals. Administrative fees accounted for
13%, 12% and 8% of the Company's net patient service revenue during 1994, 1995
and 1996, respectively. The hospital contracts typically require that the
Company and the physicians performing services maintain professional liability
insurance and general liability insurance in minimum amounts of $1.0 million per
claim per physician and $3.0 million in the aggregate per year per physician.
The Company contracts for and pays the premiums for such insurance on behalf of
the physicians. See "-- Professional Liability and Insurance."
Payor Relationships. While virtually all of the Company's contracts with
third party payors are discounted fee for service contracts, as of December 31,
1996, the Company had five contracts that provide for capitated payments,
including three contracts in California with an independent practice association
("IPA"), one contract in Arizona with an HMO and one contract in Texas with an
IPA. The Company is prepared to enter into capitation arrangements with other
third party payors. In the event the Company enters into relationships with
third party payors with respect to regional and state-wide networks, such
relationships may be on a capitated basis.
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PA Contractor Relationships. PMG has entered into management agreements
("PA Management Agreements") with PA Contractors in all states in which it
operates, other than Florida. There is at least one PA Contractor in each state
in which the Company operates. Each PA Contractor is owned by a physician
licensed in the jurisdiction in which the PA Contractor operates, who is also an
officer of the PA Contractor. Under the PA Management Agreements, the PA
Contractors delegate to PMG the administrative, management and support functions
(but not any functions constituting the practice of medicine) that the PA
Contractors have agreed to provide to the hospital. In consideration of such
services, each PA Contractor pays PMG a percentage of the PA Contractor's gross
revenue (but in no event greater than the net profits of such PA Contractor), or
a flat fee. PMG has the discretion to determine whether the fee shall be paid on
a monthly, quarterly or annual basis. The management fee may be adjusted from
time to time to reflect industry standards and the range of services provided by
the PA Contractor. The agreements provide that the term of the arrangements are
permanent, subject only to termination by PMG, and that the PA Contractor shall
not terminate the agreement without PMG's prior written consent. Also, the
agreements provide that PMG or its assigns has the right, but not the
obligation, to purchase the stock of the PA Contractor. See Note 2 to the
Consolidated Financial Statements.
Physician Relationships. The Company contracts with the PA Contractors to
provide the medical services required to fulfill its obligations to hospitals.
The physician employment agreements typically have terms of three to five years
and can be terminated by either party at any time upon 90 days prior written
notice. The physicians generally receive a base salary plus a productivity
bonus. The physician is required to hold a valid license to practice medicine in
the appropriate jurisdiction in which the physician practices and to become a
member of the medical staff, with appropriate privileges at the hospital. The
Company is responsible for billing patients and third party payors for services
rendered by the physician, and the Company has the exclusive right to establish
the schedule of fees to be charged for such services. Substantially all of the
physicians employed by PMG or the PA Contractors have agreed not to compete with
PMG or the PA Contractor within a five-mile radius of any hospital for which the
physician is rendering medical services for a period of one to two years after
termination of employment. The Company contracts for and pays the premiums for
malpractice insurance on behalf of the physicians. See "-- Professional
Liability and Insurance."
Acquisitions. The Company structures acquisitions of physician practice
groups as asset purchases, stock purchases and stock mergers. Generally, these
structures provide for: (i) the assignment to the Company of the contracts
between the physician practice group and the hospital at which the physician
practice group provides medical services; (ii) physician "tail insurance"
coverage under which the Company is an insured party to cover malpractice
liabilities that may arise after the date of the acquisition which relate to
events prior to the acquisition; and (iii) indemnification to the Company by the
previous owners of the acquired entity. Generally, in acquisitions structured as
asset purchases, the Company does not acquire the physician practice group's
receivables or liabilities, including malpractice claims, arising from the
physician practice group's activities prior to the date of the acquisition.
Generally, in acquisitions structured as stock purchases or stock mergers, the
physician practice group's receivables (net of any liabilities accruing prior to
the acquisition and permitted indemnification claims) are distributed as
compensation to and collected by the former owners of the physician practice
group.
GOVERNMENT REGULATION
The Company's operations and relationships are subject to a variety of
governmental and regulatory requirements relating to the conduct of its
business. The Company is also subject to laws and regulations which relate to
business corporations in general. The Company believes that it exercises care in
an effort to structure its practices and arrangements with hospitals and
physicians to comply with relevant federal and state law and believes that such
arrangements and practices comply in all material respects with all applicable
statutes and regulations.
Approximately 31% and 29% of the Company's net patient service revenue in
1995 and 1996, respectively, was derived from payments made by government-
sponsored healthcare programs (principally Medicaid). These programs are subject
to substantial regulation by the federal and state governments. Any change in
reimbursement regulations, policies, practices, interpretations or statutes that
places material limitations on reimbursement amounts or practices could
adversely affect the operations of the Company. Medicaid and other government
reimbursement programs are increasingly shifting to managed care, which could
result in reduced
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payments to the Company for Medicaid patients. In addition, funds received under
these programs are subject to audit with respect to the proper billing for
physician services and, accordingly, retroactive adjustments of revenue from
these programs may occur.
The Company is also subject to (i) certain provisions of the Social
Security Act, commonly referred to as the "Anti-kickback Statute," which
prohibits entities, such as the Company, from offering, paying, soliciting, or
receiving any form of remuneration in return for the referral of Medicare or
state health program patients or patient care opportunities, or in return for
the recommendation, arrangement, purchase, lease, or order of items or services
that are covered by Medicare or state health programs, (ii) prohibitions against
physician referrals, commonly known as "Stark II," which prohibit, subject to
certain exemptions, a physician or a member of his immediate family from
referring Medicare or Medicaid patients to an entity providing "designated
health services" (which include hospital inpatient and outpatient services) in
which the physician has an ownership or investment interest, or with which the
physician has entered into a compensation arrangement including the physician's
own group practice, and (iii) state and federal civil and criminal statutes
imposing substantial penalties, including civil and criminal fines and
imprisonment, on healthcare providers which fraudulently or wrongfully bill
governmental or other third party payors for healthcare services. Although the
Company believes that it is not in violation of these provisions, there can be
no assurance that the Company's current or future practices will not be found to
be in violation of these provisions, and any such finding could have a material
adverse effect on the Company.
In addition, business corporations such as PMG are generally not permitted
under state law to practice medicine, exercise control over the medical
judgments or decisions of physicians, or engage in certain practices such as
fee-splitting with physicians. In states where PMG is not permitted to practice
medicine, the Company performs only nonmedical administrative services, does not
represent to the public or its clients that it offers medical services and does
not exercise influence or control over the practice of medicine by the PA
Contractors or the physicians employed by the PA Contractors. Accordingly, the
Company believes it is not in violation of applicable state laws relating to the
practice of medicine. In most states, PMG contracts with the PA Contractors
(which are owned by a licensed physician employed by the respective PA
Contractor), which in turn employ or contract with physicians to provide
necessary physician services. There can be no assurance that regulatory
authorities or other parties will not assert that PMG is engaged in the
corporate practice of medicine or that the percentage fee arrangements between
PMG and the PA Contractors constitute fee splitting or the corporate practice of
medicine. If such a claim were successfully asserted in any jurisdiction, PMG
could be subject to civil and criminal penalties under such jurisdiction's laws
and could be required to restructure its contractual arrangements, which could
have a material adverse effect on the Company's financial condition and results
of operations.
In addition to current regulation, the public and state and federal
governments have recently focused significant attention on reforming the
healthcare system in the United States. Although the Company cannot predict
whether these or other reductions in the Medicare or Medicaid programs will be
adopted, the adoption of such proposals could have a material adverse effect on
the Company's business. Concern about such proposals has been reflected in
volatility of the stock prices of companies in healthcare and related
industries.
PROFESSIONAL LIABILITY AND INSURANCE
The Company's business entails an inherent risk of claims of physician
professional liability. The Company maintains professional liability insurance
and general liability insurance on a claims-made basis in the amounts of $1.0
million per incident per physician and ARNP ($2.0 million for certain physicians
in California), and $3.0 million in the aggregate per annum for each physician
and ARNP ($4.0 million for certain physicians in California); $2.0 million per
incident and $4.0 million in the aggregate per annum for the Company; and $12.0
million in the aggregate per year for the Company and all physicians employed by
or under contract with the Company. The Company believes that these amounts,
which represent the required amounts of insurance coverage in the states in
which the Company does business, are appropriate based upon claims experience
and the nature and risks of its business. The Company's credit facility includes
a $2.0 million amount reserved to cover deductibles under the Company's
insurance policies. There can be no assurance that a pending or future claim or
claims will not be successful or if successful will not exceed the limits of
available insurance coverage or that such coverage will continue to be available
at acceptable costs and on favorable terms. See "Legal Proceedings."
9
<PAGE> 10
The physicians that are employed by or under contract with the Company are
required to obtain professional liability insurance coverage, and the Company
contracts for and pays the premiums with respect to such insurance for the
physicians. This insurance would provide coverage to the Company, subject to
policy limits, in the event the Company were held liable as a co-defendant in a
lawsuit against a physician or a hospital arising out of the provision of
medical services by the physician. The current policy expires April 30, 1997,
and the Company expects to be able to renew such policy upon expiration.
COMPETITION
The healthcare industry is highly competitive and has been subject to
continual changes in the method in which healthcare services are provided and
the manner in which healthcare providers are selected and compensated. The
Company believes that private and public reforms in the healthcare industry
emphasizing cost containment and accountability will result in an increasing
shift of NICU and related pediatric care from highly fragmented, individual or
small practice neonatology providers to physician management companies.
Companies in other healthcare industry segments, such as managers of other
hospital-based specialties or large physician group practices, some of which
have financial and other resources greater than those of the Company, may become
competitors in providing management of neonatal and pediatric intensive care
services to hospitals.
The Company provides neonatal and pediatric management services in Arizona,
California, Colorado, Florida, Illinois, Kansas, Michigan, Nevada, New Jersey,
New Mexico, New York, Ohio, Pennsylvania, Puerto Rico, South Carolina, Texas,
Utah, Virginia, Washington and West Virginia. Competition in the Company's
current markets and other geographic markets where the Company may expand is
generally based upon the Company's reputation and experience, and the
physician's ability to provide cost-effective, quality care.
SERVICE MARKS
The Company has registered the service mark "Pediatrix Medical Group" and
its design with the United States Patent and Trademark Office, and has applied
for registration of a baby design logo.
EMPLOYEES AND PROFESSIONALS UNDER CONTRACT
In addition to the 195 physicians employed or under contract with the
Company as of December 31, 1996, Pediatrix employed or contracted with 41 other
clinical professionals and 239 other full-time and part-time employees. None of
the Company's employees are subject to a collective bargaining agreement.
10
<PAGE> 11
ITEM 2. PROPERTIES
The Company owns its executive offices located in Ft. Lauderdale,
Florida (approximately 30,000 square feet) including a new building that was
completed in the third quarter of 1996 at a cost of approximately $2.3 million.
The Company also leases space in other facilities in various states for its
California business office, pediatric cardiology offices, storage space, and
temporary housing of medical staff, with aggregate annual rents of approximately
$340,000. To facilitate its acquisition and business integration programs, in
September 1996 the Company entered into a contract to lease an aircraft. See
Note 10 to the Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
During the ordinary course of business, the Company has become a party
to pending and threatened legal actions and proceedings, most of which involve
claims of medical malpractice and are generally covered by insurance. The
Company intends to vigorously defend these suits. The Company believes, based
upon the investigations conducted by the Company to date, that the outcome of
such legal actions and proceedings, individually or in the aggregate, will not
have a material adverse effect on the Company's financial condition, results of
operations or liquidity, notwithstanding any possible insurance recovery. If
liability results from the medical malpractice claims, there can be no assurance
that the Company's medical malpractice insurance coverage will be adequate to
cover liabilities arising out of such proceedings.
The Company is currently under examination by the Internal Revenue
Service (the "IRS") for the tax years ended December 31, 1992, 1993, and 1994.
The IRS has challenged certain deductions that, if ultimately disallowed, would
result in additional taxes of approximately $4.5 million, plus interest. The
Company has reviewed the IRS matters under consideration and believes that the
tax returns are substantially correct as filed. The Company intends to
vigorously contest the proposed adjustments and believes it has adequately
provided for any liability that may result from this examination. The Company
and its tax advisors believe that the ultimate resolution of the examination
will not have a material effect on the Company's consolidated financial position
or results of operations and cash flows.
The Company was recently notified by an hospital customer of a dispute
regarding the interpretation of the customer's contract with the Company. The
customer believes that the Company should refund approximately $7.5 million of
payments made to the Company over the last five years. The Company disagrees
with the customer's interpretation of the contract and believes that the matter
will be resolved amicably. In the unlikely event that the Company cannot
resolve this matter amicably, the Company intends to vigorously litigate the
matter and assert all its legal defenses. The Company believes that resolution
of the matter will have no material effect on the Company's consolidated
financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fiscal
quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock commenced trading on the Nasdaq National
Market (the "Nasdaq") under the symbol "PEDX" on September 20, 1995. The
Company's stock began trading on the New York Stock Exchange (the "NYSE") under
the symbol "PDX" on September 11, 1996 and ceased trading on the Nasdaq on
September 10, 1996. The following table sets forth, for the periods indicated,
the high and low sales prices for the Common Stock as reported on the Nasdaq and
the NYSE.
<TABLE>
<CAPTION>
High Low
---- ---
1995
----
<S> <C> <C>
Third Quarter 22 1/4 18 7/8
Fourth Quarter 28 1/2 18 1/2
1996
----
First Quarter 40 3/4 22 1/2
Second Quarter 64 3/4 35 1/4
Third Quarter 53 31 1/4
Fourth Quarter 50 3/8 32
</TABLE>
11
<PAGE> 12
As of February 28, 1997, there were approximately 104 holders of record
of the 14,911,482 outstanding shares of Common Stock. The closing sales price
for the Common Stock on February 28, 1997 was $37.50.
The Company did not declare or pay in 1994, 1995 or 1996, nor does it
currently intend to declare or pay in the future, any dividends on its Common
Stock, but intends to retain all earnings for the operation and expansion of its
business. The payment of any future dividends will be at the discretion of the
Board of Directors and will depend upon, among other things, future earnings,
results of operations, capital requirements, the general financial condition of
the Company, general business conditions and contractual restrictions on payment
of dividends, if any, as well as such other factors as the Board of Directors
may deem relevant. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
ITEM 6. SELECTED FINANCIAL DATA (in thousands, except per share and other
operating data)
The selected consolidated financial data set forth below as of and for
each of the five years in the period ended December 31, 1996, have been derived
from the Consolidated Financial Statements, which statements have been audited
by Coopers & Lybrand L.L.P., independent accountants. The following data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Consolidated Financial Statements
and the notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- ------------- ------------- -------------- -------------
CONSOLIDATED INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net patient service revenue............ $15,438 $23,570 $32,779 $43,860 $80,833
Operating expenses:
Salaries and benefits................ 9,585 14,852 20,723 29,545 52,732
Supplies and other operating
expenses........................... 1,743 2,230 2,774 3,451 6,262
Depreciation and amortization........ 60 95 244 363 1,770
Nonrecurring expense(1).............. 15,400 -- -- -- --
------------- ------------- ------------- ------------- --------------
Total operating expenses....... 26,788 17,177 23,741 33,359 60,764
------------- ------------- ------------- ------------- --------------
Income (loss) from operations.......... (11,350) 6,393 9,038 10,501 20,069
Investment income...................... 160 45 208 804 2,096
Interest expense....................... (49) (105) (90) (117) (192)
Other income (expense), net............ 45 (17) -- -- --
------------- ------------- ------------- ------------- --------------
Income (loss) before income taxes...... (11,194) 6,316 9,156 11,188 21,973
Income tax provision (benefit)......... (3,536) 2,166 3,749 4,475 8,853
------------- ------------- ------------- ------------- --------------
Net income (loss)(2)................... $(7,658) $4,150 $5,407 $6,713 $13,120
============= ============= ============= ============= ==============
PER SHARE DATA (1994 AND 1995 PRO
FORMA UNAUDITED):
Net income per common share(3)
Primary............................ $ 0.60 $ 0.65 $ 0.90
Fully diluted...................... ============== ============ ============
Weighted average shares $ 0.47 $ 0.55 $ 0.90
outstanding (3) ============== ============ ============
Primary............................ 6,853 8,773 14,535
Fully diluted...................... ============== ============ ============
11,430 12,216 14,555
============== ============ ============
</TABLE>
12
<PAGE> 13
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- ------------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
OTHER OPERATING DATA:
Number of units at end of period:
NICU................................. 13 18 22 37 68
PICU................................. 2 3 5 4 8
Other pediatric services............. -- 1 1 2 3
Number of physicians at end of period.. 42 52 75 114 195
Number of births(4).................... 23,289 32,532 39,541 59,186 132,796
NICU admissions........................ 3,600 4,777 5,823 7,611 14,250
NICU patient days...................... N/A 59,024 64,615 87,672 185,702
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents............ $2,329 $2,469 $7,384 $18,499 $18,435
Working capital...................... 6,651 8,052 13,772 53,448 81,187
Total assets......................... 11,721 14,239 20,295 69,881 159,026
Total liabilities.................... 3,388 3,762 4,203 7,071 22,705
Long-term debt, including current
maturities......................... 1,604 965 879 815 2,950
Convertible Preferred Stock(5)....... 13,212 14,401 15,697 -- --
Stockholders' equity (deficit)(6).... (4,879) (3,924) 395 62,810 136,321
</TABLE>
- --------------------
(1) Reflects nonrecurring payments to certain of the Company's physicians (i)
as bonuses for prior services in the aggregate amount of $9.5 million, and
(ii) for covenants not to compete in the aggregate amount of $5.9 million.
The source of funds for approximately $13 million of such payments was the
sale of redeemable cumulative convertible preferred stock (the "Convertible
Preferred Stock"). See footnote 5 below.
(2) The net income (loss) amounts do not include accrued and unpaid dividends
with respect to the Convertible Preferred Stock. See footnote 5 below.
(3) See Note 2 of Notes to Consolidated Financial Statements for an explanation
of the basis used to calculate proforma net income per common share and
weighted average shares outstanding.
(4) Represents number of births at the hospitals with which the Company had
contracts during the periods indicated.
(5) Immediately prior to the consummation of the Company's IPO in September
1995, the Convertible Preferred Stock was converted into 4,571,063 shares
of Common Stock and unpaid dividends of approximately $3.7 million were
forgiven pursuant to the terms of the Series A Preferred Stock Purchase
Agreement, dated as of October 26, 1992. Upon conversion, such amounts were
credited to the common stock and additional paid-in capital accounts.
(6) The deficit in total stockholders' equity is due to the net loss in 1992 as
well as the accrual of unpaid cumulative dividends on the Convertible
Preferred Stock.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Pediatrix is the nation's leading provider of physician management
services to hospital-based NICUs. The Company also provides physician management
services to hospital-based PICUs and pediatrics departments in hospitals.
Pediatrix was incorporated in 1980 by its co-founders, Drs. Roger Medel and
Gregory Melnick. Since obtaining its first hospital contract in 1980, the
Company has grown by increasing revenues at existing units ("same unit growth")
and by adding new units.
In July 1995, the Company completed its first acquisition of a neonatal
physician group practice. Since its initial public offering in September 1995,
the Company has enhanced its management infrastructure, thereby
13
<PAGE> 14
strengthening its ability to identify acquisition candidates, consummate
transactions and integrate acquired physician group practices into the Company's
operations. During 1996, the Company completed ten acquisitions, which added 33
NICUs, 4 PICUs and 2 pediatrics departments. Additionally, 3 NICUs were added
through the Company's internal marketing activities. In the aggregate, the
number of NICU patient days attributable to these units was approximately 78,000
during 1996. The Company has developed regional networks in Denver, Phoenix and
Southern California and intends to develop additional regional and state-wide
networks. The Company believes these networks, augmented by ongoing marketing
and acquisition efforts, will strengthen its position with third party payors,
such as Medicaid and managed care organizations.
The Company bills payors for services provided by physicians based upon
rates for the specific services provided. The rates are substantially the same
for all patients in a particular geographic area regardless of the party
responsible for paying the bill. The Company determines its net patient service
revenue based upon the difference between the gross fees for services and the
ultimate collections from payors which differ from the gross fees due to (i)
Medicaid reimbursements at government established rates, (ii) managed care
payments at contracted rates, (iii) various reimbursement plans and negotiated
reimbursements from other third parties and (iv) discounted and uncollectible
accounts of private pay patients.
The Company seeks to increase revenue at existing units in hospitals by
providing support to areas of the hospital outside the NICU and PICU,
particularly in the obstetrics, nursery and pediatrics departments, where
immediate accessibility to specialized care is critical. The following table
indicates the point at which services originate, expressed as a percentage of
net patient service revenue, exclusive of administrative fees, for the periods
indicated.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996
----------- ----------- --------
<S> <C> <C> <C>
NICU......................................................... 73.4% 74.7% 81.4%
PICU and PEDS................................................ 7.7 6.0 3.4
Other(1)..................................................... 18.9 19.3 15.2
------ ------ ------
100.0% 100.0% 100.0%
====== ====== ======
</TABLE>
- ----------
(1) Represents principally the percentage of net patient service revenue
generated by physicians providing support to areas of hospitals outside the
NICU and PICU.
PAYOR MIX
The Company's payor mix is comprised of government (principally Medicaid),
managed care, other third parties and private pay patients. The Company benefits
when more patients are covered by Medicaid, despite Medicaid's lower
reimbursement rates as compared with other payors, because typically these
patients would not otherwise be able to pay for services due to lack of
insurance coverage. In addition, the Company benefits from the fact that most of
the medical services provided at the NICU or PICU are classified as emergency
services, a category typically classified as a covered service by managed care
payors. A significant increase in the managed care or capitated components of
the Company's payor mix, however, could result in reduced reimbursement rates
and, in the absence of increased patient volume, could have a material adverse
effect on the Company's financial condition and results of operations. The
following is a summary of the Company's payor mix, expressed as a percentage of
net patient service revenue, exclusive of administrative fees, for the periods
indicated.
14
<PAGE> 15
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1994 1995 1996
----------- ----------- --------
<S> <C> <C> <C>
Government................................................... 26% 31% 29%
Managed care................................................. 23 24 35
Other third parties.......................................... 44 39 32
Private pay.................................................. 7 6 4
--- --- ---
100% 100% 100%
=== === ===
</TABLE>
RESULTS OF OPERATIONS
The following discussion provides an analysis of the Company's results of
operations and should be read in conjunction with the Consolidated Financial
Statements and related notes thereto appearing elsewhere in this Annual Report
on Form 10-K. The operating results for the periods presented were not
significantly affected by inflation.
The following table sets forth, for the periods indicated, certain
information relating to the Company's operations expressed as a percentage of
the Company's net patient service revenue (patient billings net of contractual
adjustments and uncollectibles, and including administrative fees):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
---------- --------- -------
<S> <C> <C> <C>
Net patient service revenue............. 100.0% 100.0% 100.0%
Operating expenses:
Salaries and benefits................. 63.2 67.4 65.2
Supplies and other operating expenses. 8.5 7.9 7.8
Depreciation and amortization......... .7 .8 2.2
-------- -------- -------
Total operating expenses...... 72.4 76.1 75.2
-------- --------- -------
Income from operations................ 27.6 23.9 24.8
Other income, net....................... .3 1.6 2.4
-------- --------- -------
Income before income taxes............ 27.9 25.5 27.2
Income tax provision.................... 11.4 10.2 11.0
-------- --------- -------
Net income............................ 16.5% 15.3% 16.2%
========= ========= ========
</TABLE>
Year Ended December 31, 1996 as Compared to Year Ended December 31, 1995
The Company reported net patient service revenue of $80.8 million for the
year ended December 31, 1996, as compared with $43.9 million in 1995, a growth
rate of 84.3%. Of this $36.9 million increase, $34.7 million, or 94.0%, was
attributable to new units, including units at which the Company provides
services as a result of acquisitions. Same unit patient service revenue
increased $2.2 million, or 6.2%, for the year ended December 31, 1996, compared
to the year ended December 31, 1995. Same units are those units at which the
Company provided services for the entire period for which the percentage is
calculated and the entire prior comparable period. The same unit growth resulted
from volume increases as there were no general price increases during the
periods.
Salaries and benefits increased $23.2 million, or 78.5%, to $52.7 million
for the year ended December 31, 1996, as compared with $29.5 million for the
same period in 1995. Of this $23.2 million increase, $18.0 million, or 77.6%,
was attributable to hiring new physicians, primarily to support new unit growth,
and the remaining $5.2 million was primarily attributable to increased support
staff and resources added in the areas of nursing, management and billing and
reimbursement. Supplies and other operating expenses increased $2.8 million, or
81.5%, to $6.3 million for the year ended December 31, 1996, as compared with
$3.5 million for the year ended December 31, 1995, primarily as a result of new
units. Depreciation and amortization expense increased by $1.4 million, or
387.6%, to $1.8 million for the year ended December 31, 1996, as compared with
15
<PAGE> 16
$363,000 for the year ended December 31, 1995, primarily as a result of
amortization of goodwill in connection with acquisitions.
Income from operations increased approximately $9.6 million, or 91.1%, to
$20.1 million for the year ended December 31, 1996, as compared with $10.5
million for the year ended December 31, 1995, representing an increase in the
operating margin from 23.9% to 24.8%. The increase in operating margin was
primarily due to increased volume, principally from acquisitions, without
comparable increases in corporate overhead.
The Company earned net interest income of approximately $1.9 million for
the year ended December 31, 1996, as compared with $687,000 for the year ended
December 31, 1995. The increase in net interest income resulted primarily from
additional funds available for investment due to proceeds from the initial and
secondary public stock offerings, as well as cash flow from operations.
The effective income tax rate was approximately 40.3% for the year ended
December 31, 1996 compared with 40.0% for the year ended December 31, 1995.
Net income increased 95.4% to $13.1 million for the year ended December 31,
1996, as compared with $6.7 million for the year ended December 31, 1995. Net
income as a percentage of net patient service revenue increased to 16.2% for the
year ended December 31, 1996, compared to 15.3% for the year ended December 31,
1995.
Year Ended December 31, 1995 as Compared to Year Ended December 31, 1994
Net patient service revenue increased by $11.1 million, or 33.8%, to $43.9
million for the year ended December 31, 1995 compared to $32.8 million for the
year ended December 31, 1994. Of this $11.1 million increase, $10.9 million, or
98.2%, was attributable to new contracts, including $2.7 million, or 24.3%,
attributable to contracts acquired in connection with an acquisition in the
third quarter of 1995. Same unit patient service revenue, exclusive of
administrative fees, increased $689,000, or 2.6%. Same units are those units at
which the Company provided services for the entire period for which the
percentage is calculated and the entire prior comparable period. The same unit
growth resulted from volume increases as there were no general price increases
during the periods.
Salaries and benefits increased by $8.8 million, or 42.6%, to $29.5 million
for the year ended December 31, 1995, compared to $20.7 million for the year
ended December 31, 1994. Of this $8.8 million increase, $6.5 million, or 73.9%,
was attributable to hiring of new physicians, primarily to support new contract
growth, and the remaining $2.3 million was primarily attributable to increased
support staff and resources added in the areas of nursing, executive management
and billing and reimbursement. Supplies and other operating expenses increased
$700,000, or 24.4%, to $3.5 million for the year ended December 31, 1995,
compared to $2.8 million for the year ended December 31, 1994, primarily as a
result of increased contract activity. Depreciation and amortization expense
increased by $119,000 or 48.8%, to $363,000 for the year ended December 31, 1995
compared to $244,000 in 1994, primarily as a result of additions of computer
equipment and amortization of goodwill in connection with an acquisition.
Income from operations increased $1.5 million, or 16.2%, to $10.5 million
for the year ended December 31, 1995, compared to $9.0 million for the year
ended December 31, 1994, representing a decrease in the operating income margin
from 27.6% to 23.9%. The decrease in operating income margin was primarily due
to increases in salaries and benefits to support new contract growth.
The Company earned net interest income of $687,000 for the year ended
December 31, 1995, compared to net interest income of $118,000 for the year
ended December 31, 1994. This increase in net interest income primarily resulted
from the investment of the net proceeds from the initial public stock offering.
The effective income tax rate was approximately 40.0% for the year ended
December 31, 1995 compared with 40.9% for the year ended December 31, 1994.
16
<PAGE> 17
Net income increased by $1.3 million, or 24.2%, to $6.7 million for the
year ended December 31, 1995, compared to $5.4 million for the year ended
December 31, 1994. Net income as a percentage of net patient service revenue
decreased to 15.3% for the year ended December 31, 1995, compared to 16.5% for
the year ended December 31, 1994.
QUARTERLY RESULTS
The following table presents certain unaudited quarterly financial data for
each of the quarters in the years ended December 31, 1995 and 1996. This
information has been prepared on the same basis as the Consolidated Financial
Statements appearing elsewhere in this Annual Report on Form 10-K and include,
in the opinion of the Company, all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the quarterly results when
read in conjunction with the Consolidated Financial Statements and the notes
thereto. The Company has historically experienced and expects to continue to
experience quarterly fluctuations in net patient service revenue and net income.
As a result, the operating results for any quarter are not necessarily
indicative of results for any future period or for the full year.
<TABLE>
<CAPTION>
1995 CALENDAR QUARTERS
----------------------------------------------
(in thousands, except per share FIRST SECOND THIRD FOURTH
data) --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net patient service revenue.......... $ 8,886 $ 9,131 $ 12,478 $ 13,365
Operating expenses:
Salaries and benefits................ 6,270 6,322 8,212 8,741
Supplies and other operating
expenses................. 607 831 967 1,046
Depreciation and amortization........ 74 66 99 124
------- ------- -------- --------
Total operating expenses.......... 6,951 7,219 9,278 9,911
------- ------- -------- --------
Income from operations............... 1,935 1,912 3,200 3,454
Other income, net.................... 79 116 85 407
------- ------- -------- --------
Income before income taxes.......... 2,014 2,028 3,285 3,861
Income tax provision................. 805 812 1,314 1,544
------- ------- -------- --------
Net income........................... $ 1,209 $ 1,216 $ 1,971 $ 2,317
======= ======= ======== ========
Per share data (1995 pro forma)
net income per common and
common equivalent share:
Primary.............................. $ .12 $ .12 $ .22 $ .17
======= ======= ======== ========
Fully diluted........................ $ .10 $ .11 $ .17 $ .17
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996 CALENDAR QUARTERS
----------------------------------------------
(in thousands, except per share FIRST SECOND THIRD FOURTH
data) --------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net patient service revenue.......... $16,127 $17,808 $22,404 $ 24,494
Operating expenses:
Salaries and benefits................ 10,796 11,541 14,526 15,869
Supplies and other operating
expenses................. 1,213 1,269 1,740 2,040
Depreciation and amortization........ 233 335 543 659
------- ------- ------- --------
Total operating expenses.......... 12,242 13,145 16,809 18,568
-------- ------- ------- --------
Income from operations............... 3,885 4,663 5,595 5,926
Other income, net.................... 464 396 455 589
-------- ------- ------- --------
Income before income taxes.......... 4,349 5,059 6,050 6,515
Income tax provision................. 1,737 2,024 2,485 2,607
------- ------- ------- --------
Net income........................... $ 2,612 $ 3,035 $ 3,565 $ 3,908
======= ======= ======= ========
Per share data
net income per common
and common equivalent share: $ .19 $ .22 $ .24 $ .25
Primary.............................. ======= ======= ======= ========
$ .19 $ .22 $ .24 $ .25
Fully diluted........................ ======= ======= ======= ========
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
During 1996 the Company completed the acquisition of ten physician group
practices, utilizing approximately $42.5 million in cash. These acquisitions
were funded principally by the $39.7 million in net proceeds from the Company's
initial public stock offering in September 1995.
On August 2, 1996, the Company completed a secondary public stock offering
whereby it issued 1,755,000 shares of common stock resulting in net cash
proceeds to the Company of approximately $59.1 million. As of December 31, 1996,
the Company had approximately $75.7 million of cash, cash equivalents and
marketable securities on hand.
As of December 31, 1996, the Company had working capital of approximately
$81.2 million, an increase of $27.8 million from the working capital of $53.4
million available at December 31, 1995. The net increase is principally a result
of net proceeds from the Company's secondary public stock offering and funds
generated from operations, less expenditures related to the acquisition of
physician group practices and additions to property and equipment.
17
<PAGE> 18
On June 27, 1996, the Company entered into a $30.0 million unsecured
revolving credit facility (the "Credit Facility") with The First National Bank
of Boston ("Bank of Boston") and SunTrust Bank, which includes a $2.0 million
amount reserved to cover deductibles under the Company's professional liability
insurance policies. The Company intends to use amounts available under the
Credit Facility primarily for acquisitions. The Credit Facility matures on June
30, 1999. At the Company's option, the Credit Facility bears interest at either
LIBOR plus .875% or the prime rate announced by Bank of Boston. There is no
balance currently outstanding under the Credit Facility.
The Company constructed a new building, which was completed in the third
quarter of 1996 at a total cost of approximately $2.3 million that was funded
with available cash. In September 1996, the Company received a $3.0 million
mortgage loan from Bank of Boston. The mortgage is collateralized by the
Company's two buildings.
The Company's annual capital expenditures have typically been for computer
hardware and software and for furniture, equipment and improvements at the
corporate headquarters. During the year ended December 31, 1996, capital
expenditures amounted to approximately $4.7 million, which included $3.2 million
for construction, furniture and equipment and other costs related to the new
building described above. In addition, the Company spent approximately $1.0
million on computer hardware and software. Capital expenditures during 1997 are
not expected to exceed $2.0 million, principally for computer and related
equipment.
The Company anticipates that funds generated from operations together with
cash and marketable securities on hand, and funds available under the Credit
Facility will be sufficient to meet its working capital requirements and finance
required capital expenditures and acquisitions for at least the next twelve
months.
CHANGES TO ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," must be implemented by the Company in 1997. This statement is designed
to improve the earnings per share ("EPS") information provided in financial
statements by simplifying the existing computational guidelines, revising the
disclosure requirements, and increasing the comparability of EPS data on an
international basis. The Company has not yet determined the impact, if any, the
adoption of the provisions of SFAS No. 128 will have on the Company's financial
statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following Consolidated Financial Statements of the Company are included
in this Annual Report on Form 10-K on the pages set forth below.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants............................................ 19
Consolidated Balance Sheets as of December 31, 1995 and 1996................. 20
Consolidated Statements of Income for the Years Ended December 31,
1994, 1995 and 1996................................................... 21
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996...................................... 22
Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996.................................................. 23
Notes to Consolidated Financial Statements................................... 24
</TABLE>
18
<PAGE> 19
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors of
Pediatrix Medical Group, Inc.
Fort Lauderdale, Florida
We have audited the consolidated financial statements and the financial
statement schedule of Pediatrix Medical Group, Inc. listed in Item 14(a) of this
Form 10-K. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Pediatrix Medical
Group, Inc. as of December 31, 1995 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedule
referred to above, when considered in relation to the basic financial statements
taken as a whole, presents fairly, in all material respects, the information
required to be included herein.
Fort Lauderdale, Florida
January 27, 1997, except as
to information presented in
Note 14 for which the date
is March 26, 1997
19
<PAGE> 20
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
-----------------
1995 1996
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,499 $ 18,435
Investments in marketable securities 27,718 57,218
Accounts receivable, net 12,096 23,396
Prepaid expenses 628 1,283
Other assets 497 375
Income taxes receivable 330 202
--------- ---------
Total current assets 59,768 100,909
Property and equipment, net 4,549 8,676
Other assets, net 5,564 49,441
--------- ---------
Total assets $ 69,881 $159,026
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 4,347 $ 13,423
Current portion of note payable 64 200
Deferred income taxes 1,909 6,099
--------- ---------
Total current liabilities 6,320 19,722
Note payable 751 2,750
Deferred income taxes -- 233
--------- ---------
Total liabilities 7,071 22,705
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.01 par value, 1,000,000
shares authorized, none issued and outstanding at
December 31, 1995 and 1996 -- --
Common stock; $.01 par value, 50,000,000 shares authorized at
December 31, 1995 and 1996, 13,051,055 and 14,864,694
shares issued and outstanding at December 31, 1995
and 1996, respectively 131 149
Additional paid-in capital 55,620 116,037
Retained earnings 7,045 20,165
Unrealized gain (loss) on investments 14 (30)
--------- ---------
Total stockholders' equity 62,810 136,321
--------- ---------
Total liabilities and stockholders' equity $ 69,881 $ 159,026
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE> 21
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Net patient service revenue $ 32,779 $ 43,860 $ 80,833
Operating expenses:
Salaries and benefits 20,723 29,545 52,732
Supplies and other operating expenses 2,774 3,451 6,262
Depreciation and amortization 244 363 1,770
-------- -------- --------
Total operating expenses 23,741 33,359 60,764
-------- -------- --------
Income from operations 9,038 10,501 20,069
Investment income 208 804 2,096
Interest expense (90) (117) (192)
-------- -------- --------
Income before income taxes 9,156 11,188 21,973
Income tax provision 3,749 4,475 8,853
-------- -------- --------
Net income $ 5,407 $ 6,713 $ 13,120
======== ======== ========
Per share data (1994 and 1995 pro forma unaudited):
Net income per common and
common equivalent share:
Primary $ .60 $ .65 $ .90
======== ======== ========
Fully diluted $ .47 $ .55 $ .90
======== ======== ========
Weighed average shares used in
computing net income per common and common
equivalent share:
Primary 6,853 8,773 14,535
======== ======== ========
Fully diluted 11,430 12,216 14,555
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
21
<PAGE> 22
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock
--------------------
Additional Retained
Number of Paid-In Earnings
Shares Amount Capital (Deficit)
--------- ------ ------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 6,224 $ 63 $ -- $ (3,986)
Net income -- -- -- 5,407
Common stock issued 118 1 588 --
Common stock retired (76) (1) (154) (227)
Accrued and unpaid preferred stock dividends
for the year ended December 31, 1994 -- -- (434) (862)
------- ------- --------- ---------
Balance at December 31, 1994 6,266 63 -- 332
Net income -- -- -- 6,713
Accrued and unpaid preferred stock dividends
through conversion date, September 25, 1995 -- -- (1,040) --
Conversion of preferred stock 4,571 46 16,691 --
Common stock issued 2,240 22 39,848 --
Common stock retired (26) -- (131) --
Tax benefit related to employee stock options -- -- 252 --
------- ------- --------- ---------
Balance at December 31, 1995 13,051 131 55,620 7,045
Net income -- -- -- 13,120
Common stock issued 1,815 18 59,757 --
Common stock retired (1) -- (45) --
Tax benefit related to employee stock options -- -- 705 --
------- ------- --------- ---------
Balance at December 31, 1996 14,865 $ 149 $ 116,037 $ 20,165
======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
22
<PAGE> 23
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,407 $ 6,713 $ 13,120
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 244 363 1,770
Deferred income taxes 517 1,456 4,423
Other -- (2) --
Changes in assets and liabilities:
Accounts receivable (1,290) (3,131) (11,300)
Prepaid expenses and other assets (449) (493) (533)
Income taxes receivable 428 101 833
Other assets (7) 62 7
Accounts payable and accrued expenses 521 871 6,470
-------- -------- --------
Net cash provided from operating activities 5,371 5,940 14,790
-------- -------- --------
Cash flows used in investing activities:
Physician group acquisition payments -- (4,938) (42,487)
Purchase of investments -- (34,382) (57,394)
Proceeds from sale of investments -- 6,681 27,850
Purchase of property and equipment (578) (1,861) (4,688)
-------- -------- --------
Net cash used in investing activities (578) (34,500) (76,719)
-------- -------- --------
Cash flows from financing activities:
Borrowings on notes payable -- -- 3,000
Payments on notes payable (87) (64) (865)
Proceeds from issuance of common stock 590 39,871 59,775
Payments made to retire common stock (381) (132) (45)
-------- -------- --------
Net cash provided from financing activities 122 39,675 61,865
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 4,915 11,115 (64)
Cash and cash equivalents at beginning of year 2,469 7,384 18,499
-------- -------- --------
Cash and cash equivalents at end of year $ 7,384 $ 18,499 $ 18,435
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 130 $ 117 $ 164
Income taxes $ 2,354 $ 2,943 $ 2,950
Non-cash investing and financing activities:
Accrued and unpaid preferred stock dividends $ 1,296 $ 1,040 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
23
<PAGE> 24
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL:
The principal business activity of Pediatrix Medical Group, Inc.
("Pediatrix" or the "Company") is to provide physician management services
to hospital-based neonatal and pediatric intensive care units in 17 states
and Puerto Rico. Contractual arrangements with hospitals include a)
fee-for-service contracts whereby hospitals agree, in exchange for the
Company's services, to authorize the Company and its healthcare
professionals to bill and collect the professional component of the charges
for medical services rendered by the Company's healthcare professionals;
and b) administrative fees whereby the Company is assured a minimum revenue
level.
In September 1995, the Company completed its initial public offering
whereby it issued 2,200,000 shares of common stock, resulting in net cash
proceeds to the Company of approximately $39.7 million. In addition, in
connection with the initial public offering, the Company authorized
50,000,000 shares of common stock and 1,000,000 shares of preferred stock.
In August 1996, the Company completed a secondary public offering whereby
it issued 1,755,000 shares of common stock resulting in net cash proceeds
to the Company of approximately $59.1 million.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles Of Presentation
The financial statements (the "consolidated financial statements") include
the accounts of Pediatrix consolidated with the accounts of the Pediatrix
Medical Group of Florida, Inc., PMG Acquisition Corp. and Pediatrix Medical
Group of Delaware, Inc. (the "Subsidiaries") and combined with the accounts
of the professional associations (the "PA Contractors") with which the
Company currently has specific management billing arrangements. All
significant intercompany and interaffiliate accounts and transactions have
been eliminated. The financial statements of the PA Contractors are
consolidated with Pediatrix because Pediatrix, as opposed to affiliates of
Pediatrix, has unilateral control over the assets and operations of the PA
Contractors. Notwithstanding the lack of technical majority ownership,
consolidation of the PA Contractors is necessary to present fairly the
financial position and results of operations of Pediatrix because of the
existence of a parent-subsidiary relationship by means other than record
ownership of the PA Contractors' voting common stock. Control of the assets
and operations of the PA Contractors by Pediatrix is permanent and other
than temporary because the PA Contractors' agreements with Pediatrix
provide that the term of the arrangements are permanent, subject only to
termination by Pediatrix and that the PA Contractors shall not terminate
the agreements without the prior written consent of Pediatrix. Also, the
agreements provide that Pediatrix or its assigns has the right, but not the
obligation, to purchase the stock of the PA Contractors.
24
<PAGE> 25
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
Accounts Receivable And Revenues
Accounts receivable are primarily amounts due under fee-for-service
contracts from third party payors, such as insurance companies,
self-insured employers and patients and government-sponsored health care
programs geographically dispersed throughout the United States and its
territories. These receivables are presented net of an estimated allowance
for contractual adjustments and uncollectibles which is charged to
operations based on the Company's evaluation of expected collections
resulting from an analysis of current and past due accounts, past
collection experience in relation to amounts billed and other relevant
information. Contractual adjustments result from the difference between the
physician rates for services performed and reimbursements by
government-sponsored healthcare programs and insurance companies for such
services. Bad debts are included in contractual allowances and
uncollectibles because they are not considered material.
Concentration of credit risk relating to accounts receivable is limited by
number, diversity and geographic dispersion of the neonatology units
managed by the Company, as well as by the large number of patients and
payors, including the various governmental agencies in the states in which
the Company provides services. Receivables from government agencies made up
approximately 41% of accounts receivable at December 31, 1995 and 1996.
Cash Equivalents
Cash equivalents are defined as all highly liquid financial instruments
with maturities of 90 days or less from the date of purchase. The Company
maintains its cash and cash equivalents which consist principally of demand
deposits, short-term government securities and amounts on deposit in money
market accounts with principally three financial institutions.
Investments
The Company determines the appropriate classification of its investments in
debt securities at the time of purchase and reevaluates such determination
at each balance sheet date. Investments are classified as available for
sale and are carried at fair value, with unrealized gains and losses, net
of tax, reported as a separate component of stockholders' equity. Fair
value is determined by the most recently traded price of the security at
the balance sheet date.
25
<PAGE> 26
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
Investments, Continued
The cost of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and interest income
and declines in value judged to be other than temporary are included in
investment income. Realized gains and losses are included in earnings using
the specific identification method for determining the cost of securities
sold.
Investments are stated at fair market value which approximates amortized
cost and consist principally of tax exempt municipal obligations (fair
value of $48.6 and $19.4 million at December 31, 1996 and 1995,
respectively), U.S. government and government agency securities (fair value
of $6.8 and $8.3 million at December 31, 1996 and 1995, respectively) and
commercial paper (fair value of $1.5 million at December 31, 1996). The
Company's investments in marketable securities represent cash available for
current operations and are accordingly classified as current assets.
Property And Equipment
Property and equipment is recorded at cost. Depreciation of property and
equipment is computed on the straight-line method over the estimated useful
lives which range from five to forty years. Upon sale or retirement of
property and equipment, the cost and related accumulated depreciation are
eliminated from the respective accounts and the resulting gain or loss is
included in earnings.
Other Assets
Other assets consists principally of the excess of cost over the fair value
of net assets acquired which is being amortized on a straight-line basis
over twenty-five years.
In 1996, the Company adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." This statement requires companies to
review certain assets for impairment whenever events or changes in
circumstances indicate that the carrying value of these assets may not be
recoverable, in which case the asset generally would be written down to
fair value. The adoption of SFAS No. 121 did not affect the Company's
financial position, results of operations or liquidity.
26
<PAGE> 27
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
At each balance sheet date following the acquisition of a business, the
Company reviews the carrying value of the goodwill to determine if facts
and circumstances suggest that it may be impaired or that the amortization
period may need to be changed. The Company considers external factors
relating to each acquired business, including hospital and physician
contract changes, local market developments, changes in third party
payments, national health care trends, and other publicly available
information. If these external factors indicate the goodwill will not be
recoverable, as determined based upon undiscounted cash flows before
interest charges of the business acquired over the remaining amortization
period, the carrying value of the goodwill will be reduced. The Company
does not believe there currently are any indicators that would require an
adjustment to the carrying value of the goodwill or its estimated periods
of recovery at December 31, 1996.
Professional Liability Coverage
The Company maintains professional liability coverage which indemnifies the
Company and its healthcare professionals on a claims made basis with a
portion of self insurance retention. The Company records an estimate of its
liabilities for claims incurred but not reported based on an actuarial
valuation. Such liabilities are not discounted.
Income Taxes
The Company utilizes the liability method of accounting for deferred income
taxes. Under this method, deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
Stock Options
SFAS No. 123, "Accounting for Stock-Based Compensation" encourages, but
does not require, companies to recognize compensation expense for grants of
stock, stock options and other equity instruments to employees based on new
fair value accounting rules. The Company has chosen the SFAS No. 123
alternative to disclose pro forma net income and earnings per share under
the new method but not to apply the fair value accounting rules in the
statement of income. No charge has been reflected in the consolidated
statements of income as a result of the grant of stock options, as the
market value of the Company's stock equals the exercise price on the date
the options are granted. To the extent that the Company realizes an income
tax benefit from the exercise or early disposition of certain stock
options, this benefit results in a decrease in current income taxes payable
and an increase in additional paid-in capital.
27
<PAGE> 28
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
1996 Net Income Per Share
Primary and fully diluted net income per share is calculated by dividing
net income by the weighted average number of common and common equivalent
shares outstanding during the period. Common equivalent shares consist of
the dilutive effect of outstanding options calculated using the treasury
stock method.
Pro Forma 1994 And 1995 Per Share Data (unaudited)
As a result of the conversion of the preferred stock, which was determined
not to be a common stock equivalent, into common stock in connection with
the initial public offering, the Company has presented pro forma net income
per common and common equivalent share for the years ended December 31,
1994 and 1995. The calculation of the pro forma shares is comparable to
primary and fully dilutive common and common equivalent shares subsequent
to the initial public offering. Pro forma net income per common and common
equivalent share is computed based upon the weighted average number of
shares of common stock and common stock equivalents, including the number
of shares of common stock issuable upon conversion of preferred stock,
outstanding during the period. Pursuant to the requirements of the
Securities and Exchange Commission (SEC), common stock issued by the
Company during the 12 months immediately preceding the initial filing of
the registration statement with the SEC, plus common stock equivalents
relating to the grant of common stock options during the same period, have
been included in the calculation of pro forma weighted average number of
common and common stock equivalents outstanding for the years ended
December 31, 1994 and 1995, using the treasury stock method and the initial
public offering price of $20 per share.
Fair Value Of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
investments in marketable securities, and accounts payable and accrued
expenses approximate fair value due to the short maturities of these items.
The carrying amount of the note payable approximates fair value because the
interest rates on this instrument change with market interest rates.
28
<PAGE> 29
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. ACCOUNTS RECEIVABLE AND NET PATIENT SERVICE REVENUE:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1995 1996
---- ----
(in thousands)
<S> <C> <C>
Gross accounts receivable $ 25,184 $ 53,991
Less allowance for contractual adjustments
and uncollectibles (13,088) (30,595)
-------- --------
$ 12,096 $ 23,396
======== ========
</TABLE>
Net patient service revenue consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1994 1995 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Gross patient service revenue $ 59,405 $ 79,360 $ 156,594
Less contractual adjustments and
uncollectibles (30,885) (40,843) (82,759)
Hospital contract administrative fees 4,259 5,343 6,998
--------- --------- ---------
$ 32,779 $ 43,860 $ 80,833
========= ========= =========
</TABLE>
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------
1995 1996
---- ----
(in thousands)
<S> <C> <C>
Land and land improvements $ 1,308 $ 1,374
Building 1,644 4,000
Equipment and furniture 2,104 4,312
------- -------
5,056 9,686
Less accumulated depreciation (748) (1,275)
Construction in progress 241 265
------- -------
$ 4,549 $ 8,676
======= =======
</TABLE>
29
<PAGE> 30
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. OTHER ASSETS:
Other assets consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1995 1996
---- ----
(in thousands)
<S> <C> <C>
Excess of cost over net assets acquired $ 3,870 $ 48,963
Physician agreements 1,692 1,692
Other 106 572
-------- --------
5,668 51,227
Less accumulated amortization (104) (1,786)
-------- --------
$ 5,564 $ 49,441
======== ========
</TABLE>
During 1995, the Company completed the acquisition of one physician group
practice in exchange for approximately $3.2 million in cash. In connection
with the transaction, the Company recorded assets of $4.6 million,
including $3.8 million of goodwill, and liabilities of $1.4 million.
During 1996, the Company completed the acquisition of ten physician group
practices. Total consideration and related costs for these acquisitions
approximated $43.7 million. In connection with these transactions, the
Company has recorded assets totalling $43.7 million, including $43.0
million of goodwill, and liabilities of $3.4 million.
The prior shareholders of two physician group practices acquired are
eligible to receive up to an aggregate of $2 million in April 1997 if
certain targets are achieved at the hospitals served by the Company during
the period from February 1, 1996 to January 31, 1997.
The Company has accounted for the transactions using the purchase method of
accounting and the excess of cost over fair value of net assets acquired is
being amortized on a straight-line basis over 25 years. The results of
operations of the acquired companies have been included in the consolidated
financial statements from the dates of acquisition.
30
<PAGE> 31
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. OTHER ASSETS, Continued:
The following unaudited pro forma information combines the consolidated
results of operations of the Company and the companies acquired during 1995
and 1996 as if the acquisitions had occurred on January 1, 1995:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1996
---- ----
(in thousands, except
per share data)
<S> <C> <C>
Net patient service revenue $ 75,974 $ 93,936
Net income 6,785 13,693
Net income per share:
Primary .65 .94
Fully diluted .56 .94
</TABLE>
The pro forma results do not necessarily represent results which would
have occurred if the acquisition had taken place at the beginning of the
period, nor are they indicative of the results of future combined
operations.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1995 1996
---- ----
(in thousands)
<S> <C> <C>
Accounts payable $ 786 $ 2,489
Accrued salaries and bonuses 779 3,508
Accrued payroll taxes and benefits 726 2,009
Accrued professional liability coverage 1,268 2,413
Other accrued expenses 788 3,004
------- -------
$ 4,347 $13,423
======= =======
</TABLE>
31
<PAGE> 32
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
7. NOTE PAYABLE:
Note payable consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------
1995 1996
---- ----
(in thousands)
<S> <C> <C>
Mortgage payable to bank $ 815 $ 2,950
Less current portion (64) (200)
------- -------
$ 751 $ 2,750
======= =======
</TABLE>
During 1996, the Company negotiated a new mortgage loan agreement
increasing the principal balance to $3 million and adjusting the terms of
the original mortgage. Prior to the new agreement, interest was payable at
prime plus .5% with quarterly principal payments of $16,032 plus interest
through maturity date of October 4, 1998 at which time the unpaid principal
balance was due. The new loan agreement requires quarterly payments
totalling $200,400 per year plus interest through the maturity date of the
loan at which time the unpaid principal balance of $1,647,300 is due, bears
interest at prime (8.25% at December 31, 1996), and is collateralized by
the Company's two buildings. The loan matures on June 30, 2003.
In June 1996, the Company entered into a $30 million unsecured revolving
credit facility which includes a $2 million amount reserved to cover
deductibles under the Company's professional liability insurance policies.
The credit facility matures on June 30, 1999. At the Company's option, the
credit facility bears interest at either LIBOR plus .875% or prime. The
Company had no outstanding balance at December 31, 1995 or 1996.
The Company is required to maintain certain financial covenants including a
requirement that the Company maintain a minimum level of net worth, as
defined under the terms of the mortgage and credit facility agreement.
8. PREFERRED STOCK:
In October 1992, the Company issued 4,571,063 shares of 9% voting,
redeemable, cumulative convertible Preferred Stock for $13,000,103. In
connection with the Company's 1995 initial public offering, the Preferred
Stock was converted into common stock of the Company and the unpaid
dividends of $3,736,589 were forgiven. As a result, the redemption value of
the Preferred Stock was credited to common stock and additional paid-in
capital accounts.
32
<PAGE> 33
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. INCOME TAXES:
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1994 1995 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Federal:
Current $2,460 $2,573 $3,072
Deferred 722 1,184 3,667
------ ------ ------
3,182 3,757 6,739
------ ------ ------
State:
Current 322 454 1,358
Deferred 245 264 756
------ ------ ------
567 718 2,114
------ ------ ------
Total $3,749 $4,475 $8,853
====== ====== ======
</TABLE>
The Company files its tax return on a consolidated basis with the
Subsidiaries. The remaining PA Contractors file tax returns on an
individual basis.
The effective tax rate on income was 41%, 40% and 40% for the years ended
December 31, 1994, 1995 and 1996, respectively. The differences between the
effective rate and the U.S. federal income tax statutory rate are as
follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1995 1996
---- ---- ----
(in thousands)
<S> <C> <C> <C>
Tax at statutory rate $ 3,114 $ 3,804 $ 7,472
State income tax, net of federal benefit 333 451 1,374
Permanent differences -- 16 (391)
Change in valuation allowance (450) -- --
Other, net 752 204 398
------- ------- -------
Income tax provision $ 3,749 $ 4,475 $ 8,853
======= ======= =======
</TABLE>
33
<PAGE> 34
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. INCOME TAXES, Continued:
The significant components of deferred income tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1996
----------------------------- ------------------------------
Total Current Non Current Total Current Non Current
----- ------- ----------- ----- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
Allowance for uncollectible accounts $ 389 $ -- $ 389 $ 150 $ 150 $ --
Net operating loss carryforward 552 -- 552 1,112 1,112 --
------- ------- ------- ------- ------- -------
Total deferred tax assets 941 -- 941 1,262 1,262 --
------- ------- ------- ------- ------- -------
Accrual to cash adjustment (2,711) (1,909) (802) (7,416) (7,355) (61)
Other (139) -- (139) (178) (6) (172)
------- ------- ------- ------- ------- -------
Total deferred tax liabilities (2,850) (1,909) (941) (7,594) (7,361) (233)
------- ------- ------- ------- ------- -------
Net deferred tax liability $(1,909) $(1,909) $ -- $(6,332) $(6,099) $ (233)
======= ======= ======= ======= ======= =======
</TABLE>
The income tax benefit related to the exercise of stock options reduces
taxes currently payable and is credited to additional paid-in capital. Such
amounts totaled $252,180 and $704,630 for the years ended December 31, 1995
and 1996, respectively.
The Company has net operating loss carryforwards for federal and state tax
purposes of approximately $1,377,000 and $2,762,000 at December 31, 1995
and 1996, respectively, expiring at various times commencing in 1999.
The Company is currently under examination by the Internal Revenue Service
for the tax years ended December 31, 1992, 1993 and 1994. The IRS has
challenged certain deductions that, if ultimately disallowed, would result
in additional taxes of approximately $4.5 million, plus interest. The
Company has reviewed the IRS matters under consideration and believes that
the tax returns are substantially correct as filed. The Company intends to
vigorously contest the proposed adjustments and believes it has adequately
provided for any liability that may result from this examination. The
Company and its tax advisors believe that the ultimate resolution of the
examination will not have a material effect on the Company's consolidated
financial position or results of operations and cash flows.
10. COMMITMENTS AND CONTINGENCIES:
During the ordinary course of business, the Company has become a party to
pending and threatened legal actions and proceedings, most of which involve
claims of medical malpractice and are generally covered by insurance. These
lawsuits are not expected to result in judgments which would exceed
professional liability insurance coverage, and therefore, will not have a
material impact on the Company's consolidated results of operations,
financial position or liquidity, notwithstanding any possible insurance
recovery. See also Note 14.
34
<PAGE> 35
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
10. COMMITMENTS AND CONTINGENCIES, Continued:
During 1996, the Company entered into an operating lease agreement expiring
in 2006. Rent expense for the year ended December 31, 1996 is $410,293. At
December 31, 1996, the future minimum lease payments are as follows:
<TABLE>
<CAPTION>
(in thousands)
--------------
<S> <C>
1997 $ 1,209
1998 1,171
1999 1,132
2000 1,094
2001 1,055
Thereafter 6,512
---------------
$ 12,173
===============
</TABLE>
11. RETIREMENT PLAN:
The Company has a qualified contributory savings plan (the "Plan") as
allowed under Section 401(k) of the Internal Revenue Code. The Plan permits
participant contributions and allows elective company contributions based
on each participant's contribution. Participants may defer up to 15% of
their annual compensation by contributing amounts to the Plan. The Company
approved contributions of $473,249, $559,125 and $1,107,092 to the Plan
during the years ended December 31, 1994, 1995 and 1996, respectively.
12. PRO FORMA HISTORICAL NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
Pro forma net income per common and common equivalent share on a historical
basis for 1994 and 1995, both primary and fully diluted, are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1994 1995
---------------- -----------------
(in thousands, except per share data)
<S> <C> <C>
Income applicable to common stock:
Net income $ 5,407 $ 6,713
Less: preferred stock dividends (1,296) (1,040)
-------- --------
Income applicable to common stock $ 4,111 $ 5,673
======== ========
Net income per share:
Primary $ 0.60 $ 0.65
======== ========
Fully diluted $ 0.47 $ 0.55
======== ========
Weighted average number of common and
common equivalent shares outstanding:
Primary 6,853 8,773
======== ========
Fully diluted 11,430 12,216
======== ========
</TABLE>
35
<PAGE> 36
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. PRO FORMA HISTORICAL NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE,
Continued:
Primary net income per common and common equivalent share is computed by
dividing net income available to common shareholders by the weighted
average number of common and common equivalent shares outstanding during
the period. The voting, redeemable, cumulative convertible preferred stock
issued in 1992 was determined not to be a common stock equivalent. In
computing primary net income per share, preferred stock dividends reduce
income available to common shareholders. Fully diluted net income per share
is computed by dividing net income by the weighted average number of common
and common equivalent shares outstanding during the period and includes
4,571,063 shares of common stock assumed to be issued upon conversion of
all shares of the preferred stock.
Pursuant to the requirements of the SEC, common stock issued by the Company
plus common stock equivalents relating to the grant of common stock
options, during the twelve months immediately preceding the initial filing
of the registration statement with the SEC, have been included in the
calculation of the weighted average number of common and common equivalent
shares outstanding on a primary and fully diluted basis for the years ended
December 31, 1994 and 1995, using the treasury stock method and the initial
public offering price of $20 per share.
13. STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLANS:
In 1993, the Company's Board of Directors authorized a stock option plan.
Under the plan, options to purchase shares of common stock may be granted
to certain employees at a price not less than the fair market value of the
shares on the date of grant. The options must be exercised within ten years
from the date of grant. The stock options become exercisable on a pro rata
basis over a three year period from the date of grant. As of January 18,
1995, 1,500,000 options were authorized by the Company's Board of Directors
and the previously issued options were confirmed. The additional
authorization of options resulted in 268,300 options available for grant as
of that date. On May 8, 1996, the Company's shareholders approved an
amendment to increase the number of shares available for grant under the
plan to 2,500,000.
36
<PAGE> 37
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLANS, Continued:
Pertinent information covering the stock option plan is as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Option Price Exercise Expiration
Shares Per Share Price Date
--------- ------------ -------- ----------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 200,000 $ 2.84-$ 3.12 $ 3.05 2003
Granted 1,035,450 $ 5.00-$10.00 6.36
Canceled (3,750) $ 5.00 5.00
--------- ------------- ------
Outstanding at December 31, 1994 1,231,700 $ 2.84-$10.00 5.82 2003-2004
Granted 841,500 $10.00-$21.50 17.95
Canceled (324,583) $ 3.12-$12.50 5.33
Exercised (39,709) $ 3.12-$10.00 3.46
--------- ------------- ------
Outstanding at December 31, 1995 1,708,908 $ 2.84-$21.50 12.03 2003-2005
Granted 600,400 $12.50-$36.75 35.27
Canceled (34,660) $ 3.12-$36.00 16.46
Exercised (47,187) $ 5.00-$20.50 5.64
--------- ------------- ------
Outstanding at December 31, 1996 2,227,461 $ 2.84-$36.75 $18.27 2003-2006
========= ============= ======
Exercisable at:
December 31, 1994 67,000 $ 2.84-$ 3.12 $ 3.05
December 31, 1995 306,872 $ 2.84-$10.00 $ 6.15
December 31, 1996 828,631 $ 2.84-$21.50 $10.20
</TABLE>
Significant option groups outstanding at December 31, 1996 and related
price and life information follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------- ----------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Contractual Exercise
Range of Exercise Prices Outstanding Price Life Exercisable Price
------------------------ ----------- -------- ----------- ----------- -----
<S> <C> <C> <C> <C> <C>
$2.84 50,000 $ 2.84 6.4 50,000 $ 2.84
$5.00 426,111 5.00 7.8 271,579 5.00
$7.50 200,000 7.50 7.8 133,333 7.50
$10.00-$12.50 313,700 11.05 8.0 154,361 10.69
$19.25-$21.50 650,200 19.61 8.8 219,358 19.60
$24.00-$31.50 17,250 25.81 9.0 -- --
$32.88-$36.75 570,200 35.55 9.5 -- --
--------- ------ --- ------- ------
2,227,461 $18.27 8.5 828,631 $10.20
========= ====== === ======= ======
</TABLE>
37
<PAGE> 38
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. STOCK OPTION PLAN AND EMPLOYEE STOCK PURCHASE PLANS, Continued:
Under the Company's stock purchase plans, employees may purchase the
Company's common stock at 85% of the average high and low sales price of
the stock as reported as of commencement of the purchase period or as of
the purchase date, whichever is lower. Under these plans, 12,786 shares
were issued during 1996. At December 31, 1996, the Company has an
additional 987,214 shares reserved under the stock purchase plans.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation expense has been recognized for stock options
granted under the stock option plan or stock issued under the employee
stock purchase plans. Had compensation expense been determined based on the
fair value consistent with the provisions of SFAS No. 123, the Company's
net income and net income per share would have been reduced to the pro
forma amounts below:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1995 1996
----- ----
(in thousands, except
per share data)
<S> <C> <C>
Net income $ 6,381 $ 11,002
Net income per share:
Primary .66 .77
Fully diluted .54 .77
</TABLE>
The fair value of each option or share to be issued is estimated on the
date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in 1995 and 1996,
respectively: dividend yield of 0% for both years; expected volatility of
42% for both years; and risk-free interest rates of 6.1% and 6.3% for
options with expected lives of five years (officers and physicians of the
Company) and 6.1% for options with expected lives of three years (all other
employees of the Company).
The pro forma effect on net income is not representative of the pro forma
effect on net income in future periods because it does not take into
consideration pro forma compensation expense related to grants made in
prior periods.
14. SUBSEQUENT EVENTS:
Subsequent to December 31, 1996, the Company completed the acquisitions of
three physician group practices. Total cash paid for these acquisitions
approximated $17.0 million. The acquisitions will be accounted for using
the purchase method of accounting.
The Company was recently notified by an hospital customer of a dispute
regarding the interpretation of the customer's contract with the Company.
The customer believes that the Company should refund approximately $7.5
million of payments made to the Company over the last five years. The
Company disagrees with the customer's interpretation of the contract and
believes that the matter will be resolved amicably. In the unlikely event
that the Company cannot resolve this matter amicably, the Company intends
to vigorously litigate the matter and assert all its legal defenses. The
Company believes that resolution of the matter will have no material effect
on the Company's consolidated financial position, results of operations or
cash flows.
38
<PAGE> 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has had no changes in or disagreements with its independent
certified public accountants on accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to directors and executive officers of the
Company is incorporated by reference to the registrant's Proxy Statement to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in response to this item is incorporated by
reference to the registrant's Proxy Statement to be filed with the Securities
and Exchange Commission pursuant to Regulation 14A not later than 120 days after
the end of the fiscal year covered by this report.
39
<PAGE> 40
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.
An index to financial statements for the year ended December
31, 1996 appears on page 18.
(2) FINANCIAL STATEMENT SCHEDULES.
The following financial statement schedules for the years ended December 31,
1994, 1995 and 1996 are included in this Annual Report on Form 10-K on the pages
set forth below.
ITEM PAGE
Financial Statement Schedules
Report of Independent Accountants.............................. 19
Schedule II: Valuation and Qualifying Accounts................ 41
Any required information not included in the above-described schedules is
included in the consolidated financial statements and notes thereto incorporated
herein by reference.
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 not applicable and therefore have been omitted.
40
<PAGE> 41
PEDIATRIX MEDICAL GROUP, INC.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1994, DECEMBER 31, 1995, AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
1994 1995 1996
--------------------- ------------------- -------------------
<S> <C> <C> <C>
Allowance for contractual
adjustments and uncollectibles:
Balance at beginning of year...... $9,770,468 $13,246,580 $13,087,899
Portion charged against
operating revenue........... 30,885,445 40,843,431 82,759,087
Accounts receivable
written-off (net of
recoveries)................. (27,409,333) (41,002,112) (65,252,080)
--------------------- ------------------- -------------------
Balance at end of year............ $13,246,580 $13,087,899 $30,594,906
===================== =================== ===================
</TABLE>
41
<PAGE> 42
(3) EXHIBITS
3.1 Pediatrix's Amended and Restated Articles of Incorporation (3.1)(1)
3.2 Pediatrix's Amended and Restated Bylaws (3.2)(1)
4.1 Registration Rights Agreement, dated as of September 13, 1995 between
Pediatrix and certain shareholders (4.1)(1)
10.1 Pediatrix's Amended and Restated Stock Option Plan (10.1)(2)
10.2 Form of Indemnification Agreement between Pediatrix and each of its
directors and certain executive officers (10.2)(1)
10.3 Employment Agreement, dated as of January 1, 1995, as amended, between
Pediatrix and Roger J. Medel, M.D. (10.3)(1)
10.4 Employment Agreement, dated as of February 1, 1995, as amended,
between Pediatrix and Richard J. Stull, II (10.4)(1)
10.5 Employment Agreement, dated as of May 1, 1995, as amended, between
Pediatrix and Larry M. Mullen (10.5)(1)
10.6 Employment Agreement, dated as of February 1, 1995, as amended,
between Pediatrix and Cathy J. Lerman, as amended (10.6)(1)
10.7 Employment Agreement, dated as of February 1, 1995, as amended,
between Pediatrix and Brian D. Udell, M.D., as amended (10.7)(1)
10.8 Employment Agreement, dated as of July 27, 1993, between
Pediatrix and Frederick V. Miller, M.D. (10.18)(1)
10.9 Employment Agreement, dated November 6, 1995, between Kristen
Bratberg and Pediatrix(10.9)(4)
10.10 Employment Agreement, dated June 1, 1996, between Pediatrix and
M. Douglas Cunningham, M.D. (10.21)(3)
10.11 The First National Bank of Boston (10.19)(1)
10.12 Amendment No. 2 to Credit Agreement, dated as of September 26,
1994, between Pediatrix, certain PA Contractors and The First
National Bank of Boston (10.20)(1)
10.13 Amendment No. 3 to Credit Agreement, dated as of June 19, 1995,
between Pediatrix, certain PA Contractors and The First National Bank
of Boston (10.21)(1)
10.14 Mortgage, Security Agreement and Assignment of Leases and Rents,
dated as of September 30, 1993, made by Pediatrix in favor of The
First National Bank of Boston (10.22)(1)
10.15 The Company's Profit Sharing Plan (10.23)(1)
10.16 Form of Non-Competition and Nondisclosure Agreement (10.24)(1)
10.17 Form of Exclusive Management and Administrative Services
Agreement between Pediatrix and each of the PA Contractors
(10.25)(1)
10.18 Agreement for Purchase and Sale of Stock, dated July 27, 1995, between
Pediatrix Medical Group of California and Neonatal and Pediatric
Intensive Care Medical Group, Inc. and the individual physicians set
forth in Exhibit A therein (10.26)(1)
10.19 NICU Medical Director Appointment, dated as of July 27, 1993, between
Pediatrix and Frederick V. Miller, M.D. (10.28)(1)
10.20 Stock Purchase Agreement, effective January 16, 1996, between Jack C.
Christensen, M.D., Cristina Carballo-Perelman, M.D., Michael C.
McQueen, M.D., Neonatal Specialists, Ltd. and Brian Udell, M.D.
(2.1)(4)
10.21 Asset Purchase Agreement, effective January 16, 1996, between
Med-Support, L.P. and Neonatal Specialists, Ltd. (2.2)(4)
10.22 Asset Purchase Agreement, effective January 16, 1996, between CMJ
Leasing, L.P. and Neonatal Specialists, Ltd. (2.3)(4)
10.23 Asset Purchase Agreement, dated January 29, 1996, among Pediatrix
Medical Group of Colorado, P.C., Pediatric and Newborn Consultants,
P.C., and the shareholders of PNC (2.1)(5)
10.24 Agreement and Plan of Merger, dated January 29, 1996, among Pediatrix
Medical Group of Colorado, P.C., Colorado Neonatal Associates, P.C.
and the shareholders of CNA (2.1)(5)
10.25 Amendment No. 4 to Credit Agreement dated as of December 30, 1995,
between Pediatrix, certain PA Contractors and The First National Bank
of Boston (10.24)(2)
42
<PAGE> 43
10.26 1996 Qualified Employee Stock Purchase Plan (10.25)(2)
10.27 1996 Non-Qualified Employee Stock Purchase Plan (10.260(2)
10.28 Agreement and Plan of Merger, dated May 1, 1996, among Pediatrix
Acquisition Corp., Rocky Mountain Neonatology, P.C. and the
shareholders of RMN (2.1)(7)
10.29 Asset Purchase Agreement, dated as of May 30, 1996, by and among
Pediatrix Medical Group of Texas, P.A., West Texas Neonatal Associates
and the individual physicians set forth in Exhibit A therein (2.1)(8)
10.30 Agreement for Purchase and Sale of Assets, dated as of June 5, 1996,
by and among Pediatrix Medical Group of California, P.C., Infant Care
Specialists Medical Group, Inc. and the individual physicians set
forth in Exhibit A therein (2.1)(9)
10.31 Airplane Purchase Agreement, dated March 22, 1996, between Pediatrix
and Learjet Inc. (10.22)(3).
10.32 First Amended and Restated Credit Agreement, dated as of June 27,
1996, between Pediatrix, certain PA Contractors, The First National
Bank of Boston and Sun Trust Bank (10.25)(3)
10.33 Modification of Mortgage, dated as of June 27, 1996, between PMG and
The First National Bank of Boston (10.26)(3)
11.1 Statement re computation of per share earnings (10)
21.1 Subsidiaries of Pediatrix (21.1)(1)
23.1 Consent of Coopers & Lybrand L.L.P.(10)
27.1 Financial Data Schedule(10)
- --------------------
(1) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form S-1 (File No. 33-95086).
(2) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 10-Q for the quarterly period ended March 31, 1996.
(3) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form S-1 (File No. 333-07125).
(4) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 8-K, dated January 31, 1996.
(5) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 8-K, dated February 8, 1996.
(6) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Annual Report on Form 10-K for the year ended December
31, 1995.
(7) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 8-K, dated May 9, 1996.
(8) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 8-K, dated May 30, 1996.
(9) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 8-K, dated June 5, 1996.
(10) Filed herewith.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the last
quarter of the period covered by this Report.
(c) EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
The index to exhibits that are listed in Item 14(a)(3) of this report
and not incorporated by reference follows the "Signatures" section hereof and is
incorporated herein by reference.
43
<PAGE> 44
(d) FINANCIAL STATEMENT SCHEDULES REQUIRED BY REGULATION S-X
The financial statement schedules required by Regulation S-X which
are excluded from the Registrant's Annual Report to Shareholders for the year
ended December 31, 1996, by Rule 14a-3(b)(1) are included above. See Item 14(a)2
for index.
44
<PAGE> 45
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.
PEDIATRIX MEDICAL GROUP, INC.
Date: March 27, 1997 By: /s/ Roger J. Medel, M.D., M.B.A.
--------------------------------
Roger J. Medel, M.D., M.B.A., President
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 in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
President, Chief Executive
/s/ ROGER J. MEDEL, M.D., M.B.A. Officer and Director (principal March 27, 1997
- -------------------------------------------- excutive officer)
Roger J. Medel, M.D., M.B.A.
Vice President and Chief Financial
/s/ LAWRENCE M. MULLEN Officer (principal financial officer March 27, 1997
- -------------------------------------------- and pricipal accounting officer)
Lawrence M. Mullen
/s/ E. ROE STAMPS, IV Director March 27, 1997
- --------------------------------------------
E. Roe Stamps, IV
/s/ BRUCE R. EVANS Director March 27, 1997
- --------------------------------------------
Bruce R. Evans
/s/ M. DOUGLAS CUNNINGHAM, M.D. Director March 27, 1997
- --------------------------------------------
M. Douglas Cunningham, M.D.
/s/ MICHAEL FERNANDEZ Director March 27, 1997
- ---------------------------------------------
Michael Fernandez
/s/ ALBERT H. NAHMAD Director March 27, 1997
- ---------------------------------------------
Albert H. Nahmad
/s/ CESAR L. ALVAREZ Director March 27, 1997
- --------------------------------------------
Cesar L. Alvarez
</TABLE>
45
<PAGE> 46
INDEX TO EXHIBITS
PAGE NUMBER IN
SEQUENTIAL
NUMBER SYSTEM
EXHIBIT NUMBER AND DESCRIPTION
11.1 - Statement re computation of earnings per share 47
23.1 - Consent of Coopers & Lybrand L.L.P. 48
27.1 - Financial Data Schedule 49
46
<PAGE> 1
PEDIATRIX MEDICAL GROUP, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
EXHIBIT 11.1
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1994 1995 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
Income applicable to common stock:
Net income.............................. $5,407,268 $6,712,500 $13,119,849
Less: preferred stock dividends........ (1,296,065) (1,039,911) --
----------------- ---------------- -----------------
Income applicable to common stock....... $4,111,203 $5,672,589 $13,119,849
================= ================ =================
Weighted average number of common
and common share equivalents
outstanding:
Primary:
Weighted average of common
shares outstanding.................. 6,272,456 8,092,448 13,805,671
Weighted average of dilutive common
share equivalents................... 580,609 680,568 729,302
---------------- ---------------- ----------------
Weighted average number of common
and common share equivalents
outstanding for primary earnings
per share...........................
6,853,065 8,773,016 14,534,973
================= ================ ================
Fully diluted:
Weighted average of common shares
outstanding......................... 6,272,456 8,092,448 13,805,671
Weighted average of dilutive common
share equivalents................... 5,157,563 4,123,219 749,663
----------------- ---------------- ----------------
Weighted average number of common and
common share equivalents outstanding
for fully dilutive earnings per share
11,430,019 12,215,667 14,555,334
================= ================ ================
Net income per share:
Primary................................ $0.60 $0.65 $0.90
================= ================ ================
Fully diluted.......................... $0.47 $0.55 $0.90
================= ================ ================
</TABLE>
47
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Pediatrix Medical Group, Inc. on Forms S-8 (File Nos. 333-07057, 333-07061 and
333-07059) of our report dated January 27, 1997, except as to information
presented in Note 14 for which the date is March 26, 1997, on our audits of the
consolidated financial statements and financial statement schedule of Pediatrix
Medical Group, Inc. as of December 31, 1995 and 1996, and for the years ended
December 31, 1994, 1995 and 1996, which report is included in this Annual
Report on Form 10-K.
Fort Lauderdale, Florida
March 28, 1997
48
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
AUDITED CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1996 AND THE AUDITED
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 18,435
<SECURITIES> 57,218
<RECEIVABLES> 23,396
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 100,909
<PP&E> 8,676
<DEPRECIATION> 0
<TOTAL-ASSETS> 159,026
<CURRENT-LIABILITIES> 19,722
<BONDS> 2,750
0
0
<COMMON> 149
<OTHER-SE> 136,172
<TOTAL-LIABILITY-AND-EQUITY> 159,026
<SALES> 0
<TOTAL-REVENUES> 80,833
<CGS> 0
<TOTAL-COSTS> 60,764
<OTHER-EXPENSES> (2,096)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 192
<INCOME-PRETAX> 21,973
<INCOME-TAX> 8,853
<INCOME-CONTINUING> 13,120
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,120
<EPS-PRIMARY> .90
<EPS-DILUTED> .90
<FN>
AMOUNTS FOR RECEIVABLES AND PROPERTY, PLANT AND EQUIPMENT ARE NET OF ANY
ALLOWANCES AND ACCUMULATED DEPRECIATION.
</FN>
</TABLE>
