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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-26762
PEDIATRIX MEDICAL GROUP, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0271219
(State or other jurisdiction of incorporation (I.R.S. Employer Identification No.)
or organization)
1301 Concord Terrace
Sunrise, Florida 33323
(Address of principal executive offices)
(Zip Code)
(954) 384-0175
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and fiscal year, if changed since last report)
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 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 the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Shares of Common Stock outstanding as of August 12, 2002: 25,559,274
PEDIATRIX MEDICAL GROUP, INC.
INDEX
Page
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.............................................................................3
Condensed Consolidated Balance Sheets as of June 30, 2002 (Unaudited)
and December 31, 2001.........................................................................3
Condensed Consolidated Statements of Income for the Three and Six Months Ended
June 30, 2002 and 2001 (Unaudited)............................................................4
Condensed Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2002 and 2001 (Unaudited)............................................................5
Notes to Condensed Consolidated Financial Statements.............................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................................................10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................................15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS...............................................................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.............................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................18
SIGNATURES....................................................................................................19
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
PEDIATRIX MEDICAL GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 December 31,
(Unaudited) 2001
------------- ------------
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 64,729 $ 27,557
Accounts receivable, net ............................... 68,189 63,851
Prepaid expenses ....................................... 1,397 3,110
Deferred income taxes .................................. 13,219 5,515
Other assets ........................................... 1,580 12,925
-------- --------
Total current assets ............................... 149,114 112,958
Property and equipment, net ................................. 14,838 14,836
Goodwill and other assets, net .............................. 464,549 445,305
-------- --------
Total assets ....................................... $628,501 $573,099
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses .................. $ 54,789 $ 73,203
Current portion of long-term debt and
capital lease obligations .......................... 533 531
Income taxes payable ................................... 1,267 4,843
-------- --------
Total current liabilities .......................... 56,589 78,577
Long-term debt and capital lease obligations ................ 2,556 2,675
Deferred income taxes ....................................... 11,897 9,846
Deferred compensation ....................................... 3,720 3,149
-------- --------
Total liabilities .................................. 74,762 94,247
-------- --------
Commitments and contingencies
Shareholders' equity:
Preferred stock; par value $.01 per share;
1,000,000 shares authorized; none issued and
outstanding at June 30, 2002 and December 31, 2001 . -- --
Common stock; par value $.01 per share;
50,000,000 shares authorized; 26,740,897 and
24,961,103 shares issued and outstanding at June 30,
2002 and December 31, 2001, respectively ........... 267 250
Additional paid-in capital ............................. 386,400 341,973
Retained earnings ...................................... 167,072 136,629
-------- --------
Total shareholders' equity ......................... 553,739 478,852
-------- --------
Total liabilities and shareholders' equity ......... $628,501 $573,099
======== ========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
3
PEDIATRIX MEDICAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
(in thousands, except for per share data)
Net patient service revenue ............ $ 116,223 $ 83,137 $ 223,505 $ 147,056
Operating expenses:
Practice salaries and benefits ...... 65,183 46,424 127,718 84,673
Practice supplies and other operating 3,954 3,564 7,443 6,461
expenses
General and administrative expenses . 17,740 15,577 35,312 27,768
Depreciation and amortization ....... 1,463 5,103 2,927 8,681
--------- --------- --------- ---------
Total operating expenses ...... 88,340 70,668 173,400 127,583
--------- --------- --------- ---------
Income from operations ........ 27,883 12,469 50,105 19,473
Investment income ...................... 222 73 375 146
Interest expense ....................... (287) (788) (570) (1,313)
--------- --------- --------- ---------
Income before income taxes ........ 27,818 11,754 49,910 18,306
Income tax provision ................... 10,851 5,397 19,467 8,345
--------- --------- --------- ---------
Net income ........................ $ 16,967 $ 6,357 $ 30,443 $ 9,961
========= ========= ========= =========
Per share data:
Net income per common and
common equivalent share:
Basic ......................... $ .64 $ .32 $ 1.18 $ .56
========= ========= ========= =========
Diluted ....................... $ .62 $ .30 $ 1.13 $ .53
========= ========= ========= =========
Weighted average shares used in
computing net income per common
and common equivalent share:
Basic ......................... 26,367 19,925 25,800 17,921
========= ========= ========= =========
Diluted ....................... 27,426 21,292 27,022 19,010
========= ========= ========= =========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
4
PEDIATRIX MEDICAL GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
---------------------------
2002 2001
-------- --------
(in thousands)
Cash flows from operating activities:
Net income .................................................. $ 30,443 $ 9,961
Adjustments to reconcile net income to net cash provided from
operating activities:
Depreciation and amortization ........................... 2,927 8,681
Deferred income taxes ................................... (7,600) (3,814)
Changes in assets and liabilities:
Accounts receivable ................................ (4,338) 10,171
Prepaid expenses and other assets .................. 1,058 (598)
Other assets ....................................... 458 473
Accounts payable and accrued expenses .............. (6,455) 2,381
Income taxes payable ............................... 15,016 1,395
-------- --------
Net cash provided from operating activities .... 31,509 28,650
-------- --------
Cash flows used in investing activities:
Physician group acquisition payments ........................ (19,093) (19,462)
Purchase of property and equipment .......................... (2,926) (3,240)
-------- --------
Net cash used in investing activities .......... (22,019) (22,702)
-------- --------
Cash flows from financing activities:
Payments on line of credit, net ............................. -- (5,400)
Payments on long-term debt and capital lease obligations .... (117) (2,446)
Proceeds from issuance of common stock ...................... 27,799 3,263
-------- --------
Net cash provided from (used in) financing
activities ................................ 27,682 (4,583)
-------- --------
Net increase in cash and cash equivalents ........................ 37,172 1,365
Cash and cash equivalents at beginning of period ................. 27,557 3,075
-------- --------
Cash and cash equivalents at end of period ....................... $ 64,729 $ 4,440
======== ========
The accompanying notes are an integral part of
these condensed consolidated financial statements.
5
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(Unaudited)
1. BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements
of Pediatrix Medical Group, Inc. presented in this Quarterly Report,
and the notes thereto, do not include all disclosures required by
accounting principles generally accepted in the United States of
America for complete financial statements. In the opinion of
management, these financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of interim periods. The financial
statements include all the accounts of Pediatrix Medical Group, Inc.,
and its subsidiaries combined with the accounts of the professional
associations (the "PA Contractors") with which the Company currently
has specific management arrangements. The terms "Pediatrix" and the
"Company" refer collectively to Pediatrix Medical Group, Inc., its
subsidiaries, and the PA Contractors.
The results of operations for the three and six months ended June 30,
2002 are not necessarily indicative of the results of operations to be
expected for the year ended December 31, 2002. The accompanying
unaudited condensed consolidated financial statements and the notes
thereto should be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001, as filed with
the Securities and Exchange Commission.
2. ACCOUNTING PRONOUNCEMENTS:
Effective July 1, 2001, the Company adopted the nonamortization
provisions of Statement of Financial Accounting Standards No. 142 ("FAS
142") "Goodwill and Other Intangible Assets," pertaining to goodwill
recorded in connection with acquisitions consummated subsequent to June
30, 2001.
Effective January 1, 2002, the Company adopted the remaining provisions
of FAS 142, which require the nonamortization of all goodwill and that
goodwill be tested annually for impairment using a two-step process.
The first step is to identify a potential impairment and the second
step measures the amount of the impairment loss. The year of adoption
of FAS 142 is considered a transition period and the timing of the
tests is different than for future periods. The first step,
identification of potential impairment, must be completed within six
months of adoption and measured as of the beginning of the fiscal year.
The second step, measurement of the impairment loss, must be completed
by the end of the fiscal year if a potential impairment is identified.
The Company completed its analysis related to the first step during the
second quarter of 2002 and did not identify any goodwill impairment as
a result of the adoption of FAS 142.
Excluding the impact of amortization expense, net of tax, for the three
and six months ended June 30, 2001, pro forma net income and net income
per share is as follows:
Three Months Six Months
Ended Ended
June 30, 2001 June 30, 2001
------------- -------------
(in thousands, except for per share data)
Net income $ 9,567 $ 15,197
Net income per share:
Basic .48 .85
Diluted .45 .80
6
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
3. BUSINESS ACQUISITIONS:
The Company completed the acquisition of five physician group practices
during the six months ended June 30, 2002. Total consideration for the
acquired practices was approximately $19.1 million in cash. The Company
has accounted for the acquisitions using the purchase method of
accounting. The results of operations of the acquired practices have
been included in the Company's 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 physician group practices
acquired during 2001 and 2002, including the acquisition of MAGELLA
Healthcare Corporation ("Magella") on May 15, 2001 pursuant to a merger
transaction (the "Merger"), as if the transactions had occurred on
January 1, 2001:
Six Months Ended
June 30,
--------------------------------
2002 2001
--------- ---------
(in thousands, except for per share data)
Net patient service revenue $ 226,206 $ 192,195
Net income 30,479 15,639
Net income per share:
Basic 1.18 .87
Diluted 1.13 .82
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
June 30, December 31,
2002 2001
-------- ------------
(in thousands)
Accounts payable $ 9,672 $ 12,625
Accrued salaries and bonuses 18,131 21,811
Accrued payroll taxes and benefits 8,447 7,374
Accrued professional liability
coverage 11,271 11,504
Accrued securities litigation
settlement -- 12,000
Other accrued expenses 7,268 7,889
-------- --------
$ 54,789 $ 73,203
======== ========
7
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
5. NET INCOME PER SHARE:
Basic net income per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the
applicable 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 applicable period.
Potential common shares consist of the dilutive effect of convertible
notes calculated using the if-converted method and outstanding options
calculated using the treasury stock method. The calculation of diluted
net income per share excludes the after-tax impact of interest expense
related to convertible subordinated notes.
6. CONTINGENCIES:
On June 6, 2002, the Company received a written request from the
Federal Trade Commission to submit information on a voluntary basis in
connection with an investigation relating to issues of competition
following the Merger. The Company is cooperating fully with the Federal
Trade Commission, but at this time cannot predict the outcome of the
investigation and whether it will have a material adverse effect on the
Company's business, financial condition, results of operations or
liquidity.
On May 3, 2002, the United States District Court for the Southern
District of Florida entered an Order and Final Judgment approving the
previously disclosed settlement of the securities class action
litigation filed against the Company and certain of its officers in
February 1999. Under the terms of the settlement, the plaintiffs' claim
was dismissed with prejudice in exchange for a cash payment of $12.0
million.
In April 1999, the Company received requests from investigators in
Arizona, Florida and Colorado for information related to its billing
practices for services reimbursed by the Medicaid programs in those
states and by the TRICARE program for military dependents. In 2000, the
Arizona and Florida Medicaid investigations were closed after the
Company entered into previously disclosed settlement agreements with
those states. On April 16, 2002, the Company entered into a settlement
agreement with the Colorado Department of Health Care Policy and
Financing pursuant to which the Company made a cash payment of $1.3
million to the State of Colorado. This amount covered a refund of any
overpayments made by the Colorado Medicaid program to the Company and
its affiliated physicians and professional corporation for neonatal
intensive care services billed during the period January 1, 1996
through April 16, 2002, interest on any such overpayments and expenses
incurred by the State of Colorado in connection with its investigation.
In addition, the Company has agreed to retain a third party to perform
annual reviews of its billings to the Colorado Medicaid program.
The TRICARE investigation is active and ongoing and this matter, along
with the Florida, Arizona and Colorado matters, have prompted inquiries
by Medicaid officials in other states. The Company believes that
additional audits, inquiries and investigations from government
agencies will continue to occur in the ordinary course of its business
and in the health care services industry in general from time to time.
The Company cannot predict whether any such audits, inquiries and
investigations will have a material adverse effect on the Company's
business, financial condition, results of operations or liquidity.
8
PEDIATRIX MEDICAL GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(Unaudited)
6. CONTINGENCIES, CONTINUED:
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. If liability results from medical malpractice claims, there
can be no assurance that the Company's medical malpractice insurance
coverage will be adequate to cover liabilities arising out of such
proceedings. The Company believes, based upon its review of these
pending matters, that the outcome of such legal actions and proceedings
will not have a material adverse effect on its financial condition,
results of operations or liquidity.
7. SUBSEQUENT EVENTS:
In July 2002, the Company's Board of Directors authorized the Company
to repurchase up to $35 million of its common stock. Purchases under
the repurchase program may be made in the open market or through
privately negotiated transactions, subject to market conditions and
trading restrictions. The repurchase program was effective on July 3,
2002, and as of August 12, 2002, the Company has repurchased
approximately 1.2 million shares at a cost of approximately $33.3
million.
Subsequent to June 30, 2002, the Company acquired one physician group
practice for $6 million in cash. The acquisition will be accounted for
by the Company using the purchase method of accounting.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion highlights the principal factors affecting our
financial condition and results of operations, as well as our liquidity and
capital resources for the periods described. This discussion should be read in
conjunction with the consolidated financial statements and the accompanying
notes presented in this Quarterly Report. As used herein, "us", "we" and "our"
refer to Pediatrix Medical Group, Inc. together with its subsidiaries and its
affiliated professional associations, corporations and partnerships.
Our unaudited condensed consolidated financial statements as of June
30, 2002, and for each of the three and six months ended June 30, 2002 and 2001
presented in this Quarterly Report, and the notes thereto, have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial statements and the rules and regulations of the
Securities and Exchange Commission for interim financial statements, and should
be read in conjunction with the discussion of our critical accounting policies
discussed in our most recent Annual Report on Form 10-K filed with the
Securities and Exchange Commission. The consolidated results of operations for
the interim periods reported are not necessarily indicative of the results to be
experienced for the entire fiscal year.
The matters discussed in Management's Discussion and Analysis of
Financial Condition and Results of Operations contain forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
Statements that are not historical facts are forward-looking and are based on
estimates, forecasts and assumptions involving risks and uncertainties that
could cause actual results or outcomes to differ materially from those expressed
in the forward-looking statements. See "Caution Concerning Forward-Looking
Statements" below.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THREE MONTHS ENDED JUNE 30, 2001
Our net patient service revenue increased $33.1 million, or 39.8%, to
$116.2 million for the three months ended June 30, 2002, as compared with $83.1
million for the same period in 2001. Of this $33.1 million increase,
approximately $21.0 million, or 63.4%, was attributable to new units at which we
provide services as a result of acquisitions, including units that were obtained
when we acquired MAGELLA Healthcare Corporation ("Magella") in a merger
transaction that was completed on May 15, 2001 (the "Merger"). Same unit patient
service revenue increased approximately $12.1 million, or 18.3%, for the three
months ended June 30, 2002. The increase in same unit net patient service
revenue is primarily the result of: (i) the flow through of price increases
implemented on June 1, 2001; (ii) improved collection performance; (iii)
improved managed care contracting; (iv) increased revenue from new services
provided in existing practices; and (v) .5 percent volume growth. Same units are
those units at which we provided services for the entire current period and the
entire comparable period.
Practice salaries and benefits increased $18.8 million, or 40.4%, to
$65.2 million for the three months ended June 30, 2002, as compared with $46.4
million for the same period in 2001. The increase was attributable to: (i) costs
associated with new physicians and other clinical staff as a result of the
Merger and new unit growth; (ii) an increase in incentive compensation as a
result of same store growth and operational improvements at the physician
practice level; and (iii) an increase in professional liability insurance costs.
Practice supplies and other operating expenses increased $390,000, or
10.9%, to $4.0 million for the three months ended June 30, 2002, as compared
with $3.6 million for the same period in 2001. The increase was attributable to
new units at which we provide services as a result of acquisitions, including
units that were obtained in the Merger.
General and administrative expenses include all salaries, benefits,
supplies and other operating expenses not specifically related to the day-to-day
operations of our physician group practices, including
10
billing and collection functions. General and administrative expenses increased
$2.1 million, or 13.9%, to $17.7 million for the three months ended June 30,
2002, as compared to $15.6 million for the same period in 2001. This $2.1
million increase was primarily due to: (i) salaries and benefits incurred as we
continued our efforts to regionalize our operations; (ii) information services
for the development and support of clinical and operational systems; (iii) legal
fees related to the Colorado Medicaid investigation which was concluded in April
2002 and the Federal Trade Commission investigation initiated in June 2002; (iv)
increased costs for services provided to the practices acquired in the Merger;
and (v) increased insurance costs.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
increased by approximately $11.7 million, or 67.0%, to approximately $29.3
million for the three months ended June 30, 2002, as compared with $17.6 million
for the same period in 2001. EBITDA margin increased by 4.1 percentage points to
25.2%, as compared with 21.1% for the same period in 2001. The EBITDA margin
improvement is primarily due to the decline in general and administrative
expenses as a percentage of net patient service revenue.
Depreciation and amortization expense decreased by approximately $3.6
million, or 71.3%, to $1.5 million for the three months ended June 30, 2002, as
compared with $5.1 million for the same period in 2001, as a result of the
adoption of the nonamortization provisions of Financial Accounting Standards No.
142 ("FAS 142") as discussed in Note 2 - "Accounting Pronouncements" of the
accompanying unaudited condensed consolidated financial statements. Excluding
the impact of amortization for the three months ended June 30, 2001,
depreciation and amortization increased approximately $289,000, primarily due to
fixed assets acquired in the Merger.
Income from operations increased approximately $15.4 million, or
123.6%, to approximately $27.9 million for the three months ended June 30, 2002,
as compared with $12.5 million for the same period in 2001. Our operating margin
increased 9.0 percentage points to 24.0% for the three months ended June 30,
2002, as compared to 15.0% for the same period in 2001. Excluding the impact of
amortization for the three months ended June 30, 2001, income from operations
increased approximately $11.5 million and operating margin increased by 4.3
percentage points.
We recorded net interest expense of approximately $65,000 for the three
months ended June 30, 2002, as compared with net interest expense of
approximately $715,000 for the same period in 2001. The decrease in net interest
expense in 2002 is primarily the result of a net reduction in the average
balance outstanding under our line of credit. Interest expense for the three
months ended June 30, 2002 consists primarily of commitment fees and amortized
deferred debt costs associated with our line of credit.
Our effective income tax rates were approximately 39.0% and 45.9% for
the three months ended June 30, 2002 and 2001, respectively. The decrease in the
tax rate for the three months ended June 30, 2002 is primarily due to the
elimination of non-deductible goodwill amortization as required under the
provisions of FAS 142 (see Note 2 - "Accounting Pronouncements").
Net income increased to approximately $17.0 million for the three
months ended June 30, 2002, as compared to $6.4 million for the same period in
2001. Excluding the impact of amortization expense for the three months ended
June 30, 2001, net income increased by $7.4 million.
Diluted net income per common and common equivalent share was $.62 on
weighted average shares of 27.4 million for the three months ended June 30,
2002, as compared to $.30 on the weighted average shares of 21.3 million for
same period in 2001. Excluding the impact of amortization expense on 2001,
diluted net income per common and common equivalent share would have been $.45
for the three months ended June 30, 2001. The increase in weighted average
shares outstanding is due to: (i) the shares issued in connection with the
Merger which were outstanding from May 15, 2001; (ii) the dilutive effect of
convertible subordinated notes and stock options assumed in the Merger; and
(iii) an increase in outstanding shares due to stock option exercises and shares
issued under our Employee Stock Purchase Plan.
11
SIX MONTHS ENDED JUNE 30, 2002 AS COMPARED TO SIX MONTHS ENDED JUNE 30, 2001
Our net patient service revenue increased $76.4 million, or 52.0%, to
$223.5 million for the six months ended June 30, 2002, as compared with $147.1
million for the same period in 2001. Of this $76.4 million increase,
approximately $53.3 million, or 69.8%, was attributable to new units at which we
provide services as a result of acquisitions, including units that were obtained
in the Merger. Same unit patient service revenue increased approximately $23.1
million, or 17.9%, for the six months ended June 30, 2002. The increase in same
unit net patient service revenue is primarily the result of: (i) the flow
through of price increases implemented on June 1, 2001; (ii) improved collection
performance; (iii) an increase in patient days of approximately 3.2%; and (iv)
improved managed care contracting. Same units are those units at which we
provided services for the entire current period and the entire comparable
period.
Practice salaries and benefits increased $43.0 million, or 50.8%, to
$127.7 million for the six months ended June 30, 2002, as compared with $84.7
million for the same period in 2001. The increase was attributable to: (i) costs
associated with new physicians and other clinical staff as a result of the
Merger and to support new unit growth and volume growth at existing units; (ii)
an increase in incentive compensation as a result of same store growth and
operational improvements at the physician practice level; and (iii) an increase
in professional liability insurance costs.
Practice supplies and other operating expenses increased $982,000, or
15.2%, to $7.4 million for the six months ended June 30, 2002, as compared with
$6.5 million for the same period in 2001. The increase was attributable to new
units at which we provide services as a result of acquisitions, including units
that were obtained in the Merger.
General and administrative expenses include all salaries, benefits,
supplies and other operating expenses not specifically related to the day-to-day
operations of our physician group practices, including billing and collection
functions. General and administrative expenses increased $7.5 million, or 27.2%,
to $35.3 million for the six months ended June 30, 2002, as compared to $27.8
million for the same period in 2001. This $7.5 million increase was primarily
due to: (i) increased costs for services provided to the practices acquired in
the Merger; (ii) settlement costs of $1.3 million related to the Colorado
Medicaid investigation; (iii) salaries and benefits incurred as we continued our
efforts to regionalize our operations; (iv) information services for the
development and support of clinical and operational systems; (v) legal fees
related to the Colorado Medicaid investigation which was concluded in April 2002
and the Federal Trade Commission investigation initiated in June 2002; and (vi)
increased insurance costs. .
EBITDA increased by approximately $24.8 million, or 88.4%, to
approximately $53.0 million for the six months ended June 30, 2002, as compared
with $28.2 million for the same period in 2001. EBITDA margin increased by 4.6
percentage points to 23.7%, as compared with 19.1% for the same period in 2001.
The EBITDA margin improvement is primarily due to the decline in general and
administrative expenses as a percentage of net patient service revenue.
Depreciation and amortization expense decreased by approximately $5.8
million, or 66.3%, to $2.9 million for the six months ended June 30, 2002, as
compared with $8.7 million for the same period in 2001, primarily as a result of
the adoption of the nonamortization provisions of FAS 142 as discussed in Note 2
- - "Accounting Pronouncements" of the accompanying unaudited condensed
consolidated financial statements. Excluding the impact of amortization for the
six months ended June 30, 2001, depreciation and amortization increased
approximately $853,000, primarily due to fixed assets acquired in the Merger.
Income from operations increased approximately $30.6 million, or
157.3%, to approximately $50.1 million for the six months ended June 30, 2002,
as compared with $19.5 million for the same period in 2001. Our operating margin
increased 9.2 percentage points to 22.4% for the six months ended June 30, 2002,
as compared to 13.2% for the same period in 2001. Excluding the impact of
amortization for the six months ended June 30, 2001, income from operations
increased approximately $24.0 million and operating margin increased by 4.7
percentage points.
12
We recorded net interest expense of approximately $195,000 for the six
months ended June 30, 2002, as compared with net interest expense of
approximately $1.2 million for the same period in 2001. The decrease in interest
expense in 2002 is primarily the result of a net reduction in the average
balance outstanding under our line of credit. Interest expense for the six
months ended June 30, 2002 consists primarily of commitment fees and amortized
deferred debt costs associated with our line of credit.
Our effective income tax rates were approximately 39.0% and 45.6% for
the six months ended June 30, 2002 and 2001, respectively. The decrease in the
tax rate for the six months ended June 30, 2002 is primarily due to the
elimination of non-deductible goodwill amortization as required under the
provisions of FAS 142 (see Note 2 - "Accounting Pronouncements").
Net income increased to approximately $30.4 million for the six months
ended June 30, 2002, as compared to $10.0 million for the same period in 2001.
Excluding the impact of amortization expense for the six months ended June 30,
2001, net income increased by $15.2 million.
Diluted net income per common and common equivalent share was $1.13 on
weighted average shares of 27.0 million for the six months ended June 30, 2002,
as compared to $.53 on the weighted average shares of 19.0 million for same
period in 2001. Excluding the impact of amortization expense on 2001, diluted
net income per common and common equivalent share would have been $.80 for the
six months ended June 30, 2001. The significant increase in weighted average
shares outstanding is due to: (i) the shares issued in connection with the
Merger which were outstanding from May 15, 2001; (ii) the dilutive effect of
convertible subordinated notes and stock options assumed in the Merger; and
(iii) an increase in outstanding shares due to stock option exercises and
shares issued under our Employee Stock Purchase Plan.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2002, we had working capital of approximately $92.5
million, an increase of $58.1 million from working capital of $34.4 million at
December 31, 2001. The increase in working capital is primarily due to net
income generated in the first half of 2002 and cash proceeds generated from the
issuance of common stock as a result of stock option exercises in the first half
of 2002.
In July 2002, our Board of Directors authorized us to repurchase up to
$35 million of our common stock. Purchases under the repurchase program may be
made in the open market or through privately negotiated transactions, subject to
market conditions and trading restrictions. The repurchase program was effective
on July 3, 2002, and as of August 12, 2002, we have repurchased approximately
1.2 million shares at a cost of approximately $33.3 million.
As discussed in Note 2 - "Accounting Pronouncements" of the
accompanying unaudited condensed consolidated financial statements, effective
January 1, 2002, we adopted the remaining provisions of FAS 142, which require
the nonamortization of all goodwill and that goodwill be tested annually for
impairment. We completed our initial testing during the second quarter of 2002
and did not identify any goodwill impairment as a result of the adoption of FAS
142.
We maintain professional liability coverage that indemnifies us and our
health care professionals on a claims-made basis for losses incurred related to
medical malpractice litigation with a portion of self insurance retention. We
record a liability for self-insured deductibles and an estimated liability for
malpractice claims incurred but not reported based on actuarial valuations.
Effective May 1, 2002, we obtained professional liability insurance coverage
that expires on April 30, 2003. Such coverage includes a higher level of
self-insured retention and a significant increase in premium costs as compared
to our prior policies.
In the third quarter of 2001, we refinanced our $75 million line of
credit, which matured on September 30, 2001, with an amended and restated credit
agreement (the "Line of Credit") in the amount of $100 million. At our option,
the Line of Credit, which matures on August 14, 2004, bears interest at either
the prime rate or the Eurodollar rate plus an applicable margin rate ranging
from 2% to 2.75%. The Line of Credit is collateralized by substantially all of
our assets. We are subject to certain covenants and
13
restrictions specified in our Line of Credit, including covenants that require
us to maintain a minimum level of net worth and earnings and a restriction on
the payment of dividends and certain other distributions, as specified therein.
At June 30, 2002, we were in compliance with such financial covenants. At June
30, 2002, we had no outstanding balances under our Line of Credit.
Our annual capital expenditures have typically been for computer
hardware and software, ultrasound equipment at our outpatient offices, and for
furniture, equipment and improvements at the corporate headquarters and our
regional offices. During the six months ended June 30, 2002, capital
expenditures amounted to approximately $2.9 million.
We anticipate that funds generated from operations, together with cash
on hand, and funds available under our Line of Credit will be sufficient to meet
our working capital requirements and finance required capital expenditures for
at least the next 12 months.
CAUTION CONCERNING FORWARD-LOOKING STATEMENTS
Certain information included or incorporated by reference in this
Quarterly Report may be deemed to be "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements may include, but are not limited to, statements
relating to our objectives, plans and strategies, and all statements (other than
statements of historical facts), that address activities, events or developments
that we or our management intend, expect, project, believe or anticipate will or
may occur in the future. Such statements are often characterized by terminology
such as "believe," "hope," "may," "anticipate," "should," "intend," "plan,"
"will," "expect," "estimate," "project," "positioned," "strategy" and similar
expressions. These statements are based on assumptions and assessments made by
our management in light of their experience and their perception of historical
trends, current conditions, expected future developments and other factors they
believe to be appropriate. Any forward-looking statements in this Quarterly
Report are made as of the date hereof. We disclaim any duty to update or revise
any such statements, whether as a result of new information, future events or
otherwise. Forward-looking statements are not guarantees of future performance
and are subject to risks and uncertainties that could cause actual results,
developments and business decisions to differ materially from those contemplated
by such forward-looking statements.
Some of the factors that may cause actual results, developments and
business decisions to differ materially from those projected or anticipated by
such forward-looking statements, as more fully discussed under the section
entitled "Risk Factors" in our most recent Annual Report on Form 10-K filed with
the Securities and Exchange Commission, include pending and future
investigations by federal and state government authorities of our billing or
other practices; determinations that we failed to comply with applicable health
care laws and regulations; limitations, reductions or retroactive adjustments in
reimbursement amounts or rates by government-sponsored health care programs;
audits by third party payors with respect to our billings for services; failure
of physicians affiliated with us to appropriately record and document the
services that they provide; our failure to find suitable acquisition candidates
or successfully integrate any future or recent acquisitions; impairment of
long-lived assets, such as goodwill; federal and state health care reform,
including changes in the interpretation of government-sponsored health care
programs; failure to successfully recruit additional and retain existing
qualified physicians; malpractice and other lawsuits; our failure to manage
growth effectively and to maintain effective and efficient information systems;
our failure to collect reimbursements from third party payors in a timely
manner; cancellation or non-renewal of our arrangements with hospitals, or
renewal of such arrangements on less favorable terms; loss of our affiliated
physicians' privileges or ability to provide services in hospitals, or hospitals
entering into arrangements with physicians not affiliated with us; and increased
competition in the health care industry. In addition, the market price of our
common stock may be impacted by the large number of shares eligible for sale
without restriction as described under the section entitled "Risk Factors" in
our most recent Annual Report on Form 10-K filed with the Securities and
Exchange Commission.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our Line of Credit and certain operating lease agreements are subject
to market risk and interest rate changes. The total amount available under our
Line of Credit is $100 million. At our option, the Line of Credit bears interest
at either the prime rate or the Eurodollar rate plus an applicable margin rate
ranging from 2% to 2.75%. The leases bear interest at LIBOR-based variable
rates. There was no outstanding principal balance on the Line of Credit at June
30, 2002. The outstanding balances related to the operating leases totaled
approximately $16.5 million at June 30, 2002. Considering the total outstanding
balances under these instruments at June 30, 2002 of approximately $16.5
million, a 1% change in interest rates would result in an impact to pre-tax
earnings of approximately $165,000 per year.
15
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
On June 6, 2002, we received a written request from the Federal Trade
Commission to submit information on a voluntary basis in connection with an
investigation relating to issues of competition following the Merger. We are
cooperating fully with the Federal Trade Commission, but at this time we cannot
predict the outcome of the investigation and whether it will have a material
adverse effect on our business, financial condition, results of operations or
liquidity.
On May 3, 2002, the United States District Court for the Southern
District of Florida entered an Order and Final Judgment approving the previously
disclosed settlement of the securities class action litigation filed against us
and certain of our officers in February 1999. Under the terms of the settlement,
the plantiffs' claim was dismissed with prejudice in exchange for a cash payment
of $12.0 million.
In April 1999, we received requests from investigators in Arizona,
Florida and Colorado for information related to our billing practices for
services reimbursed by the Medicaid programs in those states and by the TRICARE
program for military dependents. In 2000, the Arizona and Florida Medicaid
investigations were closed after we entered into previously disclosed settlement
agreements with those states. On April 16, 2002, we entered into a settlement
agreement with the Colorado Department of Health Care Policy and Financing
pursuant to which we made a cash payment of $1.3 million to the State of
Colorado. This amount covered a refund of any overpayments made by the Colorado
Medicaid program to us and our affiliated physicians and professional
corporation for neonatal intensive care services billed during the period
January 1, 1996 through April 16, 2002, interest on any such overpayments and
expenses incurred by the State of Colorado in connection with its investigation.
In addition, we have agreed to retain a third party to perform annual reviews of
our billings to the Colorado Medicaid program.
The TRICARE investigation remains active and ongoing and this matter,
along with the Florida, Arizona and Colorado matters, have prompted inquiries by
Medicaid officials in other states. We believe that additional audits,
inquiries, and investigations from government agencies will continue to occur in
the ordinary course of business and in the health care services industry in
general from time to time. We cannot predict whether any such audits, inquiries
and investigations will have a material adverse effect on our business,
financial condition, results of operations or liquidity.
During the ordinary course of business, we have 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. If
liability results from medical malpractice claims, there can be no assurance
that our medical malpractice insurance coverage will be adequate to cover
liabilities arising out of such proceedings. We believe, based upon our review
of these pending matters, that the outcome of such legal actions and proceedings
will not have a material adverse effect on our financial condition, results of
operations or liquidity.
16
PEDIATRIX MEDICAL GROUP, INC.
PART II - OTHER INFORMATION - (CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The Company's annual meeting of shareholders was held on May 14, 2002.
Proposals 1 and 2 described below were approved.
Proposal 1. ELECTION OF DIRECTORS
The following directors were elected at the meeting to serve a
one-year term as directors:
Against
Name For or Withheld
---- ---------- -----------
Cesar L. Alvarez 21,569,356 547,179
Kristen Bratberg 21,070,532 1,046,003
Waldemar A. Carlo, M.D. 21,600,725 515,810
John K. Carlyle 21,095,009 1,021,526
M. Douglas Cunningham, M.D. 21,464,734 651,800
Michael B. Fernandez 21,572,156 544,379
Roger K. Freeman, M.D. 21,646,887 469,648
Roger J. Medel, M.D, M.B.A. 21,071,701 1,044,833
Ian M. Ratner, M.D. 20,940,993 1,175,542
Proposal 2. AMENDMENTS TO EMPLOYEE STOCK PURCHASE PLANS
The directors' proposal to approve amendments to the Company's
employee stock purchase plans to reduce the maximum number of shares to
be issued under the Qualified Plan by 250,000 shares and to increase
the maximum number of shares to be issued under the Non-Qualified Plan
by an equal amount was approved.
Broker
For Against or Withheld Abstain Non-Vote
---------- ------------------- ------- --------
20,381,247 1,706,174 29,113 0
17
PEDIATRIX MEDICAL GROUP, INC.
PART II - OTHER INFORMATION - (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
See Exhibit Index.
(b) REPORTS ON FORM 8-K.
Form 8-K, filed April 18, 2002, reporting Item 5 (Other Events)
related to an agreement with the Colorado Department of Health Care
Policy and Financing concluding the State of Colorado's three-year
investigation into our billings to Colorado's Medicaid program.
18
SIGNATURES
Pursuant to the requirements 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: August 14, 2002 By: /s/ Roger J. Medel, M.D.
-------------------------------------
Roger J. Medel, M.D., Chairman of the
Board, Chief Executive Officer and
Director (principal executive
officer)
Date: August 14, 2002 By: /s/ Karl B. Wagner
-------------------------------------
Karl B. Wagner, Chief Financial
Officer (principal financial and
accounting officer)
19
EXHIBIT INDEX
Exhibit
No. Description
------- ------------
3.1 Amended and Restated Articles of Incorporation of Pediatrix
(incorporated by reference to Exhibit 3.1 to Pediatrix's
Registration Statement on Form S-1 (Registration No. 33-95086)).
3.2 Amendment and Restated Bylaws of Pediatrix (incorporated by
reference to Exhibit 3.2 to Pediatrix's Quarterly Report on Form
10-Q for the period ended June 30, 2000).
3.3 Articles of Designation of Series A Junior Participating Preferred
Stock (incorporated by reference to Exhibit 3.1 to Pediatrix's
current report on Form 8-K dated March 31, 1999).
10.1* Amendment No. 2 to Amended and Restated Credit Agreement, dated as
of June 28, 2002, among Pediatrix, certain professional
contractors, Fleet National Bank, U.S. Bank National Association,
and HSBC Bank USA.
11.1* Statement Re: Computation of Per Share Earnings.
99.1* Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2* Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
- -------
* Filed herewith.