================================================================================
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, 1999
[ ] 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
PEDIATRIX MEDICAL GROUP, INC.
(Exchange 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.)
1301 Concord Terrace, Sunrise, Florida 33323
-------------------------------------- -----
(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
------------------- ----------------------------
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.
The aggregate market value of shares of Common Stock held by
non-affiliates of the registrant as of March 9, 2000, was approximately
$74,159,000 based on a $7.63 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 March 9, 2000 were 15,625,265.
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.
================================================================================
<PAGE>
<TABLE>
<CAPTION>
Index to Items
--------------
<S> <C> <C> <C>
PART I ....................................................................................3
Item 1 Business............................................................................3
Item 2 Properties.........................................................................18
Item 3 Legal Proceedings..................................................................18
Item 4 Submission of Matters to a Vote of Security Holders................................19
PART II ...................................................................................20
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters................................................................20
Item 6 Selected Financial Data............................................................21
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations..........................................................23
Item 7A Quantitative and Qualitative Disclosures About Market Risk.........................29
Item 8 Financial Statements and Supplementary Data........................................30
Item 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...........................................................51
PART III ...................................................................................52
Item 10 Directors and Executive Officers of the Registrant.................................52
Item 11 Executive Compensation.............................................................52
Item 12 Security Ownership of Certain Beneficial Owners and Management.....................52
Item 13 Certain Relationships and Related Transactions.....................................52
PART IV ...................................................................................53
Item 14 Exhibits, Financial Statement Schedules, and Reports on Form 8-K...................53
Schedule ...................................................................................54
Exhibits ...................................................................................55
Signatures ...................................................................................58
</TABLE>
2
<PAGE>
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 services at
hospital-based neonatal intensive care units ("NICUs"). NICUs are staffed by
specialized pediatric physicians, known as neonatologists, who provide medical
care to newborn infants with low birth weight and other medical complications.
In addition, the Company believes that it is the nation's leading provider of
perinatal medicine. Perinatology is a subspecialty of obstetrical medicine that
focuses on the diagnostics, management and care of high-risk and/or complicated
pregnancies. The Company also provides physician services at (i) hospital-based
pediatric intensive care units ("PICUs"), 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, 1999, the
Company provided services in 25 states and Puerto Rico and employed or
contracted with 417 physicians.
The Company staffs and manages NICUs and PICUs in hospitals, providing
the physicians, professional 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 neonatal and perinatal
physician services 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 perinatologists
and hiring related staff to provide services in a cost-effective manner thereby
relieving hospitals of certain financial and administrative burdens, (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 1999, the Company completed 11 acquisitions, which added 23
NICUs, one PICU and four perinatal practices. Additionally, two NICUs and one
PICU were added through the Company's internal marketing activities. The Company
has developed regional networks in Seattle, Denver, Phoenix-Tucson, Southern
California and Dallas-Fort Worth 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 managed
care organizations and other third party payors.
During the period of January 1 through March 22, 2000, the Company
completed the acquisition of two physician practices ("Recent Acquisitions").
3
<PAGE>
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 companies to manage specialized functions in an effort to contain
costs, improve utilization management, and reduce administrative burdens.
Physician organizations provide hospitals with professional management of staff,
including recruiting, staffing and scheduling of physicians.
Physicians have responded 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 organizations provide
physicians an alternative to self-management that enables them 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. The Company's strategy is to continue
growth through acquisitions, as physicians remain receptive to being acquired.
In addition, the Company continues to market its services to hospitals to obtain
new contracts.
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 through affiliations with
small, local physician groups or with independent practitioners. These small
practices typically lack the necessary expertise and support services in quality
assurance, billing and reimbursement, recruiting and effective medical
management to operate NICUs on a cost-effective basis. Hospitals are
increasingly seeking to contract with physician groups that have the capital
resources, information and reimbursement systems and 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.
During 1997, the Company entered the field of perinatology, which was a
natural extension of the neonatal practice. Since many perinatal cases result in
an admission to a NICU, early involvement by the neonatologist helps to
positively affect outcomes for both mother and child. In addition, improved
perinatal care has a positive impact on neonatal outcomes. The expansion of the
continuum of care provided by the Company to include perinatology has created an
opportunity to strengthen its relationships with both hospitals and payors.
4
<PAGE>
Strategy
The Company's objective is to enhance its position as the nation's
leading provider of neonatal and perinatal physician services by adding new
practices 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 primarily 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 neonatal physician services and (ii) a competitive
advantage in recruiting and retaining neonatologists seeking to join a
group practice. In 1997, the Company began providing perinatal services.
The Company is continuing to focus its efforts in perinatology and is
dedicated to developing the same level of expertise in perinatology that it
currently provides in neonatology. The Company believes its continued focus
will allow it to enhance its position as the nation's leading provider of
neonatal and perinatal physician services.
Acquire Neonatal and Perinatal Physician Group Practices. The
Company intends to further increase the number of locations at which it
provides physician services by acquiring well-established neonatal and
perinatal 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 July 1995 and since has completed acquisitions of more than 50
physician group practices. The Company is actively pursuing acquisitions of
other neonatal and perinatal physician group practices. No assurance can be
given that future acquisition candidates will be identified or that any
future acquisitions will be consummated. See "Business-Recent Developments"
and "Business-Factors to be Considered - Risks Relating to Acquisition
Strategy."
Develop Regional Networks and Expand the Continuum of Care. The
Company intends to develop regional and state-wide networks of NICUs and
perinatal practices in geographic areas with high concentrations of births.
The Company operates combined regional networks of NICUs and perinatal
practices in Seattle-Tacoma, Denver, Phoenix-Tucson and Fort Worth. In
addition, the Company intends to continue to acquire and develop perinatal
practices in markets where it currently provides NICU services. The Company
believes that the development of regional and state-wide networks and
expanding the continuum of care it provides 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 it 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 perinatologists and
neonatologists in emergency situations, as well as the retention of
qualified perinatologists and 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 services.
5
<PAGE>
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 and strengthen
its relationships among payors and hospitals. The Company is also prepared
to enter into flexible arrangements with third party payors, including
capitation arrangements. As the nation's leading provider of neonatal and
perinatal physician services, 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 Services
The Company provides physician 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, PICU and perinatal
practice it manages with a medical director who reports to a Regional
Medical Officer ("RMO") of the Company. The RMOs and all medical directors
at these units are board certified or board eligible in neonatology,
perinatology, 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.
Recruiting, Staffing and Scheduling. The Company is responsible for
recruiting, staffing and scheduling the neonatologists, perinatologists,
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, perinatologists 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 RMOs 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, perinatology, 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
"Business - 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.
6
<PAGE>
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. The hospital bills and collects
separately for all other services. To address the increasingly complex and
time-consuming process of 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. The
Company's billing and collection operations are conducted from its
corporate headquarters in Sunrise, Florida, as well as regional business
offices in Phoenix, Arizona, Orange, California and Dallas, Texas.
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 and perinatal 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 perinatal and 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 and
medical staff. In addition, the Company intends to focus on developing
additional regional networks and state-wide networks to strengthen its position
with managed care organizations and other third-party payors.
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, (ii) an intranet site to facilitate clinical research and
interaction among physicians regarding clinical matters on a real-time basis,
(iii) electronic interchange with payors utilizing electronic benefits
verification and claims submission, (iv) 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, (v) electronic imaging to
streamline accessibility to operational documents, and (vi) 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.
7
<PAGE>
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 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 90 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 disabilities 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
5%, 5% and 6% of the Company's net patient service revenue during 1997, 1998 and
1999, respectively. The hospital contracts typically require that the Company
and the physicians performing services maintain minimum levels of professional
and general liability insurance. The Company contracts for and pays the premiums
for such insurance on behalf of the physicians. See "Business - Professional
Liability and Insurance."
Payor Relationships. Substantially all of the Company's contracts with
third party payors are discounted fee-for-service contracts. Although the
Company has a minor number of small capitated arrangements with certain payors,
the Company is prepared to enter into additional 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. See "Business - Factors to be
Considered - Impact of Payor Discounts and Capitation Arrangements."
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 and "Business - Factors to be Considered -
State Laws Regarding Prohibition of Corporate Practice of Medicine."
8
<PAGE>
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
specified 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 "Business -- 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 assigned to 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 21% of the Company's net patient service revenue in 1999
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
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. See "Business - Factors to be Considered -- Reliance
upon Government Programs; Possible Reduction in Reimbursement."
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
9
<PAGE>
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. See
"Business - Factors to be Considered -- Risk of Applicability of Anti-Kickback
and Self-Referral Laws."
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. See "Business - Factors to be Considered -- State Laws Regarding
Prohibition of Corporate Practice of Medicine."
In addition to current regulation, significant attention has recently
been focused 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. See "Business - Factors to be Considered -- Health-Care
Regulatory Environment Could Increase Restrictions on the Company."
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 accordance with
standard industry practice. The Company believes that its coverage is
appropriate based upon claims experience and the nature and risks of its
business. 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" and "Business -
Factors to be Considered -- Professional Liability and Insurance."
In order to maintain hospital privileges, the physicians that are
employed by or under contract with the Company are required to obtain
professional liability insurance coverage. The Company contracts for and pays
the premiums with respect to such insurance for the physicians. The current
professional liability insurance policy expires May 1, 2000 and the Company
expects to be able to renew such policy upon expiration.
10
<PAGE>
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 neonatal and perinatal care from highly fragmented, individual or small
practice providers to larger physician groups. 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 perinatal, neonatal and pediatric intensive care services to
hospitals. See "Business - Factors to be Considered -- Competition."
The Company provides services in Arizona, Arkansas, California,
Colorado, Florida, Georgia, Illinois, Indiana, Kansas, Maryland, Missouri,
Nevada, New Jersey, New Mexico, New York, Ohio, Oklahoma, Pennsylvania, Puerto
Rico, South Carolina, Tennessee, 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 marks "Pediatrix Medical Group"
and "Obstetrix Medical Group" and their design as well as the baby design logo
with the United States Patent and Trademark Office.
Employees and Professionals under Contract
In addition to the 434 physicians employed by or under contract with
the Company as of December 31, 1999, Pediatrix employed or contracted with 198
other clinical professionals and 639 other full-time and part-time employees.
None of the Company's employees are subject to a collective bargaining
agreement.
Factors to be Considered
The parts of this Annual Report on Form 10-K titled "Item 1. Business,"
"Item 3. Legal Proceedings" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" contain certain forward-looking
statements (within the meaning of the Private Securities Litigation Reform Act
of 1995 (the "Reform Act")) which involve risks and uncertainties. In addition,
officers of the Company may from time to time make certain forward-looking
statements which also involve risks and uncertainties. These statements are
subject to the safe harbor provisions of the Reform Act.
When used in this Annual Report on Form 10-K, the words "anticipate,"
"believe," "estimate" and similar expressions are generally intended to identify
forward-looking statements. Because such forward-looking statements involve
risks and uncertainties, there are important factors, such as the ultimate
outcome of the Company's pending securities litigation and billing
investigations, and the ability of the Company to secure financing in amounts
and on similar terms to its existing financing arrangement, that could cause
actual results to differ materially from those expressed or implied by such
forward-looking statements. Set forth below is a discussion of certain factors
that could cause the Company's actual results to differ materially from the
results projected in such forward-looking statements. In addition to the other
information contained in this Annual Report on Form 10-K or incorporated by
reference herein, such factors should be considered when evaluating the Company
and its business.
Securities Litigation. In February 1999, the first of several federal
securities law class actions was commenced against the Company and three of its
principal officers in United States
11
<PAGE>
District Court for the Southern District of Florida. Plaintiffs are shareholders
purporting to represent a class of all open market purchasers of the Company's
common stock between April 28, 1998, and various dates through and including
April 1, 1999. They claim that during that period the Company violated the
antifraud provisions of the federal securities laws by issuing false and
misleading statements concerning its accounting practices and financial results,
focusing in particular on the capitalization of certain payments made to
employees in connection with acquisitions and revenue recognition in light of
recent inquiries initiated by state investigators into the Company's billing
practices. The Plaintiffs seek damages in an undetermined amount based on the
alleged decline in the value of the common stock after the Company disclosed the
issue with respect to the capitalization of certain payments and the inquiries
by state investigators. While the Company believes that the claims are without
merit and intends to defend them vigorously, there can be no assurance that the
claims will not be successful or if successful, will not exceed the limits of
the Company's insurance coverage. See "Legal Proceedings."
Billing Investigations. In April 1999, the Company received requests,
and in one case a subpoena, from investigators in Arizona, Colorado and Florida
for information related to its billing practices. The Company is fully
cooperating with these inquiries. Although the Company believes that its billing
practices are proper, the investigations are ongoing and the Company is unable
to predict at this time whether they will have a material adverse effect on the
Company's business, financial condition or results of operations. See "Legal
Proceedings."
Health Care Regulatory Environment Could Increase Restrictions on the
Company. The health care industry and physicians' medical practices are highly
regulated. Neonatal, perinatal and other health care services that the Company
offers and proposes to offer are subject to extensive federal and state laws and
regulations governing state matters such as licensure and certification of
facilities and personnel, conduct of operations, audit and retroactive
reimbursement policies, adjustment of prior government billings and prohibitions
on payments for the referral of business and self referrals. Failure to comply
with these laws, or a determination that in the past the Company has failed to
comply with these laws, could have an adverse effect on the Company's financial
condition and results of operations. There can be no assurance that the health
care regulatory environment will not change so as to restrict the Company's
existing operations or limit the expansion of its business. Changes in
government regulation could also impose new requirements, involving compliance
costs which cannot be recovered through price increases. See "Business --
Government Regulation."
Reliance upon Government Programs; Possible Reduction in Reimbursement.
A significant portion of the Company's net patient service revenue is derived
from payments made by government-sponsored health care programs (principally
Medicaid). Increasing budgetary pressures may lead to reimbursement reductions
or limits, reductions in these programs or elimination of coverage for certain
individuals or treatments under these programs. Federal legislation could result
in a reduction of Medicaid funding or an increase in state discretionary funding
through block grants, or a combination thereof. State Medicaid waiver requests
if granted by the federal government could increase discretion, or reduce
coverage of or funding for certain individuals or treatments under the Medicaid
program, in the absence of new federal legislation. Increased state discretion
in Medicaid, coupled with the fact that Medicaid expenditures comprise a
substantial and growing share of state budgets, could lead to significant
reductions in reimbursement. In addition, these programs generally reimburse on
a fee schedule basis, rather than a charge-related basis. Therefore, the Company
generally cannot increase its revenues by increasing the amount it charges for
services provided. To the extent the Company's costs increase, the Company may
not be able to recover such cost increases from government reimbursement
programs. In various states, Medicaid managed care is encouraged and may become
mandated. In such systems, health maintenance organizations ("HMOs") bargain for
reimbursement with competing providers and contract with the state to provide
benefits to Medicaid enrollees. Such systems are intended and expected to reduce
Medicaid reimbursement of providers. Legislation enacted in states could result
in reduced payments to the Company for Medicaid patients.
12
<PAGE>
Changes in government-sponsored health care programs which result in the Company
being unable to recover cost increases through price increases or otherwise
could have a material adverse effect on the Company's financial condition and
results of operations. Because of cost containment measures and market changes
in non-governmental insurance plans, the Company may not be able to shift cost
increases to, or recover them from, non-governmental payors. In addition, funds
received under government 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. See "Business - Government
Regulation."
State Laws Regarding Prohibition of Corporate Practice of Medicine.
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 the states in which the Company operates, other than Florida,
there exist potential judicial or governmental interpretations which may extend
the scope of the corporate practice of medicine and/or medical practices acts
principles. For such reasons, or for business reasons, PMG contracts with the PA
Contractors (which are owned by a licensed physician in the state) in such
states, which in turn employ or contract with physicians to provide necessary
physician management services. There can be no assurance that the 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. For example, an order by the Florida Board of Medicine, which has been
upheld by the Florida Courts, concludes that certain percentage-based management
arrangements violate applicable fee-splitting statutes. If an order of this
nature was upheld and adopted in other jurisdictions, or a similar claim was
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. Such results or the inability to
successfully restructure contractual arrangements could have a material adverse
effect on the Company's financial condition and results of operations. In states
where PMG is not permitted to practice medicine, PMG performs only non-medical
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 physicians employed by the PA Contractors.
Accordingly, the Company believes it is not in violation of applicable state
laws in relation to the corporate practice of medicine. See "Business -
Contractual Relationships."
Risk of Applicability of Anti-Kickback and Self-Referral Laws. Federal
anti-kickback laws and regulations prohibit any knowing and willful offer,
payment, solicitation, or receipt of any form of remuneration, either directly
or indirectly, in return for, or to induce (i) referral of an individual for a
service for which payment may be made by Medicaid or another
government-sponsored health care program or (ii) purchasing, leasing, ordering
or arranging for, or recommending the purchase, lease or order of, any service
or item for which payment may be made by a government sponsored health care
program. Violations of anti-kickback rules are punishable by monetary fines,
civil and criminal penalties and exclusion from participation in Medicare and
Medicaid programs. Effective January 1, 1995, federal physician self-referral
laws became applicable to inpatient and outpatient hospital services. Subject to
certain exceptions, these laws, such as "Stark I" and "Stark II", prohibit
Medicare or Medicaid payments for services furnished by a physician who has a
financial relationship with the entity through ownership, investment, or
compensation agreement. Possible sanctions for violation of these laws include
civil monetary penalties, exclusion from Medicare and Medicaid programs and
forfeiture of amounts collected in violation of such prohibitions. Certain
states in which the Company does business have similar anti-kickback,
anti-fee-splitting and self-referral laws, imposing substantial penalties for
violations. The Company's relationships, including fee payments, among PA
Contractors, hospital clients and physicians have not been examined by federal
or state
13
<PAGE>
authorities under these laws and regulations. Although the Company believes it
is in compliance with these laws and regulations, there can be no assurance that
federal or state regulatory authorities will not challenge the Company's current
or future activities under these laws. See "Business - Strategy" and "Business -
Government Regulation."
Uncertainty Relating to Federal and State Legislation. Federal and
state governments have recently focused significant attention on health care
reform. Some of the proposals under consideration, or others which may be
introduced, could, if adopted, have a material adverse effect on the Company's
financial condition and results of operations. It is not possible to predict
which, if any, proposal, that has been or will be considered will be adopted.
The Company cannot predict what effect any future legislation will have on the
Company. There can be no assurance that any future state or federal legislation
or other changes in the administration or the interpretation of governmental
health care programs will not adversely affect the Company's financial condition
and results of operations. See "Business - Government Regulation."
Risks Relating to Acquisition Strategy. The Company has expanded and
intends to continue to expand its geographic and market penetration primarily
through acquisitions of physician group practices. In implementing this
acquisition strategy, the Company will compete with other potential acquirers,
some of which may have greater financial or operational resources than the
Company. Competition for acquisitions may intensify due to the ongoing
consolidation in the healthcare industry, which may increase the costs of
capitalizing on such opportunities. While the Company has recently completed
acquisitions, there can be no assurance that future acquisition candidates will
be identified or that any future acquisition will be consummated or, if
consummated, that any acquisition, including the Recent Acquisitions, will be
integrated successfully into the Company's operations or that the Company will
be successful in achieving its objectives. The Recent Acquisitions also involve
numerous short and long-term risks, including diversion of management's
attention, failure to retain key personnel and amortization of acquired
intangible assets. The Company may also incur one-time acquisition expenses in
connection with acquisitions. Consummation of acquisitions could result in the
incurrence or assumption by the Company of additional indebtedness and the
issuance of additional equity. The issuance of shares of common stock for an
acquisition may result in dilution to shareholders. Also, as the Company enters
into new geographic markets, the Company will be required to comply with laws
and regulations of states that differ from those in which the Company's
operations are currently conducted. There can be no assurance that the Company
will be able to effectively establish a presence in these new markets. Many of
the expenses arising from the Company's efforts in these areas may have a
negative effect on operating results until such time, if at all, as these
expenses are offset by increased revenues. There can be no assurance that the
Company will be able to implement its acquisition strategy, or that this
strategy will be successful. See "Business - Strategy", "Business - Marketing",
and "Business - Government Regulation."
Growth Strategy; Rapid Growth. The Company has experienced rapid growth
in its business and number of employees in recent years. Continued rapid growth
may impair the Company's ability to efficiently provide its physician services
and to adequately manage its employees. While the Company is taking steps to
manage rapid growth, future results of operations could be materially adversely
affected if it is unable to do so effectively.
Quarterly Fluctuations in Operating Results; Potential Volatility. The
Company has historically experienced and expects to continue to experience
quarterly fluctuations in net patient service revenue and associated net income
due to unit specific volume and cost fluctuations. The Company has a high level
of fixed operating costs, including physician costs, and, as a result, is highly
dependent on the volume of patient visits, births and capacity utilization of
its affiliated perinatal practices, NICUs and PICUs to sustain profitability.
Results of operations for any quarter are not necessarily indicative of results
of operations for any future period or full year. As a result, there can be no
assurance that the results of operations will not fluctuate significantly from
period to period. There has been significant volatility in the market price of
securities of health care companies that often has been unrelated to the
operating
14
<PAGE>
performance of such companies. The Company believes that certain factors, such
as legislative and regulatory developments, quarterly fluctuations in the actual
or anticipated results of operations of the Company, lower revenues or earnings
in the financial results of the Company than those anticipated by securities
analysts, the overall economy and the financial markets, could cause the price
of the Company's common stock to fluctuate substantially.
Impact of Payor Discounts and Capitation Arrangements. The evolving
managed care environment has created substantial cost containment pressures for
the health care industry. The Company's business could be adversely affected by
reductions in reimbursement amounts or rates, changes in services covered and
similar measures which may be implemented by government sponsored health care
programs or by other third party payors. The Company contracts with payors and
managed care organizations traditionally have been fee-for-service arrangements.
At December 31, 1999, the Company had a minor number of shared-risk capitated
arrangements with certain payors. These arrangements and any similar or other
future arrangements may adversely affect the Company's financial condition and
results of operations if the Company is unable to limit the risks associated
with such arrangements. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Business - Contractual Relationships",
and "Business - Government Regulation."
Professional Liability and Insurance. The Company's business entails an
inherent risk of claims of physician professional liability. The Company
periodically becomes involved as a defendant in medical malpractice lawsuits,
some of which are currently ongoing, and is subject to the attendant risk of
substantial damage awards. See "Legal Proceedings." The Company's contracts with
hospitals generally require the Company to indemnify certain parties for losses
resulting from the negligence of physicians who are managed by or affiliated
with the Company. While the Company believes it has adequate professional
liability insurance coverage, 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 "Business -
Professional Liability and Insurance."
Collection and Reimbursement Risk. The Company assumes the financial
risk related to collection, including the potential uncollectibility of accounts
and delays attendant to reimbursement by third party payors, such as government
programs, private insurance plans and managed care plans. Failure to manage
adequately the collection risks and working capital demands could have a
material adverse effect on the Company's financial condition and results of
operations. See "Business - Contractual Relationships" and "Business -
Government Regulation."
Contract Administrative Fees; Cancellation or Non-Renewal of Contracts.
The Company's net patient service revenue is derived primarily from
fee-for-service billings for patient care provided by its physicians and from
administrative fees. Certain contracting hospitals that do not generate
sufficient patient volume pay the Company administrative fees to assure the
Company a minimum revenue level. If, at the time of renewal of the contracts
with the hospitals currently paying administrative fees to the Company, such
hospitals continue to generate insufficient patient volume but elect not to pay
administrative fees to assure the Company a minimum revenue level, then the
Company could either choose not to renew the contract or renew the contract with
lower gross profit margins at such hospitals. 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
director at such hospital. Administrative fees accounted for 5%, 5% and 6% of
the Company's net patient service revenue during 1997, 1998, and 1999,
respectively. The Company's contracts provide for terms of one to five years and
are generally terminable by the hospital upon 90 days' written notice. While the
Company has in most cases been able to negotiate renewal of its contracts in the
past, no assurance can be given that the Company's contracts with hospitals will
not be canceled or will be renewed in the future or that the administrative fees
will be continued. To the extent that the Company's contracts with hospitals are
canceled or are not renewed or replaced
15
<PAGE>
with other contracts with at least as favorable terms, the Company's financial
position and results of operations could be adversely affected. See "Business -
Contractual Relationships."
Competition. The health care industry is highly competitive and subject
to continual changes in the method in which services are provided and the manner
in which health care providers are selected and compensated. The Company
believes that private and public reforms in the health care industry emphasizing
cost containment and accountability will result in an increasing shift of
neonatal and perinatal care from highly fragmented, individual or small practice
providers to larger physician groups. Companies in other healthcare industry
segments, such as managers of other hospital-based specialties or currently
expanding large physician group practices, some of which have financial and
other resources greater than those of the Company, may become competitors in
providing of neonatal, perinatal, and pediatric intensive care physician
services to hospitals. Increased competition could have a material adverse
effect on the Company's financial condition and results of operations. See
"Business - Competition."
Dependence on Qualified Neonatologists and Perinatologists. The
Company's business strategy is dependent upon its ability to recruit and retain
qualified neonatologists and perinatologists. The Company has been able to
compete with many types of health care providers, as well as teaching, research,
and government institutions, for the services of such physicians. No assurance
can be given that the Company will be able to continue to recruit and retain a
sufficient number of qualified neonatologists and perinatologists who provide
services in markets served by the Company on terms similar to its current
arrangements. The inability to successfully recruit and retain physicians could
adversely affect the Company's ability to service existing or new units at
hospitals, or expand its business.
Dependence on Key Personnel. The Company's success depends to a
significant extent on the continued contributions of its key management,
business development, sales and marketing personnel, including one of the
Company's principal shareholders, President, Chief Executive Officer and
co-founder, Dr. Roger Medel, for management of the Company and successful
implementation of its growth strategy. The loss of Dr. Medel or other key
personnel could have a material adverse effect on the Company's financial
condition, results of operations and plans for future development.
Dependence on PA Contractors. The Company has a management agreement
with a PA Contractor in each state in which it operates except Florida. The
agreements provide that the terms 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. Any disruption of the Company's
relationships with the PA Contractors' relationships with contracting hospitals
(including the determination that the PA Contractors' arrangements with PMG
constitute the corporate practice of medicine) or any other event adverse to the
PA Contractors could have a material adverse effect on the Company's financial
condition and results of operations. See "Business - Government Regulation" and
"Business - Contractual Relationships."
Shares Eligible for Future Sale; Possible Adverse Effects on Market
Price. As of December 31, 1999, the Company had 15,625,265 shares of Common
Stock outstanding. In addition, as of December 31, 1999, the Company had (i)
4,869,817 shares of Common Stock reserved for issuance under the Stock Option
Plan, of which options for an aggregate of 3,930,443 shares of Common Stock were
issued and outstanding and options for an aggregate of 2,131,235 shares of
Common Stock were exercisable and (ii) 769,705 shares of Common Stock reserved
for issuance under the Employee Stock Purchase Plans. Shares issued under the
Stock Option Plan and Employee Stock Purchase Plans will be freely tradable
unless acquired by affiliates of the Company, as defined in Rule 144 of the
Securities Act. Sales of such shares in the public market, or the perception
that such sales may occur, could adversely affect the market price of the Common
Stock or impair the Company's ability to raise additional capital in the future.
16
<PAGE>
Anti-Takeover Provisions; Issuance of Preferred Stock. On March 31,
1999, the Board of Directors of the Company adopted a Preferred Share Purchase
Rights Plan (the "Rights Plan") and, in connection therewith, declared a
dividend distribution of one preferred share purchase right ("Right") on each
outstanding share of the Company's common stock to shareholders of record at the
close of business on April 9, 1999. The Board of Directors also adopted various
amendments to the Company's Bylaws, including provisions in connection with
shareholder meetings, actions by written consent and other matters. These
provisions could render more difficult or discourage an attempt to obtain
control of the Company through a proxy contest or consent solicitation. See Note
14 to the Consolidated Financial Statements.
17
<PAGE>
Item 2. Properties
- ------- ----------
The Company leases its corporate office located in Sunrise, Florida
(approximately 80,000 square feet). The Company also owns its former executive
offices located in Fort Lauderdale, Florida (approximately 30,000 square feet).
During 1999, the Company leased space in other facilities in various states for
its business and medical offices, storage space, and temporary housing of
medical staff, with aggregate annual rents of approximately $1,922,000. See Note
9 to the Consolidated Financial Statements.
Item 3. Legal Proceedings
- ------- -----------------
In February 1999, the first of several federal securities law class
actions was commenced against the Company and three of its principal officers in
United States District Court for the Southern District of Florida ("District
Court"). The Plaintiffs are shareholders purporting to represent a class of all
open market purchasers of the Company's common stock between April 28, 1998, and
various dates through and including April 1, 1999. They claim that during that
period the Company violated the antifraud provisions of the federal securities
laws by issuing false and misleading statements concerning its accounting
practices and financial results, focusing in particular on the capitalization of
certain payments made to employees in connection with acquisitions and revenue
recognition in light of recent inquiries initiated by state investigators into
the Company's billing practices. The Plaintiffs seek damages in an undetermined
amount based on the alleged decline in the value of the common stock after the
Company disclosed the issue with respect to the capitalization of certain
payments and the inquiries by state investigators. On June 24, 1999, the Judge
of the District Court entered an Order of Consolidation consolidating into one
case the several federal securities law class action lawsuits. On August 20,
1999, the Judge entered two Orders in the case. The first Order granted the
motion made by the three public pension funds to be appointed as lead Plaintiffs
and to have their counsel appointed as lead Plaintiffs' counsel. The second
Order set the administrative mechanism for handling the consolidated cases,
including the time limitations for the filing of a Consolidated Amended Class
Action Complaint. On October 7, 1999, the Company filed a Motion to Dismiss the
Consolidated Amended Class Action Complaint. On January 19, 2000, the Judge
granted defendants' Motion to Dismiss based on deficiencies in the allegations
which rendered the pleading insufficient as a matter of law. The Judge provided
that the Plaintiffs could file an Amended Complaint on or before February 3,
2000. The Plaintiffs filed a Second Amended Complaint on February 3, 2000. On
March 10, 2000, the Company filed a Motion to Dismiss the Second Amended
Consolidated Class Action Complaint. The Plaintiffs answering memorandum is due
on March 30, 2000, and the Company's reply memorandum is due on April 10, 2000.
The Company continues to believe that the claims are without merit and intends
to defend them vigorously.
In April 1999, the Company received requests, and in one case a
subpoena, from investigators in Arizona, Colorado and Florida for information
related to its billing practices. The Company is fully cooperating with these
inquiries. Although the Company believes that its billing practices are proper,
the investigations are ongoing and the Company is unable to predict at this time
whether they will have a material adverse effect on the Company's business,
financial condition or results of operations.
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.
However, 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. See "Business -
Factors to be Considered - Professional Liability and Insurance."
18
<PAGE>
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, 1999.
19
<PAGE>
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
- ------- -----------------------------------------------------------------
Matters
- -------
The Company's Common Stock is traded on the New York Stock Exchange
(the "NYSE") under the symbol "PDX". The following table sets forth, for the
periods indicated, the high and low sales prices for the Common Stock as
reported on the NYSE.
High Low
---- ---
1998
----
First Quarter 46 9/16 35 7/8
Second Quarter 50 1/4 32 3/16
Third Quarter 49 7/8 33 3/8
Fourth Quarter 60 7/8 35 5/8
1999
----
First Quarter 65 9/16 18 1/16
Second Quarter 28 3/8 13 1/8
Third Quarter 21 1/4 12 1/2
Fourth Quarter 13 7/8 6
As of March 9, 2000 there were approximately 139 holders of record of
the 15,625,265 outstanding shares of Common Stock. The closing sales price for
the Common Stock on March 9, 2000 was $7.63.
The Company did not declare or pay in 1998 or 1999, nor does it
currently intend to declare or pay in the future, any cash 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."
20
<PAGE>
Item 6. Selected Financial Data (in thousands, except per share and other
- ------- -----------------------------------------------------------------
operating data)
- ---------------
The selected consolidated financial data set forth as of and for each
of the five years in the period ended December 31, 1999, have been derived from
the Consolidated Financial Statements, which statements have been audited. 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,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Consolidated Income
Statement Data:
Net patient service revenue $ 43,860 $ 80,833 $ 128,850 $ 185,422 $ 227,042
Operating expenses:
Salaries and benefits 29,545 52,732 81,486 113,748 148,915
Supplies and other operating expenses 3,451 6,262 9,765 14,050 21,053
Depreciation and amortization 363 1,770 4,522 8,673 12,068
--------- --------- --------- --------- ---------
Total operating expenses 33,359 60,764 95,773 136,471 182,036
--------- --------- --------- --------- ---------
Income from operations 10,501 20,069 33,077 48,951 45,006
Investment income 804 2,096 2,102 564 296
Interest expense (117) (192) (324) (1,013) (2,697)
--------- --------- --------- --------- ---------
Income before income taxes 11,188 21,973 34,855 48,502 42,605
Income tax provision 4,475 8,853 13,942 19,403 17,567
--------- --------- --------- --------- ---------
Net income $ 6,713 $ 13,120 $ 20,913 $ 29,099 $ 25,038
========= ========= ========= ========= =========
Per share data :
Net income per common share
Basic $ 0.70 $ 0.95 $ 1.39 $ 1.91 $ 1.61
========= ========= ========= ========= =========
Diluted $ 0.57 $ 0.90 $ 1.33 $ 1.82 $ 1.58
========= ========= ========= ========= =========
Weighted average shares
outstanding
Basic 8,092 13,806 15,021 15,248 15,513
========= ========= ========= ========= =========
Diluted 11,855 14,535 15,743 15,987 15,860
========= ========= ========= ========= =========
</TABLE>
21
<PAGE>
Item 6. Selected Financial Data, Continued
- ------- ----------------------------------
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
Years Ended December 31,
-------------------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Other Operating Data:
Number of physicians at end of
period 114 195 260 350 434
Number of births 59,186 132,796 200,616 268,923 337,480
NICU admissions 7,611 14,250 21,203 27,911 33,942
NICU patient days 87,672 185,702 325,199 450,225 548,064
Consolidated Balance Sheet
Data:
Cash and cash equivalents $ 18,499 $ 18,435 $ 18,562 $ 650 $ 825
Working capital 53,448 81,187 53,908 14,915 (16,352)
Total assets 69,881 162,869 203,719 270,658 334,790
Total liabilities 7,071 26,548 40,010 63,265 105,903
Long term debt, including
current maturites 815 2,950 2,750 10,400 50,743
Minority interest -- -- -- 6,342 --
Stockholders' equity 62,810 136,321 163,709 201,051 228,887
</TABLE>
22
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
- -------------
General
Pediatrix is the nation's leading provider of neonatal physician
services to hospital-based NICUs. In addition, the Company believes it is the
nation's leading provider of perinatal physician services. Pediatrix was founded
in 1979 by 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. The Company also
provides physician management services to hospital-based PICUs and pediatrics
departments in hospitals.
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 strengthening
its ability to identify acquisition candidates, consummate transactions and
integrate acquired physician group practices into the Company's operations.
During 1999, the Company completed 11 acquisitions, which added 23 NICUs, four
perinatal practices and one PICU. Additionally, two NICUs and one PICU were
added through the Company's internal marketing activities. The Company has
developed combined perinatal and neonatal networks in Seattle-Tacoma, Denver,
Phoenix-Tucson, Fort Worth, Kansas City and Reno and intends to develop
additional regional and state-wide networks. The Company has also established
neonatal networks in Southern California and Oklahoma. 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 pediatric 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 and perinatal
services, for the periods indicated.
Years Ended December 31,
-----------------------------------------------
1997 1998 1999
------------ ------------ -------------
NICU 85.4% 85.6% 84.3%
PICU and PEDS 2.2% 2.0% 1.6%
Other(1) 12.4% 12.4% 14.1%
------------ ------------ -------------
100.0% 100.0% 100.0%
============ ============ =============
(1) Represents principally the percentage of net patient service revenue
generated by physicians providing support to areas of hospitals outside
the NICU and PICU.
23
<PAGE>
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 period
indicated.
Years Ended December 31,
-----------------------------------------------
1997 1998 1999
------------ ------------- --------------
Government 22% 22% 21%
Managed Care 31% 39% 45%
Other third parties 44% 37% 33%
Private pay 3% 2% 1%
------------ ------------- --------------
100% 100% 100%
============ ============= ==============
The payor mix shown above is not necessarily representative of the
amount of services provided to patients covered under these plans. For example,
services provided to patients covered under government programs represented
approximately 41% of the Company's total gross patient service revenue but only
21% of net patient service revenue during 1999.
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.
The operating results for the periods presented were not significantly affected
by inflation.
The following table sets forth, for the periods indicated, certain
information related 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,
-------------------------------------------------
1997 1998 1999
-------------- ------------- -------------
<S> <C> <C> <C>
Net patient service revenue 100% 100% 100%
Operating expenses:
Salaries and benefits 63.2 61.3 65.6
Supplies and other operating expenses 7.6 7.6 9.3
Depreciation and amortization 3.5 4.7 5.3
-------------- ------------- -------------
Total operating expenses 74.3 73.6 80.2
-------------- ------------- -------------
Income from operations 25.7 26.4 19.8
Other income (expense), net 1.3 (0.2) (1.1)
-------------- ------------- -------------
Income before income taxes 27.0 26.2 18.7
Income tax provision 10.8 10.5 7.7
-------------- ------------- -------------
Net income 16.2% 15.7% 11.0%
============== ============= =============
</TABLE>
24
<PAGE>
Year Ended December 31, 1999 as Compared to Year Ended December 31, 1998
The Company reported net patient service revenue of $227.0 million for
the year ended December 31, 1999, as compared with $185.4 million in 1998, a
growth rate of 22.4%. This growth is attributable to new units at which the
Company provides services as a result of acquisitions. Same unit net patient
service revenue decreased approximately $7.9 million, or 5.3%, for the year
ended December 31, 1999, compared to the year ended December 31, 1998. The
decline in same unit patient service revenue is primarily the result of a lower
acuity level of patient service billed in 1999 as compared to 1998. Services
provided at these units in 1999 actually increased over 1998. Same units are
those units at which the Company provided services for the entire current period
and the entire comparable period.
Salaries and benefits increased $35.2 million, or 30.9%, to $148.9
million for the year ended December 31, 1999, as compared with $113.7 million
for the same period in 1998. Of this increase, $20.5 million, or 58.2% was
attributable to hiring new physicians, primarily to support new unit growth, and
the remaining $14.7 million was primarily attributable to increased support
staff and resources added in the areas of nursing, management and billing and
reimbursement. During 1999, the Company continued to invest in the
infrastructure required to manage and grow the Company into the future. Supplies
and other operating expenses increased $7.0 million, or 49.8%, to $21.1 million
for the year ended December 31, 1999, as compared with $14.1 million for the
year ended December 31, 1998. The increase was primarily the result of (i)
increased legal fees related to government investigations (see Legal
Proceedings); (ii) new units; and (iii) the addition of new outpatient offices.
Outpatient services require a higher level of office supplies than do inpatient
services. Depreciation and amortization expense increased by $3.4 million, or
39.1%, to $12.1 million for the year ended December 31, 1999, as compared with
$8.7 million for the year ended December 31, 1998, primarily as a result of
amortization of goodwill in connection with acquisitions.
Income from operations decreased $4.0 million, or 8.1%, to $45.0
million for the year ended December 31, 1999, as compared with $49.0 million for
the year ended December 31, 1998.
The Company recorded net interest expense of approximately $2.4
million for the year ended December 31, 1999, as compared with net interest
expense of approximately $449,000 for the year ended December 31, 1998. The
increase in interest expense in 1999 is primarily the result of funds used for
the acquisition of physician practices and the use of the Company's line of
credit for such purposes.
The effective income tax rate was approximately 41.2% and 40.0% for the
years ended December 31, 1999 and 1998, respectively. The increase was the
result of a growth in non-deductible amounts associated with goodwill as a
percentage of pretax income.
Net income decreased 14.0% to $25.0 million for the year ended December
31, 1999, as compared with $29.1 million for the same period in 1998. Diluted
net income per common and common equivalent share decreased to $1.58 for the
year ended December 31, 1999, compared to $1.82 for the same period in 1998.
25
<PAGE>
Year Ended December 31, 1998 as Compared to Year Ended December 31, 1997
The Company reported net patient service revenue of $185.4 million for
the year ended December 31, 1998, as compared with $128.9 million in 1997, a
growth rate of 43.9%. Of this $56.5 million increase, approximately $50.0
million, or 88.5%, was attributable to new units, including units at which the
Company provides services as a result of acquisitions. Same unit net patient
service revenue increased approximately $6.5 million, or 6.8%, for the year
ended December 31, 1998, compared to the year ended December 31, 1997. Same
units are those units at which the Company provided services for the entire
current period and the entire comparable period. The same unit growth resulted
primarily from volume increases.
Salaries and benefits increased $32.2 million, or 39.6%, to $113.7
million for the year ended December 31, 1998, as compared with $81.5 million for
the same period in 1997. Of this increase, $23.1 million, or 71.5% was
attributable to hiring new physicians, primarily to support new unit growth, and
the remaining $9.1 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 $4.3 million, or
43.9%, to $14.1 million for the year ended December 31, 1998, as compared with
$9.8 million for the year ended December 31, 1997. The increase was primarily
the result of new units and the addition of several new outpatient offices.
Outpatient services require a higher level of office supplies than do inpatient
services. Depreciation and amortization expense increased by $4.2 million, or
91.8%, to $8.7 million for the year ended December 31, 1998, as compared with
$4.5 million for the year ended December 31, 1997, primarily as a result of
amortization of goodwill in connection with acquisitions.
Income from operations increased $15.9 million, or 48.0%, to $49.0
million for the year ended December 31, 1998, as compared with $33.1 million for
the year ended December 31, 1997, representing an increase in the operating
margin from 25.7% to 26.4%. The increase in operating margin was primarily due
to increased volume, principally from acquisitions, without the comparable
increases in corporate overhead. In addition, the Company realized significant
same unit revenue growth in 1998 as compared to 1997 (6.8% as compared to 1.2%)
without a corresponding increase in expenses at those units.
The Company recorded net interest expense of approximately $449,000
for the year ended December 31, 1998, as compared with net interest income of
$1.8 million for the year ended December 31, 1997. The reduction of interest
income in 1998 is primarily the result of funds used for the acquisition of
physician practices and the use of the Company's line of credit for such
purposes.
The effective income tax rate was approximately 40.0% for the years
ended December 31, 1998 and 1997.
Net income increased 39.1% to $29.1 million for the year ended December
31, 1998, as compared with $20.9 million for the year ended December 31, 1997.
Diluted net income per common and common equivalent share increased to $1.82 for
year ended December 31, 1998, compared to $1.33 for the same period in 1997.
26
<PAGE>
Quarterly Results
The following table presents certain unaudited quarterly financial data
for each of the quarters in the years ended December 31, 1998 and 1999. This
information has been prepared on the same basis as the Consolidated Financial
Statements appearing elsewhere in this Annual Report 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>
1998 Calendar Quarters 1999 Calendar Quarters
------------------------------------------ ------------------------------------------
First Second Third Fourth First Second Third Fourth
--------- --------- --------- --------- --------- --------- --------- ---------
(In thousands, except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net patient service revenue $37,808 $ 46,144 $ 49,351 $52,119 $ 53,826 $ 56,767 $ 57,921 $ 58,528
Operating expenses:
Salaries and benefits 23,560 28,584 30,334 31,270 34,390 35,321 39,329 39,875
Supplies and other
operating expenses 2,695 3,393 3,575 4,387 4,526 5,076 5,774 5,677
Depreciation and
amortization 1,688 2,125 2,372 2,488 2,666 2,971 3,168 3,263
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating
expenses 27,943 34,102 36,281 38,145 41,582 43,368 48,271 48,815
--------- --------- --------- --------- --------- --------- --------- ---------
Income from operations 9,865 12,042 13,070 13,974 12,244 13,399 9,650 9,713
Other income (expense), net 337 (197) (354) (235) (160) (380) (905) (956)
--------- --------- --------- --------- --------- --------- --------- ---------
Income before income taxes 10,202 11,845 12,716 13,739 12,084 13,019 8,745 8,757
Income tax provision 4,083 4,738 5,086 5,496 4,834 5,207 3,760 3,766
--------- --------- --------- --------- --------- --------- --------- ---------
Net income $6,119 $ 7,107 $ 7,630 $ 8,243 $ 7,250 $ 7,812 $ 4,985 $4,991
========= ========= ========= ========= ========= ========= ========= =========
Per share data :
Net income per common
and common equivalent
Share:
Basic $ .40 $ .47 $ .50 $ .54 $ .47 $ .50 $ .32 $ .32
========= ========= ========= ========= ========= ========= ========= =========
Diluted $ .39 $ .45 $ .48 $ .51 $ .45 $ .50 $ .32 $ .32
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
Liquidity and Capital Resources
During 1999, the Company completed the acquisition of 11 physician
group practices, utilizing approximately $51.4 million in cash and 1,000,000
shares of stock in a subsidiary of the Company. These acquisitions were funded
principally by the Company's Line of Credit. As of December 31, 1999, the
Company had approximately $825,000 of cash and cash equivalents on hand.
As of December 31, 1999, the Company had a working capital deficit of
approximately $16.4 million, a decrease of $31.3 million from the working
capital of $14.9 million available at December 31, 1998. The net decrease is
principally due to the classification of the Company's Line of Credit as a
current liability at December 31, 1999. Excluding the amount due under the Line
of Credit, working capital increased by approximately $17.1 million.
On June 27, 1996, the Company entered into an unsecured revolving
credit facility (the "Credit Facility") with BankBoston and SunTrust Bank.
During 1997, the Company increased the amount available under the Credit
Facility to $75.0 million, which includes a $2.0 million amount reserved to
cover deductibles under the Company's professional liability insurance policies.
The Company uses the amount available under the Credit Facility primarily for
acquisitions. The Credit Facility matures on September 30, 2000. At the
Company's option, the Credit Facility bears interest at either LIBOR plus .875%,
or the prime rate announced by BankBoston. As of
27
<PAGE>
December 31, 1999, there was approximately $48.4 million outstanding under the
Credit Facility. The Company is currently evaluating several options to obtain
financing beyond the current maturity of its Line of Credit. However, there can
be no assurance that the Company will be able to obtain financing in amounts and
on terms substantially similar to its Credit Facility on or prior to September
30, 2000.
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, 1999, capital
expenditures amounted to approximately $3.6 million.
Provided the Company is able to secure financing in amounts similar to
those currently available under its Line of Credit, it anticipates that funds
generated from operations, together with cash on hand, and funds available under
such financing will be sufficient to meet its working capital requirements and
finance required capital expenditures for at least the next twelve months.
Billing Inquiries
In April 1999, the Company received requests, and in one case a
subpoena, from investigators in Arizona, Colorado and Florida for information
related to its billing practices. The Company is fully cooperating with these
inquiries. Although the Company believes that its billing practices are proper,
the investigations are ongoing and the Company is unable to predict at this time
whether they will have a material adverse effect on the Company's business,
financial condition or results of operations.
Status of Year 2000 Compliance
During 1999, the Company completed testing on all of its critical
systems which include its clinical, billing, general ledger and accounts payable
systems. In addition, the Company completed an inventory and certain tests of
its information technology assets as well as critical non-information technology
related assets and services, including embedded microprocessors in, for example,
ultra-sound machines. As a result of the Company's planning and implementation
efforts, no disruptions related to critical systems or critical assets and
services were experienced during early 2000. The Company's costs to date related
to the year 2000 transition have not been material.
In preparing for the year 2000, the Company also requested certain
information from its payors, vendors, financial institutions and hospital
customers in order to evaluate their compliance plans and state of readiness. To
date, the Company has not experienced any significant year 2000 transition
problems with third parties. The Company will continue to monitor its third
parties to determine what, if any, impact latent year 2000 problems may have on
its business.
Accounting Matters
Effective January 1, 1999, the Company adopted a policy of expensing
certain incremental internal costs directly related to completed acquisitions as
incurred. For the year ended December 31, 1999, the Company expensed such costs
which totaled approximately $706,000. Historically, the Company had capitalized
these costs as a component of the acquisition costs. Had these costs been
expensed for the years ended December 31, 1997 and 1998 the impact on net income
would have been approximately $1.3 million and $1.4 million, respectively.
In June 1998, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities". The effective date of SFAS
No. 133 was delayed by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB No. 133." SFAS No.
133 is now effective for all quarters of all fiscal years beginning after
28
<PAGE>
June 15, 2000, with early adoption permitted. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. It is currently anticipated that the Company will adopt SFAS No.
133 on January 1, 2001, and that SFAS No. 133 will not have a significant
financial statement impact upon adoption.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
- -------- ----------------------------------------------------------
The Company's unsecured revolving Credit Facility, mortgage note
payable and certain operating lease agreements are subject to market risk and
interest rate changes. The total amount available under the Credit Facility is
$75 million. At the Company's option, the Credit Facility bears interest at
either LIBOR plus .875% or prime. The mortgage note payable bears interest at
prime and the leases bear interest at LIBOR based variable rates. The
outstanding principal balances on the Credit Facility and mortgage note payable
were approximately $48.4 million and $2.4 million, respectively, at December 31,
1999. The outstanding balances related to the operating leases totaled
approximately $16.4 million at December 31, 1999. Considering the total
outstanding balances under these instruments at December 31,1999 of
approximately $67.2 million, a 1% change in interest rates would result in an
impact to pre-tax earnings of approximately $672,000 per year.
29
<PAGE>
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 Certified Public Accountants............................................31
Independent Auditors' Report..................................................................32
Consolidated Balance Sheets as of December 31, 1998 and 1999..................................33
Consolidated Statements of Income for the Years Ended
December 31, 1997, 1998 and 1999.................................................34
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999.....................................35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999.....................................................36
Notes to Consolidated Financial Statements....................................................37
</TABLE>
30
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Pediatrix Medical Group, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 8 present fairly, in all material respects, the financial
position of Pediatrix Medical Group, Inc. and subsidiaries (the "Company") at
December 31, 1999, and the results of their operations and their cash flows for
the year ended December 31, 1997 and the year ended December 31, 1999, in
conformity with generally accepted accounting principles in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) presents fairly, in all material respects
the information set forth therein when read in conjunction with the related
consolidated financial statements. 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 based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
February 1, 2000
31
<PAGE>
Independent Auditors' Report
To the Board of Directors of
Pediatrix Medical Group, Inc.
We have audited the consolidated balance sheet of Pediatrix Medical Group, Inc.
and subsidiaries (the "Company") as of December 31, 1998 and the related
statements of income, stockholders' equity and cash flows for the year then
ended. In connection with our audit of the consolidated financial statements, we
also have audited the financial statement schedule as of December 31, 1998.
These consolidated financial statements and the financial statement schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and financial statement
schedule based on our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pediatrix Medical
Group, Inc. and subsidiaries as of December 31, 1998, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. Also in our opinion, the related
financial statement schedule when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
KPMG LLP
Fort Lauderdale, Florida
March 22, 1999
32
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31,
---------------------------------
ASSETS 1998 1999
-------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 650 $ 825
Accounts receivable, net 61,599 77,726
Prepaid expenses 682 468
Other assets 769 962
-------- --------
Total current assets 63,700 79,981
Property and equipment, net 11,942 13,567
Other assets, net 195,016 241,242
-------- --------
Total assets $270,658 $334,790
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 30,043 $ 29,099
Income taxes payable 3,938 92
Line of credit -- 48,393
Current portion of note payable 200 200
Deferred income taxes 14,604 18,549
-------- --------
Total current liabilities 48,785 96,333
Line of credit 7,850 --
Note payable 2,350 2,150
Deferred income taxes 3,327 5,111
Deferred compensation 953 2,309
-------- --------
Total liabilities 63,265 105,903
-------- --------
Minority interest 6,342 --
Commitments and contingencies
Stockholders' equity:
Preferred stock; $.01 par value, 1,000,000
shares authorized, none issued and
outstanding at December 31, 1998 and 1999 -- --
Common stock; $.01 par value, 50,000,000
shares authorized at December 31, 1998
and 1999,15,400,315 and 15,625,265
shares issued and outstanding at
December 31, 1998 and 1999, respectively 154 156
Additional paid-in capital 130,720 133,516
Retained earnings 70,177 95,215
-------- --------
Total stockholders' equity 201,051 228,887
-------- --------
Total liabilities and stockholders' equity $270,658 $334,790
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
33
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except for per share data)
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net patient service revenue $ 128,850 $ 185,422 $ 227,042
--------- --------- ---------
Operating expenses:
Salaries and benefits 81,486 113,748 148,915
Supplies and other operating expenses 9,765 14,050 21,053
Depreciation and amortization 4,522 8,673 12,068
--------- --------- ---------
Total operating expenses 95,773 136,471 182,036
--------- --------- ---------
Income from operations 33,077 48,951 45,006
Investment income 2,102 564 296
Interest expense (324) (1,013) (2,697)
--------- --------- ---------
Income before income taxes 34,855 48,502 42,605
Income tax provision 13,942 19,403 17,567
--------- --------- ---------
Net income $ 20,913 $ 29,099 $ 25,038
========= ========= =========
Per share data:
Net income per common and
common equivalent share:
Basic $ 1.39 $ 1.91 $ 1.61
========= ========= =========
Diluted $ 1.33 $ 1.82 $ 1.58
========= ========= =========
Weighted average shares used
in computing net income per common
and common equivalent share:
Basic 15,021 15,248 15,513
========= ========= =========
Diluted 15,743 15,987 15,860
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
34
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
<TABLE>
<CAPTION>
Common Stock
--------------------------------- Additional
Number of Paid-In Retained
Shares Amount Capital Earnings
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 14,865 $ 149 $ 116,037 $ 20,165
Net income -- -- -- 20,913
Common stock issued 276 2 3,480 --
Tax benefit related to
employee stock options and
stock purchase plans -- -- 2,874 --
--------- --------- --------- ---------
Balance at December 31, 1997 15,141 151 122,391 41,078
Net income -- -- -- 29,099
Common stock issued 259 3 5,833 --
Tax benefit related to
employee stock options
and stock purchase plans -- -- 2,496 --
--------- --------- --------- ---------
Balance at December 31, 1998 15,400 154 130,720 70,177
Net income -- -- -- 25,038
Common stock issued 225 2 2,253 --
Tax benefit related to
employee stock options
and stock purchase plans -- -- 792 --
Other -- -- (249) --
--------- --------- --------- ---------
Balance at December 31, 1999 15,625 $ 156 $ 133,516 $ 95,215
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
35
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1997 1998 1999
------------- ------------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 20,913 $ 29,099 $ 25,038
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 4,522 8,673 12,068
Deferred income taxes 6,503 5,096 5,729
Changes in assets and liabilities:
Accounts receivable (14,534) (19,826) (16,127)
Prepaid expenses and other assets 198 8 (42)
Other assets (232) 282 (236)
Accounts payable and accrued expenses 7,205 5,344 646
Income taxes payable 4,424 5,089 (3,054)
-------- -------- --------
Net cash provided from operating
activities 28,999 33,765 24,022
-------- -------- --------
Cash flows used in investing activities:
Physician group acquisition payments (60,158) (88,939) (51,443)
Purchase of investments (14,003) (9,939) --
Proceeds from sale of investments 44,207 36,982 --
Purchase of subsidiary stock -- -- (17,151)
Purchase of property and equipment (2,200) (3,267) (3,608)
-------- -------- --------
Net cash used in investing activities (32,154) (65,163) (72,202)
-------- -------- --------
Cash flows from financing activities:
Borrowings on line of credit, net -- 7,850 40,543
Payments on notes payable (200) (200) (200)
Proceeds from issuance of common stock 3,482 5,836 2,255
Proceeds from issuance of subsidiary stock -- -- 5,757
-------- -------- --------
Net cash provided from financing activities 3,282 13,486 48,355
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents 127 (17,912) 175
Cash and cash equivalents at beginning of year 18,435 18,562 650
-------- -------- --------
Cash and cash equivalents at end of year $ 18,562 $ 650 $ 825
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 310 $ 990 $ 2,338
Income taxes $ 2,651 $ 10,202 $ 14,910
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
36
<PAGE>
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 neonatal and perinatal
physician services. The Company provides services in 25 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.
2. Summary of Significant Accounting Policies:
Principles of Presentation
The financial statements (the "consolidated financial statements")
include all the accounts of Pediatrix and its subsidiaries 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.
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.
37
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, Continued:
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.
Concentration of credit risk relating to accounts receivable is limited
by number, diversity and geographic dispersion of the business 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 15% and 18% of net accounts receivable
at December 31, 1998 and 1999, respectively.
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 and amounts on deposit in money market
accounts with principally one financial institution.
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 three 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.
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, 1999.
38
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, Continued:
Other Assets, Continued
Effective January 1, 1999, the Company adopted a policy of expensing
certain incremental internal costs directly related to completed
acquisitions as incurred. For the year ended December 31, 1999, the
Company expensed such costs which totaled approximately $706,000.
Historically, the Company had capitalized these costs as a component of
the acquisition costs. Had these costs been expensed for the years
ended December 31, 1997 and 1998 the impact on net income would have
been approximately $1.3 million and $1.4 million, respectively.
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 a liability for self-insured deductibles and an
estimate of its liabilities for claims incurred but not reported based
on an actuarial valuation. Liabilities for claims incurred but not
reported 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 as if the fair value based method was used. 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.
39
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, Continued:
Net Income Per Share
The Company computes basic and diluted earnings per share in accordance
with SFAS No. 128, "Earnings Per Share". Basic net income per share is
calculated by dividing net income by the weighted average number of
common shares outstanding during the period. Diluted net income per
share is calculated by dividing net income by the weighted average
number of common and potential common shares outstanding during the
period. Potential common shares consist of the dilutive effect of
outstanding options calculated using the treasury stock method.
Comprehensive Income
During 1998, the Company adopted the provisions of SFAS No. 130,
"Reporting Comprehensive Income", which requires that all items
recognized under accounting standards as components of comprehensive
income be reported in the financial statements. The components of
comprehensive income not reflected in the Company's net income are
related to the unrealized gains and losses on investments. For the
years ended December 31, 1997, 1998 and 1999, the net impact of
recording these items was $119,000, ($89,000) and $0, respectively.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable
and accounts payable and accrued expenses approximate fair value due to
the short maturities of these items.
The carrying amount of the note payable and line of credit approximates
fair value because the interest rates on these instruments change with
market interest rates.
Fourth Quarter Adjustments
During the fourth quarter of 1999, the Company recorded an adjustment
to reduce the Company's elective contribution to its qualified
contributory savings plan. Approximately $600,000 of this adjustment
related to expenses recorded in prior quarters.
3. Accounts Receivable and Net Patient Service Revenue:
Accounts receivable consists of the following:
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1998 1999
----------------- -----------------
(in thousands)
<S> <C> <C>
Gross accounts receivable $ 149,035 $ 180,205
Allowance for contractual adjustments
and uncollectibles (87,436) (102,479)
----------------- -----------------
$ 61,599 $ 77,726
================= =================
</TABLE>
40
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
3. Accounts Receivable and Net Patient Service Revenue, Continued:
Net patient service revenue consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
(in thousands)
<S> <C> <C> <C>
Gross patient service revenue $ 260,112 $ 386,593 $ 485,917
Contractual adjustments
and uncollectibles (137,385) (209,817) (272,812)
Hospital contract administrative
fees 6,123 8,646 13,937
-------------- -------------- --------------
$ 128,850 $ 185,422 $ 227,042
============== ============== ==============
</TABLE>
4. Property and Equipment:
Property and equipment consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1999
------------- -------------
(in thousands)
<S> <C> <C>
Land and land improvements $ 1,493 $ 1,493
Building 4,323 4,323
Equipment and furniture 9,615 13,482
------------- -------------
15,431 19,298
Accumulated depreciation (3,689) (5,731)
Construction in progress 200 --
------------- -------------
$ 11,942 $ 13,567
============= =============
</TABLE>
5. Other Assets:
Other assets consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1999
------------- -------------
(in thousands)
<S> <C> <C>
Excess of cost over net assets
acquired $204,070 $258,812
Physician agreements 1,692 1,692
Other 2,309 3,805
------------- -------------
208,071 264,309
Accumulated amortization (13,055) (23,067)
------------- -------------
$195,016 $241,242
============= =============
</TABLE>
41
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
5. Other Assets, Continued:
During 1998, the Company completed the acquisition of 15 physician
group practices. Total consideration and related costs for these
acquisitions approximated $88.9 million in cash and 6,176,546 shares of
stock in a subsidiary of the Company. In connection with these
transactions, the Company recorded assets totaling approximately $96.4
million, principally goodwill, and liabilities of approximately $3.7
million.
During 1999, the Company completed the acquisition of 11 physician
group practices. Total consideration and related costs for these
acquisitions approximated $51.4 million in cash and 1,000,000 shares of
stock in a subsidiary of the Company. In connection with these
transactions, the Company recorded assets totaling approximately $55.0
million, principally goodwill.
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.
The following unaudited pro forma information combines the consolidated
results of operations of the Company and the companies acquired during
1998 and 1999 as if the acquisitions had occurred on January 1, 1998:
Years Ended December 31,
-------------------------------------
1998 1999
------------- --------------
(in thousands, except
Per share data)
Net patient service revenue $226,975 $236,427
Net income 30,715 25,421
Net income per share:
Basic $2.01 $1.64
Diluted $1.92 $1.60
The pro forma results do not necessarily represent results which would
have occurred if the acquisitions had taken place at the beginning of
the period, nor are they indicative of the results of future combined
operations.
42
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
6. Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1999
------------- --------------
(in thousands)
<S> <C> <C>
Accounts payable $10,373 $9,664
Accrued salaries and bonuses 6,433 4,366
Accrued payroll taxes and benefits 4,465 4,258
Accrued professional liability
coverage 6,866 7,134
Other accrued expenses 1,906 3,677
------------- --------------
$30,043 $29,099
============= ==============
</TABLE>
7. Note Payable:
Note payable consists of the following:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1998 1999
------------- --------------
(in thousands)
<S> <C> <C>
Mortgage payable to bank $2,550 $2,350
Current portion (200) (200)
------------- --------------
$2,350 $2,150
============= ==============
</TABLE>
The Company's mortgage loan agreement requires quarterly payments
totaling $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. The mortgage bears interest at prime (8.50% at December 31, 1999),
and is collateralized by the Company's two buildings. The loan matures
on June 30, 2003.
In June 1996, the Company entered into an unsecured revolving credit
facility. During 1997, the amounts available under the credit facility
were increased to $75 million, which includes a $2 million amount
reserved to cover deductibles under the Company's professional
liability insurance policies. The credit facility matures on September
30, 2000. At the Company's option, the credit facility bears interest
at either LIBOR plus .875% or prime. The Company had approximately
$48.4 million outstanding at December 31, 1999.
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.
43
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Income Taxes:
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1997 1998 1999
-------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Federal:
Current $6,004 $12,339 $11,316
Deferred 5,913 4,146 5,116
-------------- ------------- -------------
11,917 16,485 16,432
-------------- ------------- -------------
State:
Current 1,054 1,964 522
Deferred 971 954 613
-------------- ------------- -------------
2,025 2,918 1,135
-------------- ------------- -------------
Total $13,942 $19,403 $17,567
============== ============= =============
</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 40% for the years ended December
31, 1997 and 1998 and 41.2% for the year ended December 31, 1999. The
differences between the effective rate and the U.S. federal income tax
statutory rate are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------
1997 1998 1999
-------------- ------------- -------------
(in thousands)
<S> <C> <C> <C>
Tax at statutory rate $12,199 $16,975 $14,912
State income tax, net
of federal benefit 1,316 1,897 738
Other, net 427 531 1,917
-------------- ------------- -------------
Income tax provision $13,942 $19,403 $17,567
============== ============= =============
</TABLE>
44
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
8. Income Taxes, Continued:
The significant components of deferred income tax assets and
liabilities are as follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1999
----------------------------------------------------------------------
Non Non
Total Current Current Total Current Current
--------- --------- --------- --------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Allowance for uncollectible
accounts $ 124 $ 124 $ - $ 86 $ 86 $ -
Net operating loss
carryforward 1,108 1,108 - 2,278 2,278 -
Amortization 2,156 - 2,156 1,909 - 1,909
Operating reserves and
accruals 1,891 1,891 - 3,795 3,795 -
Other 1,361 777 584 1,852 1,186 666
--------- --------- --------- --------- ---------- ----------
Total deferred tax
assets 6,640 3,900 2,740 9,920 7,345 2,575
--------- --------- --------- --------- ---------- ----------
Accrual to cash adjustment (16,327) (16,327) - (24,670) (24,670) -
Property and equipment (2,996) - (2,996) (3,302) - (3,302)
Receivable discounts (2,319) (2,319) - (2,319) (2,319) -
Amortization (3,215) - (3,215) (4,872) - (4,872)
Other 286 142 144 1,583 1,095 488
--------- --------- --------- --------- ---------- ----------
Total deferred tax
liabilities (24,571) (18,504) (6,067) (33,580) (25,894) (7,686)
--------- --------- --------- --------- ---------- ----------
Net deferred tax
liability $(17,931) $(14,604) $(3,327) $(23,660) $(18,549) $(5,111)
========= ========= ========= ========= ========== ==========
</TABLE>
The income tax benefit related to the exercise of stock options and the
purchase of shares under the Company's non-qualified employee stock
purchase plan, reduces taxes currently payable and is credited to
additional paid-in capital. Such amounts totaled approximately
$2,874,000, $2,496,000 and $792,000 for the years ended December 31,
1997, 1998 and 1999, respectively.
The Company has net operating loss carryforwards for federal and state
tax purposes totaling approximately $978,000, $2,993,000 and $5,992,000
at December 31, 1997, 1998 and 1999, respectively, expiring at various
times commencing in 2009.
9. Commitments and Contingencies:
In February 1999, the first of several federal securities law class
actions was commenced against the Company and three of its principal
officers in United States District Court for the Southern District of
Florida ("District Court"). The Plaintiffs are shareholders purporting
to represent a class of all open market purchasers of the Company's
common stock between April 28, 1998, and various dates through and
including April 1, 1999. They claim that during that period the Company
violated the antifraud provisions of the federal securities laws by
issuing false and misleading statements concerning its accounting
practices and financial results, focusing in particular on the
capitalization of certain payments made to employees in connection with
acquisitions and revenue recognition in light of recent inquiries
initiated by state investigators into the Company's billing practices.
The Plaintiffs seek damages in an undetermined amount based on the
alleged decline in the value of the common stock after the Company
disclosed the issue with respect to the capitalization of certain
payments and the inquiries by state investigators. On June 24, 1999,
the Judge of the District Court entered an Order of Consolidation
consolidating into one case the several federal securities law class
action lawsuits. On August 20, 1999, the Judge entered two Orders in
the case. The first Order granted the motion made by the three public
pension funds to be appointed as lead Plaintiffs and to have their
counsel appointed as lead Plaintiffs' counsel. The second Order set the
administrative mechanism for handling the consolidated cases, including
the time limitations for the filing of a Consolidated Amended Class
Action Complaint. On October 7, 1999, the Company filed a Motion to
Dismiss the Consolidated Amended Class Action Complaint.
45
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
9. Commitments and Contingencies, Continued:
On January 19, 2000, the Judge granted defendants' Motion to Dismiss
based on deficiencies in the allegations which rendered the pleading
insufficient as a matter of law. The Judge provided that the Plaintiffs
could file an Amended Complaint on or before February 3, 2000. The
Plaintiffs filed a Second Amended Complaint on February 3, 2000. On
March 10, 2000, the Company filed a Motion to Dismiss the Second
Amended Consolidated Class Action Complaint. The Plaintiffs answering
memorandum is due on March 30, 2000, and the Company's reply memorandum
is due on April 10, 2000. The Company continues to believe that the
claims are without merit and intends to defend them vigorously.
In April 1999, the Company received requests, and in one case a
subpoena, from investigators in Arizona, Colorado and Florida for
information related to its billing practices. The Company is fully
cooperating with these inquiries. Although the Company believes that
its billing practices are proper, the investigations are ongoing and
the Company is unable to predict at this time whether they will have a
material adverse effect on the Company's business, financial condition
or results of operations.
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.
The Company leases space for its business and medical offices, storage
space, and temporary housing of medical staff. In addition, the Company
leases an aircraft. Rent expense for the years ended December 31, 1997,
1998 and 1999 was approximately $1,722,000, $2,172,000 and $3,063,000,
respectively. At December 31, 1999, future minimum lease payments are
as follows:
(in thousands)
--------------
2000 $ 3,840
2001 3,244
2002 2,913
2003 9,323
2004 1,328
Thereafter 3,688
-----------
$ 24,336
===========
10. 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
approximately $1,732,000, $2,363,000 and $1,627,000 to the Plan during
the years ended December 31, 1997, 1998 and 1999, respectively.
46
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
11. Net Income Per Common and Common Equivalent Share:
The calculation of basic and diluted net income per share for the years
ended December 31, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1997 1998 1999
-------------- -------------- ---------------
(in thousands, except for per share data)
<S> <C> <C> <C>
Basic net income per share:
Net Income $20,913 $29,099 $25,038
======= ======= =======
Weighted average common shares outstanding 15,021 15,248 15,513
======= ======= =======
Basic net income per share $ 1.39 $ 1.91 $ 1.61
======= ======= =======
Diluted net income per share:
Weighted average common shares outstanding 15,021 15,248 15,513
Stock options 722 739 347
------- ------- -------
Weighted average common and potential
common shares outstanding 15,743 15,987 15,860
======= ======= =======
Net income $20,913 $29,099 $25,038
======= ======= =======
Diluted net income per share $ 1.33 $ 1.82 $ 1.58
======= ======= =======
</TABLE>
12. 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. In 1999, the Company's Board of Directors approved an
amendment to increase the number of shares authorized to be issued
under the plan from 4,250,000 to 5,500,000. At December 31, 1999,
939,374 shares were available for future grants.
47
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. 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> <C> <C> <C>
Outstanding at December 31, 1996 2,227,461 $2.84-$36.75 $18.27 2003-2006
Granted 783,500 $29.00-$41.38 $33.38
Canceled (68,021) $5.00-$36.00 $21.55
Exercised (229,710) $5.00-$36.00 $9.69
-------------- --------------- --------------
Outstanding at December 31, 1997 2,713,230 $2.84-$41.38 $23.28 2003-2007
Granted 868,000 $32.50-$45.13 $38.80
Canceled (43,034) $19.25-$36.00 $23.37
Exercised (219,025) $5.00-$40.38 $20.02
-------------- --------------- --------------
Outstanding at December 31, 1998 3,319,171 $2.84-$45.13 $27.55 2003-2008
Granted 1,558,154 $7.88-$61.00 $27.69
Canceled (852,330) $18.88-$61.00 $43.50
Exercised (94,552) $2.84-$36.13 $10.54
-------------- --------------- --------------
Outstanding at December 31, 1999 3,930,443 $5.00-$61.00 $24.55 2004-2009
============== =============== ==============
Exercisable at:
December 31, 1997 1,315,850 $2.84-$36.75 $14.74
December 31, 1998 1,750,281 $2.84-$41.38 $19.43
December 31, 1999 2,131,235 $5.00-$45.13 $23.49
</TABLE>
Significant option groups outstanding at December 31, 1999 and related
price and life information follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ --------------------------
Weighted
Weighted Average Weighted
Average Remaining Average
Range of Exercise Exercise Contractual Exercise
Prices Outstanding Price Life Exercisable Price
---------------------- ------------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$5.00-$7.88 806,587 $7.07 7.2 400,587 $6.25
$10.00-$14.56 305,217 $11.15 5.8 250,217 $10.70
$18.88-$22.06 1,061,489 $19.61 7.5 467,100 $19.52
$24.00-$29.00 337,999 $28.63 6.1 220,165 $28.80
$30.88-$33.88 274,834 $32.61 7.9 158,505 $32.83
$36.00-$39.13 645,650 $36.56 7.1 454,325 $36.54
$40.38-$45.13 333,667 $42.75 7.7 180,336 $42.21
$61.00 165,000 $61.00 9.1 -- --
------------- ------------ ------------- ------------ ------------
3,930,443 $24.55 7.2 2,131,235 $23.49
============= ============ ============= ============ ============
</TABLE>
48
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
12. 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, 47,302,
41,359 and 128,848 shares were issued during 1997, 1998 and 1999,
respectively. At December 31, 1999, the Company has an additional
769,705 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,
-------------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
(in thousands, except
per share data)
<S> <C> <C> <C>
Net income $16,272 $23,328 $15,697
Net income per share:
Basic $1.08 $1.53 $1.01
Diluted $1.05 $1.50 $1.01
</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 1997, 1998
and 1999, respectively: dividend yield of 0% for all years; expected
volatility of 41%, 42% and 82%; and risk-free interest rates of 6.6%,
4.8% and 5.2% for options with expected lives of five years (officers
and physicians of the Company) and 6.6%, 5.2% and 5.7% 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.
13. Subsidiary Stock:
In January 1999, a subsidiary of the Company sold 6,257,150 shares of
its common stock, valued at $1.00 per share, in a private placement to
certain officers and employees of the Company. These officers and
employees were required to meet certain financial qualifications to be
considered accredited investors and become eligible to participate in
the offering. The subsidiary used the proceeds from the offering to
repurchase shares previously issued to the Company.
In July 1999, the Company purchased shares of common stock in the
subsidiary for approximately $17.7 million, which resulted in the
subsidiary being wholly-owned by the Company. The shares purchased by
the Company were held by certain officers and employees of the Company
and represented approximately 23.5% of all outstanding shares of the
subsidiary.
49
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, Continued
13. Subsidiary Stock, Continued:
The Company accounted for the transaction using the purchase method of
accounting and the excess of the cost over the book value of the shares
acquired of approximately $3.6 million is being amortized on a
straight-line basis over 25 years.
14. Preferred Share Purchase Rights Plan:
On March 31, 1999, the Board of Directors of the Company adopted a
Preferred Share Purchase Rights Plan (the "Rights Plan") and, in
connection therewith, declared a dividend distribution of one preferred
share purchase right ("Right") on each outstanding share of the
Company's common stock to shareholders of record at the close of
business on April 9, 1999.
Each Right entitles the shareholder to purchase from the Company one
one-thousandth of a share of the Company's Series A Junior
Participating Preferred Stock (the "Preferred Shares") (or in certain
circumstances, cash, property or other securities). Each Right has an
initial exercise price of $150.00 for one one-thousandth of a Preferred
Share (subject to adjustment). The Rights will be exercisable only if a
person or group acquires 15% or more of the Company's common stock or
announces a tender or exchange offer, the consummation of which would
result in ownership by a person or group of 15% or more of the common
stock. Upon such occurrence, each Right will entitle its holder (other
than such person or group of affiliated or associated persons) to
purchase, at the Right's then-current exercise price, a number of the
Company's common shares having a market value of twice such price. The
final expiration date on the Rights is the close of business on March
31, 2009 (the "Final Expiration Date").
The Board of Directors of the Company may, at its option, as approved
by a Majority Director Vote, at any time prior to the earlier of (i)
the time that any Person becomes an Acquiring Person, or (ii) the Final
Expiration Date, redeem all but no less than all of the then
outstanding Rights at a redemption price of $.005 per Right, as such
amount may be appropriately adjusted to reflect any stock split, stock
dividend or similar transaction. The redemption of the Rights may be
made effective at such time, on such basis and with such conditions as
the Board of Directors of the Company, in its sole discretion, may
establish (as approved by a Majority Director Vote).
15. Subsequent Events:
Subsequent to December 31, 1999, the Company completed the acquisition
of two physician group practices. Total consideration for these
acquisitions was approximately $7.2 million in cash.
50
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- ---------------------------------------------------------------
Financial Disclosure
--------------------
The accounting firm of PricewaterhouseCoopers LLP ("PwC") (formerly
Coopers & Lybrand L.L.P.) was previously engaged as the principal independent
accountants during fiscal years 1996 and 1997 and throughout fiscal year 1998.
As a result of an accounting and auditing enforcement administrative proceeding
in which the Securities and Exchange Commission (the "SEC") determined that PwC
had violated the auditor independence rules, the Company also engaged KPMG LLP
("KPMG") in January 1999 to audit the Company's 1998 financial statements. On
March 29, 1999, the Company's Audit Committee dismissed PwC, and KPMG became the
Company's principal independent accountants.
On December 13, 1999, the Company dismissed the accounting firm of KPMG
as the Company's principal accountant and retained the service of PwC as its
principal accountant. The decision to change accountants was approved by the
Company's Audit Committee.
KPMG's report on the financial statements of the Company for fiscal
year 1998 (the only year for which KPMG has issued a report on the financial
statements of the Company) did not contain an adverse opinion or disclaimer of
opinion, and was not qualified or modified as to uncertainty, audit scope, or
accounting principles.
During the Company's most recent fiscal year and for the interim
periods through December 13, 1999, there were no disagreements between the
Company and KPMG on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of KPMG, would have caused it to make reference
to the subject matter of the disagreement in connection with its audit report.
However, during the process of conducting the audit of the Company's 1998
financial statements, KPMG questioned the historical accounting of capitalizing
certain acquisition-related bonus costs. The Company discussed the historical
accounting with KPMG and PwC and sought clarification from the SEC regarding
this accounting matter. The SEC did not require the Company to restate any
financial statements provided that the Company agreed to prospectively adopt an
accounting policy to expense all such bonuses for transactions occurring on or
after January 1, 1999, which policy was adopted by the Company effective January
1, 1999.
Also during the audit of the Company's 1998 financial statements, KPMG
noted, in a report dated March 22, 1999, certain reportable conditions in the
Company's internal control procedures regarding residual debit balances and
overpayments due to patients and payors. These conditions were reported to and
discussed with the Company's Audit Committee. As a result of these conditions,
KPMG expanded the scope of its audit to ensure that the information contained in
the Company's financial statements were fairly stated in accordance with
generally accepted accounting principles. KPMG issued an unqualified opinion on
the Company's 1998 financial statements. Subsequent to the completion of the
1998 audit, the Company has strengthened its controls over these areas through
process change and the dedication of appropriate personnel.
51
<PAGE>
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.
52
<PAGE>
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 included in this
annual report on Form 10-K appears on page 30.
(2) Financial Statement Schedules.
The following financial statement schedules for the years ended December 31,
1997, 1998 and 1999 are included in this Annual Report on Form 10-K on the pages
set forth below.
Item Page
- ---- ----
Financial Statement Schedules
Report of Independent Certified Public Accountants.................31
Independent Auditors' Report.......................................32
Schedule II: Valuation and Qualifying Accounts....................54
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.
53
<PAGE>
PEDIATRIX MEDICAL GROUP, INC.
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
For the years ended December 31, 1997, December 31, 1998 and December 31, 1999
1997 1998 1999
--------- --------- ---------
Allowance for contractual (in thousands)
adjustments and uncollectibles:
Balance at beginning of year $ 30,595 $ 45,371 $ 87,436
Portion charged against
operating revenue 137,385 209,817 272,812
Accounts receivable written-
off (net of recoveries) (122,609) (167,752) (257,769)
--------- --------- ---------
Balance at end of year $ 45,371 $ 87,436 $ 102,479
========= ========= =========
54
<PAGE>
(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)(17)
3.3 Articles of Designation of Series A Junior Participating Preferred
Stock (3.1)(17)
4.1 Registration Rights Agreement, dated as of September 13, 1995 between
Pediatrix and certain shareholders (4.1)(1)
4.2 Rights Agreement, dated as of March 31, 1999, between the Registrant
and BankBoston, N.A., as Right Agent including the form of Articles of
Designations of Series A Junior Participating Preferred Stock and the
form of Rights Certificate (4.1) (17)
10.1 Pediatrix's Amended and Restated Stock Option Plan, as amended
(4.3)(18)
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 May 1, 1995, as amended, between
Pediatrix and Larry M. Mullen (10.5)(1)
10.5 Employment Agreement, dated November 6, 1995, between Kristen Bratberg
and Pediatrix (10.9)(4)
10.6 Employment Agreement, dated June 1, 1996, between Pediatrix and M.
Douglas Cunningham, M.D. (10.21)(3)
10.7 The First National Bank of Boston (10.19)(1)
10.8 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)
10.9 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)
10.10 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)
10.11 The Company's Profit Sharing Plan (10.23)(1)
10.12 Form of Non-competition and Nondisclosure Agreement (10.24)(1)
10.13 Form of Exclusive Management and Administrative Services Agreement
between Pediatrix and each of the PA Contractors (10.25)(1)
10.14 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)
10.15 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)
10.16 Asset Purchase Agreement, effective January 16, 1996, between
Med-Support, L.P. and Neonatal Specialists, Ltd. (2.2)(4)
10.17 Asset Purchase Agreement, effective January 16, 1996, between CMJ
Leasing, L.P. and Neonatal Specialists, Ltd. (2.3)(4)
10.18 Asset Purchase Agreement, dated January 29, 1996, among Pediatrix
Medical Group of Colorado, P.C., Pediatrix and Newborn Consultants,
P.C., and the shareholders of PNC (2.1)(5)
10.19 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)
10.20 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)
10.21 1996 Qualified Employee Stock Purchase Plan (10.25)(2)
10.22 1996 Non-Qualified Employee Stock Purchase Plan (10.26)(2)
10.23 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)
55
<PAGE>
10.24 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)
10.25 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)
10.26 Airplane Purchase Agreement, dated March 22, 1996, between Pediatrix
and Learjet Inc. (10.22)(3)
10.27 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)
10.28 Modification of Mortgage, dated as of June 27, 1996, between PMG and
The First National Bank of Boston (10.26)(3)
10.29 Amendment No. 2 to the employment agreement between Pediatrix and Roger
J. Medel, M.D. (10.34)(10)
10.30 Amendment No. 1 to the employment agreement between Pediatrix and
Kristen Bratberg (10.35)(10)
10.31 Amendment No. 2 to First Amended and Restated Credit Agreement, dated
October 21, 1997, between Pediatrix, certain PA Contractors, BankBoston
and SunTrust Bank (10.36)(11)
10.32 Amendment No. 3 to Amended and Restated Credit Agreement, dated March
10, 1998 between Pediatrix, certain PA contractors, Bank Boston and
Suntrust Bank (10.33)(13)
10.33 Amendment No. 4 to Amended and Restated Credit Agreement, dated June
24, 1998 between Pediatrix, certain PA contractors, Bank Boston and
Suntrust Bank (10.34)(13)
10.34 Pediatrix Executive Non-Qualified Deferred Compensation Plan, dated
October 13, 1997 (10.35)(13)
10.35 Amendment No. 3 to the Employment Agreement between Pediatrix and Roger
J. Medel, M.D. (10.35)(14)
10.36 Amendment No. 2 to the Employment Agreement between Pediatrix and
Kristen Bratberg (10.36)(14)
10.37 Amendment No. 3 to the Employment Agreement between Pediatrix and
Kristen Bratberg (10.37)(15)
10.38 Employment Agreement between Pediatrix and Karl B. Wagner (10.38)(16)
21.1 Subsidiaries of Pediatrix (21.1)(12)
23.1 Consent of PricewaterhouseCoopers LLP (19)
23.2 Consent of KPMG LLP (19)
27.1 Financial Data Schedule (19)
- ----------------------
(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.
56
<PAGE>
(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) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 10-Q for the quarterly period ended June 30,
1997.
(11) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 10-Q for the quarterly period ended September
30, 1997.
(12) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 10-K for the year ended December 31, 1997.
(13) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 10-Q for the quarterly period ended June 30,
1998.
(14) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 10-K for the year ended December 31, 1998.
(15) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 10-Q for the quarterly period ended March 31,
1999.
(16) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 10-Q for the quarterly period ended September
30, 1999.
(17) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form 8-K, dated March 31, 1999.
(18) Incorporated by reference to the exhibit shown in parentheses and filed
with the Pediatrix Form S-8 (File No. 333-77779), dated May 5, 1999.
(19) Filed herewith.
(b) Reports on Form 8-K
The Company filed, on December 20, 1999 and later amended on December
22, 1999, a Form 8-K dated December 13, 1999 reporting under Item 4 (Changes in
registrant's Certifying Accountant) the dismissal by the Company of KPMG LLP as
the Company's independent accountants and the appointment of
PricewaterhouseCoopers LLP as the Company's independent accountants for fiscal
1999.
(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.
(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, 1999, by Rule 14a-3(b)(1) are included above. See Item 14(a)2 for
index.
57
<PAGE>
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 24, 2000 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 24, 2000
- -------------------------------------------------- executive officer)
Roger J. Medel, M.D., M.B.A.
Vice President and Chief Financial
/s/ KARL B.WAGNER Officer (principal financial officer March 24, 2000
- -------------------------------------------------- and principal accounting officer)
Karl B. Wagner
/s/ WALDEMAR A. CARLO, M.D. Director March 24, 2000
- --------------------------------------------------
Waldemar A. Carlo, M.D.
/s/ G. ERIC KNOX, M.D. Director March 24, 2000
- --------------------------------------------------
G. Eric Knox, M.D.
/s/ M. DOUGLAS CUNNINGHAM, M.D. Director March 24, 2000
- --------------------------------------------------
M. Douglas Cunningham, M.D.
/s/ MICHAEL FERNANDEZ Director March 24, 2000
- --------------------------------------------------
Michael Fernandez
/s/ CESAR L. ALVAREZ Director March 24, 2000
- --------------------------------------------------
Cesar L. Alvarez
</TABLE>
58
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders of
Pediatrix Medical Group, Inc.
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (File Nos. 333-07057, 333-07061, 333-07059 and 333-77779)
of Pediatrix Medical Group, Inc. of our report dated February 1, 2000 on our
audits of the consolidated financial statements and financial statement schedule
of Pediatrix Medical Group, Inc. at December 31, 1999 and for the year ended
December 31, 1997 and the year ended December 31, 1999, which report is included
in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
March 23, 2000
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Pediatrix Medical Group, Inc.:
We consent to incorporation by reference in the registration statements (No.
333-07057, 333-07061, 333-07059 and 333-77779) on Forms S-8 of Pediatrix Medical
Group, Inc. and subsidiaries of our report dated March 22, 1999, relating to the
consolidated balance sheet of Pediatrix Medical Group, Inc. as of December 31,
1998 and the related consolidated statements of income, stockholders' equity and
cash flows and the financial statement schedule for the year ended December 31,
1998 which report appears in the December 31, 1998 annual report on Form 10-K of
Pediatrix Medical Group, Inc. and subsidiaries.
KPMG LLP
Fort Lauderdale, Florida
March 23, 2000
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1999 AND THE AUDITED
CONSOLIDATED STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000893949
<NAME> PEDIATRIX MEDICAL GROUP, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<CASH> 825
<SECURITIES> 0
<RECEIVABLES> 77726 <F1>
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 79981
<PP&E> 13567 <F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 334790
<CURRENT-LIABILITIES> 96333
<BONDS> 2150
0
0
<COMMON> 156
<OTHER-SE> 228731
<TOTAL-LIABILITY-AND-EQUITY> 334790
<SALES> 0
<TOTAL-REVENUES> 227042
<CGS> 0
<TOTAL-COSTS> 182036
<OTHER-EXPENSES> (296)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2697
<INCOME-PRETAX> 42605
<INCOME-TAX> 17567
<INCOME-CONTINUING> 25038
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25038
<EPS-BASIC> 1.61
<EPS-DILUTED> 1.58
<FN>
<F1>
AMOUNTS FOR RECEIVABLES AND PROPERTY, PLANT AND
EQUIPMENT ARE NET OF ANY ALLOWANCES AND ACCUMULATED
DEPRECIATION.
</FN>
</TABLE>
